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Medical College of Wisconsin Affiliated Hospitals Inc. v. United States

United States Court of Appeals, Seventh Circuit

April 25, 2017

Medical College of Wisconsin Affiliated Hospitals, Inc., Plaintiff-Appellant,
v.
United States of America, Defendant-Appellee.

          Argued April 10, 2017

         Appeal from the United States District Court for the Eastern District of Wisconsin. No. 14-C-1477 - C.N. Clevert, Jr., Judge.

          Before Easterbrook, Rovner, and Sykes, Circuit Judges.

          Easterbrook, Circuit Judge.

         Medical College of Wisconsin, a nonprofit corporation, received a refund of Social Security (FICA) taxes after the Internal Revenue Service ruled that medical residents were exempt from them until April 1, 2005. (A regulation governing later periods requires hospitals to pay FICA taxes on residents' salaries. See Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44 (2011).) The IRS added to the refund approximately $13 million in interest but later demanded $6.7 million back, informing Medical College that it had used too high a rate. Medical College returned the money and filed this suit under 28 U.S.C. §1346(a)(1), asking to have the disputed sum restored. See also 26 U.S.C. §7422. The district court rejected its request, 2016-2 U.S. Tax Cas. (CCH) ¶50, 409 (E.D. Wis. Sept. 14, 2016), precipitating this appeal.

         The parties' dispute arises from 26 U.S.C. §6621, which begins:

(a) General rule.
(1) Overpayment rate. The overpayment rate established under this section shall be the sum of-
(A) the Federal short-term rate determined under subsection (b), plus
(B)3 percentage points (2 percentage points in the case of a corporation).
To the extent that an overpayment of tax by a corporation for any taxable period (as defined in subsection (c)(3), applied by substituting "overpayment" for "underpayment") exceeds $10, 000, subparagraph (B) shall be applied by substituting "0.5 percentage point" for "2 percentage points".

         The IRS initially paid Medical College interest at the federal short-term rate plus 3 percentage points under §6621(a)(1)(B) but then decided that interest should be paid at the short-term rate plus 2 percentage points for the first $10, 000 and 0.5 percentage points for the rest. Medical College contends that the IRS got it right the first time, because, in light of subsection (c), a nonprofit is not the sort of corporation to which paragraph (a)(1)(B) refers.

         Subsection (c) reads:

(c) Increase in underpayment rate for large corporate ...

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