Today the Tax Court looked at an ambiguous section of the Tax Code. Suppose an S Corporation is owed a refund, with interest. What interest rate should be used? The general “corporate overpayment” rate, the “large corporation” overpayment rate, or the “non-corporate” rate?
All corporations start as C Corporations. Many corporations immediately become small business corporations, or S Corporations. Sometimes a corporation will convert to being an S Corporation during its life. Today’s case involves such a corporation. Corporations that convert from C to S can owe a “Built-In Gains Tax.”
Garwood Irrigation Company owed such a tax, and prepaid it. In fact, they overpaid the tax and were due a refund. Last year, the Tax Court decided the amount of the refund. The IRS computed the refund using §6621 (a)(1) of the Internal Revenue Code, and assumed that Garwood was a large corporation:
Section 6621(a)(1) provides:
SEC. 6621. DETERMINATION OF RATE OF INTEREST.
(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”.
As the Tax Court notes, the dispute is based on what a large corporate overpayment is. Subsection (c)(3) states,
(3) Large corporate underpayment.–For purposes of this subsection–
(A) In general.–The term “large corporate underpayment” means any underpayment of a tax by a C corporation for any taxable period if the amount of such underpayment for such period exceeds $100,000.
(B) Taxable period.–For purposes of subparagraph (A), the term “taxable period” means–
(i) in the case of any tax imposed by subtitle A, the
taxable year, or
(ii) in the case of any other tax, the period to which the underpayment relates.
Confused? Well, the Internal Revenue Code can confuse anyone, including Tax Court judges. As the Court notes, “This creates a question as to why Congress did not more artfully express the incongruity in dollar thresholds, if petitioner’s argument is assumed to be correct.”
Because the statutes are ambiguous, the Court looks at the legislative history to resolve the dispute. The Court discovers that the large overpayment statute was designed for C Corporation; the petitioner, Garwood Irrigation Corporation, is not one. So that rules out the 1/2% rate of interest. However, Garwood is a corporation, so the Court throws out the 3% that Garwood wanted. Garwood will have to settle for a measly 2% above the federal short-term rate. But that is 1 1/2% more than the IRS wanted to give.