Garwood Irrigation Company v. Commissioner ( 2006 )

126 T.C. No. 12UNITED STATES TAX COURT
GARWOOD IRRIGATION COMPANY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1459-03. Filed May 1, 2006.
P, an S corporation, is due an overpayment that
exceeds $10,000. R computes that overpayment using the
Federal short-term rate plus 0.5 percentage point
according to R’s reading of sec. 6621(a)(1), I.R.C. P
maintains that it should not be treated as a
corporation for purposes of determining the applicable
rate because of its S corporation election. P’s
position is based upon sec. 6621(c)(3), I.R.C., which
is cross-referenced in sec. 6621(a)(1), I.R.C.
Held: The lower corporate rate set forth in the
flush language of sec. 6621(a)(1), I.R.C., applies to C
corporations, and P is entitled to the higher rate of
overpayment interest set forth in sec. 6621(a)(1)(B),
I.R.C., for corporations (the Federal short-term rate,
plus 2 percentage points).
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Donald F. Wood and Benjamin M. Leff, for petitioner.
Richard T. Cummings and Michael W. Bentley, for respondent.
OPINION
GOEKE, Judge: Petitioner has filed a motion under Rule 2611
seeking a redetermination of overpayment interest. The issue is
the appropriate rate of interest on petitioner’s overpayment.
The underlying facts of this case are set out in detail in
Garwood Irrigation Co. v. Commissioner, T.C. Memo. 2004-195, and
are incorporated herein by this reference. Petitioner is
entitled to recover with interest an overpayment of tax on its
built-in gain for the taxable year ending December 31, 1999,
pursuant to our Memorandum Opinion. Petitioner elected status as
an S corporation effective January 1, 1997, and remains such.
In determining the interest due petitioner relative to that
overpayment, respondent applied the reduced interest rate
provided in the flush language of section 6621(a)(1). Petitioner
disputes this computation in a timely filed motion under Rule
261. Petitioner seeks the higher interest paid to noncorporate
taxpayers under section 6621(a)(1)(A) and (B) rather than the
lower rates for corporations provided in the parenthetical
language of subparagraph (B) and the flush language of section
1
Rule references are to the Tax Court Rules of Practice and
Procedure. Section references are to the Internal Revenue Code.
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6621(a)(1). In other words, petitioner seeks interest to exceed
the Federal short-term rate by 3 percent instead of 0.5 percent.
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”.
The gist of this dispute is the cross-reference to subsection
(c)(3). Subsection (c)(3) provides:
(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–
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(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.
Petitioner maintains that the term that is defined by
subsection (c)(3) is not “taxable period” as respondent asserts,
but rather “overpayment of tax by a corporation for any taxable
period”. Petitioner makes this argument in order to incorporate
not simply the provisions of subsection (c)(3)(B) of section 6621
into the operation of section 6621(a)(1), but also subsection
(c)(3)(A). Thereby petitioner hopes to limit the meaning of
“corporation” in subsection (a)(1) to C corporations. In other
words, this dispute turns on what is defined for purposes of the
flush language in subsection (a)(1) by the cross-reference to
subsection (c)(3) of section 6621.
Respondent counters that subsection (c)(3)(A) provides a
different threshold than subsection (a)(1), $100,000 rather than
$10,000. The parenthetical in subsection (a)(1) substitutes
“overpayment” for “underpayment”, but it does not say “$10,000”
rather than “$100,000”. The lower threshold is set forth after
the parenthetical. 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.
Respondent argues that if “taxable period” is the defined term,
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the incongruity of the threshold amount is avoided because only
subsection (c)(3)(B) is required to define the term. Petitioner
forms its counterargument out of the broader reference in the
flush language of subsection (a)(1) to subsection (c)(3) rather
than subsection (c)(3)(B). Petitioner states that the broader
subsection reference is intentional and must not be disregarded.
Petitioner reasons that the reference to subsection (c)(3) means
that “overpayment” and the words that follow are included in the
defined term, not simply “taxable period”.
Another complication is that subsection (c)(3) does not
define “underpayment” but rather the phrase “large corporate
underpayment”. “Large corporate overpayments” does not appear in
subsection (a)(1).
Because neither party’s interpretation is without
difficulty, we find the statutory language to be ambiguous, and
we find reference to legislative history is appropriate. While
we do not find a definitive answer in the legislative history,
there is some guidance. The stated reason for the addition of
the flush language to section 6621(a)(1) was:
Distortions may result if the rates of
interest in the Code differ appreciably from
market rates. Reducing the overpayment rate
for large corporate overpayments of taxes
will reduce the possibility of distortions.
H. Rept. 103-826 (Pt. 1), at 178 (1994), 1995-1 C.B. 250, 254.
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The phrase “large corporate overpayments” in the committee
report is significant since it echoes the definition of “large
corporate underpayment” in subsection (c)(3). This parallel
language causes us to find that the reference to “(c)(3)” rather
than “(c)(3)(B)” was intentional and tilts the scales of the
statutory interpretation to petitioner’s broader reading. It
follows that the overpayments subject to the lower rate of
overpayment interest set forth in the flush language are those of
C corporations, and petitioner is not limited to the 0.5-percent
addition to the Federal short-term rate.
We have also considered that petitioner was at one time a C
corporation and is only now subject to a corporate-level tax
liability because of its prior status and the operation of
section 1374. However, this does not change our conclusion
because in interpreting the application of section 6621(c)(3) to
underpayments, section 301.6621-3(b)(3), Proced. & Admin. Regs.,
provides that after the year of the S corporation election, the S
corporation is not to be treated as a C corporation in applying
the large corporate underpayment provision of section 6621(c)(3).
We find that the overpayment provisions of section 6621(a)(1)
should be applied in the same manner.
We are left with one final issue. Petitioner seeks the
additional 3 percentage points provided for a noncorporate
taxpayer in section 6621(a)(1)(B), but that section provides
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clearly “2 percentage points in the case of a corporation”.
While we agree with petitioner that “corporation” in the flush
language means C corporation as a result of the cross-reference
to subsection (c)(3), we do not find that cross-reference
applicable to the operation of subsection (a)(1)(B) and are left
with the word “corporation” with no cross-reference. The general
definition of “corporation” in section 7701(a)(3) and section
301.7701-2(b)(1), Proced. & Admin. Regs., does not distinguish
between C and S corporations. Accordingly, we find petitioner is
entitled to an additional 2 percentage points interest, rather
than the 3 percentage points for noncorporate taxpayers.
To reflect the foregoing,
An appropriate order
will be entered.