The US Court of Appeals for the Sixth Circuit recently held in U.S. v. Detroit Medical Center that a nonprofit entity incorporated under state law falls within the definition of a ‘corporation’ for purposes of determining the interest rate applicable to tax refunds. The case is worth reading for its plain meaning analysis as well as its reliance on prior case law dating back hundreds of years.
In Detroit Medical, a not-for-profit corporation overpaid its taxes, entitling it to a refund plus interest. Under the Internal Revenue Code (Code), ‘corporations’ receive lower interest rates on refund than other taxpayers. The taxpayer claimed that, as a not-for-profit corporation, it should not be treated as a ‘corporation’ and thus was eligible for the higher interest rate resulting in an extra $9.1 million in refunds. The Sixth Circuit found nothing in the relevant statute that excludes a not-for-profit corporation from the definition of “corporation.” In reaching its holding, the court relied on various statutory construction principles, including: (1) in the absence of any statutory definition to the contrary, courts presume that Congress adopts the customary meaning of the terms it uses; (2) the word “includes” is a term of inclusion, not exclusion; (3) dictionary definitions (both old and new) are appropriate tools to determine the meaning of a word used in the Code; and (4) when Congress uses particular language in one section of a statute but omits it in another part of the same Act, the general rule is that Congress acted intentionally and purposely in the disparate inclusion or exclusion.
As further support for its plain meaning analysis, the Sixth Circuit relied primarily on an 1819 opinion by Chief Justice Marshal in Dartmouth College that permitted charitable organizations to be treated as corporations. The court further noted that in 1612, Sir Edward Coke wrote in The Case of Sutton’s Hospital that a charitable hospital and school founded at the London Charterhouse was as valid a corporation as any other because it possessed all the characteristics that are of the essence of a corporation. Finally, the court cited to commentaries by William Blackstone from 1753 that charitable corporations are one of three basic kinds of corporations.
The Sixth Circuit’s approach of applying a strict plain meaning analysis is consistent with its approach in prior tax cases, including its interpretation of Code section 956 in The Limited and Code section 1256 in Wright Additionally, the opinion highlights the importance in tax litigation of not limiting one’s argument to just the most recent cases and searching for useful authority outside the tax context. In a recent opinion involving the interpretation of Code section 6662, the Tax Court in Rand employed a similar approach by applying the rule of lenity and relying on an 1820 Supreme Court opinion dealing with homicide at sea.