Vernoia, Enterline + Brewer, CPA LLC

S corporations get same lower interest rate on refunds given to C Corporations

The U.S. Court of Federal Claims has found that the lower interest rate that the IRS must pay on corporate refunds applies to S corps as well as C corporations. As a result, an S corp was entitled to only overpayment interest of 0.5 percent on refunds over $10,000, instead of the three percent rate payable to individuals.

Background
The taxpayer noted that Code Sec, 6621(c)(3), which provides for a different (in this case, higher) interest rate owed by corporations on underpayments, specifically applies to C corporations. However, Code Sec. 6621(a), which provides the rates for interest on overpayments, applies to “a corporation” and makes no distinction between C and S corporations. An S corporation is commonly known as a pass-through entity that generally pays no tax itself on annual income but passes income down to its individual shareholders.

No special treatment for S corps
The Claims Court analyzed the provisions under various tools of statutory construction and concluded that they all supported the government’s position, but ultimately it relied on the plain language of the statute.

Here, the court stated, the plain text was clear and unambiguous; only the government’s interpretation was reasonable. An S corp is a corporation, as generally defined by the Tax Code; therefore the lower interest rate applies to their overpayments. The court also found that a reference in the overpayment statute to the underpayment statute did not include the latter’s application to a C statute and could not be incorporated into the overpayment provisions.

The taxpayers also argued that an S corp, as a passthrough entity, is more like an individual than a C corporation for tax purposes. The court found that although Congress could have reasonably exempted S corps from the corporate overpayment rates, it did not do so or indicate any intent to do so.
Eaglehawk Carbon, Inc., Fed.Cl., July 16, 2015

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