Med James, Inc. v. Commissioner

121 T.C. No. 9
UNITED STATES TAX COURT
MED JAMES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 366-01. Filed September 9, 2003.
R sent P a 30-day letter proposing a deficiency in
excess of $100,000 for P’s tax year ended Jan. 31,
1994. R subsequently issued a notice of deficiency to
P determining deficiencies in P’s corporate income
taxes for its tax years ended Jan. 31, 1994, 1995, and
1996. P filed a petition to this Court. R and P
stipulated that P’s deficiency in income tax for the
tax year ended Jan. 31, 1994, computed before allowance
for a net operating loss (NOL) carryback from the
subsequent tax year was $225,753. After allowance for
the NOL carryback, P’s deficiency for the tax year
ended Jan. 31, 1994, was $63,573. The Court entered a
decision that there was a deficiency in income tax due
from P for the tax year ended Jan. 31, 1994, of
$63,573. The decision became final on Sept. 3, 2002,
and R then assessed the $63,573 deficiency plus
interest. R applied the increased interest rate under
sec. 6621(c), I.R.C., for the period beginning 30 days
after the 30-day letter was sent. P paid the
deficiency and interest. On Mar. 17, 2003, P filed a
motion to redetermine interest.
- 2 -
Held: The Court has jurisdiction under sec.
7481(c), I.R.C., to redetermine interest because P paid
the deficiency plus interest claimed by R, filed the
motion within 1 year of the date the Court’s decision
became final, and the deficiency and interest were
assessed under sec. 6215, I.R.C.
Held, further: Under sec. 6621(c), I.R.C., and
the regulations promulgated thereunder, a large
corporate underpayment exists if the excess of the
amount of tax imposed by the Internal Revenue Code
(excluding interest, penalties, additional amounts, and
additions to tax) for the taxable period over the
amount of tax paid on or before the return due date
(“the threshold underpayment”) exceeds $100,000.
Because the Code allows a deduction for NOL carrybacks
for purposes of determining the tax imposed for the
taxable year, the tax imposed by the Code for the year
in issue was $63,573.
Held, further: For purposes of sec. 6621(c),
I.R.C., threshold underpayments of tax are generally
determined only when an assessment is made with respect
to a taxable period. Sec. 301.6621-3(b)(2)(iii)(A),
Proced. & Admin. Regs. The interest rate under sec.
6621(c), I.R.C., “hot interest”, does not apply if,
after a Federal court determines a taxpayer’s liability
for a period, the threshold underpayment for that
taxable period does not exceed $100,000. Sec.
301.6621-3(b)(2)(iii)(B), Proced. & Admin. Regs. After
the Court entered its decision, P’s liability for the
tax year in issue was $63,573. Therefore, sec.
6621(c), I.R.C., does not apply.
Ron R. Morgan, for petitioner.
Eric Johnson, for respondent.
- 3 -
OPINION
GOEKE, Judge: On March 17, 2003, petitioner filed a motion
to redetermine interest under section 7481(c) and Rule 261.1
Petitioner, a C corporation, claims that it overpaid interest
relating to its income tax liability for its tax year ended
January 31, 1994, because respondent erroneously applied the
increased interest rate under section 6621(c) (“hot interest”).
The substantive issue for decision is whether a net operating
loss (NOL) carryback which reduces an underpayment of tax for a
preceding year below $100,000 is disregarded for purposes of
determining whether a large corporate underpayment exists and
whether hot interest applies. We hold that the NOL is not
disregarded and hot interest does not apply. Before we address
the substantive issue, we explain the Court’s jurisdiction to
decide the matter.
Background2
On November 5, 1998, respondent sent a letter of proposed
deficiency (30-day letter) to petitioner proposing a deficiency
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the time of the filing of
the motion, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
For purposes of deciding this motion, we rely in part on
the information contained in the petitions, answer, stipulations,
and decision document. The facts subsequent to the date the
decision was entered are based on the parties’ undisputed factual
allegations.
- 4 -
in excess of $100,000 for petitioner’s tax year ended January 31,
1994. On October 6, 2000, respondent issued a notice of
deficiency to petitioner for its tax years ended January 31,
1994, 1995, and 1996. In the notice, respondent determined
deficiencies in petitioner’s corporate income tax of $225,753,
$111,191, and $184,219, respectively, for those years.
Respondent also determined that petitioner was liable for an
addition to tax under section 6651(a)(1) of $24,923.25 for the
tax year ended January 31, 1995.
Petitioner filed a petition and an amended petition with
this Court seeking a redetermination. In the petitions,
petitioner disputed the entire amounts determined by respondent
for the tax years ended January 31, 1994, and January 31, 1995,
and $14,745 of the amount determined for the tax year ended
January 31, 1996. Among other allegations, petitioner alleged
that it was entitled to an additional deduction of $900,000 for
the tax year ended January 31, 1995, for an accrued liability to
an insurance company. On the basis of this allegation,
petitioner alleged that it was entitled to an NOL of $605,067 for
the tax year ended January 31, 1995.
On March 18, 2002, the parties filed a stipulation of agreed
issues with the Court. Among other concessions, respondent
conceded that for the tax year ended January 31, 1995, petitioner
was entitled to an additional deduction of $900,000 and incurred
- 5 -
an NOL of $605,067. In addition, the parties stipulated that
they had not reached an agreement as to the application of all or
part of the NOL carryback to the tax year ended January 31, 1994.
On June 4, 2002, the parties filed the following stipulation
with respect to petitioner’s income tax liability for the tax
year ended January 31, 1994:
Tax liability, computed without allowance
for net operating loss carryback
from the tax year ended January 31, 1995,
to the tax year ended January 31, 1994 $225,753.00
Tax assessed and paid 0.00
Deficiency, without allowance for net
operating loss carryback 225,753.00
Reduction in liability due to net
operating loss carryback 162,180.00
Deficiency, after allowance for net
operating loss carryback 63,573.00
It is further stipulated that interest will be assessed
as provided by law on the deficiencies due from
petitioner.
It is further stipulated that, effective upon the entry
of this decision by the Court, the petitioner waives
the restrictions contained in I.R.C. §6213(a)
prohibiting assessment and collection of the
deficiencies (plus statutory interest) until the
decision of the Tax Court becomes final.
On June 5, 2002, the Court entered a decision that there
were deficiencies in income tax due from petitioner for the tax
years ended January 31, 1994, 1995, and 1996, in the amounts of
$63,573, $0, and $169,474, respectively, and that there was no
addition to tax under section 6651(a)(1) for the tax year ended
- 6 -
January 31, 1995. The decision document reflected an agreement
by the parties: (1) The Court could enter the decision in
accordance with the stipulation of the parties submitted
therewith; (2) interest would be assessed as provided by law on
the deficiencies due from petitioner; and (3) effective upon the
entry of decision, petitioner waived the restrictions prohibiting
assessment and collection of the deficiencies, plus statutory
interest, until the decision of the Court became final. The
decision became final on September 3, 2002.
On September 9, 2002, respondent issued a notice to
petitioner reflecting an assessment of tax and interest of
$63,573 and $99,100.97, respectively, for the tax year ended
January 31, 1994. Respondent subsequently issued a second
notice, dated October 14, 2002, which included a tax due of
$162,673.97. This notice also included a penalty of $317.86.3
In calculating interest, respondent applied the normal interest
rate prescribed under section 6621(a)(2) for the period April 15,
1994, until December 5, 1998. This computation included
restricted interest on $225,753 for the period April 15, 1994,
until April 15, 1995, and normal interest on $63,573 from April
15, 1995, until December 5, 1998. On December 5, 1998,
respondent began applying the increased interest rate prescribed
3
The evidence in the record reflects that the penalty was
based on the failure to timely pay the assessment amount.
- 7 -
under section 6621(c). Petitioner has paid the deficiency
assessed for the tax year ended January 31, 1994, plus the
interest and penalties claimed by respondent.
Petitioner provided interest and penalty detail reports
calculating petitioner’s interest liability applying section
6621(c) and not applying section 6621(c). If we decide that
section 6621(c) does apply, petitioner does not dispute the
accuracy of respondent’s original interest computation. In the
event we decide that section 6621(c) does not apply, respondent
concedes that petitioner’s interest computation is correct. The
interest in dispute is $12,104.88.
Discussion
The parties dispute whether the increased interest rate
prescribed under section 6621(c), or “hot interest”, applies.4
Petitioner claims that hot interest does not apply because the
deficiency amount decided by this Court and assessed by
respondent did not exceed $100,000. Respondent contends that for
purposes of applying hot interest the underpayment of tax is the
amount computed before allowance of any NOL carryback. Before we
4
The increased interest rate assessed on large corporate
underpayments is commonly known as “hot interest”. RHI Holdings,
Inc. v. United States, 142 F.3d 1459, 1460 (Fed. Cir. 1998);
Saltzman, IRS Practice and Procedure, par. 6.02[3][e] (2d ed.
1991); Abreau, “Distinguishing Interest from Damages: A Proposal
for a New Perspective”, 40 Buff. L. Rev. 373, 395 (1992).
- 8 -
address this issue, we explain this Court’s jurisdiction to
redetermine interest.5
I. Jurisdiction
Generally, this Court lacks jurisdiction over issues
involving interest. Bax v. Commissioner, 13 F.3d 54, 56 (2d Cir.
1993); ASA Investerings Pship. v. Commissioner, 118 T.C. 423, 424
(2002); LTV Corp. v. Commissioner, 64 T.C. 589, 597 (1975).
However, we do have jurisdiction to redetermine interest in
certain limited circumstances. Section 7481(c) provides:
SEC. 7481(c). Jurisdiction Over Interest
Determinations.--
(1) In General.–-Notwithstanding subsection (a),
if, within 1 year after the date the decision of the
Tax Court becomes final under subsection (a) in a case
to which this subsection applies, the taxpayer files a
motion in the Tax Court for a redetermination of the
amount of interest involved, then the Tax Court may
reopen the case solely to determine whether the
taxpayer has made an overpayment of such interest or
the Secretary has made an underpayment of such interest
and the amount thereof.
(2) Cases to which this subsection applies.–- This
subsection shall apply where–-
(A)(i) an assessment has been made by the
Secretary under section 6215 which includes interest
as imposed by this title, and
(ii) the taxpayer has paid the entire
5
In Pen Coal Corp. v. Commissioner, 107 T.C. 249, 254
(1996), we held that we lacked jurisdiction to redetermine a
taxpayer’s liability for hot interest in deficiency proceedings.
We explicitly left for another day whether we have jurisdiction
to determine liability for hot interest in a supplemental
proceeding commenced pursuant to sec. 7481(c) and Rule 261. Id.
- 9 -
amount of the deficiency plus interest
claimed by the Secretary, and
(B) the Tax Court finds under section 6512(b)
that the taxpayer has made an overpayment.
(3) Special rules.–-If the Tax Court determines
under this subsection that the taxpayer has made an
overpayment of interest or that the Secretary has made
an underpayment of interest, then that determination
shall be treated under section 6512(b)(1) as a
determination of an overpayment of tax. An order of
the Tax Court redetermining interest, when entered upon
the records of the court, shall be reviewable in the
same manner as a decision of the Tax Court.[6]
We have jurisdiction to redetermine interest under section
7481(c) when: (1) The entire amount of the deficiency plus the
entire amount claimed by the Commissioner as interest on the
deficiency has been paid; (2) a timely motion to redetermine
interest has been filed; and (3) an assessment has been made by
the Commissioner under section 6215 which includes interest.
Rule 261; ASA Investerings Pship. v. Commissioner, supra at 425;
Bankamerica Corp. v. Commissioner, 109 T.C. 1, 6-7 (1997).
Petitioner has paid the entire amount of the deficiency for
the tax year ended January 31, 1994, plus the entire amount of
6
Under sec. 7481(a), a decision of this Court becomes final
“after the exhaustion of the possibilities of direct review”.
This finality generally precludes any subsequent consideration by
the Court. Kenner v. Commissioner, 387 F.2d 689, 690 (7th Cir.
1968); ASA Investerings Pship. v. Commissioner, 118 T.C. 423, 425
n.3 (2002). Sec. 7481(c) “‘specifically carves out an exception
to the rule on the finality of our decisions’; a prerequisite for
invoking that exception is a final decision of this Court.” ASA
Investerings Pship. v. Commissioner, supra at 425 n.3 (quoting
Bankamerica Corp. v. Commissioner, 109 T.C. 1, 8-9 (1997)).
- 10 -
interest (and penalties) related to the deficiency. Petitioner’s
motion to redetermine interest was filed on March 17, 2003, which
date was within 1 year of the date the Court’s decision became
final. Thus, petitioner has satisfied the first two
jurisdictional prerequisites.
Section 6215 requires a petition filed by the taxpayer with
this Court and an amount redetermined as a deficiency by a
decision of the Court which has become final. ASA Investerings
Pship. v. Commissioner, supra at 426. These requirements have
been met because a petition was filed to this Court and the Court
entered a decision, which has become final, redetermining an
amount as a deficiency. The evidence in the record reflects that
respondent has assessed the deficiency and interest for the tax
year ended January 31, 1994. Accordingly, we hold that the
requirements of section 7481(c) have been met and we have
jurisdiction to determine whether petitioner made an overpayment
of interest.
II. Applicable Interest Rate
Interest on underpayments of tax is generally imposed at the
normal underpayment rate of the Federal short-term rate plus 3
percentage points. Secs. 6601(a), 6621(a)(2). Section 6621(c)
imposes an additional 2-percent interest rate, called hot
interest, on large corporate underpayments. In the present case,
if applicable, this additional interest would be imposed by
- 11 -
section 6621(c)(2)(A)(i) 30 days after November 5, 1998, the date
respondent sent the 30-day letter. At all times that hot
interest might apply in this case, the underlying tax to which it
would apply was $63,573, which is less than the $100,000
threshold for a large corporate underpayment and the application
of hot interest.7 Sec. 6621(c)(3)(A). Nevertheless, respondent
maintains that because the pre-NOL liability for the year ended
January 31, 1994, was $225,753, hot interest should apply.8
Thus, the case before us turns on whether the amount subject to
the threshold determination should be reduced by the NOL9 from
the tax year ended January 31, 1995. Hot interest applies only
to periods after the “applicable date”. Sec. 6621(c)(1); sec.
7
In addition to applying to the underlying tax, hot interest
applies to any interest, penalties, additional amounts, and
additions to tax imposed with respect to the underlying tax;
however, the threshold amount is determined based only on the
underlying tax. Sec. 301.6621-3(b)(2)(i) and (ii), Proced. &
Admin. Regs.
8
The evidence in the record reflects that the tax shown as
due on petitioner’s return for the tax year ended Jan. 31, 1994,
was zero.
9
An NOL is generally defined as the excess of deductions
over gross income. Sec. 172(c). Sec. 172 provides specific
rules allowing NOLs to be carried back to preceding taxable years
and carried forward to future years to reduce a taxpayer’s
taxable income. Sec. 172(a) allows as a deduction for the
taxable year an NOL carryback. If the amount of tax is reduced
by reason of an NOL carryback, the reduction in tax does not
affect the computation of interest under sec. 6601 for the period
ending with the filing date for the taxable year in which the NOL
arises. Sec. 6601(d)(1); see also Manning v. Seeley Tube & Box
Co., 338 U.S. 561, 570 (1950); Intel Corp. & Consol. Subs. v.
Commissioner, 111 T.C. 90, 95 (1998).
- 12 -
301.6621-3(c)(1), Proced. & Admin. Regs. In the case of any
underpayment of a tax to which the deficiency procedures apply,
the applicable date is the 30th day after the earlier of the date
on which the Commissioner sends the 30–day letter or the notice
of deficiency. Sec. 6621(c)(2); sec. 301.6621-3(c)(2), Proced. &
Admin. Regs. Letters or notices involving amounts not greater
than $100,000 (determined by not taking into account any
interest, penalties, or additions to tax) are disregarded for
purposes of determining the applicable date.10 Sec.
6621(c)(2)(B)(iii).
It is undisputed that petitioner was liable for interest on
the original understatement of $225,753 for the period from the
due date of the return for the tax year ended January 31, 1994,
to the due date of the return for the tax year ended January 31,
1995. Additionally, it is undisputed that from the due date of
the return for the taxable year ended January 31, 1995, until the
date paid in full, petitioner was generally liable for interest
10
As originally enacted, sec. 6621(c) did not contain the
provision disregarding letters or notices involving amounts not
greater than $100,000. The Taxpayer Relief Act of 1997, Pub. L.
105-34, sec. 1463(a), 111 Stat. 1057, added sec.
6621(c)(2)(B)(iii), applicable for purposes of determining
interest for periods after Dec. 31, 1997. The legislative
history indicates that Congress was concerned that minor
mathematical errors by the taxpayer might result in the
application of hot interest to a subsequently identified income
tax deficiency. H. Rept. 105-148, at 642 (1997), 1997-4 C.B.
(Vol. 1) 319, 964. The Commissioner has not updated the
regulations promulgated under sec. 6621(c) to reflect this
change.
- 13 -
on the reduced amount of $63,573.11 The parties agree that the
normal underpayment rate under section 6621(a)(1) applies from
the due date of the return for the tax year ended January 31,
1994, until December 5, 1998.12
Petitioner argues that hot interest does not apply because
the underpayment of tax for the tax year ended January 31, 1994,
was $63,573, which is below the $100,000 amount required to
trigger application of the increased interest rate. Petitioner
claims that the deficiency amount decided by this Court and then
assessed by respondent is the proper amount to use in determining
whether hot interest applies.
Respondent contends that hot interest applies because it is
undisputed that before the carryback of the NOL from the tax year
ended January 31, 1995, petitioner’s corporate income tax was
understated by $225,753. Respondent’s argument is based on the
position that an NOL carryback, regardless of whether it is
applied preassessment or postassessment, does not reduce the
amount of the underpayment for an earlier taxable period.
11
The interest and penalty detail reports computing the
amount of interest owed by petitioner state that the period from
July 5, 2002, through Sept. 9, 2002, was an “interest free
period”.
12
The interest computation report prepared by respondent
states that the 30-day letter date was Nov. 5, 1998. Respondent
started imposing hot interest on Dec. 5, 1998. If we decide that
there was a large corporate underpayment, then petitioner does
not challenge the use of this date as the applicable date.
- 14 -
A threshold underpayment of tax is defined for this purpose
as the excess of a tax imposed by the Internal Revenue Code (the
Code) (exclusive of interest, penalties, additional amounts, and
additions to tax) for the taxable period over the amount of tax
paid on or before the last date prescribed for payment. Sec.
301.6621-3(b)(2)(ii), Proced. & Admin. Regs. This case turns on
when the tax imposed by the Internal Revenue Code for purposes of
determining the amount of a threshold underpayment is determined.
If determined at the time hot interest starts to accrue, when the
tax was assessed, or after this Court’s decision, petitioner
prevails. If determined at the time petitioner’s return was
filed, respondent prevails. On the basis of the Code and the
regulations, we hold that the determination in this case is made
no sooner than the time of entry of our decision that there was a
deficiency of $63,573.
The first step is to determine the amount of tax imposed by
the Code on petitioner for the tax year ended January 31, 1994.13
Section 11(a) imposes a tax for each tax year on the taxable
income of a corporation. Taxable income is the corporation’s
gross income minus the deductions allowed by chapter 1 of the
Code. Lastarmco, Inc. v. Commissioner, 79 T.C. 810, 812 (1982),
13
The taxable period in this case is the taxable year
because the taxes at issue are income taxes imposed by subtitle A
of the Code. Sec. 6621(c)(3)(B); sec. 301.6621-3(b)(4), Proced.
& Admin. Regs.
- 15 -
affd. 737 F.2d 1440 (5th Cir. 1984); sec. 1.11-1(b), Income Tax
Regs. Section 172(a) allows as a deduction for the taxable year
an NOL carryback. NOLs in tax years beginning before August 6,
1997, may generally be carried back to the 3 years preceding the
loss year and then forward to 15 years following the loss year.
Sec. 172(b)(1)(A); Taxpayer Relief Act of 1997, Pub. L. 105-34,
sec. 1082(a), 111 Stat. 950; see also Intermet Corp. & Subs. v.
Commissioner, 117 T.C. 133, 136 n.1 (2001).
At the time petitioner filed its Federal income tax return
for the tax year ended January 31, 1994, it understated its
income tax by $225,753. The tax shown as due on petitioner’s
return for the year was zero. The parties agree that for the tax
year ended January 31, 1995, petitioner incurred an NOL which it
was entitled to carry back to the year in issue. Section 172(a)
treats the NOL carryback as a deduction from petitioner’s income.
This deduction reduced petitioner’s taxable income, and
correspondingly reduced its tax, as imposed by the Code, for the
tax year ended January 31, 1994, to $63,573. Therefore, under a
straightforward application of the statute and the Commissioner’s
own regulations, the excess of the tax imposed by the Code for
the tax year at issue over the amount of tax paid on or before
the return due date was $63,573.
- 16 -
This interpretation is consistent with other parts of the
regulations that discuss when an underpayment is determined.
Section 301.6621-3(b)(2)(iii), Proced. & Admin. Regs., provides:
(iii) When determined--(A) In general. The
existence of a threshold underpayment of a tax and
the amount of a large corporate underpayment are
generally determined only when an assessment is made
with respect to the taxable period. Thus, the amount
of a deficiency or proposed deficiency set forth
in a letter or notice pursuant to which the
applicable date is determined (under paragraph (c)
of this section) does not determine whether there
is a large corporate underpayment.
(B) Judicial determinations.
Notwithstanding any prior assessment made
with respect to a taxable period, the section
6621(c) rate does not apply if, after a
federal court determines the taxpayer’s
liability for a period, the threshold
underpayment for that taxable period does not
exceed $100,000. See Example 3 in paragraph (d)
of this section.
Section 301.6621-3(d), Examples (2) and (3), Proced. &
Admin. Regs., illustrate the application of the above
regulations. In Example 2, involving a corporation that
petitions the Tax Court for redetermination of a deficiency in
its income tax, the date of the Tax Court’s determination is the
operative date for purposes of determining the threshold
underpayment of tax. In Example 3, the Commissioner examines the
taxpayer’s return and subsequently sends a 30-day letter
proposing a deficiency of $450,000 and then a notice of
deficiency determining a $300,000 deficiency. The taxpayer does
not file a petition to the Tax Court, and the Commissioner
- 17 -
assesses the $300,000. The taxpayer then pays the amount
assessed and files a claim for refund. A Federal district court
determines that, exclusive of interest and penalties, the
taxpayer overpaid its income tax by $250,000.
Example 3 states that at the time of the assessment there
was a large corporate underpayment of $300,000. However, the
example goes on to state that because of the district court’s
decision that the taxpayer’s underpayment, exclusive of interest
and penalties, was only $50,000, the taxpayer does not have a
large corporate underpayment.
Respondent argues that despite the language contained in the
above regulations, petitioner had a large corporate underpayment.
With respect to section 301.6621-3(b)(2)(iii)(A), Proced. &
Admin. Regs., respondent claims that the term “generally”
indicates that assessments and abatements of assessment are not
necessarily dispositive. We disagree with respondent’s
interpretation.
Section 301.6621-3(b)(2)(iii), Proced. & Admin. Regs., and
Examples 2 and 3 indicate that the assessment date is generally
the operative date for purposes of determining whether there is
an underpayment of tax exceeding $100,000. If the assessment
reflects an underpayment exceeding $100,000, then there is a
large corporate underpayment at that time. However, if after a
judicial determination the taxpayer’s liability is determined to
- 18 -
not exceed $100,000, then there is no large corporate
underpayment and hot interest does not apply. The use of the
word “generally” in section 301.6621-3(b)(2)(iii)(A), Proced. &
Admin. Regs., accounts for judicial determinations. A subsequent
judicial determination overrides a previous assessment and
represents the operative date for purposes of determining whether
there is a large corporate underpayment. As illustrated by
example 3 in the regulations, this concept is important in the
case of a taxpayer seeking a refund in a Federal district court
because any deficiency will generally be assessed before the
judicial determination is made. However, in proceedings properly
before this Court, the Commissioner generally does not assess the
deficiency until the Court’s decision becomes final. In this
case, after the decision became final, respondent assessed the
deficiency of $63,573. Therefore, the assessment in this case
did not reflect a threshold underpayment of tax exceeding
$100,000.
With respect to section 301.6621-3(b)(2)(iii)(B), Proced. &
Admin. Regs., respondent claims that the Court’s decision
determined a deficiency, but it did not determine any issue with
respect to the existence of a large corporate underpayment.
Respondent contends that there was a large corporate underpayment
because from at least the return due date for the tax year ended
January 31, 1994, until the return due date for the tax year
- 19 -
ended January 31, 1995, petitioner had an underpayment with
respect to the tax year ended January 31, 1994, that exceeded
$100,000.
Section 301.6621-3(b)(2)(iii)(B), Proced. & Admin. Regs.,
plainly provides that section 6621(c) does not apply if, after
this Court determines the taxpayer’s liability for a period, the
threshold underpayment for the taxable period does not exceed
$100,000. The Court had no jurisdiction to make a determination
with respect to petitioner’s interest liability because section
7481(c) was triggered only after the decision became final and
respondent assessed the deficiency. Pen Coal Corp. v.
Commissioner, 107 T.C. 249, 254 (1996). The Court did decide
that the deficiency in petitioner’s income tax for the tax year
ended January 31, 1994, was $63,573. Respondent assessed this
amount after the decision became final. Under the regulations,
the Court’s decision and subsequent assessment establish that
there was not a threshold underpayment of tax exceeding $100,000
for purposes of section 6621(c).
Finally, respondent relies on one sentence in the preamble
to the regulations to support his position that the amount of the
underpayment should be determined without consideration of any
NOL carryback. The entire paragraph containing the sentence
provides:
- 20 -
Post-Assessment Determinations of the Amount of the
Threshold Underpayment
Commentators argued that the section 6621(c) rate
should not apply if it is determined after assessment
that the threshold underpayment is less than $100,000.
The section 6621(c) rate does not apply if, as a result
of a full or partial abatement of an assessment to
correct an administrative error on the part of the
Service, the taxpayer’s threshold underpayment does not
exceed $100,000. The final regulations also provide
that the section 6621(c) rate does not apply, if, as a
result of a court determination of the taxpayer’s
liability, the threshold underpayment is less than
$100,000. However, a net operating loss or credit
carryback does not reduce the amount of the threshold
underpayment for an earlier taxable period. [T.D.
8447, 1992-2 C.B. 313, 315; emphasis added.]
The heading of the paragraph indicates that this portion of
the preamble is referring to postassessment determinations that
potentially affect the amount of a threshold underpayment. In
such a situation, the preamble states that an NOL does not reduce
the amount of an underpayment for an earlier taxable period. The
instant case does not involve a postassessment determination.
Rather, at the time of the Court’s decision and the subsequent
assessment, the parties were fully aware of the NOL, and
petitioner’s liability for the tax year at issue was computed
with allowance for the NOL carryback.
The regulations do not state that a liability or threshold
underpayment is not adjusted to account for an NOL for purposes
of determining whether section 6621(c) applies. Rather, the
regulations generally provide that if the liability assessed by
respondent or decided by this Court does not exceed $100,000,
- 21 -
then hot interest does not apply. As explained earlier, the
assessment date is generally the operative date for purposes of
determining whether there is a large corporate underpayment and
hot interest applies. If the liability is subsequently
redetermined by a Federal court, then the operative date is when
the judicial determination is made. Because petitioner did not
have a threshold underpayment of tax exceeding $100,000 after
this Court’s decision or on the assessment date, section 6621(c)
does not apply.14
Respondent’s arguments in this case focus on petitioner’s
liability as of the return due date, without reference to any
future events that might ultimately reduce petitioner’s liability
for the taxable year. This is consistent with the general rule
of section 6601(d) that if the amount of income tax is reduced by
the carryback of NOLs and capital losses, the reduction does not
affect the computation of interest for the period ending with the
filing date for the taxable year in which the NOL or capital loss
arose. However, unlike normal interest, hot interest does not
start to accrue until the applicable date.15 This distinguishes
14
We leave to another day whether an NOL carryback
determination made postassessment or after a final judicial
determination would affect the existence or amount of a threshold
underpayment of tax.
15
The legislative history of sec. 6621(c) indicates that
Congress was concerned that corporations were allowed to deduct
interest on tax obligations but that individuals were not.
(continued...)
- 22 -
the rule regarding NOLs in section 6601(d) from the position
advanced by respondent in the context of section 6621(c), and it
highlights the distinction in the statutory scheme between
liability for interest and the proper rates of interest to apply.
Our holding today is consistent with this statutory scheme and
incorporates the mandate of the statute, the guidance set forth
in respondent’s own regulations, and the legislative history
associated with the enactment of the increased interest rate
rules.
III. Conclusion
The statutes and regulations containing the interest
provisions indicate that the purpose of section 6621(c) is to
impose a higher rate of interest on corporate taxpayers if, after
a letter or notice proposing or determining a deficiency
exceeding $100,000 is sent to a taxpayer and payment is not
promptly made, a judicial determination or assessment is made
reflecting an underpayment exceeding $100,000. In the instant
case, the parties agreed and this Court decided that petitioner
had a deficiency of $63,573 for the tax year ended January 31,
15
(...continued)
Imposing a $100,000 threshold and allowing corporations to avoid
hot interest by paying the underpayment within 30 days after
notice was provided indicates that Congress was reluctant to
allow arbitrage activities by corporations accruing interest but
did not want to penalize corporations with small underpayments or
which promptly paid their tax liabilities. H. Conf. Rept. 101-
964 (1990), 1991-2 C.B. 560, 591.
- 23 -
1994, computed after allowance of the NOL carryback. That amount
was assessed by respondent after this Court’s decision became
final. Although petitioner’s underpayment at the time of the due
date for the 1994 return was $225,753, petitioner was entitled
under the Code to carry back its NOL from the subsequent year,
resulting in a tax of $63,573 for petitioner’s tax year ended
January 31, 1994. The NOL arose more than 3-1/2 years before
respondent sent the 30-day letter containing the proposed
deficiency exceeding $100,000. Applying hot interest in this
situation, where the amount of petitioner’s liability decided by
the Court, the amount assessed by respondent, and the tax imposed
by the Code does not exceed $100,000, is contrary to the
regulations. Accordingly, we hold that section 6621(c) does not
apply under the facts of this case.
An appropriate order will be
entered.