"Hot Interest" for Large Corporate Underpayments

"Large corporate under-payments" exceeding $100,000 are subject to a "hot interest" rate that is 2 percent higher than the normal rate for underpayments. The higher rate may take effect after the taxpayer is notified of an underpayment exceeding the threshold and fails to pay. There must, however, actually be a "large corporate underpayment" at the end of the day forthe additional interest to be due. Thus, the regulations provide that "hot interest" is provisionally collected once total tax assessments exceed $100,000, but the extra interest will be refunded if a court later determines the underpayment to fall below the threshold.

On September 9, 2003, the Tax Court held in Med James, Inc. v. Commissioner that the "hot interest" rate does not apply when an underpayment is reduced below the $100,000 threshold by a car-ryback. The taxpayer had reduced its potential $225,753 underpayment for 1994 to $63,573 by carrying back a loss from 1995. The Service contended that