"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 the carryback from 1995 should be ignored in determining whether the $100,000 threshold was exceeded for 1994. However, the Tax Court held that the regulatory language squarely covered the case. Thus, "hot interest" did not run on the 1994 underpayment at all because the final liability was less than $100,000.
Language in the opinion creates some confusion about its scope. For example, the preamble to the regulations expressly states that carrybacks should be disregarded in determining whether the $100,000 threshold is exceeded. The court held this language refers only to refunds of previously paid deficiencies and does not apply when the carry-back is taken into account in computing the initial assessment, as it was in Med James. This distinction is debatable. The overriding issue seems to be whether the Tax Court is right that carry-backs should be considered, or whether the preamble is right that they should not. If the Tax Court's reasoning is accepted, it could extend to any case in which "hot interest" may apply.
Taxpayers potentially affected by the holding should be conscious of potential statute of limitations issues. As long as a related carryback claim remains pending, taxpayers may be able to raise an argument based on Med James. After a carryback is allowed, however, a request for refund of further interest may be treated as an independent claim for limitations purposes. Taxpayers therefore should consider taking appropriate steps to protect their position while the issues raised by Med James are being litigated.
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This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
