UNITED STATES TAX COURT

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.

4

Before we

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.

SEC. 7481(c).

Determinations.--

Section 7481(c) provides:

Jurisdiction Over Interest

(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.

Pship. v. Commissioner, supra at 426.

ASA Investerings

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.

Admin. Regs.

Sec. 6621(c)(2); sec. 301.6621-3(c)(2), Proced. &

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.

301.6621-3(b)(2)(ii), Proced. & Admin. Regs.

Sec.

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.

13

Lastarmco, Inc. v. Commissioner, 79 T.C. 810, 812 (1982),

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.

provides:

The entire paragraph containing the sentence

- 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. 101964 (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.