CCA 1120026: when large-corporate underpayment interest begins

Plain-English summary

Chief Counsel Advice addresses when the increased interest rate for a large corporate underpayment begins under IRC § 6621(c). It states that the applicable date is 30 days after the earlier of the first 30-day letter or a notice of deficiency, and that once triggered, the rate applies to subsequent underpayments determined for that tax year. The advice also discusses the $100,000 threshold, the effect of net operating loss carrybacks, and the Service's disagreement with a Tax Court decision concerning the treatment of an NOL carryback.

Ruling snapshot

• Question: When does the increased IRC § 6621(c) interest rate apply to a large corporate underpayment?
• Outcome: Advice given.
• Key authorities: IRC §§ 6601(a), 6601(d), and 6621(a)(2), (c); Treas. Reg. § 301.6621-3.

Full text (IRS public release)

ID: CCA_2011042012330242 Number: 201120026
Release Date: 5/20/2011
Office: --------------
UILC: 6621.04-00

From: -------------------------
Sent: Wednesday, April 20, 2011 12:33:03 PM
To: ------------------------
Cc:
Subject: hot interest

The applicable date for computing section 6621(c) interest on a large corporate
underpayment of tax (hot interest) is established thirty days after the issuance of a first
30-day letter or a notice of deficiency, whichever is earlier. Once triggered, the
applicable date is effective for all subsequent underpayments determined for that year.

Section 6601(a) provides that if any amount of tax is not paid on or before the last date
prescribed for payment, interest at the rate established under section 6621 will accrue
from the last date to the date paid.

Section 6621 establishes the rates for interest on tax overpayments and tax
underpayments. Under section 6621(a)(2), the underpayment rate is the sum of the
federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on
any large corporate underpayment for any period after the applicable date, the
underpayment rate under section 6621(a)(2) is determined by substituting "5
percentage points" for "3 percentage points." This interest rate is also known as “hot
interest.”

A "large corporate underpayment" is an underpayment of tax that exceeds $100,000.00
for any single taxable period. The “applicable date” is the thirtieth day after the earlier of
the mailing of the first letter of proposed deficiency which allows the taxpayer an
opportunity for administrative review (“30-day letter”), or the mailing of the notice of
deficiency. See section 6621(c)(2)(A)(i) and (ii) and Treas. Reg. Section 301.6621-
3(c)(2)(i) and (ii), which are generally effective for periods after December 31, 1990.

“Hot interest” begins to run per section 6601(a) “when a tax becomes both due and
unpaid.” Avon Products, Inc. v. United States, 588 F.2d 342, 344 (2d. Cir. 1978).
Pursuant to section 301.6621-3(b)(2)(ii), the existence of a threshold underpayment of
tax should be determined as of the due date of the return. Thus, we would argue that
an NOL carryback that arises after the due date of the return does not affect the
existence of a threshold underpayment.
 2

We continue to believe that once the threshold is met, hot interest applies to all
underpayments of tax after the applicable date regardless of any payments made. The
satisfaction of a deficiency by the carryback of an NOL is considered a payment.
Section 6601(d) provides generally that if an amount of tax is reduced by reason of a
carryback of an NOL, the reduction shall not affect the computation of interest for the
period ending with the filing date for the year in which the NOL arises. We do not agree
with the decision in Med James, Inc., v. Commissioner, 121 T.C. 147 (2003).

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