United States: Contesting Increased Interest On Large Corporate Underpayments

Section 6621(c) imposes a two percentage point higher interest rate on any underpayment of tax by a C Corporation if at any time the underpayment exceeds $100,000 for any taxable period. The Regulations provide that for purposes of determining whether or not the underpayment of tax exceeds $100,000, any payments made after the last date prescribed for payment are ignored. For example, payments made by way of amended return or deposits in the nature of a cash bond affect the actual amount of underpayment on which interest is computed, but these payments do not affect the amount of underpayment for purposes of determining whether or not there was "at any time" an underpayment in excess of $100,000. Thus, the actual deficiency determined by the Tax Court may be only $40,000, but interest may be imposed at the §6621(c) rate because there was an underpayment in excess of $100,000 for purposes of §6621(c). If applicable, the §6621(c) rate applies for all purposes where interest applies.

The higher rate does not apply from the due date of the return; it commences only on the 30th day after a triggering Notice, if the taxpayer does not pay the amount due as set forth in the Notice within 30 days. When deficiency procedures apply, the triggering Notice is the earlier of (i) the date on which the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review by the IRS Appeals Office is sent (usually a 30-day letter), or (ii) the date the Notice of Deficiency is sent. When deficiency procedures do not apply, the triggering Notice is the first notice sent to the taxpayer advising of an assessment.

It is important to understand that there are two separate conditions for imposition of the §6621(c) rate:

- whether the §6621(c) rate applies, which depends on whether the underpayment exceeds $100,000, and

- when, if at all, the §6621(c) rate commences, which depends on (i) whether there has been a triggering Notice and (ii) whether the amounts shown thereon as due have been paid within the required 30 days.

These tests are applied separately. For example, if the Service sends a 30-day letter on June 1, 1992 asserting that $1,000 is due, which amount the corporation fails to pay by June 30, 1992, and five years later the ultimate tax deficiency is determined to be $200,000, the §6621(c) rate will apply from July 1, 1992, 30 days after the notice seeking $1,000 was sent. Thus, a C Corporation which receives a letter or notice that could trigger the §6621(c) rate should carefully consider the possible interest rate consequences of not paying the full amount within 30 days, even if the amount shown as due is small.

Unfortunately, there appears to be no way to judicially contest the imposition of §6621(c) interest in court before the interest is paid. The Tax Court recently held that it does not have jurisdiction to determine the issue as part of the pre-assessment deficiency proceeding. In Pen Coal Corp., 107 T.C. No. 14 (11/6/96), the Notice of Deficiency itself included a determination that the §6621(c) rate applied. In the petition, the taxpayer contested the imposition of the §6621(c) rate. The Tax Court granted the Commissioner's motion to dismiss this portion of the petition for lack of jurisdiction.

What alternatives are available to contest the imposition of the §6621(c) rate? The taxpayer could pay the interest, file a claim for refund and bring an action in the U.S. Court of Federal Claims or a federal district court. In addition, §7481(c) permits a taxpayer whose tax case was litigated in the Tax Court, and who pays the entire amount of the tax deficiency determined by the Tax Court, plus the interest claimed by the Service, to petition the Tax Court within one year after the decision of the Tax Court becomes final for a determination as to the proper amount of interest which should have been charged.

Tax Court Rule 261 provides that the petitioner should file a "Motion to Redetermine Interest Pursuant to Rule 261". This motion will ordinarily be disposed of without an evidentiary or other hearing unless it is clear from the motion or the Commissioner's written response that there is a bona fide factual dispute that cannot be resolved without an evidentiary hearing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.