Med James, Inc. v. Comm'r of Internal Revenue
| Citation | 121 T.C. No. 9,121 T.C. 147 |
| Decision Date | 09 September 2003 |
| Docket Number | No. 366–01.,366–01. |
| Parties | MED JAMES, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Corporate taxpayer petitioned for redetermination of amount of interest on assessed deficiencies, following Tax Court decision, which applied its net operating loss (NOL) carryback to determine its unpaid tax liability. The Tax Court, Goeke, J., held that: (1) Court had jurisdiction to redetermine hot interest; (2) assessment amount was determined after deduction for NOL carrybacks for purposes of determining tax underpayment; and (3) hot interest did not apply after Tax Court decision determined taxpayer's unpaid liability did not exceed threshold amount for hot interest.
Decision for taxpayer.
Ron R. Morgan, for petitioner.
Eric Johnson, for respondent.
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.
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 () 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.
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.
On November 5, 1998, respondent sent a letter of proposed deficiency (30–day letter) to petitioner proposing a deficiency 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 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 ¦ ¦
¦carrybackfrom the tax year ended January 31, 1995, to the tax ¦$225,753.00¦
¦year ended January 31, 1994 ¦ ¦
+-----------------------------------------------------------------+-----------¦
¦ ¦ ¦
+-----------------------------------------------------------------+-----------¦
¦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 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 under section 6621(c). Petitioner has paid the deficiency assessed for the tax year ended January 31, 1994, plus...
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