Final Regs on Large Corporate Underpayments Contain Few Changes

   [4830-01]

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations under section 6621(c), regarding an increase in the rate of interest payable on large corporate underpayments. Changes to the applicable law were made by the Omnibus Budget Reconciliation Act of 1990. The regulations affect certain corporations and are necessary to provide them with guidance needed to comply with these changes.

 EFFECTIVE DATE: January 1, 1991.

 FOR FURTHER INFORMATION CONTACT: David A. Schneider of the Office of Assistant Chief Counsel (Income Tax & Accounting), Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:IT&A:2) or telephone (202) 622-4920 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On December 19, 1990, the Federal Register (55 FR 52054) published a notice of proposed rulemaking that, by cross reference to temporary regulations, provided rules under section 6621(c) of the Internal Revenue Code of 1986, as amended (Code), relating to the increase in the rate of interest payable on large corporate underpayments of tax. Written comments were received, and on April 2, 1991, a public hearing was held. After consideration of the public comments regarding the proposed regulations, the regulations are adopted as revised by this Treasury decision. Descriptions of the revisions to the proposed regulations are included in the discussion of the public comments below.

PUBLIC COMMENTS

SCOPE OF SECTION 6621(c)

 The proposed regulations define an "underpayment of a tax" to include interest, penalties, additional amounts, and additions to tax. Accordingly, the section 6621(c) rate applies to those items. One commentator argued that this is a strained interpretation of section 6621(c) and contrary to legislative intent. The commentator based the argument upon a number of factors, including the fact that the proposed regulations adopt the concept of a "threshold underpayment of a tax" that specifically excludes these items solely for purposes of determining whether a large corporate underpayment exists. As stated in the preamble to the temporary regulations, the sole purpose of the "threshold underpayment" concept is to enable taxpayers and the Service to determine more easily, prior to the time of an assessment, whether the taxpayer's underpayment exceeds the $100,000 benchmark of section 6621(c)(3)(A). This concept has no application for any other purpose under section 6621(c) or elsewhere in the federal tax laws.

 Section 6601(a), which imposes interest on underpayments, effectively defines an "underpayment" as any excess of the amount of tax imposed by the Code over the amount of tax paid on or before the last date prescribed for payment. This reference to the amount of tax imposed by the Code includes interest, penalties, additional amounts, and additions to tax. See sections 6601(e)(1) and 6665(a)(2). The final regulations therefore provide that the section 6621(c) rate applies to the entire underpayment of a tax, including any interest, penalties, additional amounts, and additions to tax.

 Some commentators argued that section 6621(c) does not apply to underpayments of income tax that are not subject to the deficiency procedures, citing the following language from the Conference Committee Report on section 6621(c): "In the case of an underpayment of a tax other than an income tax, a notice provided by the IRS that is similar to [a 30-day or 90-day letter] is treated similarly." H.R. Rep. No. 964, 101st Cong., 2d Sess. 1101 (1990). The report then cites an assessment notice under section 6303 as an example of a "similar" notice.

 This portion of the report describes draft legislative language contained in the Senate bill. The conferees rejected this language and substituted the existing language describing potential trigger notices by reference to whether the deficiency procedures apply to a particular underpayment. The committee report, however, was not revised to reflect the amendment. Accordingly, the final regulations continue to provide that section 6621(c) applies to nondeficiency procedure underpayments of income tax.

APPLICABLE DATE

FORM OF LETTER OR NOTICE

The proposed regulations provide that if the deficiency procedures of subchapter B of Chapter 63 of the Code apply to an underpayment, the applicable date is the 30th day after the earlier of the date on which the Service sends the taxpayer (i) a 30-day letter, or (ii) a 90-day letter. If the deficiency procedures do not apply to an underpayment, the applicable date is the 30th day after the date on which the Service sends the first letter or notice that notifies the taxpayer of an assessment or proposed assessment.

 Commentators urged the Service to adopt a number of special procedures designed to assist corporate taxpayers to act more expeditiously on letters and notices that may trigger an applicable date. For example, commentators urged the Service to identify such letters and notices, to allow taxpayers to designate an address to which the Service would send the letters and notices, and to post- date them.

 Under current administrative practice, 30-day letters, 90-day letters, and assessment notices are accompanied by a separate insert containing standard language of a general nature designed to alert taxpayers to the potential applicability of section 6621(c). Treasury and the Service believe that this practice gives taxpayers adequate notice of the possible application of section 6621(c). The Service has concluded that allowing taxpayers to designate a specific address for section 6621(c) notices is not administratively feasible at this time.

LETTERS AND NOTICES SENT PRIOR TO 30-DAY LETTERS

A few commentators asked for clarification that partial revenue agent reports ("RARs"), draft RARs, and information document requests that are sent to the taxpayer prior to a 30-day letter will be disregarded for purposes of determining an applicable date. Although the final regulations do not discuss this point, Treasury and the Service believe that the language of the statute and the regulations is clear that these documents are disregarded for purposes of determining an applicable date because they are not letters of proposed deficiency which allow the taxpayer an opportunity for administrative review in the Office of Appeals.

EXCEPTION FOR PAYMENT OF AMOUNT SHOWN AS DUE

The proposed regulations provide that a letter or notice will be disregarded for purposes of determining the applicable date if the taxpayer makes a payment equal to the amount shown as due in the letter or notice within 30 days of the date that the Service sends the letter or notice. Several commentators argued that 30 days is insufficient for many large corporate taxpayers to take advantage of the payment rule. The commentators proposed a number of changes to the final regulations, including extending the 30-day period in general and creating special exceptions.

 Section 6621(c)(2)(B)(ii) specifically limits the period for making a payment of the amount shown as due to 30 days. This period coincides with the 30-day period between the date that a letter or notice is sent and the applicable date of the section 6621(c) rate. Given the deliberate decision by Congress to limit these periods to 30 days in the statute, the final regulations do not extend the 30-day payment period or provide special exceptions.

TRANSITION RULE

The proposed regulations contain a special transition rule disregarding certain letters or notices sent by the Service prior to January 1, 1991, for purposes of determining the applicable date. The Service will disregard these letters and notices if the taxpayer made a payment on or before January 31, 1991, equal to the amount shown as due in the letter or notice plus a reasonable estimate of the interest payable on such amount.

 A number of commentators requested that the special transition rule be extended. One commentator asked that the regulations clarify that the payment of the amount shown as due in the most recent pre-1991 letter or notice satisfies the transition rule requirements even if the taxpayer had received a previous letter or notice showing a greater amount due for the same tax and the same taxable period.

 The January 31, 1991, cut-off date was chosen to provide a comparable period to the 30-day period provided in the statute for paying the amount shown as due. Treasury and the Service continue to believe that the January 31, 1991, cut-off date is appropriate. Accordingly, the period for payment under the transition rule has not been extended in the final regulations. However, the final regulations do clarify that the payment of the amount shown as due in the most recent pre-1991 letter or notice satisfies the transition rule requirements even if the taxpayer had received a previous letter or notice showing a greater amount due for the same tax and the same taxable period.

RELIANCE ON TRANSCRIPTS OR ACCOUNT INFORMATION

In response to comments, the Service has considered whether taxpayers should be entitled to rely on transcripts or account information provided by the Service for purposes of avoiding the application of section 6621(c). For example, if the taxpayer receives a letter or notice showing an amount due, and the Service's account information on the taxpayer erroneously shows a balance of zero, the letter or notice would be disregarded for purposes of determining an applicable date. The Service has determined that such a rule would be inconsistent with the statute, which clearly provides that certain notices will trigger an applicable date under section 6621(c).

PARTNERSHIPS SUBJECT TO TEFRA PROCEDURES

Three commentators requested guidance on the relationship between section 6621(c) and TEFRA partnership procedures. These commentators argued that only an assessment notice to a partner, and not any prior notice sent under the TEFRA procedures, should trigger an applicable date. Under the TEFRA procedures, the partnership, or the partners, may receive a number of notices prior to the actual assessment of the partnership adjustment. These notices include (i) notices of the beginning of a partnership-level administrative proceeding, (ii) a letter relating to proposed adjustments, rights of appeal, and requirements for filing a protest (a "60-day letter"), and (iii) the notice of a final partnership administrative adjustment ("FPAA").

 Section 6230(a)(1) (which sets forth certain administrative provisions relating to TEFRA proceedings) provides generally that the deficiency procedures do not apply to the assessment of a change in the tax liability of a partner which properly reflects the treatment of a partnership item. Section 6621(c) provides that if the deficiency procedures do not apply to an underpayment, the applicable date will be the 30th day after the date that the Service sends the first letter of assessment or proposed assessment. Thus, the final regulations clarify that TEFRA letters and notices sent prior to an assessment notice will not be taken into account in determining an applicable date. Accordingly, in the absence of a prior assessment notice, 30-day letter, or 90-day letter sent to a corporate partner with respect to items other than partnership items, the applicable date will be the 30th day after the day on which an assessment notice is sent to the partner with respect to partnership items.

WITHDRAWN LETTERS AND NOTICES

Several commentators argued that letters and notices that are withdrawn, modified, or revoked by the Service subsequent to their issuance should be disregarded in determining an applicable date.

 Section 6212(d) of the Code provides that a 90-day letter that is rescinded will not be treated as a notice of deficiency for certain purposes. See Rev. Proc. 88-17, 1988-1 C.B. 692 (providing instructions on entering into an agreement under section 6212(d) to rescind a notice of deficiency). Under section 6404, the Secretary is authorized in certain limited circumstances to abate assessments. Consistent with these provisions, the final regulations provide that any 90-day letter that is rescinded and any assessment notice that is abated in full will be disregarded in determining an applicable date.

 By contrast, no statutory or administrative provision exists for withdrawing 30-day letters. However, the final regulations provide that, in determining an applicable date, a 30-day letter will be disregarded if the letter is issued as a result of an administrative error either to the wrong taxpayer or for the wrong taxable period.

 Commentators suggested that any 30-day letter that Appeals sends back to Examination for further consideration or development of an issue should be treated as withdrawn for purposes of determining an applicable date. They argued that the taxpayer is likely to receive no opportunity for Appeals review in such a case before the expiration of the 30-day period for paying the amount shown as due in the letter.

 Congress intended that a taxpayer receive notification from the Service, and have a limited opportunity to pay the tax, before the section 6621(c) rate becomes applicable. However, a 30-day letter need not raise every potential issue or adjustment for the taxable year before the section 6621(c) rate becomes applicable. The statute is also clear that Appeals review is not a precondition to the application of section 6621(c) because the applicable date may be determined by reference to a 90-day letter if the Service elects not to issue a 30-day letter. Moreover, to postpone the applicable date until all issues are fully developed by the Examination function of the Service may provide taxpayers with an incentive not to cooperate with Examination prior to the time the case is forwarded to Appeals. Thus, the final regulations do not adopt this suggestion.

LETTERS AND NOTICES FOR DIFFERENT TYPES OF TAXES

The proposed regulations provide that, in determining whether a threshold underpayment exists, different types of taxes (such as income tax and FICA tax) and amounts that relate to different taxable periods are not added together. In response to a comment, the final regulations amplify this point by providing that a letter or notice relating to a particular type of tax may result in an applicable date only for that type of tax.

SMALL NOTICES AND LETTERS

The proposed regulations indicate that a letter or notice that remains unpaid 30 days after it is sent, regardless of the amount, will trigger an applicable date for a subsequently identified underpayment of the same type of tax for the same taxable period. Thus, a letter or notice for less than $100,000 can potentially trigger an applicable date for a large corporate underpayment that is later determined to exist. Several commentators urged the Service to adopt a rule that a letter or notice will not trigger the section 6621(c) rate unless the letter or notice indicates an amount due in excess of $100,000.

 Treasury and the Service have declined to make this change to the regulations for several reasons. First, the legislative history of section 6621(c) reveals that Congress did not intend that a letter or notice would trigger the section 6621(c) rate only for the amount shown as due in that letter or notice. See H.R. Rep. No. 964, 101st Cong., 2d Sess. 1101 (1990) ("The AFR plus 5 rate applies to the amount determined to be the underpayment, regardless of the amount of tax assessed in the 30-day letter, 90-day letter, or other notice."). Second, as discussed under Withdrawn Letters and Notices, neither notice of all issues nor administrative review is required by the statute as a precondition to application of the section 6621(c) rate. Third, the 30-day payment rule in the statute gives taxpayers a way to prevent certain notices (such as small assessment notices) from triggering the application of section 6621(c). Finally, the suggested rule requires collapsing into one test the two separate statutory tests for determining (i) the existence of a large corporate underpayment and (ii) an applicable date.

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.

ABATEMENT OF INTEREST BECAUSE OF APPEALS DELAY

 Some commentators argued that the Service should abate the 6621(c) incremental interest automatically if the Service "causes" a delay during the appeals process. The legislative history of section 6621(c) indicates that Congress did not intend to postpone the application of the section 6621(c) rate until such time as the Service and the taxpayer have had ample opportunity to exchange legal arguments, request or furnish all necessary information, or resolve all disputed issues. Moreover, Congress gave the Service no special authority to abate section 6621(c) interest. Accordingly, the final regulations do not adopt this suggestion.

RELATIONSHIP BETWEEN FORMER AND CURRENT SECTION 6621(c)

 One commentator suggested that the regulations should address whether former section 6621(c) and current section 6621(c) could apply concurrently. The statute and regulations provide that section 6621(c) is effective for determining interest for periods after December 31, 1990, regardless of the taxable period to which the underlying tax relates. Former section 6621(c), prior to its repeal, increased by 20 percent the rate of interest imposed with respect to any substantial underpayment of income taxes attributable to tax motivated transactions. The repeal of former section 6621(c) was effective for returns the due date for which (determined without regard to extensions) is after December 31, 1989.

 It is clear from the effective dates that both former section 6621(c) and current section 6621(c) could apply to an underpayment of income tax by a C corporation if the requirements of both provisions are met. Because the applicability of these provisions depends on a number of independent factors, and because there is no uncertainty with respect to the effective dates of either provision, the final regulations contain no statement regarding the relationship between the two provisions.

SOURCE OF INTEREST RULES UNDER SECTION 861

 Under section 861, underpayment interest (expense) paid to the U.S. Government must be "apportioned" between U.S. and foreign sources. Refunded interest (income), however, is treated as entirely U.S. source. Commentators argued that this result is unfair to taxpayers and requested that the final regulations under section 6621(c) address this issue. Although section 6621(c) may exacerbate the effect of the different sourcing rules, the commentators' concern relates directly to the sourcing rules themselves, and not to section 6621(c). Therefore, the final regulations do not address this issue.

IMPACT OF PAYMENT UPON ACCESS TO TAX COURT

 Commentators expressed concern that because taxpayers must pay the amount shown as due in a letter or notice within 30 days in order to avoid an applicable date, the 30-day payment rule will discourage some taxpayers from seeking administrative review and from challenging proposed deficiencies in the Tax Court. To some extent, these changes in taxpayers approaches are predictable responses to section 6621(c), which was enacted to reduce the number and amount of corporate deficiencies by encouraging corporations to pay their taxes sooner. Thus, the final regulations do not contain a provision on this point.

NETTING OVERPAYMENTS AGAINST UNDERPAYMENTS

 In the legislative history of section 6621(c), Congress called upon the Secretary to implement the most comprehensive crediting procedures under section 6402 of the Code that are consistent with sound administrative practice. A number of commentators urged the Service to include in the final regulations under section 6621(c) crediting or "netting" provisions pursuant to which no underpayment interest would be imposed to the extent an overpayment is credited against an underpayment.

 The authority provided by section 6402 to the Secretary to credit the amount of any overpayment against any liability under the Code has significance beyond section 6621(c). The Service is continuing its efforts to develop crediting procedures in a separate project. Accordingly, no special crediting or netting provisions are contained in these final regulations.

CASH BOND PROCEDURES

 Two commentators requested that the final regulations address the restrictions on cash bond procedures. Generally, taxpayers may elect to make a deposit in the nature of a cash bond that will effectively stop the running of interest on an equal amount of underpayment. See Rev. Proc. 84-58, 1984-2 C.B. 501 (describing the deposit procedures). The taxpayer generally may request that the deposit be returned (without interest) anytime before assessment of the tax. However, if the deposit is returned, the depositor loses the benefit of the interest offset for the entire period of the deposit.

 Although the enactment of section 6621(c) may result in closer scrutiny being applied to certain aspects of the deposit procedures, any reevaluation of these procedures would involve numerous administrative issues that have significance far beyond section 6621(c). Thus, the final regulations do not address the restrictions contained in the cash bond procedures. Moreover, for the reasons set forth in the preamble to the temporary regulations, the final regulations continue to provide that a deposit in the nature of a cash bond will not be considered a payment of the amount shown as due.

SPECIAL ANALYSES

 It has been determined that these final rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on the regulations' impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is David A. Schneider of the Office of Assistant Chief Counsel (Income Tax & Accounting), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing these final regulations.

LIST OF SUBJECTS IN 26 CFR PART 301

 Administrative practice and procedure, Alimony, Bankruptcy, Child support, Continental shelf, Courts, Crime, Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income taxes, Investigations, Law enforcement, Oil pollution, Penalties, Pensions, Reporting and recordkeeping requirements, Statistics, Taxes.

Treasury Decision 8447

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 301 is amended as follows:

Part 301 -- Procedure and Administration

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 301.6621-3 is added to read as follows:

SECTION 301.6621-3 HIGHER INTEREST RATE PAYABLE ON LARGE CORPORATE UNDERPAYMENTS.

(a) IN GENERAL. Section 6621 establishes the interest rate for purposes of computing the amount of interest that must be paid under section 6601, relating to interest on underpayments of tax. Section 6621(a)(2) provides that the underpayment rate is the sum of the Federal short-term rate (determined under section 6621(b)) plus 3 percentage points. That underpayment rate is referred to hereinafter as the "section 6621(a)(2) rate." Section 6621(c) and this section, however, provide that the underpayment rate on any large corporate underpayment is the sum of the Federal short-term rate (determined under section 6621(b)) plus 5 percentage points. This higher underpayment rate is referred to hereinafter as the "section 6621(c) rate." The section 6621(c) rate applies only for periods after the applicable date (as determined in paragraph (c) of this section).

(b) LARGE CORPORATE UNDERPAYMENT -- (1) DEFINED. For purposes of section 6621(c) and this section, "large corporate underpayment" means any underpayment of a tax by a C corporation for any taxable period if the amount of the threshold underpayment of the tax (as defined in paragraph (b)(2)(ii) of this section) for that taxable period exceeds $100,000.

(2) UNDERPAYMENT OF A TAX -- (i) IN GENERAL. As used in section 6621(c) and this section, "underpayment of a tax" means the excess of a tax imposed by the Internal Revenue Code over the amount of such tax paid on or before the last date prescribed for payment. Except as provided in paragraph (b)(2)(ii) of this section, "tax" for such purposes includes interest, penalties, additional amounts, and additions to tax. See sections 6601(e)(1), 6665(a), and 6671(a). Thus, the section 6621(c) rate generally applies to any interest, penalties, additional amounts, and additions to tax, as well as to the underlying tax with respect to which such amounts are imposed.

(ii) THRESHOLD UNDERPAYMENT OF A TAX. Solely for purposes of this section and not for any other purpose under section 6621(c) or elsewhere in the interpretation or administration of the federal tax laws, a "threshold underpayment of a tax" is the excess of a tax imposed by the Internal Revenue Code (exclusive of interest, penalties, additional amounts, and additions to tax) for the taxable period over the amount of such tax paid on or before the last date prescribed for payment. Thus, any payments made after the last date prescribed for payment (for example, by way of an amended return) will not affect the existence of a threshold underpayment. In determining whether there is a threshold underpayment, different types of taxes (such as income tax and FICA tax) and amounts that relate to different taxable periods are not added together.

(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.

(iv) SPECIAL RULE. The section 6621(c) rate is not used to compute the interest charges that a taxpayer timely assesses against itself in return for using a method of tax accounting or reporting that defers the payment of tax, such as the interest charges relating to passive foreign investment companies under section 1291(c) and installment obligations of nondealers under section 453A(c). However, to the extent such charges are not paid on or before the last date prescribed for payment and therefore become part of an underpayment of a tax, the section 6621(c) rate will apply to such amounts for periods after the applicable date (as determined in paragraph (c) of this section).

(3) C CORPORATION DEFINED. For purposes of section 6621(c)(3)(A) and this section, "C corporation" means, with respect to any taxable period, a corporation that is a C corporation during any part of the taxable period. Interest on a large corporate underpayment for a taxable period continues to be imposed at the auction 6621(c) rate even if during or after the taxable period --

(i) The taxpayer ceases to be a C corporation; or

(ii) The underpayment becomes the liability of a successor or transferee that is not a C corporation.

(4) TAXABLE PERIOD. For purposes of section 6621(c) and this section, the "taxable period" is the taxable year in the case of any tax imposed by subtitle A of the Internal Revenue Code. In the case of any other tax, the "taxable period" is the period to which the underpayment relates. For example, the taxable period for an underpayment of FICA taxes is the calendar quarter. If the underpayment does not relate to a particular period (for example, in the case of certain transactional excise taxes), the "taxable period" is the period covered by a return on which the tax is required to be shown.

(5) LAST DATE PRESCRIBED FOR PAYMENT. For purposes of this section, the "last date prescribed for payment" means the last date prescribed for payment as determined, without regard to any extension of time, under section 6601(b).

(c) APPLICABLE DATE -- (1) IN GENERAL. The section 6621(c) rate applies only to periods after the applicable date. Pursuant to the effective date of section 6621(c) and paragraph (e) of this section, however, the section 6621(c) rate will not apply prior to January 1, 1991, even if the applicable date is prior to December 31, 1990. A letter or notice relating to a particular type of tax creates an applicable date only for that type of tax. For example, a letter or notice with respect to FUTA tax will not create an applicable date with respect to income tax for the same taxable year.

(2) WHEN DEFICIENCY PROCEDURES APPLY. The applicable date, in the case of any underpayment of a tax to which the deficiency procedures of subchapter B of Chapter 63 of the Internal Revenue Code apply, is the 30th day after the earlier of --

(i) The date on which the Service sends the taxpayer the first letter of proposed deficiency that allows the taxpayer an opportunity for administrative review in the Service's Office of Appeals (commonly called a "30-day letter"); or

(ii) The date on which the Service sends a deficiency notice under section 6212 of the Internal Revenue Code (commonly called a "90-day letter").

(3) WHEN DEFICIENCY PROCEDURES DO NOT APPLY. The applicable date, in the case of any underpayment of a tax to which the deficiency procedures do not apply, is the 30th day after the date on which the Service sends the first letter or notice that notifies the taxpayer of an assessment or proposed assessment of the tax. In the case of income taxes, for example, the deficiency procedures do not apply to amounts shown as due on the taxpayer's return if the taxpayer fails to remit the full amount on or before the last date prescribed for payment, and to amounts attributable to mathematical or clerical errors on a return (unless a request for abatement is filed by the taxpayer under section 6213(b)). Because no 30-day letter or 90-day letter is issued to the taxpayer in such cases, the applicable date is the 30th day after the date on which an assessment notice under section 6303 of the Internal Revenue Code is sent.

(4) PARTNERSHIP ITEMS. For purposes of section 6621(c) and this paragraph (c), 60-day letters and the notices described in sections 6223(a)(1) and 6223(a)(2) (relating to administrative proceedings at the partnership level) are not treated as letters of proposed deficiency that allow the taxpayer an opportunity for administrative review in the Service's Office of Appeals, deficiency notices under section 6212 of the Internal Revenue Code, or letters or notices that notify the taxpayer of an assessment or proposed assessment of the tax. Thus, in the absence of any other letter or notice described in paragraph (c)(2) or (c)(3) of this section that establishes an earlier applicable date, the applicable date in the case of any underpayment of a tax attributable, in whole or in part, to a partnership item (as defined in section 6231(a)(3)) is the 30th day after the date on which the Service sends the first letter or notice that notifies the taxpayer of an assessment of the tax.

(5) EXCEPTION FOR PAYMENT OF AMOUNT SHOWN AS DUE -- (i) IN GENERAL. A letter or notice will be disregarded for purposes of determining the applicable date if the taxpayer makes a payment equal to the amount shown as due in the letter or notice within 30 days from the date that the Service sends the letter or notice.

(ii) SPECIAL TRANSITION RULE. A letter or notice sent by the Service prior to January 1, 1991, will be disregarded by the Service for purposes of determining the applicable date if the taxpayer makes a payment on or before January 31, 1991, equal to the amount shown as due in the letter or notice plus a reasonable estimate of the interest payable on such amount computed by applying the section 6621(a)(2) rate. If the taxpayer has received two or more letters or notices with respect to the same tax for the same taxable period and pays the amount shown as due in the last letter or notice sent prior to December 19, 1990, (plus a reasonable estimate of the interest), all of the prior letters and notices with respect to the same tax for the same taxable period will be disregarded under this paragraph (c)(5)(ii). In the case of an assessment notice, the payment of the amount of interest shown as due on the last assessment notice sent to the taxpayer prior to December 19, 1990, will be treated as a payment of a reasonable estimate of the interest payable on the amount shown in that assessment notice or in any prior assessment notice sent with respect to the same tax for the same taxable period. The special transition rule in this paragraph (c)(5)(ii) applies even if the payment is not made within 30 days of the date on which the Service sent the letter or notice.

(iii) AMOUNT SHOWN AS DUE. For purposes of section 6621(c)(2)(B)(ii) and this paragraph (c)(5), the "amount shown as due" in any letter or notice means the total amount of tax, as well as any interest, penalties, additional amounts, and additions to tax that are set forth in the letter or notice. A deposit in the nature of a cash bond will not be considered a payment of the amount shown as due.

(6) EXCEPTION FOR WITHDRAWN LETTERS AND NOTICES -- (i) LETTERS OF PROPOSED DEFICIENCY. A letter of proposed deficiency will be disregarded for purposes of determining the applicable date if the letter of proposed deficiency is issued as a result of an administrative error either to the wrong taxpayer or for the wrong taxable period.

(ii) DEFICIENCY NOTICES. A deficiency notice under section 6212 of the Internal Revenue Code will be disregarded for purposes of determining the applicable date if the deficiency notice is rescinded under section 6212(d).

(iii) ASSESSMENT LETTERS AND NOTICES. A letter or notice that notifies the taxpayer of an assessment or proposed assessment of tax will be disregarded for purposes of determining the applicable date if the full amount of tax assessed is subsequently abated.

(d) EXAMPLES. The application of this section may be illustrated by the following examples.

EXAMPLE 1. V, a C corporation, timely files Form 941 on January 31, 1991, for the fourth quarter of 1990. On September 1, 1992, the Service sends V a section 6303 notice and demand reflecting an additional FICA tax liability for that quarter of $90,000. Interest computed at the section 6621(a)(2) rate totals $15,000 as of September 1, 1992. Accordingly, V's underpayment of FICA tax for the fourth quarter of 1990 exceeds $100,000. However, V's $90,000 threshold underpayment of FICA tax for that taxable period is less than $100,000, so that the section 6621(c) rate will not apply to the underpayment for that taxable period.

EXAMPLE 2. (i) W, a C corporation, timely files its 1990 income tax return on March 15, 1991, showing a liability of $95,000, of which W pays only $35,000 with the return. On June 1, 1991, the Service sends W an assessment notice reflecting the balance due of $60,000 plus interest computed at the section 6621(a)(2) rate. W pays all amounts due on August 1, 1991. On July 1, 1993, the Service sends W a 90-day letter (without having sent a 30-day letter) reflecting an additional income tax deficiency of $85,000 for the taxable year 1990. W files a petition in the Tax Court within 90 days. In 1995, the Tax Court determines a $50,000 income tax deficiency (exclusive of interest, penalties, additional amounts, and additions to tax) for 1990, which the Service promptly assesses against W.

(ii) As a result of the combination of the failure to timely pay the $60,000 of income tax reported as due on the return and the Tax Court's determination of an additional deficiency of $50,000, W's threshold underpayment of income tax for 1990 is $110,000. Because W is a C corporation and the threshold underpayment for 1990 exceeds $100,000, the section 6621(c) rate applies to W's 1990 large corporate underpayment for periods after the applicable date.

(iii) The applicable date is July 1, 1991, the 30th day after the date on which the Service sent W the first assessment notice.

(iv) From March 16, 1991, through July 1, 1991, interest on W's 1990 underpayment of income tax (including any interest, penalties, additional amounts, and additions to tax) is computed at the section 6621(a)(2) rate. From July 2, 1991, such interest is computed at the section 6621(c) rate.

(v) If W had paid the amount shown as due on the June 1, 1991, assessment notice on or before June 30, 1991, instead of on August 1, 1991, the applicable date would have been July 31, 1993.

(vi) Assume that W had paid the amount shown as due on the June 1, 1991, assessment notice on or before June 30, 1991. If W had made a $40,000 deposit in the nature of a cash bond on July 15, 1993, the applicable date would be July 31, 1993. Moreover, the deposit would have no effect on the existence or amount of W's threshold underpayment or large corporate underpayment for 1990. In such a case, however, when the Service assesses the amount due from W in 1995, the deposit would be treated as a payment made as of July 15, 1993, for purposes of computing interest due after that date. As a result, interest would accrue after July 15, 1993, (at the section 6621(c) rate) only on the portion of W's 1990 underpayment that exceeds the $40,000 deposit amount.

EXAMPLE 3. (i) X, a C corporation, filed its 1989 income tax return on September 17, 1990, pursuant to an automatic extension. X enclosed payment of the $7,500 balance reported on the return as due (plus interest). On January 1, 1992, the Service sends X a written notification that X's 1989 income tax return is being examined. This written notification also contains a request that X provide supplemental information with respect to particular deductions totalling $1.5 million. On July 1, 1993, the Service sends X a 30-day letter proposing a $450,000 without any reference to penalties, additional amounts, additions to tax, and interest) with respect to 1989. On December 15, 1993, the Service sends X a 90-day letter asserting a deficiency of $300,000 (excluding penalties, additional amounts, additions to tax, and other interest). X does not file a Tax Court petition and the Service assesses the $300,000 (plus interest and penalties) on April 1, 1994. On April 5, 1994, X pays the full amount assessed. Thereafter, X timely files an administrative claim for refund and a refund suit in federal district court for the amounts assessed on April 1, 1994. On September 30, 1995, the federal district court determines that, exclusive of interest and penalties, X overpaid its 1989 income tax by $250,000.

(ii) The April 1, 1994, assessment establishes at that time that X's threshold underpayment of income tax for 1989 is $300,000. Because X is a C corporation and the threshold underpayment for 1989 exceeds $100,000, X's underpayment of income tax for 1989 is a large corporate underpayment to which the section 6621(c) rate applies for periods after the applicable date. X's decision to file a refund claim does not affect, in and of itself, either the existence of a threshold underpayment or the amount of X's large corporate underpayment.

(iii) For purposes of determining the amount of interest to assess on April 1, 1994, the applicable date is July 31, 1993, the 30th day after the date on which the Service sent X a 30-day letter. The January 1, 1992, notice of examination and request for additional information has no effect on the applicable date. Similarly, the September 30, 1995, federal district court decision has no effect on the applicable date.

(iv) From March 16, 1990, through July 31, 1993, interest on X's 1989 underpayment of income tax (including any interest, penalties, additional amounts, and additions to tax) is computed at the section 6621(a)(2) rate. From August 1, 1993, through April 5, 1994, such interest is computed at the section 6621(c) rate.

(v) Because of the federal district court's decision that X's underpayment, exclusive of interest and penalties, was only $50,000, X does not have a large corporate underpayment of income tax for 1989. Thus, the interest X paid with respect to the remaining $250,000 in taxes (exclusive of interest and penalties) becomes part of the overpayment and will be refunded. In addition, any interest computed at the section 6621(c) rate for the period from August 1, 1993, through April 5, 1994, should be recomputed at the section 6621(a)(2) rate and the difference refunded.

EXAMPLE 4. (i) Y, a C corporation, timely filed its 1989 income tax return on March 15, 1990, and enclosed payment of the amount reported on the return as due. On May 1, 1990, the Service sent to Y an assessment notice for $1,000 resulting from a math error on Y's return. Y did not request an abatement of the assessment pursuant to section 6213(b). Instead, Y paid the $1,000, plus interest, on July 31, 1990. On March 31, 1992, the Service sends Y a 90-day letter showing an income tax deficiency for 1989 of $125,000 (exclusive of interest, penalties, additional amounts, and additions to tax). No 30-day letter had been issued previously to Y in connection with its 1989 taxable year. Y does not file a petition with the Tax Court, but files an amended return for 1989 on April 15, 1992, showing $30,000 of tax due. Y pays this amount (plus interest from March 15, 1990, computed at the section 6621(a)(2) rate) with the amended return. Shortly thereafter, the Service assesses the $125,000 deficiency (plus interest) and credits the April 15, 1992, payment against the assessment.

(ii) Y's threshold underpayment for 1989 is $125,000 notwithstanding Y's April 15, 1992, payment of $30,000. Because Y is a C corporation and the threshold underpayment for 1989 exceeds $100,000, Y has a large corporate underpayment of income tax for the taxable period 1989 to which the section 6821(c) rate applies for periods after the applicable date.

(iii) Because Y paid the $1,000 amount shown as due on the math error assessment notice (plus interest) on or before January 31, 1991, the applicable date is April 30, 1992, the 30th day after the 90-day letter is sent.

(iv) From March 16, 1990, through April 30, 1992, interest is computed on Y's underpayment of income tax (including any interest, penalties, additional amounts, and additions to tax) at the section 6621(a)(2) rate. From May 1, 1992, such interest is computed at the section 6621(c) rate.

(v) If Y had not paid the $1,000 amount shown as due on the math error assessment notice (plus interest) on or before January 31, 1991, the applicable date would have been May 31, 1990, and interest would be computed at the section 6621(c) rate beginning on January 1, 1991. If, however, Y had timely requested an abatement of the assessment under section 6213(b), the applicable date would be April 30, 1992.

EXAMPLE 5. (i) Effective January 1, 1993, Y converts from a C corporation to an S corporation. On January 31, 1993, Y files its 1992 FUTA tax return and encloses a payment equal to the amount reported as due on the return. On March 15, 1993, Y files its 1992 income tax return and encloses a payment equal to the amount reported as due on the return. On August 1, 1993, the Service sends to Y an assessment notice for $150,000 of FUTA tax, plus interest, with respect to calendar year 1992. Y pays the full amount shown as due in the assessment notice on August 7, 1993. On January 1, 1995, Y files an amended income tax return for 1992 showing $15,000 of tax due. Y pays this amount with the amended return. On February 10, 1995, the Service sends Y an assessment notice for the interest payable on the $15,000. Y pays this interest on February 13, 1995.

(ii) Y's threshold underpayment of FUTA tax for 1992 is $150,000. Because Y was a C corporation in 1992 and the threshold underpayment of FUTA tax for 1992 exceeds $100,000, Y has a large corporate underpayment of FUTA tax. However, Y's threshold underpayment of income tax for the same taxable period (i.e., calendar 1992) is $15,000, so that Y does not have a large corporate underpayment of income tax for that year.

(iii) Because Y pays within 30 days the amount shown as due on the August 1, 1993, assessment notice, there is no applicable date with respect to the large corporate underpayment of FUTA tax for 1992.

(iv) All of the interest payable with respect to the 1992 underpayments of FUTA and income taxes is computed at the section 6621(a)(2) rate.

(v) If Y had not paid the amount shown as due on the August 1, 1993, FUTA tax assessment notice within 30 days, the applicable date would have been August 31, 1993, (the 30th day after the assessment notice is sent). Thus, interest would have been computed at the section 6621(c) rate after that date, even though Y is not at that time a C corporation.

(vi) If the amended 1992 income tax return Y files on January 1, 1995, had shown $115,000 of tax due instead of $15,000, Y's threshold underpayment of income tax for 1992 would have been $115,000. Because Y was a C corporation in 1992 and the threshold underpayment of income tax for that year would have exceeded $100,000, Y would have a large corporate underpayment of income tax for that year. However, because Y would have paid the amount shown as due in the February 10, 1995, assessment notice within 30 days of when that assessment notice was sent, there would have been no applicable date with respect to that large corporate underpayment and the section 6621(c) rate would have not applied.

EXAMPLE 6. (i) On August 1, 1990, the Service sent to Z, a C corporation, an assessment notice for $200,000 of income tax, plus $30,000 in interest and penalties, with respect to calendar year 1988. Subsequent assessment notices were sent to Z on September 12, 1990, October 10, 1990, and November 14, 1990, each including additional interest. The November 14, 1990, assessment notice provided that the total amount of tax, interest and penalties due was $242,000. On December 31, 1990, Z pays $230,000. On February 13, 1991, the Service sends Z an assessment notice for the remaining balance (plus additional interest thereon). On December 31, 1991, Z pays all amounts owed as of that date in connection with its 1988 income tax liability.

(ii) Z's threshold underpayment of income tax for 1988 is $200,000. Because Z is a C corporation and its threshold underpayment of income tax for 1988 exceeds $100,000, Z has a large corporate underpayment for 1988 to which the section 6621(c) rate applies for periods after the applicable date.

(iii) Notwithstanding Z's payment of $230,000 on December 31, 1990, the applicable date with respect to the large corporate underpayment of 1988 income tax is August 31, 1990, the 30th day after the date on which the Service sent the first assessment notice.

(iv) From March 16, 1989, to December 31, 1990, interest is computed on Z's underpayment of income tax (including any interest, penalties, additional amounts and additions to tax) at the section 6621(a)(2) rate. From January 1, 1991, through December 31, 1991, interest is computed on that underpayment at the section 6621(c) rate.

(v) If Z had paid on or before January 31, 1991, the full $242,000 shown as due on the November 14, 1990, assessment notice, the applicable date with respect to any remaining unpaid interest would have been March 15, 1991, the 30th day after the Service sent the February 13, 1991, assessment notice.

(vi) The same result as in paragraph (v) of this Example 6 would apply if the November 14, 1990, assessment notice had provided that only $150,000 was due with respect to calendar year 1988 (as a result of a correction by the Service of an error in its original August 1, 1990, assessment, and not as a result of any payment by Z), and if Z had paid that $150,000 on or before January 31, 1991.

(e) EFFECTIVE DATE. Section 6621(c) and this section are effective for determining interest for periods after December 31, 1990, regardless of the taxable period to which the underlying tax may relate and even if the applicable date is prior to December 31, 1990.

Par. 3. Section 301.6621-3T is removed.