Temporary and proposed "hot interest" regulations under section 6621(c).

On behalf of Tax Executives Institute, I am pleased to submit these comments on the Internal Revenue Service's temporary and proposed regulations on the increase in the rate of interest payable on large corporate underpayments under section 6621(c) of the Internal Revenue Code. The temporary regulations (T.D. 8325) and proposed regulations (IA-110-90) were issued by the IRS on December 14, 1990, and were the subject of a public hearing on April 2, 1991. (1)

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our nearly 4,600 members represent more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayer and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that evinces solid tax policy, that taxpayers can comply with, and tht the IRS can audit.

Members of TEI are responsible for managing the tax affairs of their companies on a day-to-day basis, contending daily with the provisions of the tax laws relating to the operations of business enterprises. It is the companies by whom our members are employed that will be principally affected by the temporary regulations: it is they that must contend with the rules relating to a higher interest rate on large corporate underpayments and the effect those rules will have on the conduct and tenor of IRS examinations. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the IRS's regulations under section 6621(c).

Overview

Section 6621(c) stands as a monument to how tax law and policy should not be made. Concocted during last year's budget summit, the proposal was "refined" by Congress to increase by two percentage points the interest rate payable by corporate taxpayers on tax underpayments exceeding $100,000. The proposal was crude and punitive in its conception (as originally proposed, it would have totally disallowed a deduction to C corporations for interest paid on tax underpayments) and, to our mind's eye, saw no grand transfiguration at its birth.

Concededly, the original statutory proposal was broader in scope and would have been less discriminating in application than its progeny. Unless interpreted and applied in a reasonable and flexible manner, however, the "hot interest" provision of section 6621(c) will undermine sound principles of penalty reform that Congress, the Treasury Departments and IRS, and the tax community at large embraced in 1989 with great fanfare: it threatens to punish a class of taxpayers for non-volitional, non-culpable behavior.

Obviously, the IRS cannot -- and should not -- ignore Congress's intent, even where it might disagree with the thrust of legislation. TEI submits, however, that the regulation writers can -- and should -- do a better job of implementing Congress's intent in enacting section 6621(c) without straying from the IRS's mission of crafting rules that "make sense" and that are fair and evenhanded. We regret that while certain provisions of the temporary regulations are marked by flexibility and reasonableness, the regulations as a whole embrace an over-aggressive, anti-taxpayer interpretation of section 6621(c). For example, we believe the linkage of amounts subject to the Code's deficiency procedures with amounts subject to the Code's non-deficiency procedures -- as illustrated with horrendous results by Example 4(v) under Temp. REg. [section] 301.6621-3T(d) -- reflects a "gotcha" mentality that while perhaps defensible under some strained maxim of legislative construction is hardly required by the statute itself. Indeed, we believe the regulations are in some measure directly at odds with congressional intent.

TEI submits that it is within the IRS's power to modify the regulations to ameliorate the harsh and inequitable results of section 6621(c). In developing final regulations, the IRS's goal should be to harmonize the literal language of the statute with its overall purpose and with other goals of sound tax administration. Stated differently, TEI believes that given the penal nature in which section 6621(c) generally operates, the regulations should be drafted to limit the running of hot interest to those situations -- consistent with legislative intent -- where the taxpayer bears some culpability. In the comments that follow, we provide our specific recommendations for accomplishing this end.

Definition of Large Corporate

Underpayment of Tax

Under the temporary regulations, two things are needed before interest will run at section 6621(c)'s "hot" rate: a "large corporate underpayment of tax" and an "applicable date" from which such higher rate will run. (2) With respect to the determination whether a "large corporate underpayment of tax" exists, Temp. Reg. [section] 301.6621-3T(b)(2)(ii) adopts the concept of a "threshold underpayment of a tax," under which interest, penalties, additional amounts, and additions to tax are not taken into account in determining whether the $100,000 threshold is exceeded. TEI commends the IRS for adopting this approach, which will simplify the mechanical application of the provision (by obviating the problem of the "moving target") (3) and reflects a salutary degree of flexibility and sensibility in interpretation.

We believe, however, that the IRS unnecessarily extends the reach of the hot interest provision by defining "underpayment of tax" to encompass not only the underlying tax but also previously accrued interest, additions to tax, and penalties. Thus, we recommend that Temp. Reg. [section] 301.6621-3T(b)(2)(i) be revised to define "underpayment of tax" to encompass only tax and previously accrued interest, but not additions to tax and penalties.

In addition, although we agree with the statement in Temp. Reg. [section] 301.6621-3T(b)(2)(iii) that the determination whether a "large corporate tax underpayment" exists is to be made at the time an assessment is made with respect to the taxable period, we believe that the increased rate should not apply where it is ultimately determined (by an IRS Appeals Officer of a court) that the underpayment (as defined in Temp. Reg. [section] 301.6621-3T(b)(2)(ii)) does not exceed that $100,000 threshold. We recommend that the final regulations confirm this result.

Applicable Date

1. Background

Section 6621(c) contains different rules for determining the "applicable date" in respect of (i) underpayments to which the deficiency procedures of subchapter B of Chapter 63 of the Code apply, and (ii) underpayments to which the deficiency procedures do not apply. Specifically section 6621(c)(2)(A) sets forth a general rule (which applies in respect of underpayments to which the deficiency procedures apply), as follows:

the applicable date will generally be the thirtieth day after the earlier of (i) the date on which the IRS issues a 30-day letter to the taxpayer under which the taxpayer will have the opportunity for administrative review in the IRS's Office of Appeals, or (ii) the date on which the IRS sends a deficiency notice (90-day letter) to the taxpayer.

With respect to underpayments to which the deficiency procedures do not apply, section 6621(c)(2)(B)(i) contains a self-styled "special rule" pursuant to which the "applicable date" is the thirtieth day after the date on which the IRS sends the first letter or notice that notifies the taxpayer of the assessment or proposed assessment of the tax.

Thus, with respect to all underpayments (without regard to whether the Code's deficiency procedures apply), section 6621(c) does not come into force until 30 days after the issuance of a notice (or letter) to the taxpayer. The purpose of the notice requirement is simple and, we believe, undeniable: to apprise the taxpayer of the issues in controversy and to afford the taxpayer an opportunity to pay the disputed tax before interest begins to run at the increased rate. TEI believes that this purpose should be kept in mind as the IRS revises those provisions of the regulations relating to (i) the linkage, or interdependence, of deficiency and non-deficiency notices, (ii) specific identification of notices that trigger the "applicable date" provision of section 6621(c), (iii) the proper treatment of erroneous, withdrawn, or modified notices, and (iv) designation of a specific mailing address for purposes of section 6621(c) notices.

2. Interdependence of

Deficiency and Non-Deficiency

Notices

Under the temporary regulations, a notice issued under section 6621(c)(2)(B)(i) in respect of an underpayment to which the Code's deficiency procedures do not apply can trigger the running of hot interest on underpayments to which those deficiency procedures do apply. Thus, Example 4 under Temp. Reg. [section] 301.6621-3T(d) posits a situation where a taxpayer received a non-deficiency notice for $1,000 (attributable to a mathematical error) on May 1, 1990, and a deficiency notice (a 90-day letter) for $125,000 on March 31, 1992; part (v) of Example 4 states that if the taxpayer had not paid the non-deficiency amount by January 31, 1991 (30 days after the effective date of section 6621(c)), hot interest would run from that date on the $125,000 deficiency amount even though no large corporate underpayment was asserted until 14 months later -- on March 31, 1992.

TEI joins the chorus of other commentators objecting to the result reached in Example 4(v). We do not believe the result is required by the statute and, indeed, submit that it is at odds with the basic structure of section 6621(c) -- which was intended to impose on the IRS an obligation to identify the amounts in dispute before interest would run at the higher rate. Stated differently, whether characterized as "a hidden time bomb" or as "a trap for the unwary," we do not believe it makes sense to link deficiency and non-deficiency notices and to have a non-deficiency notice trigger the higher, punitive rate of interest on a deficiency underpayment having absolutely no relation to the earlier, non-deficiency notice. This is especially the case where a long period of time may elapse between the non-deficiency "applicable date" and the subsequently issued deficiency notice (i.e., a 30-day or 90-day letter).

Based on comments made during the April 2, 1991, public hearing on the temporary regulations, the regulation writers apparently believe the interdependence of deficiency and non-deficiency notices is suggested, if not required, by a special rule contained in section 6621(c). Specifically, section 6621(c)(2)(B)(ii) provides that, in determining whether there has been an applicable date, a letter or notice "shall be disregarded if, during the 30-day period beginning on the day on which it was sent, the taxpayer makes a payment equal to the amount shown as due in such letter or notice, as the case may be." At the public hearing, the regulation writers asked why this rule was included if no linkage between the two types of notices was contemplated by Congress.

TEI submits that section 6621(c)(2)(B)(ii) can be easily harmonized with the overall purpose of the statute and with the recommended bifurcation of deficiency and non-deficiency notices. Specifically, the provision should be interpreted as providing taxpayers with additional protection from the running of hot interest. Under the basic statutory provision, interest will accrue at the increased rate from the applicable date if a large corporate underpayment is deemed to exist. Temp. Reg. [section] 301.6621-3T(b)(2)(iii) provides that the existence and amount of a threshold underpayment of tax is to be made, not on the basis of the deficiency or non-deficiency notice, but rather on the amount ultimately assessed. Since the underlying purpose of sectin 6621(c) is to encourage the early payment of amounts set forth in deficiency and non-deficiency notices, a taxpayer that pays the stated amount has done everything the statute asks of it, even if it is ultimately determined that the amount so stated was not the correct amount.

In other words, section 6621(c)(2)(B)(ii) should be construed as providing an escape valve from the hot interest provision where the taxpayer pays the amount shown on the notice within 30 days. In such a case, then, payment of the stated amount vitiates the notice entirely for purposes of section 6621(c), without regard to whether the amount ultimately determined to be the underpayment is larger than the amount set forth on the notice. On the other hand, if a taxpayer paid less than the full amount set forth in the notice, the escape-valve feature of section 6621(c)(2)(B)(ii) would not be available and the taxpayer could find itself subject to the increased interest rate notwithstanding its efforts to avoid the statute's application. For example, assume the taxpayer receives a Revenue Agent's Report (30- day letter) for $225,000, and that it pays $135,000 of that amount within 30 days. If it is ultimately determined that the taxpayer's net underpayment is $90,000 ($225,000 less the $135,000 payment), the taxpayer could argue that, under the statute, no large corporate underpayment existed. (4) Interest on the underpayment would not accrue at the increased rate. On the other hand, if it is ultimately determined that the taxpayer's net underpayment exceeds $100,000, both conditions precedent to the running of hot interest would be satisfied, notwithstanding the taxpayer's making a partial payment in an effort to have the amount of the underpayment fall below section 6621(c)'s $100,000 threshold. Although Congress concluded that the application of the increased interest rate in such situations was proper, it added section 6621(c)(2)(B)(ii) to ensure that hot interest would never run where the taxpayer paid the full amount set forth in the notice.

To minimize the inequities that can obtain under the temporary regulations and to harmonize the applicable rules with both principles of sound tax administration and the thrust of the statute, TEI recommends that the regulations be revised to clarify that the purpose of the notice provision of section 6621(c) is to ensure that the taxpayer has been advised of the amount and nature of the underpayment of tax before interest starts to run at the increased rate. Consistent with that purpose, the regulations should explicitly state that non-deficiency notices and deficiency notices will be treated independently for purposes of section 6621(c). This rule would obviate harsh results such as those in Example 4(v). (5)

3. Specific Identification of

Notices that Trigger an

"Applicable Date"

Consistent with the goal of providing the taxpayer with an opportunity to avoid the application of section 6621(c), TEI recommends that the regulations be revised to provide that all "applicable date" notices will be clearly identified as such. This is especially important in respect of amounts subject to non-deficiency procedures.

The preamble to the regulations lists the current designations of 30-day and 90-day letters, but the listing of non-deficiency notices is far from complete. (Indeed, it encompasses only section 6303 assessment notices.) 1991-2 I.R.B. at 25. Consequently, a taxpayer may not know whether a notice it has received brings it within the scope of section 6621(c). For example, pursuant to section 6230(a), the deficiency procedures generally do not apply to adjustments made to a corporation's distributive share of partnership items. (6) Neither the statute nor the temporary regulations address which notice -- if any -- in a partnership proceeding triggers the application of section 6621(c). Although the notice of "final partnership administrative adjustment" is sometimes referred to as the equivalent of a 90-day letter, neither it nor the other forms routinely used in partnership proceedings (e.g., Forms 870-P of Forms 870-P (AD)) are listed in the preamble to the proposed regulations. (7) TEI believes it would be improper to trigger the running of hot interest earlier than 30-days after a corporate partner is notified of the effect of the proposed partnership adjustments on its tax liability and given an opportunity to pay that amount. By clearly identifying which notices will be "applicable date" notices for purposes of section 6621(c)(2)(B)(i), the IRS can minimize those situations where the taxpayer is unwittingly and inequitably affected by the hot interest provision. (8)

Finally, we submit that the uncertain application of section 6621(c) to notices of partnership adjustments underscores the need to "delink" deficiency and non-deficiency notices for purposes of the "applicable date" provision. Absent delinkage, a notice of a nominal adjustment in respect of one of possibly a multitude of corporate partnerships could trigger the running of hot interest in respect of a much larger (and subsequently issued) deficiency notice in respect of an entire consolidated return group. Such a result would be wholly inconsistent with congressional intent.

4. Proper Treatment of

Erroneous, Withdrawn,

and Modified Notices

The IRS not infrequently issues notices that are subsequently determined to be incorrect, incomplete, or otherwise flawed. TEI submits that if a taxpayer receives such a notice that would normally trigger the applicable date for purposes of section 6621(c), the erroneous or defective notice should not give rise to an applicable date. This rule should apply not only with respect to non-deficiency notices (e.g., a notice of a mathematical or clerical error, or a computer-generated notice that is subsequently abated in whole or in part), but also with respect to deficiency notices. (9) Thus, if the IRS issues a 30-day letter that is withdrawn (and eventually replaced by a new 30-day letter), the first letter should be disregarded in determining whether section 6621(c) applies. Otherwise, an IRS agent might threaten the precipitous issuance of a 30-day letter as a bargaining chip during the audit, knowing that the 30-day letter could be subsequently withdrawn and revised without compromising the effect of the threat.

Similarly, TEI recommends that the final regulations confirm that hot interest will not accrue with respect to issues raised in a supplemental Revenue Agent's Report until 30-days after the issuance of the supplemental report. Clearly, Congress wanted to afford taxpayers a choice between paying an asserted deficiency and paying hot interest on the asserted deficiency. The running of hot interest with respect to issues earlier than 30 days after they have been formally brought to the taxpayer's attention -- i.e., the taxpayer is given the intended choice with some specificity -- would be inconsistent with that congressional intent. (10)

With respect to withdrawn notices, we note that section 102(c)(6) of the pending Technical Corrections Act of 1991 (H.R. 1555 and S. 750) would amend section 6621(c)(2)(A) to provide that an IRS notice that is withdrawn is to be disregarded for purposes of applying the applicable date provision. (11) We do not believe the introduction of this statutory clarification undercuts the IRS's ability to accomplish the same result by regulation.

5. Designation of Specific

Mailing Address

Section 6621 places a premium on paying disputed amounts within 30 days by providing, in section 6621(c)(2)(B)(ii), that a notice is to be disregarded if payment in full is made within 30 days. To ensure that this provision of the statute operates to its full potential, TEI recommends that the regulations be revised to permit taxpayers to specify one address to which all section 6621(c) notices would be sent.

By virtue of the $100,000 threshold, section 6621(c) applies primarily to large corporations, which have far-flung operations and multiple locations. If a notice is directed to a remote location -- or fails to carry the proper designation -- the 30-day payment period may expire before the notice is routed to the proper destination. Thus, a taxpayer may find itself subject to hot interest notwithstanding its intention and best efforts to pay (or otherwise deal with) underpayments within the 30-day period. (12) By permitting the taxpayer to designate a single address to which all section 6621(c) notices would be sent, the IRS would further the goal of the statute (providing taxpayers with notice of disputed amounts and encouraging the early payment of those amounts) while eliminating a possible "gotcha" effect. (13)

Abatement of Hot Interest in

Appropriate Circumstances

During the April 2, 1991, public hearing on the temporary regulations, it was recommended that the running of hot interest be suspended in two circumstances: (i) where a case "languishes" in Appeals for an excessive period of time following the taxpayer's filing of its protest, and (ii) where a case has been returned from Appeals to the Examination Division. TEI believes that these recommendations merit careful consideration and that, in certain cases, the running of hot interest should be suspended (or abated). Under section 6404(e), the IRS is authorized to abate the assessment of any or all interest for any period where the interest is attributable to an error or delay by an officer or employee of the IRS in performing a ministerial act. Under the current section 6404(e) regulations, an Appeals Officer's delay in resolving a case would generally not constitute a "ministerial act," potentially giving rise to an abatement of interest. We submit, however, that the IRS should liberalize the definition of "ministerial act" set forth in Temp. Reg. [section] 301.6404-2T(b)(1). For example, although a decision concerning the proper application of federal tax law may correctly be deemed not to be a ministerial act, we believe that an Appeals Officer's failure to even consider that issue for an extended period of time could be construed to constitute such an act. Thus, we believe that the term "ministerial act" could be broadly interpreted to encompass a wide array of actions (or inactions) by IRS officials or employees, as long as they are unconnected with the taxpayer's case. Thus, if a taxpayer files its protest and it is logged in by the Appeals Officer but not even read for six months (e.g., because of his or her workload), we believe that delay may properly be deemed to be attributable to a ministerial act (i.e., the failure to even look at the protest). Similarly, if the Appeals Officer requests additional information from the Examination Division on an international issue and that information is not forthcoming for several months because the pertinent International Examiner is involved in another case, we believe that delay may properly be deemed to be attributable to a ministerial act.

As to whether the running of hot interest should be suspended where a case has been formally returned by Appeals to the Examination Division, we believe this matter is covered by our earlier discussion of erroneous, withdrawn, or modified notices. Thus, if a case is returned to the Examination Division for further factual development, the 30-day letter in respect of the case should be deemed to have been withdrawn, at least in respect of the issues returned to be considered "on remand" by the Examination Division. (14) Possible measures of whether the initial 30-day letter should be considered withdrawn could be (i) whether a new 30-day letter is subsequently issued, or (ii) whether the amount of the proposed adjustments ultimately considered by Appeals differs from the amount proposed in the original 30-day letter by more than a specified percentage (say, five percent).

TEI recognizes that the implementation of any abatement of suspension procedure would be fraught with difficulty because it would be inherently factual. Consequently, we recommend that, instead of crafting rules that provide such relief outright, the IRS should develop guidelines on those situations where the taxpayer may petition the District Director for the suspension or abatement of hot interest. For instance, the guidelines might provide that a taxpayer may request that the increased rate of interest not be imposed where the case is returned to the Examination Division for longer than a specified period (say, 30 days) or where more than a specified period of time (say, 60 days) elapses following the filing of a taxpayer's protest and the first scheduled meeting between Appeals officials and the taxpayer or its prepresentatives. These guidelines could also address the taxpayer's burden in demonstrating, for purposes of Temp. Reg. [section] 301.6404-2T(a)(2), that "no significant aspect" of the delay is attributable to the taxpayer's own actions or inactions.

Development of Comprehensive

Netting Scheme

Under section 6402, the IRS is authorized to credit the amount of any overpayment by a taxpayer against any liability owed by that taxpayer. The legislative history of section 6621(c) states that the IRS "should implement the most comprehensive crediting procedures under section 6402 that are consistent with sound administrative practices." H.R. Rep. No. 101-964, 101st Cong., 2d Sess. 1101 (1990) (Conference Report). Congress issued a similar injunction in 1986 when the odious concept of differential interest rates -- one rate for overpayments (refunds) and a higher rate for underpayments (deficiencies) -- was introduced. (15) H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-785 (1986) (Conference Report). Regrettably, notwithstanding the clear statements of congressional intent in 1986 and 1990, the temporary regulations under section 6621(c) do not address the netting of overpayments and underpayments in different years.

TEI recommends that, in order to effectuate congressional intent and to inject a fuller measure of fairness into the operation of section 6621(c), the omission be rectified in the final regulations. We submit that the equitable case for netting (even before the enactment of the hot interest provision) is illustrated by the following example.

Assume that a taxpayer underpaid its tax liability for 1988 by $100 and overpaid its liability for 1989 by the same amount because of its erroneous decision to deduct an item in the earlier, rather than the later, year. Assume further that the error was discovered in 1991. Finally, for illustration purposes, assume that the interest rate on tax deficiencies during all periods is 11 percent, that the interest rate on tax overpayments is 10 percent, and that interest is not compounded daily.

Without netting, the taxpayer would owe interest in respect of its 1988 underpayment of $33 ($11 in each of 1989, 1990, and 1991), and the taxpayer would be entitled to interest on its 1989 overpayment of $20 ($10 in each of 1990 and 1991). Thus, the IRS would receive a net benefit of $13, $2 of which is an undeserved windfall. The goal of the "comprehensive crediting procedures" contemplated by Congress would be to put the parties (the government and the taxpayer) in the same economic position they would have been in had the overpayment been immediately applied to pay (or pay down) the underpayment. Under a fair netting regime, the IRS in the above example would be entitled only to $11 of interest -- the $2 windfall would be eliminated.

TEI recommends that the following provision be added to Temp. Reg. [section] 301.6621-3T(b):

(6) Netting. Pursuant to section 6402, any payment due under this section will be considered, at the request of the taxpayer, as having been paid on the date, and to the extent that, the taxpayer is owed a refund.

Thus, where a taxpayer receives or is entitled to a refund at the same time it has an outstanding tax liability, then that taxpayer should neither be charged interest on the deficiency nor be entitled to interest on the refund during the period that the overpayment can be used to satisfy the underpayment.

TEI submits that the development of netting rules is especially important in the case of large corporate taxpayers, not only because the inequities of differential interest rates are exacerbated by section 6621(c) but because their disputes with the IRS are frequently simply a matter of timing. In the absence of reasonable netting rules, taxpayers otherwise inclined to settle timing adjustments within an audit cycle could well resist such settlements because of the interest costs involved. The resulting delays would not be in the best interest of taxpayers or the IRS.

TEI recognizes that the netting question raises a host of mechanical issues. We should be pleased to work with the IRS in addressing these issues within the overall context of section 6402, including the development of comprehensive examples for inclusion in the regulations.

Conclusion

Tax Executives Institute appreciates this opportunity to present our views on the IRS's temporary regulations under section 6621(c). If you have any questions about the Institute's comments, please do not hesitate to call Ralph J. Weiland, chair of TEI's IRS Administrative Affairs Committee, at [phone] or the Institute's professional staff (Timothy J. McCormally or Mary L. Fahey) at [phone].

Notes

(1) The temporary and proposed regulations were published in the Federal Register on December 19, 1990 (55 Fed. Reg. 52042 and 55 Fed Reg. 52052, respectively), and were reprinted in the January 14, 1991, issue of the Internal Revenue Bulletin (1991-2 I.R.B. 24 and 1991-2 I.R.B. 35, respectively). For simplicity's sake, the regulations are generally referred to as "the temporary regulations" and specific provisions are cited as "Temp. Reg. [section]." References to page numbers are to the temporary regulations (and preamble) as published in the Internal Revenue Bulletin.

(2) The determination of the appropriate "applicable date" is considered in the next section of these comments.

(3) One of the stated reasons for the development of the "threshold underpayment" concept was to ensure that the taxpayer would be aware of section 6621(c)'s applicability. 1991-2 I.R.B. at 24.

(4) We recognize that Temp. Reg. [section] 301.6621-3T(b)(2)(ii) provides that a taxpayer's payment after the last date prescribed for payment (for example, by way of an amended return) will not affect the existence of a threshold underpayment. Although TEI harbors no great objection to this interpretation, the Institute questions whether it flows naturally and unequivocally from the statutory language. Consequently, we believe it would be improper to reject our proposed construction of section 6621(c)(2)(b)(II) (as set forth in the text) on the ground that it is inconsistent with subsequently drafted regulations. Such an argument, while facile, represents little more than a tautology (the statute must be interpreted the way it is in the regulations or otherwise it will be inconsistent with the regulations).

(5) Alternatively, the regulations could provide that the running of hot interest will not be triggered unitl the issuance of notices involving aggregate underpayments of tax of at least $100,000 and, further, that a notice of less thatn $100,000 will be totallly disregarded if paid before the date of a notice asserting an additional amount. In other words, the regulations should provide that an "applicable date" cannot exist until the taxpayer is expressly notified of the existence of a large corporate underpayment.

(6) Under section 6221, the tax treatment of partnership items is determined at the partnership level. The IRS coordinates its audit of the partnership through the "tax matters partner," but is required by section 6223(a) to provide notice to all partners of (1) the beginning of an administrative proceeding at the partnership level, and (2) the final partnership administrative adjustment resulting from any such proceeding. The tax effect of adjustments with respect to individual partners is determined only after the audit at the partnership level is completed, at which point the partners are sent copies of the tax computation and collection notices demanding payments.

(7) For purposes of section 6621(c), however, the notice of final partnership administrative adjustment (FPAA) may not be the equivalent of the 90-day letter because an individual partner may not receive the notice until after the 30-day period contemplated in section 6621(c)(2)(A) has elapsed. This is because the IRS is permitted to send all "notice partners" copies of the FPAA notice anytime up to 60 days after the notice is sent to the tax matter partner. I.R.C. [section] 6223(d)(2).

Another example of a "notice" that should not trigger hot interest is the "partial RAR" that is issued where the IRS (often at the taxpayer's request) accelerates a portion of its audit. For example, if a taxpayer disposes of a subsidiary (a member of its consolidated return group), it may request an accelerated audit of the subsidiary to ensure the availability of records and personnel. At the conclusion of the partial audit, the IRS apprises the taxpayer of the issues found during the partial audit, which will eventually be incorporated into the 30-day letter prepared in respect of the consolidated group. We recommend that the final regulations confirm that the "partial RAR" will not satisfy the requirements of section 6621(c)(2)(A)(i) since it does not accord the taxpayer an immediate opportunity for administrative review of the disputed issues.

(9) Taxpayers should not have to risk the potential application of section 6621(c) when they choose to contest assessments rather than paying them within the 30-day period specified in section 6621(c)(2)(B)(ii); this is especially the case since taxpayers are accorded 60 days under section 6213(b)(2)(A) to contest any assessment made under section 6213(b)(1).

(10) Indeed, since section 6621(c)(2)(A)(i) refers to the notice "which allows the taxpayer an opportunity for administrative review within the Internal Revenue Service Office of Appeals," a withdrawn or supplemented 30-day letter (as contrasted with the reissued or supplemental notice) would not seem to meet the statutory requirement inasmuch as that letter would not be the one used by Appeals.

(11) The explanation of the legislation prepared by the staff of the Joint Committee on Taxation states that the provision would apply to a notice "that is later withdrawn because it was issued in error." Staff of the Joint Committee on Taxation, Description of Tax Provisions of H.R. 1555 and S. 750 (Title of the Technical Corrections Act of 1991), at 8 (JCX-5-91) (March 21, 1991).

(12) The misdirection may be attributable to several things: IRS errors, U.S. Postal Service delays, or problems with the taxpayer's own corporate mail system.

(13) The statutory goal could also be furthered by dating notices in such a manner to ensure that the taxpayer will have adequate time to respond. For example, the IRS could adopt procedures comparable to those developed in respect of certain information-return related collection notices, pursuant to which the IRS notices are "post-dated" to take into account possible Service Center and Postal Service delays.

(4) On the other hand, if the case is returned to the Examination Division to consider information that had been reasonably requested on a timely basis by the International Examiner but not provided by the taxpayer until the case had reached Appeals, the abatement of hot interest may not be appropriate under Temp. Reg. [section] 301.6404-2T(a)(2) (which provides that there shall be no abatement where a "significant aspect" of the delay is attributable to the taxpayer); the taxpayer, however, should be given the opportunity of demonstrating why its action should not preclude such an abatement.

(15) Under section 6621(a), the tax interest rate on overpayments is one percentage point less than the tax interest rate on deficiencies.