In a case of first impression, Chief Administrative Law Judge Bill Thompson held that the so-called “hot interest” applicable to large corporate underpayments does not begin to accrue until 30 days after the entry of the preliminary assessment, rejecting the Alabama Department of Revenue’s (the “Department”) position that hot interest should begin accruing on the due date of the return. Nextel South Corp. v. Alabama Dep’t of Rev., Admin. Law Div., Dkt. No. BIT. 13-136 (Sep. 23, 2013). The Department did not appeal the ruling.
Nextel South Corp. (the “Taxpayer”) conceded that it underpaid its Alabama income tax in the subject years. The sole issue before Judge Thompson was whether the Department correctly computed the statutory interest due on the amounts underpaid in those years.
Alabama law provides that interest is due on any tax not paid by the due date of the tax return. Ala. Code § 40-1-44(a). An additional two percent of so-called “hot interest” applies to large corporate underpayments—i.e., underpayments of more than $100,000. The dispute centered on when the hot interest rate begins to apply on a large corporate underpayment—specifically, whether Ala. Code § 40-1-44(a) permits the Department to charge hot interest on an assessment from the original due date of the tax or, as provided in I.R.C. § 6621, the Department may charge hot interest only from the “applicable date.”
Section 6621(c)(1) provides that the “applicable date” that triggers the additional two percent rate for federal purposes is the 30th day after either (1) “the date on which the 1st letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent, or (2) the date on which the deficiency notice under Section 6212 is sent,” whichever is earlier.
Although Alabama law does not define the term “applicable date,” Ala. Code § 40-1-44(a) ties Alabama’s interest computation to the “underpayment rate established by the Secretary of the Treasury under the authority of 26 U.S.C. § 6621.” Therefore, the Taxpayer argued that Alabama’s “applicable date” that triggers the running of hot interest is the date a preliminary assessment is entered against the taxpayer. The Department countered by arguing that the reference in Ala. Code § 40-1-44(a) to I.R.C. § 6621(c)(1) was adopted by the Alabama legislature merely for the purpose of setting the interest rate, not to control when hot interest begins to run, and that there was no intent on the part of the Alabama legislature to adopt by reference the applicable federal period for the running of hot interest.
In rejecting the Department’s argument, Judge Thompson stated that the Alabama legislature did not “suggest” that the applicable federal period should apply for purposes of applying hot interest. Rather, the Alabama legislature “specifically adopted the federal rule . . . in its entirety, including the hot interest provision at § 6621(c). By adopting § 6621, the Legislature clearly expressed its intent to follow the federal scheme for computing interest on underpayments. That scheme includes an additional two percent rate on large corporate underpayments, and that rate applies or begins to accrue only after the ‘applicable date,’ not on the due date of the tax.”
Judge Thompson then decided what the applicable date is for purposes of Alabama law. As noted above, under federal law, hot interest is triggered by the first letter of proposed deficiency or the I.R.C. § 6212 deficiency notice, whichever is issued first. While the Department does not issue documents under those titles, Judge Thompson agreed with the Taxpayer that the Alabama equivalent of those documents is the notice of preliminary and final assessment entered by the Department. Except in very limited circumstances, the Department is required to issue a notice of preliminary assessment before entering a final assessment. Thus, Judge Thompson concluded that the entry of a preliminary assessment will, in most cases (including the Taxpayer’s), trigger the running of hot interest on large corporate underpayments.
The Department elected not to appeal this ruling to circuit court.
The authors of this article represented the Taxpayer in this case.
© Christopher R. Grissom/William T. Thistle, II/J. Sims Rhyne, III/Bradley Arant Boult Cummings LLP/October 2013.