Feller v. Commissioner

RICK D. FELLER, PETITIONER v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Docket No. 4325–07. Filed November 8, 2010.

P overstated his prepayment credits on his Federal income

tax returns in order to claim refunds for 1992 through 1997.

On Nov. 22, 2006, R issued two notices of deficiency deter-

mining that P was subject to the fraud penalty of I.R.C. sec.

6663 because his overstated prepayment credits resulted in

underpayments of income tax pursuant to I.R.C. sec. 6664 and

sec. 1.6664–2(c)(1) and (g), Example (3), Income Tax Regs. On

Nov. 27, 2006, R assessed, by use of the mathematical error

assessment procedures of I.R.C. sec. 6213(b)(1), adjustments

related to P’s overstatement of prepayment credits for 1992

through 1997. P argues that (1) I.R.C. sec. 6501 bars the

issuance of the notices of deficiency and (2) sec. 1.6664–2(c)(1)

and (g), Example (3), Income Tax Regs., under which over-

stated prepayment credits result in underpayments of income

tax, is invalid because it violates the intent of Congress in

enacting I.R.C. sec. 6664 and that he is not subject to the

fraud penalty. We apply the test set forth in Chevron U.S.A.

Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), to

determine the validity of the regulation. Under Chevron step

1, we find that I.R.C. sec. 6664 is ambiguous regarding the

definition of ‘‘underpayment’’. Under Chevron step 2, we find

that the regulation is based on a permissible construction of

I.R.C. sec. 6664. Held: P filed false returns with the intent to

evade tax within the meaning of I.R.C. sec. 6501(c); therefore

the issuance of the deficiency notices was not time barred.

Held, further, sec. 1.6664–2(c)(1) and (g), Example (3), Income

Tax Regs., is valid. Held, further, P is subject to the fraud

penalty pursuant to I.R.C. sec. 6663 for each year at issue.

Terry W. Vincent, for petitioner.

Cathy J. Horner and Dennis G. Driscoll, for respondent.

HAINES, Judge: Rick D. Feller petitioned the Court for

redetermination of the following penalties:

497

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00001 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

498 135 UNITED STATES TAX COURT REPORTS (497)

Penalty

Year sec. 6663

1992 ..................................................................... $78,481

1993 ..................................................................... 56,689

1994 ..................................................................... 43,566

1995 ..................................................................... 58,660

1996 ..................................................................... 59,963

1997 ..................................................................... 58,552

Hereafter, the years 1992, 1993, 1994, 1995, 1996, and

1997 will be referred to as the years at issue. After conces-

sions, the issues for decision are: (1) Whether the issuance of

the notice of deficiency for each of the years at issue is

barred by the expiration of the limitations period for assess-

ment under section 6501; and (2) whether petitioner’s over-

stated prepayment credits for the years at issue resulted in

underpayments of income tax attributable to fraud pursuant

to sections 6663 and 6664. 1 In so deciding, we must deter-

mine the validity of section 1.6664–2(c)(1) and (g), Example

(3), Income Tax Regs.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts, together with the attached exhibits,

is incorporated herein by this reference. At the time peti-

tioner filed his petition, he resided in Ohio.

Petitioner’s Business

Petitioner earned a bachelor of science degree in

accounting from the University of Akron in 1976 and

received a certified public accountant certificate from the

State of Ohio in 1980. In 1984 petitioner became a partner

in the small accounting firm of Skonk, Feller, Tuber &

Brown. 2

In 1992 petitioner and two additional partners of the firm

became 100-percent owners of stock in SFT Health Care Corp.

(SFT). SFT owned two nursing homes, Red Carpet Health Care

Center and Southeastern Health Care Center. Petitioner

1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code),

as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Amounts are rounded to the nearest dollar.

2 The firm went through several name changes. It was originally called Tuber & Shonberg,

Inc., then Skonk, Feller & Tuber, and finally Skonk, Feller, Tuber & Brown.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00002 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 499

served as president of the nursing homes throughout the

years at issue. In his capacity as president, petitioner visited

the nursing homes once or twice a week and oversaw their

operations. He also was responsible for the financial

reporting and preparation of tax returns associated with the

nursing homes and SFT.

Red Carpet Health Care Center Forms W–2

For the years at issue petitioner attached to his Federal

income tax returns Forms W–2, Wage and Tax Statement,

reporting actual wages from Red Carpet Health Care Center

of $17,781, $17,602, $19,202, $33,571, $19,016, and $23,580

with Federal withholdings of $366, $300, $464, $1,025, $350,

and zero, respectively. Petitioner also attached to his Federal

income tax returns for the years at issue fictitious Forms W–

2 purportedly issued by Red Carpet Health Care Center and

reporting fictitious wages of $120,000, $100,000, $75,000,

$75,000, $75,000, and $72,500 and fictitious Federal

withholdings of $65,000, $52,000, $39,000, $40,500, $40,750,

and $41,750, respectively.

Southeastern/Barnesville Health Care Center Forms W–2

For 1992 petitioner attached to his Federal income tax

return a Form W–2 issued by Southeastern Health Care

Center reporting actual wages of $23,739 and Federal with-

holding of $1,334. Petitioner also attached to his Federal

income tax return a second, fictitious Form W–2 purportedly

issued by Southeastern Health Care Center reporting ficti-

tious wages of $120,000 and fictitious withholding of $70,000.

For 1993, 1994, 1995, 1996, and 1997 petitioner attached

to his Federal income tax returns Forms W–2 issued by

Barnesville Health Care Center 3 reporting actual wages of

$25,536, $28,161, $47,960, $80,119, and $80,119 with Federal

withholdings reported of $1,253, $650, $990, $2,210, and

$2,210, respectively. Petitioner also attached to his Federal

income tax return fictitious Forms W–2 purportedly issued

by Barnesville Health Care Center reporting fictitious wages

of $100,000, $75,000, $80,000, $80,000, and $75,000 with

3 Southeastern Health Care Center changed its name to Barnesville Health Care Center in

1993.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00003 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

500 135 UNITED STATES TAX COURT REPORTS (497)

fictitious Federal withholdings reported of $52,000, $39,000,

$43,500, $44,500, and $42,500, respectively.

Other Falsifications

For each of the years at issue petitioner included with his

Federal income tax return a Schedule E, Supplemental

Income and Loss, on which he reported a false amount of

partnership losses generated by his accounting firm. Peti-

tioner also included a Schedule A, Itemized Deductions, in

which he reported an inflated itemized deduction for State

and local income taxes paid that was based on the fictitious

Forms W–2 he prepared.

Refund Claims

For 1992, 1993, 1994, 1995, 1996, and 1997 petitioner

claimed refunds of $86,181, $57,349, $34,686, $48,776,

$48,703, and $44,383, respectively.

Criminal Case

After a civil audit and a criminal investigation, criminal

proceedings were initiated against petitioner in the U.S. Dis-

trict Court for the Northern District of Ohio. On January 23,

2003, petitioner pleaded guilty to willfully making and

submitting a false tax return for 1997 in violation of section

7206(1). In his plea agreement, petitioner admitted that he

filed deliberately falsified personal tax returns for each of the

years at issue. He also admitted that for each of the years

at issue he claimed a false income tax refund when he knew

he actually owed income taxes and that he attached to his

return a fictitious Form W–2 for each nursing home.

On November 22, 2006, respondent mailed petitioner two

notices of deficiency, one for 1992–95 and the other for 1996–

97. The Form 4549–B, Income Tax Examination Changes,

attached to each notice, among other things reduced income

by the amount of fictitious wages, increased income for ficti-

tious losses claimed from the partnership, and reduced

itemized deductions by the amount of State taxes claimed on

the fictitious Forms W–2. For each year the corrected tax

liability was less than the tax shown on the return petitioner

filed if claimed prepayment tax credits were ignored.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00004 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 501

However, section 1.6664–2(c)(1) and (g), Example (3),

Income Tax Regs., requires excess withholding tax credits to

be included in determining an underpayment under section

6663. Accordingly, the notices of deficiency determined fraud

penalties under section 6663 based upon underpayments of

income tax pursuant to section 6664 of $104,642, $75,584,

$58,087, $78,214, $80,993, and $78,073 for 1992, 1993, 1994,

1995, 1996, and 1997, respectively. On November 27, 2006,

respondent assessed adjustments related to petitioner’s over-

statement of withholding tax credits for each of the years at

issue through the mathematical error assessment procedures

of section 6213(b)(1) and section 301.6201–1(a)(3), Proced. &

Admin. Regs.

On February 22, 2007, petitioner sought redeterminations,

asserting that (1) pursuant to section 6501, the statute of

limitations applied to bar assessment for each of the years at

issue, and (2) section 1.6664–2(c)(1) and (g), Example (3),

Income Tax Regs., including petitioner’s overstated with-

holding tax credits in the calculation of his underpayments

is invalid.

OPINION

I. Period of Limitations on Assessment

Petitioner argues that the issuance of the notices of defi-

ciency was barred by section 6501(a). Section 6501(a) pro-

vides the general rule that the amount of any tax imposed

must be assessed within 3 years after the return is filed. An

exception to the 3-year rule is provided in section 6501(c)(1):

(1) FALSE RETURN.—In the case of a false or fraudulent return with the

intent to evade tax, the tax may be assessed, or a proceeding in court for

collection of such tax may be begun without assessment, at any time.

Respondent argues that the period of limitations in section

6501(a) does not apply because petitioner filed false returns

with the intent to evade taxes for the years at issue. See sec.

6501(c)(1).

The burden of proof is upon respondent to prove that peti-

tioner has filed a false return with the intent to evade tax

for each year at issue. See sec. 7454(a); Rule 142(b). Because

direct evidence of an intent to evade tax is rarely available,

intent may be proved by circumstantial evidence and reason-

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00005 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

502 135 UNITED STATES TAX COURT REPORTS (497)

able inferences from the facts. Petzoldt v. Commissioner, 92

T.C. 661, 699 (1989).

Petitioner pleaded guilty to willfully making and submit-

ting a false tax return for 1997 in violation of section 7206(1)

and admitted, in his plea agreement, that to obtain refunds

he falsified personal tax returns for each of the years at issue

by attaching to his returns fictitious Forms W–2 which over-

stated income tax withheld. Throughout the 6 years at issue,

petitioner was licensed as a certified public accountant prac-

ticing in an accounting firm that prepared income tax

returns for clients. He held himself out to the public as

sophisticated and knowledgeable in the preparation of tax

returns. He prepared his own returns and those needed for

businesses in which he had invested.

Critically, petitioner falsified his own returns and Forms

W–2 for the businesses in the same manner for 6 consecutive

years and stopped only when confronted by the authorities.

On each of his returns, among other things, he overstated

and falsified (1) partnership losses, (2) itemized deductions

for State taxes withheld, and (3) Federal withholding credits.

Through his conduct he obtained $320,078 in Federal refunds

to which he was not entitled over the 6-year period. Peti-

tioner testified that he intended to pay back the refunds he

received as soon as he overcame troubles in his personal life,

but there is no evidence that petitioner at any time made an

effort to repay even after his conduct was discovered. Peti-

tioner’s explanation for his behavior is implausible.

We find that respondent has shown by clear and con-

vincing evidence that petitioner filed his returns for the

years at issue with the intent to evade tax. See Brister v.

United States, 35 Fed. Cl. 214 (1996) (involving an account-

ant and bookkeeper who overstated withholding credits to

obtain refunds). Therefore, the 3-year period of limitations

under section 6501(a) does not apply for any of the years at

issue, and respondent was not barred from issuing the

notices of deficiency for those years.

II. Sections 6663 and 6664; Section 1.6664–2(c), Income

Tax Regs.

Respondent has established that petitioner intended to

evade tax and thus engaged in fraudulent conduct. However,

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00006 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 503

before there can be an imposition of a fraud penalty,

respondent must also prove that the fraud resulted in under-

payments of tax required to be shown on the returns. Section

6663(a) sets out the fraud penalty:

SEC. 6663(a). IMPOSITION OF PENALTY.—If any part of any under-

payment of tax required to be shown on a return is due to fraud, there

shall be added to the tax an amount equal to 75 percent of the portion of

the underpayment which is attributable to fraud.

The term ‘‘underpayment’’ is defined in section 6664(a) as fol-

lows:

SEC. 6664(a). UNDERPAYMENT.—For purposes of this part, the term

‘‘underpayment’’ means the amount by which any tax imposed by this title

exceeds the excess of—

(1) the sum of—

(A) the amount shown as the tax by the taxpayer on his return, plus

(B) amounts not so shown previously assessed (or collected without

assessment), over

(2) the amount of rebates made.

For purposes of paragraph (2), the term ‘‘rebate’’ means so much of an

abatement, credit, refund, or other repayment, as was made on the ground

that tax imposed was less than the excess of the amount specified in para-

graph (1) over the rebates previously made.

Neither paragraph (1)(B) nor (2) applies in this case.

Section 1.6664–2(c)(1), Income Tax Regs., interprets the

definition of ‘‘underpayment’’ in section 6664 by stating that

the tax shown on the return is reduced by the excess of:

(i) The amounts shown by the taxpayer on his return as credits for tax

withheld under section 31 (relating to tax withheld on wages) * * * over

(ii) The amounts actually withheld, * * * with respect to a taxable year

before the return is filed for such taxable year.

The regulation extends the meaning of ‘‘underpayment’’ to

include a taxpayer’s overstated credits for withholding. Sec.

1.6664–2(g), Example (3), Income Tax Regs. Accordingly, if a

taxpayer overstates prepayment credits, such as the credit

for wages withheld, the overstatement decreases the amount

of tax shown on the return and increases the underpayment

of tax. Sadler v. Commissioner, 113 T.C. 99, 103 (1999).

Petitioner contends that section 1.6664–2(c)(1) and (g),

Example (3), Income Tax Regs., is invalid because the statute

which it interprets, section 6664, does not refer to credits for

tax withheld, and it was not Congress’ intent to include with-

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00007 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

504 135 UNITED STATES TAX COURT REPORTS (497)

holding credits in the calculation of an underpayment. Peti-

tioner notes that repealed section 6653, which previously had

imposed the fraud penalty, defined an underpayment with

reference to a deficiency as defined in section 6211. Section

6211(b)(1) excludes credits for taxes withheld from the cal-

culation of a deficiency, and consequently such credits did

not affect the calculation of an underpayment under repealed

section 6653(c). Therefore, petitioner bases his argument in

legislative history that the definition of an underpayment in

section 6664(a) as in effect for the years at issue was ‘‘not

intended to be substantively different from * * * [previous]

law.’’ H. Rept. 101–247, at 1394 (1989).

Respondent argues that Congress enacted a new penalty

regime and significantly reworded the definition of ‘‘under-

payment’’ for income tax purposes, thereby justifying the Sec-

retary’s clarification of the treatment of overstated prepay-

ment credits.

As a threshold matter, both parties agree that the regula-

tion was issued under section 7805(a) and is applicable to the

computation of the underpayments in the instant case.

Accordingly, our next step is to determine whether the regu-

lation warrants judicial deference.

III. Judicial Deference

Much ink has been spilled on the question of the level of

judicial deference to be afforded to regulations. See, e.g.,

Berg, ‘‘Judicial Deference to Tax Regulations: A Reconsider-

ation in Light of National Cable, Swallows Holding, and

Other Developments’’, 61 Tax Law. 481 (2008). The Court of

Appeals for the Sixth Circuit, to which any appeal of this

case would lie absent a written stipulation to the contrary,

has held that regulations issued under the general authority

of the Secretary to promulgate necessary rules, with notice

and comment procedures, are entitled to judicial deference as

outlined by the U.S. Supreme Court in Chevron U.S.A. Inc.

v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). See

sec. 7482(b)(2); Golsen v. Commissioner, 54 T.C. 742 (1970),

affd. 445 F.2d 985 (10th Cir. 1971); Estate of Timken v.

United States, 601 F.3d 431, 434–435 (6th Cir. 2010); Estate

of Gerson v. Commissioner, 507 F.3d 435 (6th Cir. 2007), affg.

127 T.C. 139 (2006).

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00008 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 505

In Chevron, the Supreme Court addressed the cir-

cumstances in which the judiciary is to afford an agency

discretion to interpret the statutes the agency administers.

In what is commonly referred to as the two-step ‘‘Chevron

analysis’’, the Supreme Court stated:

When a court reviews an agency’s construction of the statute which it

administers, it is confronted with two questions. First, always, is the ques-

tion whether Congress has directly spoken to the precise question at issue.

If the intent of Congress is clear, that is the end of the matter; for the

court, as well as the agency, must give effect to the unambiguously

expressed intent of Congress. If, however, the court determines Congress

has not directly addressed the precise question at issue, the court does not

simply impose its own construction on the statute, as would be necessary

in the absence of an administrative interpretation. Rather, if the statute

is silent or ambiguous with respect to the specific issue, the question for

the court is whether the agency’s answer is based on a permissible

construction of the statute. [Id. at 842–843; fn. refs. omitted.]

Chevron step 1 requires us to determine whether the statute

clearly expresses the intent of Congress. If the statute is

‘‘silent or ambiguous with respect to the specific issue’’ before

the Court, Chevron step 2 requires us to determine whether

the regulation ‘‘is based on a permissible construction of the

statute.’’

‘‘[T]he cardinal rule [is] that a statute is to be read as a

whole * * * since the meaning of statutory language, plain

or not, depends on context.’’ King v. St. Vincent’s Hosp., 502

U.S. 215, 221 (1991). Sections 6663 and 6664 impose a fraud

penalty when taxpayers, with intent to evade, underpay the

income tax shown on their returns. We will examine the lan-

guage and history of those sections to determine what the

term ‘‘underpayment’’ means in the context of a fraud

statute. The examination requires us to analyze the defini-

tions of a ‘‘deficiency’’ and of an ‘‘underpayment’’ and their

interrelationship, if any, in interpreting sections 6663 and

6664. We must consider whether an underpayment can exist

without a deficiency.

The definition of a deficiency in section 6211(a) as it

relates to income tax has remained essentially unchanged

since the 1954 codification of the internal revenue laws. 4 The

4 SEC. 6211. DEFINITION OF A DEFICIENCY.

(a) IN GENERAL.—For purposes of this title * * * the term ‘‘deficiency’’ means the amount by

Continued

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00009 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

506 135 UNITED STATES TAX COURT REPORTS (497)

basic formula is to determine the correct tax and reduce it

by the tax reported by the taxpayer. The resulting amount

is the deficiency. In calculating the deficiency, estimated tax

payments and withholding credits are ignored. Sec.

6211(b)(1).

The definition of an underpayment for purposes of the civil

fraud penalty remained unchanged from the 1954 codifica-

tion of the Internal Revenue Code until 1989. In 1989 Con-

gress repealed sections of the Code, 5 including section 6653,

that imposed accuracy-related penalties and replaced them

with sections 6662 through 6665. Omnibus Budget Reconcili-

ation Act of 1989, Pub. L. 101–239, sec. 7721(a), 103 Stat.

2395. Congress’ primary focus in enacting a new penalty

regime was to alleviate taxpayer confusion and the difficul-

ties of administration of several different penalties relating

to the accuracy of a tax return. H. Rept. 101–247, supra at

1388. The House report also stated that the definition of

‘‘underpayment’’ in section 6664(a) was not ‘‘intended to be

substantively different from * * * [previous] law.’’ Id. at

1394.

Repealed section 6653(b)(1) provided that if any part of any

underpayment (as defined in subsection (c)) of tax required

to be shown on a return was due to fraud, certain penalties

applied. 6 Section 6653(c) tied the definition of an under-

payment to the definition of a deficiency.

SEC. 6653(c). DEFINITION OF UNDERPAYMENT.—For purposes of this sec-

tion, the term ‘‘underpayment’’ means—

(1) INCOME, ESTATE, GIFT, AND CERTAIN EXCISE TAXES.—In the case of

a tax to which section 6211 (relating to income, estate, gift, and certain

which the tax imposed by Subtitle A or B * * * exceeds the excess of—

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made

by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amount previously assessed (or collected without assessment) as a deficiency,

over—

(2) the amount of rebates, as defined in subsection (b)(2), made.

(b) RULES FOR APPLICATION OF SUBSECTION (a).—For purposes of this section—

(1) The tax imposed by subtitle A and the tax shown on the return shall both be determined

without regard to payment on account of estimated tax, without regard to the credit under

section 31 * * *

5 Secs. 6653, 6659, 6659A, 6660, and 6661. Omnibus Budget Reconciliation Act of 1989, Pub.

L. 101–239, sec. 7721(c), 103 Stat. 2399. Sec. 6662 was stricken and replaced by a new sec. 6662.

Id. sec. 7721(a), 103 Stat. 2395.

6 The amount of penalty was increased in stages over the years from 50 percent of the under-

payment to 75 percent of the underpayment and 50 percent of the interest payable under sec.

6601.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00010 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 507

excise taxes) is applicable, a deficiency as defined in that section (except

that, for this purpose, the tax shown on a return referred to in section

6211(a)(1)(A) shall be taken into account only if such return was filed

on or before the last day prescribed for the filing of such return, deter-

mined with regard to any extension of time for such filing) * * *

The basic formula (correct tax – reported tax = under-

payment) applied and, because of the application of section

6211(b)(1), estimated payments and withholding credits did

not enter into the calculation.

Sections 6663 and 6664 replaced repealed section 6653. For

convenience, we again set out the pertinent portions of sec-

tions 6663 and 6664. Section 6663(a) deals with imposition of

the fraud penalty:

SEC. 6663(a). IMPOSITION OF PENALTY.—If any part of any under-

payment of tax required to be shown on a return is due to fraud, there

shall be added to the tax an amount equal to 75 percent of the portion of

the underpayment which is attributable to fraud.

The term ‘‘underpayment’’ is defined in section 6664(a) as fol-

lows:

SEC. 6664(a). UNDERPAYMENT.—

For purposes of this part, the term ‘‘underpayment’’ means the amount

by which any tax imposed by this title exceeds the excess of—

(1) the sum of—

(A) the amount shown as the tax by the taxpayer on his return,

* * *

The basic formula (correct tax – reported tax = under-

payment) is retained and, to that extent, the definition of an

underpayment is not substantively different from previous

law. In a case involving a deficiency and fraud in which no

excess withholding credits are claimed, the calculation of an

underpayment is unchanged. In that context, the terms ‘‘defi-

ciency’’ and ‘‘underpayment’’ can be used interchangeably.

However, in a fraud case where there is no deficiency but

excess withholding credits have been claimed, as is the case

here, or in a fraud case where there is a deficiency and such

credits have been claimed, the effect of the statutory

changes, in relation to the amount of any underpayment, is

unclear from sections 6663 and 6664(a) on their face. The

definition of an underpayment is no longer tied to the defini-

tion of a deficiency under section 6211, as it had been in sec-

tion 6653(c), and the restrictions in section 6211(b)(1),

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00011 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

508 135 UNITED STATES TAX COURT REPORTS (497)

excluding estimated tax and withholding credits from the cal-

culation of a deficiency, no longer apply to an underpayment

by explicit cross-reference. Consequently, the statutes do not

speak expressly to the precise issue whether withholding

credits can be taken into account when calculating an under-

payment for purposes of sections 6663 and 6664(a).

Therefore, we find under Chevron step 1 that for the deter-

mination of an underpayment, Congress seems to have

retained the basic formula (correct tax – reported tax =

underpayment) in section 6664 but has deleted the express

cross-reference to the definition of a deficiency in section

6211. Section 6664 is silent and ambiguous with respect to

the issue before us; i.e., Congress has not directly addressed

the meaning of the term ‘‘underpayment’’ when a taxpayer

has overstated withholding credits.

The Secretary has promulgated section 1.6664–2(c)(1) and

(g), Example (3), Income Tax Regs., to address the issue.

Under Chevron step 2 we must determine whether the regu-

lation is based upon a permissible construction of the statute.

We ‘‘need not conclude that the agency construction was the

only one it permissibly could have adopted to uphold the

construction, or even the reading * * * [we] would have

reached if the question had arisen in a judicial proceeding.’’

Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467

U.S. at 843 n.11. Rather, ‘‘considerable weight should be

accorded to an executive department’s construction of a

statutory scheme it is entrusted to administer.’’ Id. at 844.

The Court should not disturb the agency’s action unless it

appears from the statute or its legislative history that it is

one that Congress would not have sanctioned. Id. at 845.

On March 4, 1991, the Federal Register published a notice

of proposed rulemaking regarding the accuracy-related pen-

alty under section 6662, the fraud penalty under section

6663, and the definitions and rules for purposes of both pen-

alties under section 6664. See Notice of Proposed Rule-

making, 56 Fed. Reg. 8943 (Mar. 4, 1991). The preamble to

the proposed regulations explained that: (1) Overstated

prepayment credits increase the amount of an underpayment

but have no effect on the calculation of a deficiency; (2)

whether a position with respect to an item has substantial

authority or is disclosed on a return is relevant to the deter-

mination of the amount of a deficiency, but not to the

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00012 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 509

determination of the amount of an underpayment; and (3)

the amount of an underpayment is reduced by amounts not

shown on the return that have been previously assessed (or

collected without assessment), but the amount of a deficiency

is not. Id. at 8947. Commentators on the proposed regulation

objected to factoring in overstated prepayment credits in the

calculation of the underpayment. The basis of their objection

was that the overstated prepayment credits are not taken

into account in computing the amount of a deficiency under

section 6211. A public hearing was held on June 3, 1991.

The proposed regulations were adopted and published as

final regulations on December 31, 1991. T.D. 8381, 1992–1

C.B. 374. The preamble to the accuracy-related penalty final

regulations rejected the position of the commentators and

stated: ‘‘There are differences in the section 6664 definition

of ‘underpayment’ and the section 6211 definition of ‘defi-

ciency’ that warrant taking overstated prepayment credits

into account for purposes of the accuracy-related penalty.’’

Id., 1992–1 C.B. at 379.

For convenience, we will again set out the pertinent por-

tion of the regulations. Section 1.6664–2(c)(1), Income Tax

Regs., interprets the definition of ‘‘underpayment’’ in section

6664 by stating that the tax shown on the return is reduced

by the excess of:

(i) The amounts shown by the taxpayer on his return as credits for tax

withheld under section 31 (relating to tax withheld on wages) * * * over

(ii) The amounts actually withheld, * * * with respect to a taxable year

before the return is filed for such taxable year.

Petitioner contends that the regulation is inconsistent with

congressional intent. 7 He stresses the House report which

stated that the definition of ‘‘underpayment’’ in section

6664(a) was not ‘‘intended to be substantively different from

* * * [previous] law.’’ H. Rept. 101–247, supra at 1394. On

the basis of that statement, petitioner argues that the defini-

tion of an underpayment, as contemplated by section 6664,

7 Petitioner cites several cases in support of the proposition that the term ‘‘underpayment’’ is

equivalent to the term ‘‘deficiency’’ under current law. See Estate of Capehart v. Commissioner,

125 T.C. 211, 224 (2005); Downing v. Commissioner, T.C. Memo. 2005–73, supplementing T.C.

Memo. 2003–347; Estate of Johnson v. Commissioner, T.C. Memo. 2001–182, affd. 129 Fed.

Appx. 597 (11th Cir. 2005). Each of these cases dealt with a situation in which the taxpayer’s

underpayment under sec. 6664 also constituted the deficiency under sec. 6211. None dealt with

the overstatement of prepayment credits.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00013 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

510 135 UNITED STATES TAX COURT REPORTS (497)

should not be different from what it was under section

6653(c) and thus withholding credits should be excluded from

the computation of an underpayment.

We disagree with petitioner’s position. Neither section

6664(a) nor the regulation differs substantively from prior

law. The basic formula (correct tax – reported tax = under-

payment) is retained, and in cases involving a deficiency in

which no excess withholding credits are claimed, the calcula-

tion of an underpayment, for purposes of section 6664 and its

regulations, is no different from what it would have been

under former section 6653(c)(1).

If Congress had intended the old and the new penalty

regimes to be identical in every respect, we may infer that

it would have equated the term ‘‘underpayment’’ with ‘‘defi-

ciency’’ and carried forward section 6653(c)(1) verbatim into

section 6664(a). 8 Congress did not do so. Congress has

amended section 6664 on three occasions but has not altered

the definition of the term ‘‘underpayment’’ in response to the

regulation. See Pension Protection Act of 2006, Pub. L. 109–

280, sec. 1219, 120 Stat. 1083; Gulf Opportunity Zone Act of

2005, Pub. L. 109–135, sec. 403, 119 Stat. 2615; American

Jobs Creation Act of 2004, Pub. L. 108–357, sec. 812, 118

Stat. 1577.

The Secretary has followed Congress’ intent to carve out a

specialized set of rules for the penalties applicable to the

accuracy of a return. The application of the regulation is by

its terms specifically limited to underpayments for purposes

of section 6662 (relating to the accuracy-related penalty) and

section 6663 (relating to the fraud penalty) for purposes of

income taxes imposed under subtitle A. Sec. 1.6664–2(a),

Income Tax Regs. By fleshing out the mechanics of what fac-

tors into the section 6664 underpayment calculation when a

deficiency is not present, it promotes fairness in the adminis-

tration of the penalties. It also facilitates the standardization

of the reasonable cause/good faith exception criteria for the

application of all accuracy-related penalties.

Our examination of whether the regulation is based on a

permissible construction of section 6664 reveals that the Sec-

8 One salient change was the omission from the new statute of the parenthetical clause found

in sec. 6653(c), under which the tax shown on a late return did not count. This created a gap

that the Secretary has filled by regulations taking account of the tax shown on a ‘‘qualified

amended return.’’ Sec. 1.6664–2(c)(2) and (3), Income Tax Regs.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00014 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 511

retary reasonably construed the statute through the regula-

tion. Accordingly, we hold the regulation to be valid. See

Estate of Gerson v. Commissioner, 507 F.3d at 441.

If the Commissioner proves that any portion of an under-

payment is due to fraud, the entire underpayment will be

treated as attributable to fraud for purposes of the penalty

under section 6663(b), except any portion of the under-

payment that the taxpayer establishes by a preponderance of

the evidence is not attributable to fraud. Knauss v. Commis-

sioner, T.C. Memo. 2005–6. Respondent has proved that peti-

tioner committed fraud in filing his returns for the years at

issue. Petitioner has not shown that any portion of the

underpayment in any year at issue is not attributable to

fraud. Therefore, the underpayments for the years at issue

are subject in their entirety to fraud penalties. Sec. 6663(b).

In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.

Reviewed by the Court.

COLVIN, COHEN, WELLS, GALE, THORNTON, GOEKE,

KROUPA, HOLMES, PARIS, and MORRISON, JJ., agree with this

majority opinion.

THORNTON, J., concurring: I agree with the majority

opinion and write separately to respond to some of the dis-

senters’ concerns.

Judge Gustafson contends that section 1.6664–2(c)(1),

Income Tax Regs., contradicts the plain meaning of section

6664(a)(1)(A) by defining ‘‘the amount shown as the tax by

the taxpayer on his return’’ so as to remove excess with-

holding credits. I respectfully disagree. As explained in more

detail below, the Code authorizes the IRS to process an

assessment to recover or disallow excess withholding credits

as an adjustment to the tax shown on the return on which

the credit was claimed. Consistent with those provisions, the

regulation permissibly treats the amount shown on the

return as reflecting such an adjustment.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00015 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

512 135 UNITED STATES TAX COURT REPORTS (497)

The IRS summarily assessed petitioner’s erroneous refunds

pursuant to section 6201(a)(3), which authorizes assessment

of excess (‘‘overstated’’) withholding credits in generally the

same manner as mathematical or clerical errors (for sim-

plicity, math errors):

If on any return or claim for refund of income taxes under subtitle A there

is an overstatement of the credit for income tax withheld at the source, or

of the amount paid as estimated income tax, the amount so overstated

which is allowed against the tax shown on the return or which is allowed

as a credit or refund may be assessed by the Secretary in the same

manner as in the case of a mathematical or clerical error appearing upon

the return, except that the provisions of section 6213(b)(2) (relating to

abatement of mathematical or clerical error assessments) shall not apply

with regard to any assessment under this paragraph.

The contemporaneous 1954 legislative history sheds some

light on this provision:

Under this new paragraph refunds caused by erroneous prepayment

credits may be recovered by assessment in the same manner as in the case

of a mathematical error on the return. For example, assume a case in

which the tax shown on the return is $100, the claimed prepayment credit

is $125, and refund of $25 is made, and that it is later determined that

the prepayment credits should have been only $70. Under existing law,

$30 (the tax of $100 as shown on the return less the $70 credit) can be

immediately assessed as tax shown on the return which was not paid, but

the remaining $25 must be recovered by suit in court. Under the new

provision, the entire $55 can be assessed and collected. [H. Rept. 1337, 83d

Cong., 2d Sess. A404 (1954).]

As this history indicates, the legislative impetus for section

6201(a)(3) was the perceived need to give the IRS a means,

previously lacking, of recouping erroneous refunds attrib-

utable to overstated withholding credits without having to

file suit. The legislative solution, as effected in section

6201(a)(3), was to permit the IRS to assess, ‘‘in the same

manner as in the case of a mathematical or clerical error

appearing upon the return,’’ not only the erroneous refund

($25 in the above example), but also the amount of over-

stated withholding credits that the IRS had previously

‘‘allowed’’ against the tax shown on the return but that had

not generated a refund ($30 in the example). 1

1 At first blush it may seem paradoxical to speak, as does sec. 6201(a)(3), of an ‘‘overstated’’

withholding credit as being ‘‘allowed’’. One would not ordinarily think of an ‘‘overstated’’ amount

as being allowed or allowable. But from the example in the above-quoted legislative history it

seems clear that the withholding credits were ‘‘allowed’’ only provisionally until the IRS ‘‘later

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00016 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 513

Section 6201(a)(3) authorizes overstated withholding

credits to be ‘‘assessed’’. And because under section 6201(a)

the IRS’ assessment authority pertains only to ‘‘taxes’’, it fol-

lows that assessment of overstated withholding credits under

section 6201(a)(3) is properly considered as assessment of

additional taxes. 2 Furthermore, because section 6213(b) is

the only Code provision that expressly addresses the process

for making assessments arising out of math errors, it is

reasonable to conclude that section 6201(a)(3), in directing

that overstated withholding credits may be assessed ‘‘in the

same manner as in the case of a mathematical or clerical

error appearing upon the return,’’ means in the same manner

as described in section 6213(b). Otherwise, this directive

would not be meaningful. Consequently, we look to section

6213(b) for guidance.

Pursuant to section 6213(b)(1), summary assessment is

permitted (i.e., the restrictions applicable to deficiencies are

made inapplicable) if a math error on a return gives rise to

an amount of tax ‘‘in excess of that shown on the return’’.

From this phrase it is clear that the tax ‘‘shown on the

return’’ is the amount the taxpayer has shown on the return

before any adjustment is made to correct the math error; i.e.,

the amount ‘‘shown on the return’’ is the amount that reflects

the math error. Because there is no suggestion in the Code

that the amount of tax ‘‘shown on the return’’ should mean

different things in different sections, the same analysis holds

true in determining the impact of a math error on the tax

‘‘shown * * * [on the] return’’ under section 6211(a)(1)

(defining ‘‘deficiency’’ by reference to the amount of tax

shown on the return) and section 6664(a)(1) (defining ‘‘under-

determined’’ that they were overstated. Ultimately, the overstated withholding credits, by virtue

of being overstated, were not in fact ‘‘allowed’’ but instead were made subject to the summary

assessment provisions of sec. 6201(a)(3). Similarly, although the statute refers to overstatements

as being ‘‘allowed against the tax shown on the return’’, and hence (as Judge Gustafson notes)

as being distinct from the tax shown on the return, this phrase merely describes which ‘‘allowed’’

‘‘overstated’’ amounts are made subject to the operation of sec. 6201(a)(3). The more meaningful

consideration is the effect of the statute’s operation upon these amounts. As described in more

detail infra, in permitting these overstated amounts to be assessed in the same manner as math

errors ‘‘appearing upon on the return’’, the effect of sec. 6201(a)(3) is to treat the overstated

withholding credits as part of the amount shown (erroneously) on the return.

2 Indeed, in the example in the legislative history, in order to recoup the $25 erroneous refund

in the manner provided in sec. 6201(a)(3), the IRS must assess not only the original $100 shown

on the return but also the $25 associated with the erroneous refund, as an additional amount

of tax.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00017 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

514 135 UNITED STATES TAX COURT REPORTS (497)

payment’’ by reference to the amount of tax shown on the

return).

Furthermore, because section 6201(a)(3) directs that over-

stated withholding credits be assessed in the same manner

as math errors, it is reasonable to conclude that the same

analysis holds true for overstated withholding credits. In

other words, for overstated withholding credits under section

6201(a)(3), as for other types of math errors under sec-

tion 6213(b)(1), summary assessment is permitted if over-

stated withholding credits give rise to an amount of tax ‘‘in

excess of that shown on the return’’. Sec. 6213(b)(1). As with

math errors, this means that the amount of tax ‘‘shown on

the return’’ is the amount shown by the taxpayer that

reflects the overstated withholding credits. Again, absent

some contrary statutory signal, it is reasonable to conclude

that this result carries over to section 6664(a)(1), where tax

‘‘shown * * * [on the] return’’ is a relevant consideration. 3

In short, under this statutory framework the ‘‘amount shown

as the tax by the taxpayer on his return’’ under section

6664(a)(1)(A) is the amount that reflects reduction for excess

withholding credits. This is precisely the result achieved by

the regulation. 4

The legislative history of section 6664(a) indicates that its

new (in 1989) definition of ‘‘underpayment’’ was not intended

to differ ‘‘substantively’’ from prior law. H. Rept. 101–247, at

1394 (1989). But in the same sentence this legislative history

states that the new definition was intended to ‘‘simplify and

coordinate’’ diverse ‘‘underpayment’’ definitions under former

law. Id. And in fact the new ‘‘underpayment’’ definition in

section 6664(a) differs in various ways from the old ‘‘under-

payment’’ definitions which it replaced. 5 Of special impor-

3 A prominent example of a contrary statutory signal appears in sec. 6211(b)(1), which ex-

pressly excludes withholding credits from the amount ‘‘shown on the return’’ for purposes of de-

termining a deficiency. Although the old ‘‘underpayment’’ definition of former sec. 6653(c)(1) in-

corporated these provisions by cross-reference, this linkage between the sec. 6211 ‘‘deficiency’’

definition and the current sec. 6664(a) definition was broken in 1989, as discussed in more detail

infra.

4 The effect is to increase the amount of the underpayment by the amount of overstated with-

holding credits. It might be noted that to be evenhanded the regulation conversely permits un-

claimed but otherwise allowable withholding credits to reduce the amount of any underpayment.

See sec. 1.6664–3(c), Income Tax Regs.

5 The new ‘‘underpayment’’ definition in sec. 6664(a) replaced at least two different ‘‘under-

payment’’ definitions that appeared in these sections of prior law: (1) Former sec. 6653(c)(1), per-

taining to additions to tax for negligence and fraud for purposes of income, estate, gift, and cer-

tain excise taxes; and (2) former sec. 6653(c)(2), pertaining to additions to tax for negligence and

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00018 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 515

tance for present purposes, it differs from the former section

6653(c)(1) definition by dropping the cross-reference to the

section 6211 ‘‘deficiency’’ definition with its directive that the

‘‘tax imposed’’ and the ‘‘tax shown on the return’’ should be

‘‘determined without regard to’’ withholding credits, among

other things.

Judge Gustafson suggests that this striking difference

between these two ‘‘underpayment’’ definitions is of no con-

sequence. Citing the 1944 legislative history of section 6211,

he contends that the phrase ‘‘determined without regard to’’

was meant merely to clarify that ‘‘refunds’’ of claimed over-

payments of withheld tax should not increase any deficiency.

He suggests that this ‘‘clarification’’ was omitted from the

section 6664(a) ‘‘underpayment’’ definition merely because

section 6664 defined ‘‘rebates’’ in such a manner as to elimi-

nate the former confusion about ‘‘refunds’’, making the

phrase ‘‘determined without regard to’’ redundant and

unnecessary. 6 See Gustafson op. pp. 535–536.

But this analysis fails to take into account the problem of

erroneous refunds arising from overstated withholding

credits. As we have seen, Congress separately addressed that

problem in 1954 with the enactment of section 6201(a)(3),

authorizing the IRS to process an assessment to recover or

disallow excess withholding credits as an adjustment to the

income tax return on which the credit was claimed. The

former section 6653(c)(1) ‘‘underpayment’’ definition excluded

such amounts from an underpayment only by virtue of the

definition’s express linkage to the ‘‘determined without

regard to’’ phrase of section 6211(b). The breaking of that

linkage in 1989 in the new section 6664(a) ‘‘underpayment’’

definition had the consequence of permitting overstated with-

holding credits to be factored into an underpayment, as pro-

vided by the regulation. 7

fraud relating to taxes other than as described in sec. 6653(c)(1). Of these two former ‘‘under-

payment’’ definitions, only the first incorporated by cross-reference the sec. 6211 ‘‘deficiency’’ def-

inition with its directive that withholding taxes should be disregarded in determining the ‘‘tax

imposed’’ and the ‘‘tax shown on the return’’.

6 Under this analysis it might be thought that the phrase ‘‘determined without regard to’’ was

also unnecessary and redundant in sec. 6211, since it contains the same definition of ‘‘rebate’’

as does sec. 6664(a). See secs. 6211(b)(2), 6664(a) (flush language). But of course interpretations

that render statutory language unnecessary or redundant are generally disfavored. See 2A Sing-

er & Singer, Sutherland Statutory Construction, sec. 46:6 (7th ed. 2007).

7 For similar reasons, I also respectfully disagree with Judge Wherry’s dissent, which depends

in large measure on the assumption that ‘‘the amount shown as the tax by the taxpayer on his

Continued

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00019 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

516 135 UNITED STATES TAX COURT REPORTS (497)

In the final analysis, ‘‘the amount shown as the tax by the

taxpayer on his return’’ is a term of art, as is the section

6664(a) definition of ‘‘underpayment’’ of which it is a compo-

nent. That the meanings of these terms of art may not be

immediately plain on their face is attributable in part to the

intricate interplay of Code provisions. But the regulation is

based upon a construction of these terms and of the larger

statutory framework that is, in my view, not merely permis-

sible but correct. For these reasons and the reasons stated in

the majority opinion, the regulation is valid.

COLVIN, COHEN, GALE, MARVEL, GOEKE, KROUPA, HOLMES,

and HAINES, JJ., agree with this concurring opinion.

WHERRY, J., dissenting: I disagree with the majority to the

extent it holds section 1.6664–2(c)(1), Income Tax Regs., 1 to

be a permissible construction of section 6664(a)(1)(A), for

many of the reasons Judge Gustafson articulates in his finely

crafted dissent.

Not only is section 1.6664–2(c)(1), Income Tax Regs., at

variance with the statute it purports to interpret; it also ren-

ders the totality of the Commissioner’s regulatory scheme, as

set forth in section 1.6664–2, Income Tax Regs., contradictory

and unreasonable. I would, therefore, hold invalid section

1.6664–2(c)(1), Income Tax Regs., and certain regulatory

examples inextricably linked with it. 2 Ignoring these provi-

sions, I find that the remainder of section 1.6664–2, Income

return’’ under sec. 6664(a)(1)(A) cannot reflect any reduction for excess withholding credits. I

also respectfully disagree with certain technical aspects of Judge Wherry’s analysis, particularly

his suggestion that overstated withholding credits are properly considered amounts ‘‘collected

without assessment’’ under sec. 1.6664–2(d), Income Tax Regs., which pertains to sec. 31 credits

which are ‘‘allowable’’. By definition, overstated withholding credits are not ‘‘allowable’’, and in

all likelihood (as is true in the case before us) the amounts on which they are predicated have

never been ‘‘collected’’. Properly construed, the regulation does not give rise to the ‘‘double-count-

ing error’’ that concerns Judge Wherry. See Wherry op. pp. 525–526.

1 Sec. 1.6664–2(c), Income Tax Regs., was adopted on Jan. 9, 2007, pursuant to T.D. 9309,

2007–1 C.B. 497, which also removed sec. 1.6664–2T, Temporary Income Tax Regs., 70 Fed. Reg.

10037 (Mar. 2, 2005). The latter, in turn, had replaced the prior final regulation, sec. 1.6664–

2(c), Income Tax Regs., adopted on Dec. 31, 1991, pursuant to T.D. 8381, 1992–1 C.B. 374. The

temporary regulation, issued to modify the rules relating to qualified amended returns contained

in the prior final regulation, had retained par. (c)(1) of that regulation unchanged. The current

version of sec. 1.6664–2(c)(1), Income Tax Regs., adopted on Jan. 9, 2007, is identical to the

version adopted on Dec. 31, 1991, and in effect during the tax years at issue. Also, ‘‘both parties

agree that the regulation * * * is applicable to the computation of the underpayments in the

instant case.’’ See majority op. p. 504.

2 See infra note 9.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00020 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 517

Tax Regs., is sufficiently consistent, both with the statute

and among its constituent parts, to sustain a section 6663

civil fraud penalty here. I would, however, impose that pen-

alty not on the entire amount by which petitioner overstated

his withholding credits, but only on the portion of the over-

stated withholding credits that he fraudulently claimed and

received as a refund.

I. Opening the Door to Withholding Credits

The majority asserts, without explanation, that ‘‘Neither

paragraph (1)(B) [of section 6664(a) relating to amounts col-

lected without assessment] nor (2) [of section 6664(a) relating

to rebates] applies in this case.’’ See majority op. p. 503. The

majority, thus, accepts respondent’s claim that in each of

petitioner’s tax years at issue the amount of a section

6664(a)(2) rebate was, respectively, zero. In failing to subject

this claim to scrutiny, the majority has denied itself the

opportunity to appreciate the creativity and complexity

underlying section 1.6664–2(d), Income Tax Regs. This sec-

tion of the regulations is not mentioned in either petitioner’s

or respondent’s briefs but, nonetheless, constitutes the basis

for arriving at respondent’s result under section 1.6664–

2(c)(1), Income Tax Regs., which petitioner challenges and

respondent defends.

Siding with respondent, the majority accurately observes

that ‘‘the statutes do not speak expressly to the precise issue

whether withholding credits can be taken into account when

calculating an underpayment for purposes of sections 6663

and 6664(a).’’ See majority op. p. 508. I suggest that

respondent finds the statutory hook for his regulatory

innovation not in section 6664(a)(1)(A), whose plain meaning,

as Judge Gustafson points out, could hardly be clearer, but

instead in section 6664(a)(1)(B).

A. Section 6664(a)(1)(B), Not Section 6664(a)(1)(A), Turns

the Key

Section 6664(a)(1)(A) replicates the operative language of

section 6211(a)(1)(A), the parallel provision in the definition

of deficiency (‘‘the amount shown as the tax by the taxpayer

on his return’’). In contrast, section 6664(a)(1)(B) uses words

slightly different from those of its deficiency counterpart, sec-

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00021 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

518 135 UNITED STATES TAX COURT REPORTS (497)

tion 6211(a)(1)(B). Whereas section 6664(a)(1)(B) specifies

‘‘amounts not so shown previously assessed (or collected with-

out assessment)’’, section 6211(a)(1)(B) refers to ‘‘amounts

previously assessed (or collected without assessment) as a

deficiency’’. (Emphasis supplied.) When compared with sec-

tion 6211(a)(1)(B), section 6664(a)(1)(B) contains the addi-

tional qualifying phrase ‘‘not so shown’’ before ‘‘previously

assessed’’ but omits the qualifying phrase ‘‘as a deficiency’’

after the parenthetical ‘‘(or collected without assessment)’’.

Relying on that omission, the Commissioner has concluded

in section 1.6664–2(d), Income Tax Regs., that the additional

qualifier ‘‘not so shown’’ in section 6664(a)(1)(B) does not

apply to the parenthetical ‘‘(or collected without assess-

ment)’’. In other words, the Commissioner reads section

6664(a)(1)(B) as referring to two different kinds of amounts:

(1) Those not shown on the return that were previously

assessed; and (2) those that were collected without assess-

ment. This taxonomy, in turn, allows the Commissioner to

define the latter amounts as

the amount by which the total of the credits allowable under section 31

(relating to tax withheld on wages) and section 33 (relating to tax withheld

at source on nonresident aliens and foreign corporations), estimated tax

payments, and other payments in satisfaction of tax liability made before

the return is filed, exceed the tax shown on the return (provided such

excess has not been refunded or allowed as a credit to the taxpayer). [Sec.

1.6664–2(d), Income Tax Regs.]

Section 6664(a)(1)(B), and its differences with section

6211(a)(1)(B), creates an opening, through which the

Commissioner has dragged withholding credits into the equa-

tion for calculating an underpayment. 3

B. Withholding Credit Is Amount Collected Without Assess-

ment Except When I Say It Is Not

Unfortunately for the Commissioner, neither the preamble

to the proposed or final regulations nor the regulations them-

selves clarify why including withholding credits in amounts

collected without assessment, under section 6664(a)(1)(B),

3 As evidence, consider the preamble to the proposed regulations, which had justified the in-

clusion of withholding credits in amounts collected without assessment under sec. 6664(a)(1)(B),

even though such credits are excluded under sec. 6211(a)(1)(B), by arguing that the amount of

an underpayment is reduced by amounts collected without assessment whereas the amount of

a deficiency is not. Notice of Proposed Rulemaking, 56 Fed. Reg. 8947 (Mar. 4, 1991).

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00022 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 519

also requires that we reduce amounts shown as tax under

section 6664(a)(1)(A) by any overstated withholding credits.

Even worse, under the plain meaning of the Commissioner’s

own regulations, in a case where there is no deficiency as

defined in section 6211(a), a refund of overstated withholding

credits would constitute a rebate under section 6664(a)(2).

Consequently, the regulations would count this refunded

amount twice in calculating an underpayment, once by

reducing the amount shown as the tax pursuant to section

1.6664–2(a) and (c)(1), Income Tax Regs., and then again as

a rebate pursuant to section 1.6664–2(a) and (e), Income Tax

Regs.

Respondent tries to disavow this anomalous effect of his

own handiwork. Respondent’s posttrial brief and section

1.6664–2(g), Examples (1) and (3), Income Tax Regs., imply

that when withholding credits are refunded, they cease to be

amounts collected without assessment and this cessation

somehow has retroactive effect so that the refund does not

constitute a rebate within the meaning of section 6664(a)(2).

Reaching this conclusion, however, requires reversing the

laws of space and time, the rules of logic and grammar, and

the force of our own precedent.

Respondent presumably relies on the parenthetical ‘‘(pro-

vided such excess has not been refunded or allowed as a

credit to the taxpayer)’’ in section 1.6664–2(d), Income Tax

Regs., to conclude that when withholding credits are

refunded, they no longer constitute amounts collected with-

out assessment. Therefore, according to respondent, the

refund cannot be a rebate under section 6664(a)(2). This flies

in the face of the obvious implication of the regulatory text

itself that until such time as a withholding credit is

refunded, it remains an amount collected without assess-

ment. In fact, section 1.6664–2(g), Example (2), Income Tax

Regs., suggests as much. It should follow that as long as the

tax shown on the return is no less than the tax imposed, so

that there is no deficiency under section 6211(a), any refund

of the withholding credit could only have been ‘‘made on the

ground that the tax imposed was less than * * * Amounts

not so shown previously assessed (or collected without

assessment)’’. Sec. 1.6664–2(e), Income Tax Regs.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00023 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

520 135 UNITED STATES TAX COURT REPORTS (497)

C. In a Galaxy Far, Far Away

Respondent appears to construct a multiverse version of

reality in which the moment a withholding credit is

refunded, it enters a parallel universe, as it were, where the

refunded amount was never an amount collected without

assessment to begin with. Tax law, alas, must inhabit our

universe where the arrow of time can move in only one direc-

tion and cause must precede its effect. If a withholding credit

is an amount collected without assessment, then it must

remain so until it is refunded. And if the refund, when made,

is made on the ground that the tax imposed is less than the

amount of withholding credits, then that refund must con-

stitute a rebate under section 6664(a)(2).

Respondent’s difficulty lies in the fact that the statutory

design envisions any amount collected without assessment as

potentially affecting the calculation of an underpayment in

two ways: (1) Negatively, under section 6664(a)(1)(B); and (2)

positively, under section 6664(a)(2). 4 Because respondent has

included withholding credits in amounts collected without

assessment under section 6664(a)(1)(B), his attempt to deny

their existence in computing a rebate under section

6664(a)(2) is logically irreconcilable.

Grammar and our own precedent also undermine respond-

ent’s cause. The Commissioner’s own words in the regula-

tions refer to the amount by which withholding credits ‘‘and

other payments in satisfaction of tax liability made before

the return is filed, exceed the tax shown on the return (pro-

4 Sec. 6664(a) establishes the following relationship between underpayment and an amount

collected without assessment:

Underpayment equals the amount of tax imposed minus (the amount shown as the tax by the

taxpayer on his return plus all amounts not so shown previously assessed, or collected without

assessment, minus the amount of rebates made).

Sec. 1.6664–2(a), Income Tax Regs., accurately represents this relationship in the following

algebraic expression:

Underpayment = W – (X + Y – Z), where W = the amount of income tax imposed; X = the

amount shown as the tax by the taxpayer on his return; Y = amounts not so shown previously

assessed (or collected without assessment); and Z = the amount of rebates made.

Rearranging the terms yields the following equivalent expression:

Underpayment = (W + Z) – (X + Y).

It is easy to see that an increase of $1 in the amount collected without assessment increases

Y and, thereby, reduces underpayment by $1. However, to the extent that this $1 is refunded

‘‘on the ground that the tax imposed was less than the excess of * * * [(X + Y)] over the rebates

previously made’’, sec. 6664(a)(2), the resulting increase in Z will increase underpayment by the

same amount.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00024 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 521

vided such excess has not been refunded or allowed as a

credit to the taxpayer).’’ Sec. 1.6664–2(d), Income Tax Regs.

(emphasis supplied). The use of the present perfect tense in

the parenthetical dictates that the parenthetical apply at the

time that the underpayment is calculated. We have long

maintained that for purposes of the civil fraud penalty, the

base on which the penalty is imposed be determined as of the

time when the return is filed and not any later time such as

when the notice of deficiency is issued. See, e.g., Stewart v.

Commissioner, 66 T.C. 54 (1976).

Underpinning such decisions was the rationale that a taxpayer should

not, after fraudulently understating his tax liability, retain the power to

avoid the fraud penalty by the simple expedient of later paying the

remainder of his correct tax upon discovering his return was under audit.

* * * [Id. at 58–59.]

It would surely be perverse to allow respondent’s discretion

in handling a refund claim to affect the amount of peti-

tioner’s underpayment well after petitioner has filed his

return.

Clearly, then, so long as a taxpayer has no deficiency

under section 6211(a), the plain meaning of the regulations’

language would cause a refund of a withholding credit to be

a rebate under section 6664(a)(2). 5 Further, any refund that

this taxpayer obtains by overstating withholding credits

would also constitute a section 6664(a)(2) rebate since this

refund must necessarily have been ‘‘made on the ground that

the tax imposed was less than’’ (emphasis supplied) the

amounts collected without assessment. Sec. 6664(a). In fact,

there could exist no other grounds for making this refund.

5 A sec. 6211(a) deficiency could arguably cause a rebate under sec. 6664(a)(2) to be smaller

by the same amount. To see this, consider a situation where ‘‘the amount by which the tax im-

posed * * * exceeds * * * the amount shown as the tax by the taxpayer upon his return’’ is

$1. This would create a deficiency of $1 under sec. 6211(a). It may be argued that this $1 could

not be included in ‘‘so much of * * * [a refund] as was made on the ground that the tax imposed

was less than the excess of * * * [(X + Y), as defined supra note 4] over the rebates previously

made.’’ Sec. 6664(a). Under this argument, any sec. 6664(a)(2) rebate would be reduced by $1.

Even though a sec. 6211(a) deficiency may result in a smaller rebate under sec. 6664(a)(2), the

sec. 6664(a) formula for underpayment would automatically pick up the deficiency to leave the

amount of underpayment, if any, unchanged. See supra note 4 for the algebraic formula for com-

puting the underpayment. See also infra note 10, discussing the converse case, where the tax

shown on the return exceeds the tax imposed, and infra note 11, deriving the numerical results

for such a converse case.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00025 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

522 135 UNITED STATES TAX COURT REPORTS (497)

II. Taking the Blue Pencil to the Commissioner’s Drafting

Finally, to the case of Rick D. Feller, where the notices of

deficiency evidence the absence of a section 6211(a) defi-

ciency in each of the tax years at issue. For the reasons dis-

cussed above, section 1.6664–2(d) and (e), Income Tax Regs.,

would cause petitioner’s section 6664(a) underpayment to

include so much of his overstated withholding credits that he

claimed and received as a refund. However, if the challenged

regulation, section 1.6664–2(c)(1), Income Tax Regs., is valid,

we would consider the overstatement of withholding credits

yet again. Specifically, we would adjust the tax shown on the

return by subtracting from it the entire amount of the over-

stated withholding credits. 6 We would then use this adjusted

figure, rather than the actual tax shown on the return, to

calculate petitioner’s underpayment. The refunded portion of

the overstated withholding credits would, thus, be counted

one more time. 7 This bizarre result is untenable, and either

section 1.6664–2(c)(1), Income Tax Regs., or both section

1.6664–2(c)(1) and (d), Income Tax Regs., must give way. 8

6 It is unclear from the regulations whether the challenged adjustment under sec. 1.6664–

2(c)(1), Income Tax Regs., to the amount of tax shown on the return also purports to cover the

calculation of a sec. 6664(a)(2) rebate under sec. 1.6664–2(e), Income Tax Regs. Compare sec.

1.6664–2(a)(1)(i), Income Tax Regs. (‘‘The amount shown as the tax by the taxpayer on his re-

turn (as defined in paragraph (c) of this section)’’), with sec. 1.6664–2(e)(1)(i), Income Tax Regs.

(‘‘The amount shown as the tax by the taxpayer on his return’’ without a cross-reference to

‘‘paragraph (c) of this section’’). However, the final amount of any sec. 6664(a)(2) rebate cal-

culated under sec. 1.6664–2(e), Income Tax Regs., would remain unchanged, whether or not sec.

1.6664–2(c)(1), Income Tax Regs., applies.

Applying sec. 1.6664–2(c)(1), Income Tax Regs., to this calculation would have two equal and

opposite effects that would cancel each other out. On the one hand, the amount of tax shown

on the return under sec. 1.6664–2(e)(1)(i), Income Tax Regs., would be reduced by the amount

of the challenged adjustment. On the other hand, however, amounts collected without assess-

ment under sec. 1.6664–2(e)(1)(ii), Income Tax Regs., would be increased by the same amount.

See sec. 1.6664–2(d), Income Tax Regs. (restricting amounts collected without assessment to

those that ‘‘exceed the tax shown on the return’’). Since the calculation of a sec. 6664(a)(2) rebate

entails adding the respective amounts under sec. 1.6664–2(e)(1)(i) and (ii), Income Tax Regs.,

the net effect would be zero.

7 See infra note 11 showing such double-counting of overstated withholding credits for peti-

tioner’s 1992 tax year.

8 Quite apart from the double-counting of the refunded portion of overstated withholding cred-

its, the challenged adjustment under sec. 1.6664–2(c)(1), Income Tax Regs., introduces another

inconsistency, and a potentially fatal one, with the remaining provisions of the regulations.

Under sec. 1.6664–2(d), Income Tax Regs., ‘‘amount ‘collected without assessment’ is the amount

by which * * * [withholding credits] and other payments in satisfaction of tax liability made

before the return is filed, exceed the tax shown on the return (provided such excess has not been

refunded or allowed as a credit to the taxpayer).’’ (Emphasis supplied.) Sec. 1.6664–2(c)(1), In-

come Tax Regs., says that the adjustment to the tax shown on the return applies ‘‘For purposes

of paragraph (a) of this section’’. And though the term ‘‘amount collected without assessment’’

is fully defined only in sec. 1.6664–2(d), Income Tax Regs., ‘‘paragraph (a) of this section’’ cer-

tainly mentions and uses it as an input in the underpayment formula set forth there. A literal

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00026 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 523

I agree with Judge Gustafson that ‘‘section 6664(a)(1)(A) is

not ambiguous, and under the Supreme Court’s Chevron

analysis, the inquiry stops there.’’ Gustafson op. p. 541.

Moreover, as I have shown, section 1.6664–2(c)(1), Income

Tax Regs., as currently written, causes the Commissioner’s

regulatory scheme to generate results that are incorrect,

illogical and incoherent. I would, therefore, invalidate section

1.6664–2(c)(1), Income Tax Regs. 9

However, I also believe that the omission of the phrase ‘‘as

a deficiency’’ in section 6664(a)(1)(B), when compared with

section 6211(a), leaves the former sufficiently ambiguous to

invite regulatory interpretation. Under ‘‘step 2’’ of a Chevron

analysis, I would then consider whether the interpretation

that the Commissioner has provided in section 1.6664–2(d),

Income Tax Regs., is ‘‘based on a permissible construction of

the statute.’’ Chevron U.S.A. Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837, 843 (1984).

The Commissioner’s interpretation is by no means ‘‘the

only one * * * [he] permissibly could have adopted’’. Id. n.11.

But I can find nothing in the statute that would indicate that

Congress would not have sanctioned including withholding

credits in amounts previously collected without assessment.

See id. at 845. Further, as the majority discusses at length,

there is sufficient legislative history to support the propo-

sition that Congress wanted to distinguish an underpayment

under section 6664(a) from a deficiency under section

6211(a). I would, therefore, defer to respondent’s interpreta-

reading of this applicability provision would require the challenged adjustment to be made to

all the terms that go into the underpayment formula of sec. 1.6664–2(a), Income Tax Regs., in-

cluding amount collected without assessment. As a consequence, depending upon the facts of a

particular situation, none, some or all of the benefits that respondent seeks from the challenged

adjustment in par. (a) would have to be given up in par. (d). The results could be startling in

a case, such as petitioner’s, where respondent has relied on the challenged adjustment to reduce

the amount shown as tax to a negative number. Invalidating sec. 1.6664–2(c)(1), Income Tax

Regs., would, thus, confer the added benefit of precluding this self-defeating construction and

salvaging the remainder of sec. 1.6664–2, Income Tax Regs.

By comparison, invalidating sec. 1.6664–2(d), Income Tax Regs., would eviscerate the entire

regulatory venture. I do not believe that in the absence of sec. 1.6664–2(d), Income Tax Regs.,

sec. 1.6664–2(c)(1), Income Tax Regs., or for that matter, any other provision of sec. 1.6664–2,

Income Tax Regs., can stand on its own since, as explained above, sec. 1.6664–2(d), Income Tax

Regs., is the provision that enables taking withholding credits into account in computing an un-

derpayment.

9 I would also invalidate sec. 1.6664–2(g), Examples (1) and (3), Income Tax Regs., holding

them to be unreasonable and impermissible constructions of the Commissioner’s own text con-

tained in sec. 1.6664–2(d), Income Tax Regs.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00027 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

524 135 UNITED STATES TAX COURT REPORTS (497)

tion of section 6664(a)(1)(B), which he provides in section

1.6664–2(d), Income Tax Regs.

Applying the unambiguous plain language of that regula-

tion section to petitioner’s case and tracing its consequences

sequentially through section 1.6664–2(e) and (a), Income Tax

Regs., I would find underpayments in the amounts of the

overstated withholding credits claimed and received as

refunds. 10 I would, therefore, sustain a section 6663 civil

fraud penalty not on the entire amount by which petitioner

overstated his withholding credits for each tax year at issue

but only on such portion of the overstated withholding

credits as he had claimed and received as a refund. 11

10 Respondent did not determine a sec. 6211(a) deficiency for any of petitioner’s tax years at

issue. However, for one or more of these years petitioner had in fact overstated his tax liability,

so that the amount shown on the return exceeded the tax imposed. Ceteris paribus, this would

cause a sec. 6664(a)(2) rebate to be larger by the amount of the overstatement. However, the

sec. 6664(a) underpayment would remain unchanged in the amount of the total refund. See infra

note 11, establishing this result for petitioner’s 1992 tax year, where the amount shown as tax

did, in fact, exceed the tax imposed. Cf. supra note 5 (discussing the case of a sec. 6211(a) defi-

ciency).

11 This is the exact amount that one obtains as a sec. 6664(a) underpayment by applying the

formula set forth in sec. 1.6664–2(a)(2), Income Tax Regs., and discussed supra note 4, without

giving effect to the challenged adjustment under sec. 1.6664–2(c)(1), Income Tax Regs. I formally

demonstrate this below for petitioner’s 1992 tax year. I then show the impact of the challenged

adjustment on petitioner’s 1992 underpayment amount, highlighting the double-counting of the

refunded portion of the overstated withholding credits. Finally, I compare petitioner’s 1992 un-

derpayment amount, computed with and without the challenged adjustment, to the under-

payment that respondent actually determined.

Recall from supra note 4 that the required inputs for the underpayment formula are:

W = the amount of income tax imposed;

X = the amount shown as the tax by the taxpayer on his return;

Y = amounts not so shown previously assessed (or collected without assessment); and

Z = the amount of rebates made.

For his 1992 tax year petitioner claimed and received a refund of $86,181, $5,328 of which

consisted of claimed excess Social Security tax withheld. The record is silent on the legitimacy

or otherwise of such claimed withholdings, and respondent has not treated them as overstated

withholdings in applying the challenged adjustment under sec. 1.6664–2(c)(1), Income Tax Regs.

For purposes of this exercise, therefore, I will ignore the claimed excess Social Security

withholdings and assume a refund amount of $86,181 less $5,328, or $80,853.

Respondent determined petitioner’s 1992 tax liability to be $30,022, whereas petitioner had

written a figure of $57,244 on line 53 of his 1992 Form 1040, U.S. Individual Income Tax Re-

turn, against the words ‘‘This is your total tax’’. Petitioner claimed withholdings of $138,097,

of which $3,097 were actual and the remaining $135,000 were fictitious. Thus, in the under-

payment formula, W is $30,022 and X is $57,244. Also, Y is zero and Z is $108,075.

Note that Y consists of amounts actually collected without assessment, but only to the extent

they ‘‘exceed the tax shown on the return’’. Sec. 1.6664–2(d), Income Tax Regs. Since actual

withholdings of $3,097 were less than the $57,244 of tax shown on the return, Y is set to be

zero. Further, Z is the amount of the sec. 6664(a)(2) rebate, calculated pursuant to sec. 1.6664–

2(e), Income Tax Regs., as follows. The rebate would consist of the excess of the tax imposed

over the amount specified in sec. 1.6664–2(e)(1), Income Tax Regs. The latter is the higher of

the amount shown as the tax, or $57,244, and the total claimed withholdings, or $138,097. This

yields: $138,097 – $30,022 = $108,075, which is larger than the refund of $80,853 by exactly

the amount by which petitioner overstated his tax liability, or $27,222. This $27,222 (in addition

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00028 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 525

III. Conclusion

I believe that the Commissioner could have drafted an

expanded version of the current section 1.6664–2(d), Income

Tax Regs., in a manner that delivered results mathematically

identical to those that section 1.6664–2(c)(1), Income Tax

Regs., seeks to attain. He could have done so without the

to the $80,853 refund) is also a rebate, and one trivially so in the sense that it is an abatement

or credit of a self-reported and immediately assessable tax liability, and such abatement or cred-

it must necessarily have been ‘‘made on the ground that the tax imposed was less than the

* * * [tax shown on the return]’’. Sec. 1.6664–2(e), Income Tax Regs.

Begin with the formula for underpayment from supra note 4,

Underpayment = (W + Z) – (X + Y).

Since Y is zero, the formula can be simplified,

Underpayment = W + Z – X.

The numbers for W, Z, and X, from above, are $30,022, $57,244, and $108,075, respectively.

Plugging these numbers in the formula,

Underpayment = W + Z – X

= $30,022 + $108,075 – $57,244

= $138,097 – $57,244 = $80,853.

The $80,853 underpayment equals the amount of the refund, and this proves the claim made

at the outset. Now, consider the impact of the challenged adjustment under sec. 1.6664–2(c)(1),

Income Tax Regs. The adjustment would reduce the amount of tax shown on the return of

$57,244 by the fictitious withholdings of $135,000 and, thus, arrive at a negative number for

X of –$77,756. The numbers for W, Z, and Y would be unchanged; i.e., $30,022, $108,075, and

zero, respectively. Plugging these numbers in the formula,

Underpayment = W + Z – X

= $30,022 + $108,075 – (–$77,756)

= $138,097 + $77,756 = $215,853.

The $215,853 underpayment is larger than the $135,000 fictitious withholdings by exactly the

refund amount of $80,853, demonstrating that the refunded portion of the fictitious withholdings

has been counted twice.

Respondent actually determined a 1992 underpayment amount for petitioner of only $104,642.

Presumably under authority of sec. 1.6664–2(g), Example (1), Income Tax Regs., and notwith-

standing the plain language of sec. 1.6664–2(d) and (e), Income Tax Regs., respondent declined

to recognize the $80,853 refund as a sec. 6664(a)(2) rebate. Curiously, respondent also did not

consider as a rebate the $27,222 by which petitioner had overstated his 1992 tax liability. Peti-

tioner had shown this amount as tax, but respondent determined it not to be so and chose not

to assess it. Consequently, sec. 1.6664–2(g), Example (1), Income Tax Regs., would not apply,

and this amount would appear to be a rebate, not just for sec. 6664(a)(2) purposes, but even

in the deficiency context. See sec. 6211(b)(2). Ignoring it as a rebate caused petitioner’s 1992

underpayment to be lower by $27,222.

Respondent’s munificence to petitioner did not end there. Instead of using the actual $57,244

figure that petitioner had handwritten as his tax on his return, respondent used an ‘‘as ad-

justed’’ amount of $60,380 as the tax shown. We, and other courts, have consistently held that

a postfiling adjustment or payment cannot mitigate a fraud that was perpetrated when the re-

turn was filed. See text supra between notes 4 and 5; see also Badaracco v. Commissioner, 464

U.S. 386 (1984). Taking a postfiling adjustment of $3,136 into account caused petitioner’s 1992

underpayment amount to be lower by the same amount.

In the underpayment formula, respondent set Z to be zero and derived X as follows. Starting

with $60,380 as the tax shown, respondent reduced that amount by the fictitious withholdings

of $135,000 and, thus, arrived at a negative number for X of –$74,620. Plugging these numbers

in the formula,

Underpayment = W + Z – X

= $30,022 + $0 – (–$74,620)

= $30,022 + $74,620 = $104,642.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00029 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

526 135 UNITED STATES TAX COURT REPORTS (497)

double-counting error that plagues the current set of regula-

tions. Our mandate, however, is to test the validity of the

regulations as the Commissioner has drafted them and seeks

to apply them, not to improve or improvise upon them in

order to achieve a ‘‘just’’ result. I would hold section 1.6664–

2(c)(1), Income Tax Regs., to be an impermissible construc-

tion of section 6664(a)(1)(A). I respectfully dissent.

HALPERN and GUSTAFSON, JJ., agree with this dissent.

GUSTAFSON, J., dissenting: I would hold invalid the regula-

tion on which the fraud penalty at issue depends. Section

6664(a)(1)(A) states an unambiguous term, i.e., ‘‘the amount

shown as the tax by the taxpayer on his return’’; but the IRS’s

corresponding regulation—26 C.F.R. section 1.6664–2(c)(1),

Income Tax Regs.—gives a definition that contradicts almost

every substantive word in that statutory term. The regula-

tion modifies the term to mean an amount that—

• is not ‘‘shown’’ but rather has to be derived;

• is not an amount of ‘‘tax’’ but rather is tax reduced by

excess credits;

• is not shown ‘‘by the taxpayer’’ but rather is asserted by

the IRS as the result of its examination, in contradiction of

what was shown ‘‘by the taxpayer’’; and

• is not shown ‘‘on the return’’ but rather must be derived

from information that is not ‘‘on the return’’.

The regulation thereby undertakes to impose the penalty to

an extent that the statute does not.

I. Introduction

Petitioner Rick D. Feller filed income tax returns for 1992

through 1997 on which he reported income tax liabilities

greater than he actually owed, because he incorrectly

reported as wages certain amounts that he did not in fact

receive. For example, for 1992 he reported a total tax liability

of $60,380, 1 whereas the IRS determined that in fact he owed

1 The actual amount of ‘‘total tax’’ shown on line 53 of Mr. Feller’s 1992 return is $57,244.58;

but on line 19 of the IRS’s notice of deficiency the ‘‘Total tax shown on return or as previously

adjusted’’ is $60,380. Presumably there are previous adjustments that would account for the dif-

ference, but the record does not show them. For simplicity’s sake and ease of comparison, I use

the IRS’s amount.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00030 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 527

only $30,022. That is, Mr. Feller’s returns overstated his total

tax liability.

However, Mr. Feller also incorrectly reported, as Federal

tax withholding from wages, certain amounts that were not

in fact withheld from his wages (because the wages were

fictitious). For example, for 1992 he reported total tax with-

holding from wages as $138,097, whereas only $3,097 was

actually withheld, and $135,000 was a fraudulent overstate-

ment of his withholding. As a result, Mr. Feller reported on

his returns net amounts due that were much less than he

actually owed. That is, his returns understated his net

amount due to the IRS and in fact claimed instead for 1992

(for example) a refund of $86,181.

When Mr. Feller was discovered, he pleaded guilty to

submitting a false tax return for one of the years in issue.

For his crime he was sentenced to 15 months in prison.

The IRS also determined against Mr. Feller a civil fraud

penalty pursuant to section 6663(a), which penalty applies

‘‘[i]f any part of any underpayment of tax required to be

shown on a return is due to fraud’’. (Emphasis added.) The

term ‘‘underpayment’’ is defined in section 6664(a) of the

Internal Revenue Code and in section 1.6664–2(a) of

the Income Tax Regulations (26 C.F.R.). This case turns on

the meaning of ‘‘underpayment’’ in section 6664(a), which in

turn depends on the meaning of the term ‘‘amount shown as

the tax by the taxpayer on his return’’ that appears in that

statute.

II. The statute and regulation at issue

A. The statute: section 6664(a)

Section 6664(a) defines the ‘‘underpayment’’ to which the

fraud penalty of section 6663(a) applies. In simplified terms,

the ‘‘underpayment’’ is the excess of one’s actual liability over

his reported liability—i.e., tax ‘‘imposed’’ minus tax ‘‘shown’’

equals ‘‘underpayment’’. Section 6664(a) provides as follows:

SEC. 6664(a). UNDERPAYMENT.—For purposes of this part, the term

‘‘underpayment’’ means the amount by which any tax imposed by this title

exceeds the excess of—

(1) the sum of—

(A) the amount shown as the tax by the taxpayer on his return, plus

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00031 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

528 135 UNITED STATES TAX COURT REPORTS (497)

(B) amounts not so shown previously assessed (or collected without

assessment), over

(2) the amount of rebates made.

For purposes of paragraph (2), the term ‘‘rebate’’ means so much of an

abatement, credit, refund, or other repayment, as was made on the ground

that the tax imposed was less than the excess of the amount specified in

paragraph (1) over the rebates previously made.[2]

This definition of ‘‘underpayment’’ follows closely the defini-

tion of a tax ‘‘deficiency’’ in section 6211(a), employing terms

used in that section (‘‘tax imposed’’, ‘‘exceeds the excess’’,

‘‘amount shown’’, ‘‘previously assessed’’); and the definition of

‘‘rebate’’ follows closely the definition of the same term in

section 6211(b)(2).

However, unlike the definition of ‘‘underpayment’’ in sec-

tion 6664(a), the definition of ‘‘deficiency’’ in section 6211(a)

is qualified by section 6211(b)(1), which provides that ‘‘For

purposes of this section [i.e., not ‘‘For purposes of this title’’]

* * * [t]he tax imposed by subtitle A and the tax shown on

the return shall both be determined * * * without regard to

the credit under section 31 [i.e., ‘‘Tax Withheld on Wages’’]’’.

Withholding credits are thus explicitly excluded from the

Code’s ‘‘deficiency’’ equation; but the Code’s ‘‘underpayment’’

equation in section 6664(a) that is at issue here does not

mention withholding credits.

B. The regulation: 26 C.F.R. section 1.6664–2

The regulation implementing the fraud penalty largely

repeats the definition of ‘‘underpayment’’ given in the

statute. Moreover, the regulation defines ‘‘tax imposed’’ in a

manner consistent with the use of that term in the deficiency

context. That is, even though section 6664(a) is, as we have

2 The definition of ‘‘rebate’’ in section 6664(a) incorporates ‘‘the amount specified in paragraph

(1)’’, in which subparagraph (A) lacks the phrase ‘‘as a deficiency’’ when compared to the equiva-

lent term in section 6211(a)(1)(B). Whether this might render a portion of the erroneous refunds

made to Mr. Feller to be rebates (and thus to increase the underpayment) is a question the par-

ties have not addressed in any detail. Respondent makes no contention that Mr. Feller had any

‘‘amount of rebates made’’, sec. 6664(a)(2), or any ‘‘amounts not so shown previously assessed

(or collected without assessment),’’ sec. 6664(a)(1)(B), but rather states in his calculations that

those amounts are zero. I therefore disregard rebates in this discussion and use the shorthand

definition of ‘‘underpayment’’ (i.e., tax ‘‘imposed’’ minus tax ‘‘shown’’ equals ‘‘underpayment’’).

However, Judge Wherry shows that respondent has a mistaken understanding of section 6664(a)

‘‘rebates’’ that wrongly equates them with section 6211(b)(2) ‘‘rebates’’ despite the phrase ‘‘as a

deficiency’’ that is present in section 6211(b)(2) but is absent from section 6664(a). When this

error is corrected, the penalty appears to be owing on the portion of the excess credit that was

actually refunded.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00032 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 529

noted, silent about withholding credits, the regulation bor-

rows from the deficiency context (section 6211(a)) and explic-

itly defines the minuend of the equation—‘‘tax imposed’’—

without regard to withholding credits: 3

(b) Amount of income tax imposed. For purposes of paragraph (a) of this

section, the ‘‘amount of income tax imposed’’ is the amount of tax imposed

on the taxpayer under subtitle A for the taxable year, determined without

regard to—

(1) The credits for tax withheld under sections 31 (relating to tax with-

held on wages) and 33 (relating to tax withheld at source on nonresident

aliens and foreign corporations) * * *.

[26 C.F.R. sec. 1.6664–2(b), Income Tax Regs.; emphasis added.]

However, in defining the subtrahend of the equation—the

‘‘amount shown as the tax’’—the regulation makes one

significant emendation:

(c) Amount shown as the tax by the taxpayer on his return—(1) Defined.

For purposes of paragraph (a) of this section, the ‘‘amount shown as the

tax by the taxpayer on his return’’ is the tax liability shown by the tax-

payer on his return, determined without regard to the items listed in

§1.6664–2(b)(1), (2), and (3), except that it is reduced by the excess of—

(i) The amounts shown by the taxpayer on his return as credits for tax

withheld under section 31 (relating to tax withheld on wages) * * * over

(ii) The amounts actually withheld * * * for such taxable year.

[26 C.F.R. sec. 1.6664–2(c), Income Tax Regs.; emphasis added.]

Under this regulation, the ‘‘amount shown’’ is thus first

determined ‘‘without regard to the items listed in §1.6664–

2(b)(1)’’—i.e., without regard to withholding credits—but is

then reduced by excess withholding credits.

Without this provision, if Mr. Feller’s ‘‘amount shown as

the tax’’ ($60,380 for 1992) is subtracted from his ‘‘tax

imposed’’ ($30,358), then the difference is less than zero, he

has no underpayment at all, and he is not subject to the

3 That is, the regulation does not give a special definition to the minuend, ‘‘tax imposed’’; and

neither respondent nor the majority suggests that the statute is ambiguous in referring to ‘‘tax

imposed’’. Much mischief or absurdity might result if ‘‘tax imposed by this title’’ were ambiguous

and might refer to tax net of withholding credits. In that event, other Code sections that are

like section 6664(a)—i.e., sections that refer to ‘‘tax imposed by this title’’ but do not explicitly

exclude the netting of credits—might become problematic. These include section 6001 (requiring

that ‘‘Every person liable for any tax imposed by this title * * * shall keep such records * * *

as the Secretary may from time to time prescribe’’), section 6011(a) (requiring that a return be

filed by ‘‘any person made liable for any tax imposed by this title’’), section 6501(a) (providing

for assessment of ‘‘tax imposed by this title’’), and section 6511(a) (setting a deadline for the

filing of a claim for refund of ‘‘any tax imposed by this title’’). These provisions have always

been (rightly) understood to apply where there is a tax liability, whether or not that liability

has been satisfied by withholding credits.

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00033 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

530 135 UNITED STATES TAX COURT REPORTS (497)

fraud penalty. The effect of this regulatory provision, how-

ever, is to reduce the ‘‘amount shown as the tax’’ (Mr. Feller’s

$60,380) by the excess withholding credits ($135,000 for

1992) in order to reveal the extent to which the taxpayer

under-reported his net liability. For Mr. Feller this modifica-

tion yields an ‘‘amount shown’’ that is negative ($60,360 –

$135,000 = –$74,640) and that therefore, when subtracted

from ‘‘tax imposed’’, does not decrease his ‘‘underpayment’’

but rather increases it. This regulation thus aims to measure

the true culpability of a return like Mr. Feller’s, rather than

overlooking the excess credits in the computation of the pen-

alty.

III. Regulations as law

Under our Constitution, it is Congress that enacts laws.

See U.S. Const., art. I, sec. 7. The first enumerated power

given to Congress (and not to the Executive) is the ‘‘Power

To lay and collect Taxes, Duties, Imposts and Excises’’. Id.

sec. 8, cl. 1. 4 As the Supreme Court observed in Whitman v.

Am. Trucking Associations, 531 U.S. 457, 472 (2001):

Article I, § 1, of the Constitution vests ‘‘[a]ll legislative Powers herein

granted . . . in a Congress of the United States.’’ This text permits no

delegation of those powers * * *.

Only the legislature can legislate. Only Congress can enact

tax laws.

However, since at least as early as 1828 (i.e., 40 years

after the Constitution was ratified), the Secretary of the

Treasury has been explicitly authorized by statute to promul-

gate ‘‘regulations’’. 5 Such regulations acquire the force of law

only derivatively, through statutes enacted by Congress—

4 Article I, section 7, clause 1 includes an additional democratic provision particular to tax

law: ‘‘All bills for raising revenue shall originate in the House of Representatives’’—i.e., the

house that (in James Madison’s words) ‘‘speak[s] the known and determined sense of a majority

of the people’’. See The Federalist No. 58 (James Madison) (the two houses have ‘‘equal author-

ity * * * on all legislative subjects, except the originating of money bills’’, which authority is

conferred on ‘‘the House [of Representatives], composed of the greater number of members,

* * * and speaking the known and determined sense of a majority of the people’’). Article I,

section 9, clause 4 of the Constitution originally prohibited ‘‘direct’’ taxes; and when the Con-

stitution was amended to curtail that prohibition, the Sixteenth Amendment provided (echoing

Article I, section 8) that ‘‘The Congress shall have power to lay and collect taxes on incomes’’.

5 See Act of May 19, 1828, ch. 55, sec. 10, 4. Stat. 274 (‘‘it shall be the duty of the Secretary

of the Treasury, under the direction of the President of the United States, from time to time,

to establish such rules and regulations, not inconsistent with the laws of the United States, as

the President of the United States shall think proper, to secure a just, faithful, and impartial

appraisal of ’’ imported goods, for purposes of customs duties).

VerDate 0ct 09 2002 14:07 May 29, 2013 Jkt 372897 PO 20009 Frm 00034 Fmt 3851 Sfmt 3851 V:\FILES\FELLER.135 SHEILA

(497) FELLER v. COMMISSIONER 531

either because a statute explicitly authorizes an agency to

promulgate ‘‘legislative regulations’’ or because the agency

that is charged by law with administering a statute issues

‘‘interpretive regulations’’ 6 that interpret the statute, and the

courts defer to that interpretation. See Chevron U.S.A. Inc.

v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843–845

(1984).

The parties and the majority of this Court acknowledge

that the regulation at issue—26 C.F.R. section 1.6664–

2(c)(1)—is in the second category described in Chevron—i.e.,

so-called ‘‘interpretive regulations’’. Such interpretive regula-

tions embody the Treasury ‘‘department’s construction of a

statutory scheme it is entrusted to administer’’, Chevron, 467

U.S. at 844, and are generally authorized in section 7805(a)

(‘‘the Secretary shall prescribe all needful rules and regula-

tions for the enforcement of this title’’).

In reviewing interpretive regulations, ‘‘a court may not

substitute its own construction of a statutory provision for a

reasonable interpretation made by the administrator of an

agency.’’ Id. As the majority explains, following Chevron we

conduct a two-step review of the regulation: First, we ask

‘‘ ‘whether Congress has directly spoken to the precise ques-

tion at issue’ ’’; and second, if the statute is ‘‘ ‘silent or ambig-

uous’ ’’, we ask whether the regulation reflects a reasonable

construction of the statute. Majority op. p. 505 (quoting

Chevron, 467 U.S. at 842–843).

IV. Discussion

There is no question that the deliberate reporting of ficti-

tious withholding credits is fraudulent. There is no question

that Congress could well impose a civil penalty on such fraud

(in addition to the criminal penalties that it has imposed and

6 Judicial deference to interpretive regulations is relatively recent. Through the mid-20th cen-

tury, courts and commentators concluded that a general rulemaking grant (such as section

7805(a)) authorizing interpretive regulations that have the force of law would be an unconstitu-

tional delegation of legislative authority. See Kristin E. Hickman, ‘‘The Need for Mead: Rejecting

Tax Exceptionalism in Judicial Deference’’, 90 Min

This text is long and has been trimmed here. Open the source document for the complete record.