Yitzchok D. Rand & Shulamis Klugman v. Commissioner

YITZCHOK D. RAND AND SHULAMIS KLUGMAN, PETITIONERS v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 2633–11. Filed November 18, 2013.

Ps filed a joint income tax return for 2008 improperly

claiming three refundable credits: an earned income credit, an

additional child tax credit, and a recovery rebate credit. As a

result, they claimed a tax refund of $7,327. The parties agree

that the correct tax liability was $144. The parties also agree

that an accuracy-related penalty applies, but they dispute

how the penalty should be calculated, specifically what should

be used as the amount shown as the tax on the return. This

number affects the amount of the underpayment that serves

as the base upon which an accuracy-related penalty is com-

puted. Held: When determining the amount shown as tax on

the return under I.R.C. sec. 6664(a)(1)(A), the earned income

credit, additional child tax credit, and recovery rebate credit

are taken into account but do not reduce the amount shown

as tax below zero.

Andrew R. Roberson, Roger J. Jones, and Patty C. Liu, for

petitioners. *

Michael T. Shelton and Lauren N. Hood, for respondent.

* An amicus curiae brief was filed by Carlton M. Smith as attorney for

the Cardozo Tax Clinic.

376

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(376) RAND v. COMMISSIONER 377

OPINION

BUCH, Judge: Respondent determined deficiencies, addi-

tions to tax, and penalties with respect to petitioners’ joint

Federal income tax as follows:

Addition to tax Penalty

Year Deficiency sec. 6651(a)(1) sec. 6662(a)

2006 $3,540 $100 $708.00

2007 3,901 100 780.20

2008 8,127 -0- 1,625.40

Because the parties have resolved all other issues by stipula-

tion, the only issue for the Court to decide is the amount of

the penalty under section 6662(a) 1 for 2008. Determining

that amount requires us to first determine the ‘‘under-

payment of tax required to be shown’’ on petitioners’ 2008

tax return. See sec. 6662(a) (imposing 20% penalty on speci-

fied portions of ‘‘an underpayment of tax required to be

shown on a return’’); sec. 6664(a) (defining ‘‘underpayment’’).

This, in turn, requires that we determine ‘‘the amount shown

as the tax’’ on petitioners’ 2008 return. See sec. 6664(a)(1)(A).

Respondent argues that the amount shown as tax on the

return is reduced by the refundable credits claimed on the

return. Under this approach, the amount shown as tax on

the return is –$7,327. Petitioners argue that the amount

shown as tax on the return is calculated without regard to

refundable credits. Under this approach, the amount shown

as tax on the return would be $144. The Cardozo Tax Clinic

argues in its amicus brief (and petitioners argue in the alter-

native) that the amount shown as tax on the return is

reduced by the refundable credits but not below zero. Under

this approach, the amount shown as tax on the return would

be zero. This last result is correct, because it is the only

approach supported by principles of statutory construction.

Background

Petitioners Rand and Klugman, who were a married couple

during 2008, timely filed a 2008 joint Federal income tax

1 Unless otherwise noted, all references to sections are to the Internal

Revenue Code of 1986, as in effect for the 2008 tax year. All Rule ref-

erences are to the Tax Court Rules of Practice and Procedure.

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378 141 UNITED STATES TAX COURT REPORTS (376)

return on Form 1040, U.S. Individual Income Tax Return.

On line 7 of their Form 1040 they reported ‘‘Wages, salaries,

tips, etc.’’ of $17,200. They attached to the Form 1040 a Form

4852, Substitute for Form W–2, 2 that Rand signed and that

stated that he had earned $17,200 in ‘‘Wages, tips, and other

compensation’’. Petitioners reported business income of

$1,020 from Rand’s work as a tutor. Lastly, they deducted

$72 for one-half of the self-employment tax liability imposed

by section 1401. In total petitioners reported that their

adjusted gross income was $18,148.

This income was reduced to zero by various deductions.

Petitioners claimed a standard deduction of $10,900 and a

deduction of $14,000 resulting from four personal exemp-

tions. The result on line 43, where taxable income is

reported, was zero, which in turn resulted in a tax liability

on line 44 also of zero.

The 2008 Form 1040 has several lines that set forth

amounts of tax. Starting with a tax of zero on line 44, peti-

tioners reported $144 of self-employment tax on line 57. This

resulted in a ‘‘total tax’’ on line 61 of $144.

Credits and Refund

The total tax of $144 was reduced, below zero, by refund-

able tax credits. Petitioners claimed an earned income credit

of $4,824, an additional child tax credit of $1,447, and a

recovery rebate credit of $1,200. They reported that they had

two qualifying children for the purpose of calculating the

earned income credit and the additional child tax credit, and

they further reported that each child lived with them in the

United States during all 12 months of 2008.

To determine qualification, both the earned income tax

credit and the additional child tax credit take into account

the amount of earned income, and petitioners reported

earned income of $18,148 on Schedule 8812, Child Tax

Credit. This amount represents $17,200 of wages and $1,020

of self-employment earnings, reduced by $72 for one-half of

self-employment taxes. After taking into account the refund-

able credits, petitioners claimed an overpayment of $7,327 on

2 The complete name of Form 4852 is Substitute for Form W–2, Wage

and Tax Statement, or Form 1099–R, Distributions From Pensions, Annu-

ities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

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(376) RAND v. COMMISSIONER 379

line 72 of their return, and on line 73, they requested that

the full amount be refunded to them.

On May 4, 2009, the Internal Revenue Service (IRS)

refunded the $7,327.

Agreed Adjustments

The IRS sent a notice of deficiency to petitioners on

December 10, 2010. The notice sets forth adjustments to tax

and penalties for tax years 2006, 2007, and 2008, but only

the penalty for 2008 remains at issue. The parties have

resolved all issues for 2006 and 2007 by stipulation.

For 2008 the notice of deficiency contains several adjust-

ments, nearly all of which the parties have resolved by stipu-

lation. 3 As is relevant to the dispute before us, the notice of

deficiency determined that petitioners were not entitled to

the earned income tax credit or the child tax credit; peti-

tioners agreed. Also, the notice of deficiency determined that

an accuracy-related penalty under section 6662 applies; the

parties agree that a penalty applies ‘‘if the Court determines

that there is ‘an underpayment of tax required to be shown

on the return’ within the meaning of I.R.C. § 6662(a)’’.

In addition to the adjustments set forth in the notice of

deficiency, respondent filed an amendment to his answer in

which he asserted that petitioners were not entitled to the

3 Even after the parties’ stipulations, one issue remains unresolved (in

addition to the penalty issue addressed in this Opinion). By stipulation,

the parties agree that petitioners did not have sufficient earned income to

qualify for the additional child tax credit or the recovery rebate credit. The

earned income thresholds for claiming the additional child tax credit and

the recovery rebate credit are $8,500 and $3,000, respectively. See sec.

24(d)(1)(B)(i) (additional child tax credit); sec. 6428(b)(2)(A) (recovery re-

bate credit). Respondent assumes that this stipulation eliminated the in-

come reported on line 7, apparently predicated on the incorrect notion that

all items reported on line 7 are earned income. Petitioners make no such

assumption; they assume that the $17,200 remains on line 7.

We need not resolve the parties’ confusion regarding their own stipula-

tion. It is possible to have line 7 income that is not earned income, such

as scholarship income that is not reported on a Form W–2. See IRS Publ.

596, at 22 (2008). The two possible interpretations of their stipulation are

(1) petitioners had $17,200 of line 7 unearned income, or (2) they had no

line 7 income. Under either scenario, petitioners’ taxable income is zero,

because their income would be fully offset by the standard deduction cou-

pled with dependency exemptions.

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380 141 UNITED STATES TAX COURT REPORTS (376)

recovery rebate credit (along with a corresponding increase

in the penalty under section 6662). Petitioners agreed to this

adjustment.

Thus, after concessions, the sole issue remaining to be

decided is whether there is an ‘‘underpayment’’ upon which

an accuracy-related penalty can be computed.

Positions of the Parties

The parties submitted the case without trial pursuant to

Rule 122. Petitioners have conceded that they are liable for

the accuracy-related penalty for 2008 if there is ‘‘an under-

payment of tax required to be shown on a return’’ as that

phrase is used in section 6662(a). It follows from the conces-

sion that petitioners have waived any defense based on

reasonable cause. See sec. 6664(c). For the purposes of part

II of subchapter A of chapter 68 of the Code, which includes

section 6662, the term ‘‘underpayment’’ is defined by section

6664(a). It consists of four components:

(1) the ‘‘tax imposed’’

(2) ‘‘the amount shown as the tax by the taxpayer on his

return’’

(3) ‘‘amounts not so shown previously assessed (or collected

without assessment)’’, and

(4) ‘‘the amount of rebates made’’.

In their briefs the parties agree that the first component is

$144, the third component is zero, and the fourth component

is zero. Their dispute is about the second component: the

amount shown as the tax by the taxpayer on the return.

The IRS contends that the statutory phrase ‘‘the amount

shown as the tax’’ is ambiguous as to whether the amount

includes the three refundable credits petitioners claimed on

their 2008 return. The IRS contends that the Court should

consult the definition of this phrase in section 1.6664–2(c),

Income Tax Regs., and that this regulation should be inter-

preted to require that petitioners’ claims for the three credits

be included in the computation of the amount shown as tax

on their return. The IRS contends that its interpretation of

the regulation should be afforded deference under the prin-

ciple that an agency’s interpretation of its own ambiguous

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(376) RAND v. COMMISSIONER 381

regulation must be afforded deference. See Auer v. Robbins,

519 U.S. 452, 461 (1997).

Petitioners contend that the Code unambiguously excludes

any credits claimed on a return from the computation of the

amount of tax shown on the return. According to petitioners,

the provisions in the Code allowing tax credits clearly distin-

guish between credits and the taxes against which credits

are applied. For example, section 24(a) provides a ‘‘credit

against the tax imposed by this chapter’’. To petitioners, this

means that the additional child tax credit they claimed is not

part of the tax shown on their return.

Petitioners also observe that in defining the amount of tax

shown on the return for calculating a deficiency, section

6211(b)(4) provides that the difference between (1) the

refundable credits 4 claimed on the return and (2) the amount

shown as tax on the return (as determined without regard to

refundable credits) is taken into account as a negative

amount of tax. Because Congress did not enact a similar

provision for the calculation of an underpayment, petitioners

contend that Congress must have intended that refundable

credits be excluded from the tax shown on the return in

underpayment calculations.

Petitioners make the following alternative argument:

‘‘Even if the refundable credits at issue were to be included

in the calculation of the amount of tax shown by Petitioners

on their return, there is no statutory or regulatory basis for

reducing the amount of tax below zero. Thus, any under-

payment would be limited to the amount of the credit against

Petitioners’ reported self-employment tax.’’ This position was

also presented by the Cardozo Tax Clinic.

The Cardozo Tax Clinic filed an amicus brief contending

that the three types of credits petitioners claimed are part of

the amount shown as tax on the return when calculating an

underpayment. However, the Clinic contends that the tax

shown on a return cannot be negative when calculating an

4 Section 6402(a) provides that the Secretary may credit the amount of

an ‘‘overpayment’’ against the tax liability of the person making the over-

payment and must refund any balance to the person. Section 6401(b) pro-

vides that if the amount of specified credits (including the three credits pe-

titioners claimed on their 2008 return) exceed the tax imposed by subtitle

A (as reduced by other nonrefundable credits), the amount of such excess

is considered an overpayment.

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382 141 UNITED STATES TAX COURT REPORTS (376)

underpayment because Congress purposefully declined to

incorporate a provision like section 6211(b) in the definition

of an underpayment. Thus, the Clinic disagrees with peti-

tioners’ primary argument that credits are excluded from the

calculation of the tax shown on the return, but it agrees with

petitioners’ alternative argument.

Discussion

The issue to be resolved is the amount of tax shown on the

return (within the meaning of section 6664(a)(1)(A)) for a

2008 income tax return that reported:

• $0 of income tax under section 1,

• $144 of self-employment tax under section 1401,

• $1,447 of additional child tax credit,

• $4,824 of earned income credit, and

• $1,200 of recovery rebate credit, resulting in

• $7,327 of overpayment, claimed as a refund.

The positions taken are: (a) –$7,327, as the IRS argues, (b)

$144, as petitioners argue, or (c) $0, as the Clinic argues

(and as petitioners argue in the alternative). We hold that

the amount is zero. The result of this conclusion is that, for

penalty computation purposes, petitioners have an under-

payment of $144.

Operative Provisions

Section 6662(a) provides the rules for the application of an

accuracy-related penalty, including a penalty that is predi-

cated on negligence or a substantial understatement of

income tax. Subsection (a) provides:

SEC. 6662(a). IMPOSITION OF PENALTY.—If this section applies to any

portion of an underpayment of tax required to be shown on a return,

there shall be added to the tax an amount equal to 20 percent of the

portion of the underpayment to which this section applies.

In turn, ‘‘underpayment’’ is defined by section 6664(a), which

provides, in relevant part:

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—

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(376) RAND v. COMMISSIONER 383

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

plus

(B) amounts not so shown previously assessed (or collected with-

out assessment), over

(2) the amount of rebates made.

This ‘‘part’’ of the Code includes sections 6662 through 6664.

Feller v. Commissioner Inapposite

In this case we are not called upon to address whether the

statute is clear on its face as to whether ‘‘the amount shown

as the tax by the taxpayer on his return’’ takes into account

the earned income tax credit, the additional child tax credit,

or the recovery rebate credit. In Feller v. Commissioner, 135

T.C. 497, 508 (2010), we previously held that ‘‘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 with-

holding credits.’’ But in Feller the Court addressed the

validity of a regulation that interpreted section 6664.

In Feller the Court addressed the question of how over-

stated withholding credits under section 31 fit within the

definition of an underpayment under section 6664. As is

pertinent here, the Court found the definition of an under-

payment to be ambiguous, at least insofar as overstated

withholding credits are concerned. This determination of

ambiguity was necessary to the Court’s analysis, because the

Secretary had promulgated regulations specifically

addressing the treatment of withholding credits. One such

regulation, section 1.6664–2(c), Income Tax Regs., provides:

(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 taxpayer on his return, determined without regard to the items

listed in paragraphs (b)(1), (2), and (3) of this section, 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) and sec-

tion 33 (relating to tax withheld at source on nonresident aliens and for-

eign corporations), as payments of estimated tax, or as any other pay-

ments made by the taxpayer with respect to a taxable year before filing

the return for such taxable year, over

(ii) The amounts actually withheld, actually paid as estimated tax, or

actually paid with respect to a taxable year before the return is filed for

such taxable year.

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384 141 UNITED STATES TAX COURT REPORTS (376)

See sec. 1.6664–2(b)(1), (2), and (3), Income Tax Regs.; see

also sec. 1.6664–2(g), Example (3), Income Tax Regs. The

phrase ‘‘items listed in paragraphs (b)(1), (2), and (3) of this

section’’ refers to amounts paid by or on behalf of the tax-

payer, such as estimated taxes and withholding.

When testing the validity of a regulation, we generally look

to the two-part test established under Chevron, U.S.A., Inc.

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

first prong of that test is ‘‘whether Congress has directly

spoken to the precise question at issue.’’ Id. at 842. If Con-

gress has not spoken to the precise question at issue, then

the Court must determine whether the regulation ‘‘is based

on a permissible construction of the statute.’’ Id. at 843.

Thus, when testing the validity of section 1.6664–2(c),

Income Tax Regs., in Feller, the Court was first required to

determine whether section 6664 has ‘‘spoken to the precise

question at issue.’’ That question, as noted by the opinion of

the Court in Feller, was ‘‘the meaning of the term ‘under-

payment’ when a taxpayer has overstated withholding

credits.’’ Feller v. Commissioner, 135 T.C. at 508. In this

case, we are not addressing withholding credits.

In contrast to withholding credits, the regulations under

section 6664 fail to address either of the two questions that

are relevant to the current dispute. First, they fail to address

whether the earned income credit, additional child tax credit,

and recovery rebate credit are taken into account when cal-

culating the amount shown as the tax on the return. One

could interpret this regulation as taking into account these

credits only by relying on the canon expressio unius est

exclusio alterius, discussed below—i.e., by specifically

addressing withheld taxes and payments, one could infer

that the Secretary intended that no adjustment be made for

refundable tax credits. Even then, however, the regulations

fail to address the second question: whether there can be a

‘‘negative tax’’.

Because the Secretary has not promulgated a regulation

addressing how the refundable credits at issue here should

be taken into account, we need not address whether the

statute leaves room for agency interpretation. It follows that

we are also not resolving the question of whether the Sec-

retary may promulgate a regulation that is inconsistent with

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(376) RAND v. COMMISSIONER 385

this Opinion. 5 And the mere fact that we devote these pages

to interpreting the statute does not, by implication, mean

that the statute is ambiguous. Whether a statute is ambig-

uous is determined not only from the language of the statute

being considered, but also from the ‘‘language and design of

the statute as a whole.’’ See, e.g., K Mart Corp. v. Cartier,

Inc., 486 U.S. 281, 291 (1988). Thus, in looking beyond the

language of section 6664(a)(1)(A) as part of our analysis, we

are not answering the question of whether the statute is

ambiguous. We are simply interpreting the statute. And to

do so, we turn to principles of statutory construction.

Reading Section 6664(a)(1)(A) in the Light of Section

6211(a)(1)(A)

Returning to the definition of an underpayment, we note

that the Code provides the following:

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 with-

out assessment), over

(2) the amount of rebates made.

A series of canons of statutory construction lead to the

conclusion that refundable credits must be taken into

account when determining the amount shown as the tax by

the taxpayer but that those credits cannot reduce that

amount below zero.

Where the same words or phrase appear within a text,

they are presumed to have the same meaning. Atl. Cleaners

& Dyers, Inc. v. United States, 286 U.S. 427, 433 (1932)

(‘‘Undoubtedly, there is a natural presumption that identical

words used in different parts of the same act are intended to

have the same meaning.’’); see also TG Mo. Corp. v. Commis-

sioner, 133 T.C. 278, 296 (2009). The phrase ‘‘the amount

5 If

the Secretary should promulgate such a regulation, we may be called

upon to revisit that question, but judicial restraint dictates that we not re-

solve that question now. LTV Corp. v. Commissioner, 64 T.C. 589, 595

(1975) (‘‘[C]ourts will not gratuitously decide complex issues that cannot

affect the disposition of the case before them.’’).

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386 141 UNITED STATES TAX COURT REPORTS (376)

shown as the tax by the taxpayer’’ appears three times in the

Code. Two of those passages are related: the definition of a

deficiency under section 6211 and the definition of an under-

payment under section 6664. 6

Although not explicitly linked today, the definition of a

deficiency under section 6211 and the definition of an under-

payment under section 6664(a) are linked by history. As

summarized in Feller v. Commissioner, 135 T.C. at 506, in

1989 several penalty provisions were consolidated into sec-

tions 6662 through 6665. Omnibus Budget Reconciliation Act

of 1989, Pub. L. No. 101–239, sec. 7721(a), 103 Stat. at 2395,

2399. The term ‘‘underpayment’’, which had been defined in

section 6653 before the 1989 amendments, was defined in

section 6664(a) after the amendments. Before amendment,

‘‘underpayment’’ was defined with an explicit cross-reference

to the definition of a deficiency. Specifically, section 6653 pro-

vided:

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

section, 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 cer-

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

* * *

Thus, at one time, the terms ‘‘underpayment’’ and ‘‘defi-

ciency’’ were coextensive.

Although they are linked by history, the fact remains that

in 1989 Congress uncoupled these terms. And although iden-

tical words are presumed to have the same meaning, the

presumption ‘‘ ‘is not rigid’ ’’. United States v. Cleveland

Indians Baseball Co., 532 U.S. 200, 213 (2001) (quoting Atl.

Cleaners & Dyers, 286 U.S. at 433). But here, Congress

expressly indicated that uncoupling these terms was not

intended to remove their definitional nexus. Despite

detaching the definition of an underpayment from the defini-

tion of a deficiency, Congress informed us that ‘‘the bill pro-

vides a standard definition of underpayment for all of the

accuracy-related penalties. This standard definition is

intended to simplify and coordinate the definitions in present

6 The third passage is section 1314 (amongst the mitigation provisions of

sections 1311 through 1314), and in that instance, this phrase appears

only in connection with a cross-reference to section 6211.

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(376) RAND v. COMMISSIONER 387

law; it is not intended to be substantively different from

present law.’’ H.R. Rept. No. 101–247, at 1394 (1989), 1989

U.S.C.C.A.N. 1906, 2864. But see H.R. Conf. Rept. No. 101–

386, at 654 (1989), 1989 U.S.C.C.A.N. 3018, 3257. Given that

sections 6211(a)(1)(A) and 6664(a)(1)(A) use the same phrase

and that the two provisions are contextually and historically

related, we turn to section 6211(a)(1)(A) to assist us in inter-

preting the provision before us.

Credits Reduce Tax Shown on Return

Before we reach the question of whether the three tax

credits at issue can reduce the amount shown as tax below

zero, we must first decide whether these credits reduce the

amount shown as tax to any extent. Although section 6664

is silent on this point, section 6211 is instructive.

Section 6211 expressly excludes certain credits from the

amount shown on the return as the tax by the taxpayer,

which is in turn used to calculate the amount of a deficiency.

Specifically, section 6211(b) provides:

SEC. 6211(b). RULES FOR APPLICATION OF SUBSECTION (a).—For pur-

poses of this section—

(1) The tax imposed by subtitle A and the tax shown on the return

shall both be determined without regard to payments on account of

estimated tax, without regard to the credit under section 31, without

regard to the credit under section 33, and without regard to any

credits resulting from the collection of amounts assessed under section

6851 or 6852 (relating to termination assessments).[7]

Because the Code specifies that certain credits should be

disregarded when determining the tax shown on the return,

we can infer that other credits should not be disregarded.

Under the canon expressio unius est exclusio alterius, if a

statute provides specific exceptions to a general rule, we may

infer that Congress intended to exclude any further excep-

tions. Leatherman v. Tarrant Cnty. Narcotics Intelligence &

Coordination Unit, 507 U.S. 163, 168 (1993); see also

Catterall v. Commissioner, 68 T.C. 413, 421 (1977), aff ’d sub

nom. Vorbleski v. Commissioner, 589 F.2d 123 (3d Cir. 1978).

This is not a rigid rule and will not apply if the result ‘‘is

7 This section was also present in substantially the same form before the

1989 amendments that removed the express cross-reference from the defi-

nition of an underpayment to the definition of a deficiency.

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388 141 UNITED STATES TAX COURT REPORTS (376)

contrary to all other textual and contextual evidence of

congressional intent.’’ Burns v. United States, 501 U.S. 129,

136 (1991); see also Neuberger v. Commissioner, 311 U.S. 83,

88 (1940). In this instance we see no evidence of a contrary

congressional intent. Whether we review the context sur-

rounding the definition of an underpayment under section

6664 or the definition of a deficiency under section 6211, the

statute is silent as to the treatment of the refundable tax

credits at issue here. In the absence of anything showing a

contrary congressional intent, the canon expressio unius est

exclusio alterius applies. Because Congress expressly chose to

disregard certain credits when determining the amount

shown as the tax by the taxpayer on his return when calcu-

lating a deficiency, it follows that other credits should be

taken into account to reduce the amount so shown. Because

the phrase ‘‘the amount shown as the tax by the taxpayer’’

appears in both sections, 6211 and 6664, we likewise con-

clude that the amount shown as the tax by the taxpayer on

his return when calculating an underpayment should be

reduced by refundable credits.

Although not specifically addressed in our prior opinions,

this holding is consistent with many previous opinions of this

Court, including Feller, where the claiming of a credit to

which a taxpayer was not entitled resulted in the imposition

of a penalty. Most credits are identified in the Code as a

‘‘credit against the tax imposed’’. 8 Petitioners attach special

meaning to the phrase ‘‘credit against the tax’’ and infer from

8 See

sec. 21 (expenses for household and dependent care services nec-

essary for gainful employment); sec. 22 (credit for the elderly and the per-

manently and totally disabled); sec. 23 (adoption expenses); sec. 24 (child

tax credit); sec. 25 (interest on certain home mortgages); sec. 25A (hope

and lifetime learning credits); sec. 25B (elective deferrals and IRA con-

tributions by certain individuals); sec. 25C (nonbusiness energy property);

sec. 25D (residential energy efficient property); sec. 27 (taxes of foreign

countries and possessions of the United States; possession tax credit); sec.

30 (credit for qualified electric vehicles); sec. 30A (Puerto Rico economic ac-

tivity credit); sec. 30B (alternative motor vehicle credit); sec. 30C (alter-

native fuel vehicle refueling property credit); sec. 38 (general business

credit); sec. 53 (credit for prior year minimum tax liability); sec. 54 (credit

to holders of clean renewable energy bonds). In using that same phrase,

the general business credit under section 38 brings along with it more

than 30 other credits that must also be considered a ‘‘credit against the

tax’’. See sec. 38(b).

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(376) RAND v. COMMISSIONER 389

those words that a credit against the tax is a payment and

not part of the tax itself. Whether a particular tax credit is

a refundable credit or not, the Code uses this same phrase

‘‘credit against the tax’’. Compare sec. 32(a)(1) (earned

income credit applied as a ‘‘credit against the tax imposed’’)

with sec. 38(a) (general business credit applied as a ‘‘credit

against the tax imposed’’). And we have imposed penalties on

disallowed credits against the tax under many provisions. 9

In doing so, we necessarily reduced the amount shown as tax

by the reported credit against the tax. Nothing in the Code

suggested that such credits should have been removed from

the computation, and nothing in the Code suggests that we

should do so now.

No Negative Tax

Having concluded that credits can reduce the amount

shown as tax on the return, we must next address the

Clinic’s argument that the earned income credit, additional

child tax credit, and recovery rebate credit cannot reduce the

amount shown as the tax on the return below zero. We again

turn to canons of statutory construction.

Section 6664(a) is silent on the issue of whether the

amount shown as the tax on the return can be negative. But

as noted previously, where the same phrase appears multiple

times in the same statutory scheme, we can look to those

other appearances to help discern the meaning. Conven-

iently, section 6211 directly addresses the question of a nega-

tive tax. Section 6211(b)(4) provides:

SEC. 6211(b). RULES FOR APPLICATION OF SUBSECTION (a).—For pur-

poses of this section—

* * * * * * *

(4) For purposes of subsection (a)—

9 See,

e.g., Carlebach v. Commissioner, 139 T.C. 1 (2012) (imposing a

penalty on disallowed child care credit under section 21 and child tax cred-

it under section 24); Langley v. Commissioner, T.C. Memo. 2013–22 (hope

and lifetime learning credits under section 25A); Ellis-Babino v. Commis-

sioner, T.C. Memo. 2012–127 (general business credit under section 38, in-

cluding the increasing research activities credit under section 41); A.J.

Concrete Pumping, Inc. v. Commissioner, T.C. Memo. 2001–42 (general

business credit under section 38, including the investment tax credit under

section 46).

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390 141 UNITED STATES TAX COURT REPORTS (376)

(A) any excess of the sum of the credits allowable under sections

24(d), 32, 34, 35, 36, 53(e), and 6428 over the tax imposed by sub-

title A (determined without regard to such credits), and

(B) any excess of the sum of such credits as shown by the taxpayer

on his return over the amount shown as the tax by the taxpayer on

such return (determined without regard to such credits),

shall be taken into account as negative amounts of tax.

More simply stated, any excess of the refundable credits

claimed as compared to the amount to which the taxpayer

was entitled is treated as a negative tax.

We can infer from this provision that the specified refund-

able credits would not be considered a negative tax but for

this provision. In this instance, the surplusage canon leads

us to conclude that excess credits are not otherwise a nega-

tive tax. Under the surplusage canon we are to give effect to

every provision Congress has enacted. United States v.

Menasche, 348 U.S. 528, 538–539 (1955) (‘‘ ‘The cardinal prin-

ciple of statutory construction is to save and not to destroy.’

Labor Board v. Jones & Laughlin Steel Corp., 301 U.S. 1, 30

(1937). It is our duty ‘to give effect, if possible, to every

clause and word of a statute,’ Inhabitants of Montclair Tp. v.

Ramsdell, 107 U.S. 147, 152 (1883), rather than to emas-

culate an entire section[.]’’); see also Tucker v. Commissioner,

135 T.C. 114, 154 (2010) (‘‘[W]e decline to read words out of

the statute; rather, we attempt to give meaning to every

word that Congress enacted[.]’’). If, as respondent suggests,

these credits are considered a negative tax, then section

6211(b)(4) would be mere surplusage; it would be wholly

unnecessary. To give section 6211(b)(4) any meaning, we

must assume that, in determining the amount shown as the

tax, the specified credits would not be considered a negative

tax but for that provision. We then use this conclusion to

inform our views on the use of the word ‘‘underpayment’’ in

section 6664.

Based on the negative tax provision of section 6211(b)(4),

we conclude that these credits do not yield a negative tax for

purposes of defining an underpayment under section

6664(a)(1)(A). We return to our premise that, because section

6664(a)(1)(A) uses the same phrase ‘‘the amount shown as

the tax by the taxpayer’’ as section 6211(a), we should inter-

pret it consistently with section 6211. And we have concluded

that, but for section 6211(b)(4), the specified refundable

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(376) RAND v. COMMISSIONER 391

credits would not yield a negative tax for the amount shown

as the tax by the taxpayer. Thus, we must likewise conclude

that these refundable credits would not yield a negative tax

for the amount shown as the tax under section 6664 unless

there is a counterpart to section 6211(b)(4). In turning to sec-

tion 6664, we find no counterpart to section 6211(b)(4).

Accordingly, excess earned income credits, additional child

tax credits, and recovery rebate credits do not result in a

negative tax for the amount shown as the tax by the tax-

payer on his return.

We note that our conclusion breaks the historical link

between the definitions of a deficiency and an underpayment;

however, it was Congress that made that break. As we pre-

viously noted, the definition of an underpayment was linked

to the definition of a deficiency until 1989. In 1988 Congress

amended section 6211(b)(4) to specifically provide that cer-

tain refundable credits could be taken into account as nega-

tive amounts of tax. Technical and Miscellaneous Revenue

Act of 1988, Pub. L. No. 100–647, sec. 1015(r)(2), 102 Stat.

at 3572. 10 Because this occurred when the definition of an

underpayment was linked to the definition of a deficiency, it

meant that those credits would be considered a negative tax

for the definition of an underpayment as well. We previously

noted that Congress expressed the view that uncoupling the

link between sections 6664(a)(1)(A) and 6211(a)(1)(A) was not

intended to ‘‘substantively’’ alter the definition of an under-

payment. H.R. Rept. No. 101–247, supra at 1394, 1989

U.S.C.C.A.N. at 2864. But as was noted in Feller, the legisla-

tive history states that ‘‘the new definition was intended to

‘simplify and coordinate’ diverse ‘underpayment’ definitions

under former law. And in fact the new ‘underpayment’ defini-

10 Of the credits at issue here, only the earned income credit was in-

cluded in section 6211(b)(4) in 1988. In 1998 Congress added the additional

child tax credit to the Code, and in 2000 it incorporated the credit in the

negative tax provision of section 6211(b)(4). Consolidated Appropriations

Act, 2001, Pub. L. No. 106–554, sec. 1(a)(7), 114 Stat. at 2763 (2000)

(amending sec. 6211(b)(4)); Taxpayer Relief Act of 1997, Pub. L. No. 105–

34, sec. 101(a), 111 Stat. at 788 (adding sec. 24). In 2008 Congress added

the rebate recovery credit to the Code and incorporated the credit in the

negative tax provision of section 6211(b)(4). Economic Stimulus Act of

2008, Pub. L. No. 110–185, sec. 101(b)(1), 122 Stat. at 615 (amending sec.

6211(b)(4)); id. sec. 101(a), 122 Stat. at 613 (amending sec. 6428(a)).

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392 141 UNITED STATES TAX COURT REPORTS (376)

tion in section 6664(a) differs in various ways from the old

‘underpayment’ definitions which it replaced.’’ Feller v.

Commissioner, 135 T.C. at 514–515 (Thornton, J., concur-

ring) (quoting H.R. Rept. No. 101–247, supra at 1394, 1989

U.S.C.C.A.N. at 2864). One of those differences is that Con-

gress did not include a counterpart to section 6211(b)(4) in

section 6664(a). If this is not what Congress intended, it is

not for the Court to reform the statute. Verito v. Commis-

sioner, 43 T.C. 429, 443 (1965) (‘‘We were not given the

responsibility of writing statutes, but we do have the respon-

sibility of interpreting them as we find them.’’).

Moreover, Congress has made it clear in analogous cir-

cumstances when it intended refundable credits to be taken

into account. We have already shown how Congress

addressed a ‘‘negative tax’’ in section 6211. Likewise, in the

preparer penalty of section 6694, Congress made it clear that

refunded amounts like the refundable credits at issue here

should be taken into account for purposes of determining an

underpayment.

Section 6694 imposes a penalty on a tax return preparer

who prepares a return with an ‘‘unreasonable position’’ as

that term is defined in section 6694(a)(2). For the penalty to

apply, there must be an ‘‘understatement of liability’’. Sec.

6694(a)(1)(A). Congress, however, made it clear that an

understatement of liability includes a situations where a

return has overstated credits that yield a refund. Specifically,

section 6694(e) provides in relevant part:

SEC. 6694(e). UNDERSTATEMENT OF LIABILITY DEFINED.—For purposes

of this section, the term ‘‘understatement of liability’’ means any under-

statement of the net amount payable with respect to any tax imposed

by this title or any overstatement of the net amount creditable or

refundable with respect to any such tax. * * *

By including the phrase ‘‘or any overstatement of the net

amount creditable or refundable’’, Congress explicitly defined

‘‘understatement’’ for preparer penalty purposes to include

refundable credits. Congress could have similarly taken such

credits into account under the definition of an underpayment

under section 6664(a), but it did not.

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(376) RAND v. COMMISSIONER 393

Rule of Lenity

Beyond the previously discussed canons of statutory

construction on which we rely, our Opinion is further sup-

ported by another canon: the rule of lenity.

The rule of lenity is an ‘‘ancient maxim’’ that ‘‘is perhaps

not much less old than construction itself. It is founded on

the tenderness of the law for the rights of individuals; and

on the plain principle that the power of punishment is vested

in the legislative, not in the judicial department. It is the

legislature, not the Court, which is to define a crime, and

ordain its punishment.’’ United States v. Wiltberger, 18 U.S.

76, 95 (1820). Thus, under the rule of lenity statutes that

impose a penalty are to be construed in favor of the more

lenient punishment. Black’s Law Dictionary 1449 (9th ed.

2009). And although often considered in the criminal context,

the rule of lenity has been applied in the civil context and

specifically with regard to civil tax penalties.

In Commissioner v. Acker, 361 U.S. 87 (1959), the IRS

sought to impose two penalties on a taxpayer as a result of

the taxpayer’s failure to file a declaration of estimated

income tax. One penalty was for a failure to file the declara-

tion. The other, however, was for a ‘‘substantial underesti-

mate of estimated tax’’. The latter penalty came about

because, by regulation, the failure to file a declaration of esti-

mated tax was deemed to be an estimate of zero. In rejecting

the latter penalty, the Supreme Court stated: ‘‘We are here

concerned with a taxing Act which imposes a penalty. The

law is settled that ‘penal statutes are to be construed

strictly,’ and that one ‘is not to be subjected to a penalty

unless the words of the statute plainly impose it’.’’ Id. at 91

(fn. ref. omitted) (quoting FCC v. Am. Broadcasting Co., 347

U.S. 284, 296 (1954), and Keppel v. Tiffin Sav. Bank, 197

U.S. 356, 362 (1905)).

Here, the words of the relevant statutes do not plainly

impose a penalty on refunds resulting from overstated

earned income credits, additional child tax credits, or

recovery rebate credits. Because the penalty is not plainly

imposed on the refundable portion of the credits, the rule of

lenity further confirms what we have already concluded: that

section 6662 does not impose a penalty on the refundable

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394 141 UNITED STATES TAX COURT REPORTS (376)

portion of erroneously claimed earned income credits, addi-

tional child tax credits, and recovery rebate credits.

Additional Issues Raised by Respondent

We have concluded that the earned income credit, addi-

tional child tax credit, and recovery rebate credit can be

taken into account to reduce the amount shown as tax on the

return, but not below zero. We turn to two additional points

raised by respondent.

Auer Deference

Respondent urges us to apply Auer deference to his

interpretation on brief of the phrase ‘‘the amount shown as

the tax by the taxpayer on his return’’. See Auer, 519 U.S.

452. When applying Auer deference, a court defers to an

agency’s interpretation of its own ambiguous regulation, even

where that interpretation appears on brief. Chase Bank USA,

N.A. v. McCoy, 562 U.S. ll, ll, 131 S. Ct. 871, 880

(2011). Judicial deference need not give way to judicial

abdication. The regulations are silent on the issue before us,

and respondent’s position on brief is at least arguably incon-

sistent with the statute.

Although we do not in this instance defer to respondent’s

interpretation on brief, we note that our interpretation of the

statute is not inconsistent with the regulation. To the extent

the regulation implies that refundable credits should be

taken into account in determining the amount shown as the

tax, we have done so. But, consistent with the statutory

scheme, we have done so only to the extent that it does not

give rise to a negative tax. On this, the regulation is silent.

Gap in the Penalty Regime

Respondent also asserts that if his position is not adopted

there would be a gap in the penalty regime. Respondent’s

point is not well taken for at least three reasons.

First, to the extent respondent’s claim is that a claim of

excess refundable credits could not be penalized under our

holding, respondent is mistaken. To the extent the credits

reduce the amount of tax shown on the return, the disallow-

ance of those credits will result in an increased under-

payment upon which a section 6662 accuracy-related penalty

could be imposed. More simply stated, the portion of a dis-

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(376) RAND v. COMMISSIONER 395

allowed credit that reduced a tax liability may be subject to

an accuracy-related penalty.

Second, to the extent an improperly claimed credit resulted

in a refund, it may be subject to a penalty under section

6676. In 2007 Congress added section 6676, which imposes a

20% penalty on an erroneous claim for refund. Small Busi-

ness and Work Opportunity Tax Act of 2007, Pub. L. No.

110–28, sec. 8247(a), 121 Stat. at 204. An erroneous claim for

refund is any claim for refund of an ‘‘excessive amount’’,

which is defined as ‘‘the amount by which the amount of the

claim for refund or credit for any taxable year exceeds the

amount of such claim allowable’’. Sec. 6676(b). Such a pen-

alty might have applied here, if respondent had asserted it.

Thus, there is no gap in the penalty regime. To the extent

an erroneously claimed credit reduces a tax liability, it may

be subject to an accuracy-related penalty under section 6662;

to the extent that credit generates a refund, it may be sub-

ject to a penalty under section 6676.

And third, respondent is incorrect that there would be a

gap in the penalty regime insofar as an erroneously claimed

earned income tax credit is concerned. In 1997 Congress

carved out a separate sanction for taxpayers who improperly

claim the earned income tax credit. See sec. 32(k) (added by

the Taxpayer Relief Act of 1997, Pub. L. No. 105–34, sec.

1085, 111 Stat. at 955). Specifically, section 32(k) provides

that a false claim to the earned income credit in one tax year

results in the denial of the earned income credit in the next

two tax years ‘‘[If] there was a final determination that the

taxpayer’s claim of credit * * * was due to reckless or inten-

tional disregard of rules and regulations’’. 11 And it appears

that Congress intended that the two-year bar be in lieu of

any other monetary sanctions. For example, the penalty

under section 6676 for an erroneous claim for refund specifi-

cally excludes a claim for refund relating to an erroneous

earned income credit.

Conclusion

In the case of an underpayment due to negligence or a

substantial understatement of income tax, among other

11 The period of disallowance is 10 years if the claim of credit is due to

fraud.

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396 141 UNITED STATES TAX COURT REPORTS (376)

things, section 6662 imposes an accuracy-related penalty on

the underpayment. Section 6664(a) defines the term ‘‘under-

payment’’ in part by reference to the amount shown as the

tax by the taxpayer on his return. The earned income credit,

additional child tax credit, and recovery rebate credit all

reduce the amount shown as the tax by the taxpayer on his

return, but not below zero.

To reflect the foregoing and concessions,

Decision will be entered under Rule 155.

Reviewed by the Court.

THORNTON, VASQUEZ, GALE, WHERRY, KROUPA, HOLMES,

PARIS, KERRIGAN, and LAUBER, JJ., agree with this opinion

of the Court.

FOLEY, J., did not participate in the consideration of this

opinion.

GUSTAFSON, J., dissenting: The Commissioner argues that

petitioners are liable under section 6662(a) for an accuracy-

related penalty of about $1,494, because of an ‘‘under-

payment’’ of their tax. Colloquially, one could certainly say

that petitioners ‘‘underpaid’’ their 2008 income tax by

claiming refundable credits to which they were not entitled.

However, as the majority opinion explains, in a case like this

one an ‘‘underpayment’’ is defined in section 6664(a)(1)(A),

and it exists only where the tax ‘‘imposed’’ exceeds the tax

‘‘shown’’ (i.e., ‘‘the amount shown as the tax by the taxpayer

on his return’’). The majority opinion corrects one significant

fallacy in the Commissioner’s reckoning (i.e., the Commis-

sioner’s erroneous assumption that there can be a ‘‘negative

amount of tax’’ for purposes of computing the underpayment

to be penalized); but the majority still holds petitioners liable

for a lesser penalty (about $29) that, though modest in

amount, contradicts an important principle: The IRS has no

authority to impose, and the courts have no authority to sus-

tain, a penalty that Congress did not enact. 1

1 In

Feller v. Commissioner, 135 T.C. 497, 526–543 (2010) (Gustafson, J.,

dissenting), I made a similar critique of this Court’s Opinion imposing the

fraud penalty of section 6663; but in one respect the majority’s error in

this case is more extreme: The outcome in Feller was supported by a regu-

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(376) RAND v. COMMISSIONER 397

I. Introduction

For 2008 petitioners filed a Form 1040, ‘‘U.S. Individual

Income Tax Return’’, on which they reported income and tax

but also claimed refundable credits (to which they were not

entitled). As a result, petitioners incorrectly reported no bal-

ance due but rather claimed an overpayment and a refund to

which they were not entitled.

In particular, Form 1040 for 2008 required petitioners to

report ‘‘Tax’’ on line 44, ‘‘Alternative minimum tax’’ on line

45, and the total of those on line 46. The form called for var-

ious non-refundable credit amounts not at issue here on lines

47–55, ‘‘Self-employment tax’’ on line 57, and ‘‘total tax’’ on

line 61. As their ‘‘total tax’’, petitioners reported $144. (I

submit that this $144 amount is ‘‘the amount shown as the

tax by the taxpayer on his return’’ for purposes of section

6664(a)(1)(A)).

Thereafter, in the section of Form 1040 entitled ‘‘Pay-

ments’’, petitioners claimed an ‘‘Earned income credit’’ (line

64a), an ‘‘Additional child tax credit’’ (line 66), and a

‘‘Recovery rebate credit’’ (line 70), to which they were not

actually entitled. They reported ‘‘total payments’’ of $7,471

(consisting solely of those excessive claimed credits) and

therefore reported an ‘‘amount you overpaid’’ of $7,327 on

line 72, and they requested on line 73 that it all be ‘‘refunded

to you’’.

The IRS determined against petitioners an accuracy-

related penalty pursuant to section 6662(a). That penalty

depends on (among other things) ‘‘the amount shown as the

tax by the taxpayer on his return’’. Rather than using the

‘‘total tax’’ of $144 that petitioners reported on line 61 of

their return as the tax shown, the IRS used negative $7,327

(i.e., the erroneous overpayment petitioners claimed on line

72), and the majority uses zero (an amount calculated by

lation, i.e., 26 C.F.R. section 1.6664–2(c)(1), Income Tax Regs. (which the

majority held valid, over my dissent); but in this case there is no equiva-

lent regulation to define ‘‘tax shown’’ in such a way as to support the impo-

sition of the penalty. This absence of a regulation makes all the more ap-

propriate the invocation of the rule of lenity (discussed below) to construe

the penalty statute narrowly. Cf. Babbitt v. Sweet Home Ch. of Comtys. for

a Great Or., 515 U.S. 687, 704 n.18 (1995) (‘‘We have applied the rule of

lenity * * * where no regulation was present’’).

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398 141 UNITED STATES TAX COURT REPORTS (376)

subtracting the excess credits from the tax reported, but not

going below zero). Neither of these approaches is warranted

by the statute.

II. The governing law

Under our Constitution, it is Congress that enacts laws.

See U.S. Const. art. I, sec. 7, cl. 1. The first enumerated

power given to Congress (and not to the Executive or the

courts) is the ‘‘Power To lay and collect Taxes, Duties,

Imposts and Excises’’. Id., sec. 8, cl. 1. 2 As the Supreme

Court observed in Whitman v. Am. Trucking Ass’ns, 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.

Section 6664(a) defines the ‘‘underpayment’’ to which the

accuracy-related penalty of section 6662 applies. 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

(B) amounts not so shown previously assessed (or collected with-

out 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

2 Article

I, Section 7, Clause 1 of the Constitution 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 authority * * * 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 peo-

ple’’). Article I, Section 9, Clause 4 of the Constitution originally prohibited

‘‘direct’’ taxes; and when the Constitution was amended to curtail that pro-

hibition, the Sixteenth Amendment provided (echoing Article I, section 8)

that ‘‘[t]he Congress shall have power to lay and collect taxes on incomes’’.

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(376) RAND v. COMMISSIONER 399

ground that the tax imposed was less than the excess of the amount

specified in paragraph (1) over the rebates previously made.

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’’.

By statute Congress has authorized the Secretary of the

Treasury to prescribe ‘‘regulations for the enforcement of ’’

the Internal Revenue Code, see sec. 7805(a); and where such

authorized regulations interpret a statute, 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). Notably, in

Feller v. Commissioner, 135 T.C. 497 (2010), a majority of

this Court deferred to such a regulation—i.e., 26 C.F.R. sec-

tion 1.6664–2(c)(1), Income Tax Regs.—to define tax ‘‘shown’’

(and thereby to define ‘‘underpayment’’) in a manner not sug-

gested in the statute. 3 However, the regulations that define

an ‘‘underpayment’’ include no provision to the effect that

excess refundable credits somehow reduce tax ‘‘shown’’.

There is no other law governing the issue in this case—

unless we invent it.

III. Discussion

Without doubt, Congress could impose a penalty for

claiming refundable credits to which one is not entitled. The

question we face is whether in fact Congress did so in section

6662(a) when it imposed the accuracy-related penalty on

‘‘underpayments’’, defined in section 6664(a)(1)(A) as ‘‘tax

imposed’’ minus ‘‘amount shown’’, or whether instead the IRS

and the majority go beyond the statute in determining a pen-

alty liability for improperly claimed refundable credits.

3 See

note 1, above. An analogous regulation defines ‘‘tax shown’’ for pur-

poses of avoiding the penalty for failure to pay estimated tax: One can pay

‘‘100 percent of the tax shown on the return of the individual for the pre-

ceding taxable year.’’ Sec. 6654(d)(1)(B)(ii) (emphasis added). The statute

is silent about credits, but the regulations make it appear that ‘‘tax shown’’

means tax minus refundable credits (but not withholding credits or pay-

ments of estimated tax). See 26 C.F.R. sec. 1.6654–2(a)(1)(i), (b)(1)(iii),

(b)(2)(i). But again, there is no such regulation pertinent to the accuracy-

related penalty of section 6662.

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400 141 UNITED STATES TAX COURT REPORTS (376)

A. The Commissioner’s position and the majority opinion

are at odds with the plain meaning of ‘‘the amount

shown as the tax by the taxpayer on his return’’.

The term at issue is ‘‘the amount [1] shown [2] as the tax

[3] by the taxpayer [4] on his return’’. Sec. 6664(a)(1)(A).

Under section 6664(a) this amount is subtracted from ‘‘tax

imposed’’ (i.e., the actual tax liability) to yield the ‘‘under-

payment’’. The plain meaning of this term could hardly be

clearer:

In the first place, the amount in section 6664(a)(1)(A) is an

amount ‘‘shown’’. It is therefore an amount that is visible.

The plain language steers us away from an amount that

would need to be determined by investigation or correction

and points us simply to what is ‘‘shown’’—in this case, the

$144 amount shown by petitioners as ‘‘total tax’’ on line 61.

However, both the Commissioner and the majority opinion

substitute for this amount ‘‘shown’’ a lesser amount com-

puted by subtracting excess credits. Neither of the resulting

numbers (i.e., neither the Commissioner’s proposed negative

$7,327 nor the majority’s zero amount) is shown anywhere on

petitioners’ 2008 return as an amount of ‘‘tax’’, so the

Commissioner and the majority look to an amount that is not

shown as tax and thereby ignore the plain language of the

statute that describes an amount ‘‘shown’’.

Second, the amount in section 6664(a)(1)(A) is ‘‘tax’’. Of

course, the Code also has provisions about other kinds of

amounts—e.g., of income, deductions, costs, basis, exclusions,

credits, payments, penalties, and so on—but section

6664(a)(1)(A) refers to an amount of ‘‘tax’’, a term not at all

interchangeable with those other kinds of amounts. But both

the Commissioner and the majority compute an amount that

consists of tax reduced by excess refundable credits. How-

ever, the plain meaning of the statutory language restricts us

to ‘‘tax’’ that is shown on the return, and the statutory lan-

guage gives no warrant for injecting excess credits into the

equation.

Third, section 6664(a)(1)(A) looks to an amount shown ‘‘by

the taxpayer’’. Of course, the Code authorizes the IRS to

make its own determinations of amounts relevant to tax

liabilities; but plainly section 6664(a)(1)(A) describes an

amount shown ‘‘by the taxpayer’’. The Commissioner and the

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(376) RAND v. COMMISSIONER 401

majority correct the amount shown ‘‘by the taxpayer[s]’’ on

their return, $144, and replace it with other numbers that

they determine. Their methods thus wander from the plain

language of section 6664(a)(1)(A), which looks to an amount

shown ‘‘by the taxpayer’’.

Fourth, the amount in section 6664(a)(1)(A) is an amount

shown as tax ‘‘on his return’’. The Commissioner designed

Form 1040 and designated certain items and not others as

‘‘tax’’. Petitioners were required to use Form 1040 and did so.

By using an amount other than the $144 that petitioners

reported as ‘‘total tax’’ on the prescribed return, the Commis-

sioner and the majority contradict the plain meaning of the

statutory description of an amount of tax ‘‘on the return’’.

B. The Form 1040 ‘‘return’’ has never ‘‘shown as the tax’’ an

amount reduced by refundable credits.

The critical term in section 6664(a)(1)(A) is the ‘‘amount

shown as the tax on the return’’. (Emphasis added.) Section

6011(a) authorizes the IRS to prescribe returns and requires

taxpayers to use them. In 26 C.F.R. section 1.6012–1(a)(6),

Income Tax Regs., the IRS has prescribed Form 1040. It is

therefore appropriate to accord great weight to the manner

in which tax and refundable credits are characterized on

Form 1040.

In fact, Form 1040 calls for a computation of ‘‘total tax’’

(without reduction by refundable credits) and only then calls

for the refundable credits to be reported as ‘‘payments’’, con-

sistent with the Code. 4 Form 1040 was so arranged when

refundable credits were first allowed in 1975; 5 and when

4 The

portion of a refundable credit that exceeds the tax liability is an

‘‘overpayment’’, see secs. 37, 6401(b)(1); an overpayment is by definition a

‘‘part of the amount of the payment’’, sec. 6401(a) (emphasis added); and

the refundable credit is therefore treated in the Code as a payment. By

contrast, nonrefundable credits are limited to and can never exceed the

amount of the tax liability, see sec. 26(a), and thus never reduce the liabil-

ity below zero.

5 When the first refundable credit (the earned income tax credit) ap-

peared on the Form 1040 for 1975, ‘‘Tax’’ was computed on line 16a and

was reduced by certain credits before the addition of ‘‘Other taxes’’ (line

19) to yield a ‘‘Total’’ (line 20). From that were subtracted withholding, es-

timated payments, the EITC (line 21c), and other payments to yield (on

line 23 or line 24) either a ‘‘BALANCE DUE IRS’’ (not a ‘‘tax’’) or an

Continued

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402 141 UNITED STATES TAX COURT REPORTS (376)

Congress enacted the current penalty regime in 1989 (and

employed the ‘‘shown * * * on his return’’ definition), the

Form 1040 return most recently in use—i.e., the Form 1040

for 1988—reflected this same arrangement. 6 The IRS has

always constructed the Form 1040 return in such a way that

‘‘total’’ tax is figured first and then refundable credits are

characterized as ‘‘payments’’ of that tax. The IRS has never

prescribed an individual income tax return on which there

was ‘‘shown as the tax’’ an amount that had already been

reduced by refundable credits.

I do not suggest that IRS forms and instructions are gen-

erally precedential. Cf. Casa De La Jolla Park, Inc. v.

Commissioner, 94 T.C. 384, 396 (1990) (‘‘The sources of

authoritative law in the tax field are the statute and regula-

tions and not government publications’’). But here the statu-

tory definition of ‘‘underpayment’’ utterly depends on and

incorporates the ‘‘return’’. By definition, petitioners cannot

owe the penalty unless they under-reported ‘‘the amount

shown as the tax * * * on * * * [their] return’’ (emphasis

added)—but the parties and the majority admit that the

‘‘total tax’’ of $144 that they did show on their return was

‘‘amount OVERPAID’’. That is, the 1975 Form 1040 reflected that credit

amounts like these are in the nature of payments, not tax. The Form 1040

for 2008 was similar in all material respects to the Form 1040 for 1975.

6 On the Form 1040 for 1988, the ‘‘Tax Computation’’ section (consisting

of lines 32 through 40) included, after the computation of taxable income,

a line 38 on which one was to ‘‘Enter tax’’, a line 39 for ‘‘Additional taxes’’,

and a line 40 that totaled lines 38 and 39. The next section, entitled ‘‘Cred-

its’’ (lines 41 through 47), consisted not of refundable credits in the nature

of payments against the tax liability but instead credits (such as the child

care credit and the foreign tax credit) that are taken into account in fig-

uring the tax liability. Thereafter, a section of ‘‘Other Taxes’’ (lines 48

through 53) included, for example, the self-employment tax and the alter-

native minimum tax; and it ended with line 53, which read: ‘‘Add lines 47

through 52. This is your total tax’’ (bold in original). Only after this ‘‘total

tax’’ on line 53 did the 1988 return include, in the section of the return

entitled ‘‘Payments’’, an entry (at line 56) for ‘‘Earned income credit’’,

which was one of the items that yielded ‘‘total payments’’ on line 61. The

net amount due after these ‘‘total payments’’ was not referred to as tax,

but either as an ‘‘amount OVERPAID’’ (line 62) or as an ‘‘AMOUNT YOU

OWE’’ (line 65). This is what in fact appeared on a ‘‘return’’ at the time

Congress defined a taxpayer’s underpayment as ‘‘tax imposed’’ minus tax

‘‘shown * * * on his return’’. The Form 1040 for 2008 was similar in all

material respects to the Form 1040 for 1988.

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(376) RAND v. COMMISSIONER 403

correct. Everyone agrees that the tax imposed, $144, was the

‘‘total tax’’ amount shown on the return. Given the wording

of section 6664(a)(1)(A), one cannot ignore petitioners’ actual

‘‘return’’ in finding an underpayment and imposing the

accuracy-related penalty.

C. The definition of ‘‘deficiency’’ in section 6211 does not

alter the definition of ‘‘underpayment’’ in section

6664(a).

To interpret the ‘‘underpayment’’ definition in section

6664(a), the majority looks to the ‘‘deficiency’’ definition in

section 6211(b)(1), which employs similar phrases, but the

majority thereby draws incorrect inferences. In defining a tax

‘‘deficiency’’, section 6211(b)(1) provides that ‘‘[t]he tax

imposed * * * and the tax shown * * * shall both be deter-

mined without regard to’’ certain credits but does not provide

for disregarding the refundable credits at issue here. The

majority therefore invokes the canon expressio unius est

exclusio alterius and infers that, as a general rule, ‘‘tax

shown’’ must therefore include all those credits (else no

exclusion of any would have been necessary). And the

majority opinion goes on to note that no such exclusions are

provided in section 6664(a) defining ‘‘underpayment’’, and

therefore ‘‘underpayment’’ must be determined with regard to

these unmentioned credits. That is, the opinion effectively

holds that ‘‘tax imposed’’ and ‘‘tax shown’’ must generally

mean tax after (among other things) the refundable credits at

issue here. For two reasons this argument is untenable.

First, if not only tax ‘‘shown’’ but also ‘‘tax imposed by this

title’’ (emphasis added) should generally be understood to

refer to tax net of refundable credits, then other Code sec-

tions that refer to ‘‘tax imposed by this title’’ but that do not

explicitly exclude the netting of credits might become very

problematic. Section 6001 requires that ‘‘[e]very person liable

for any tax imposed by this title * * * shall keep such

records * * * as the Secretary may from time to time pre-

scribe’’, and section 6011(a) requires that a return be filed by

‘‘any person made liable for any tax imposed by this title’’.

For taxpayers who are entitled to refundable credits, these

requirements apply not only if they report a balance due but

also if they are entitled to a refund. Section 6501(a) provides

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404 141 UNITED STATES TAX COURT REPORTS (376)

for assessment of ‘‘tax imposed by this title’’ (and the IRS

duly assessed the $144 ‘‘total tax’’ that petitioners reported

on their 2008 return and separately recorded the allowance

of the credits claimed). Section 6511(a) sets a deadline for the

filing of a claim for refund of ‘‘any tax imposed by this title’’.

It would be nonsense to suggest that this deadline does not

apply where the claimed overpayment arises from refundable

credits.

These provisions have always been (rightly) understood to

apply where there is a tax liability, whether or not that

liability has been satisfied by refundable credits. That is, it

is a truism that ‘‘tax imposed’’ does not generally mean

‘‘amount of tax due after application of refundable credits’’.

It is hard to imagine administering the provisions listed

above if it were otherwise. The inference that an internal

revenue statute that addresses ‘‘tax imposed’’—or ‘‘tax

shown’’—without mentioning refundable credits must refer to

the tax due after such credits is manifestly unwarranted.

Second, the majority states that it ‘‘see[s] no evidence of a

contrary congressional intent’’ (i.e., intent contrary to its

expressio unius construction), but it describes no inquiry into

the congressional intent that did produce the critical lan-

guage in section 6211. See op. Ct. p. 388. In fact, the clari-

fication in section 6211(b)(1) that ‘‘[t]he tax imposed * * *

and the tax shown * * * shall both be determined without

regard to’’ withholding credits is a truism whose presence

has a historical explanation. After income tax withholding

was inaugurated in 1943, the definition of ‘‘deficiency’’ had to

be changed in order to prevent non-rebate refunds (i.e.,

refunds of over-withheld tax) from inappropriately increasing

the amount of a deficiency. In 1944 Congress therefore

employed and defined the concept of a ‘‘rebate’’ refund (now

in section 6211(b)(2)) and—important to the current discus-

sion—noted that tax ‘‘imposed’’ and tax ‘‘shown’’ did not

include the relatively new withholding credit. See Feller v.

Commissioner, 135 T.C. at 536–538.

At that time, there were no refundable credits. Congress’

1944 expressio as to withholding credits made no implication

whatsoever as to the alterius of refundable credits that would

not exist until 1975. The silence of section 6211(b)(1) about

refundable credits (which did not then exist) should not give

rise to an aberrant definition of section 6664(a)(1)(a) that

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(376) RAND v. COMMISSIONER 405

assumes that ‘‘tax’’ imposed and shown somehow includes

refundable credits not mentioned in either statute.

D. The rule of lenity calls for a strict construction of the

penalty.

The majority opinion is correct that the ‘‘rule of lenity’’

requires that penalty statutes be ‘‘construed strictly’’.

Commissioner v. Acker, 361 U.S. 87, 91 (1959); see op. Ct. pp.

392–393. The majority aptly invokes this canon to conclude

‘‘that section 6662 does not impose a penalty on the refund-

able portion of erroneously claimed earned income credits,

additional child tax credits, and recovery rebate credits’’, see

op. Ct. p. 393; but it fails to observe that the same canon

counsels against expanding the penalty to make it apply

where refundable credits were overstated but ‘‘tax’’ was not

understated.

Applying the rule of lenity, we should construe ‘‘tax’’

strictly to mean tax, rather than construing it loosely to

mean tax minus refundable credits. We should construe

‘‘shown as the tax * * * on his return’’ strictly to mean

shown as the tax on his return, rather than construing it

loosely to mean not really shown as the tax on his return.

IV. Conclusion

The parties and the majority agree that the tax ‘‘imposed’’

is $144, and there is no dispute that $144 was shown as the

‘‘total tax’’ on line 61 of petitioners’ return. There is therefore

no ‘‘underpayment’’ as defined in section 6664(a)(1)(A) and,

as a result, no penalty can be imposed under section 6662(a).

HALPERN and GOEKE, JJ., agree with this dissent.

MORRISON, J., dissenting: On their joint federal tax return

for 2008, Rand and Klugman claimed that they were entitled

to three types of refundable credits: the earned income credit,

the additional child tax credit, and the recovery rebate credit.

To buttress their claims to these credits, Rand and Klugman

falsely reported on their tax return:

(1) that they lived in the United States;

(2) that their children lived in the United States;

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406 141 UNITED STATES TAX COURT REPORTS (376)

(3) that they had earned income of $18,148, including

$17,200 in wages supposedly paid to Rand by the Yeshivas

Brisk Institute in Israel.

Rand and Klugman reported that their total tax liability,

before credits, was $144. This amount was attributable to

self-employment taxes. The refundable credits they claimed

total $7,471, and they sought a refund of $7,327 ($7,471 –

$144).

The statements on the return were false; Rand and

Klugman were not entitled to the refundable credits they

claimed. The issue remaining in this case is to determine the

amount of their penalty under section 6662.

Section 6662 imposes a 20% penalty on underpayments

associated with inaccurate tax returns. For returns that are

fraudulent, a 75% penalty applies under section 6663. The

amount of either penalty is mathematically dependent on the

amount of the underpayment. The amount of the under-

payment is in turn a function of four variables, including

‘‘the amount [of tax] shown as the tax by the taxpayer on his

return’’. Sec. 6664(a)(1)(A). This variable is referred to here

as the ‘‘tax shown’’. A disagreement about how to calculate

this variable divides our Judges in this case.

The Court holds that the ‘‘tax shown’’ for the purpose of

calculating an underpayment cannot be less than zero.

Therefore, the Court holds that the ‘‘tax shown’’ on Rand and

Klugman’s return is zero. In my view, the ‘‘tax shown’’ on the

return can be less than zero. I would hold that the ‘‘tax

shown’’ on Rand and Klugman’s return is $144 (the amount

they reported on their return for self-employment tax) minus

$7,471 (the refundable credits they claimed), which is

–$7,327. 1

Whether the ‘‘tax shown’’ on a return can be negative, i.e.,

less than zero, in calculating an underpayment is not

answered by the plain language of the Internal Revenue

Code. Section 1 imposes the federal income tax on individ-

uals. It provides that a ‘‘tax’’ is ‘‘imposed’’ on ‘‘taxable

income’’. The tax imposed by section 1 is supplemented by a

‘‘tax’’ imposed by section 1401(a) on ‘‘the self-employment

1 The difference between zero and –$7,327 affects the amount of the un-

derpayment. If the ‘‘tax shown’’ is zero, the underpayment is $144. If the

‘‘tax shown’’ is –$7,327, the underpayment is $7,471.

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(376) RAND v. COMMISSIONER 407

income of every individual’’. The Code provides for several

types of credits ‘‘against the’’ taxes imposed by section 1 and

section 1401, among other taxes. Some of these credits,

including the additional child tax credit, the earned income

credit, and the recovery rebate credit, are refundable credits.

See secs. 24(d), 32(a), 6428(a). Refundable credits must be

refunded by the Internal Revenue Service (IRS) to the tax-

payer to the extent they exceed the taxpayer’s pre-refund-

able-credit tax liability. See secs. 6402(a), 6401(b).

I disagree with the Court’s holding for three primary rea-

sons. First, it does not give sufficient weight to Congress’s

purpose in enacting section 6662. Second, it relies too heavily

on section 6211(b)(4), a section of uncertain relevance to the

term in dispute in this case—the term ‘‘underpayment’’.

Third, the Court’s holding creates a gap in the penalty

regime that Congress could not have intended. I address

each shortcoming in turn.

When a law is ambiguous, it is appropriate for a court to

interpret the law in a manner consistent with Congress’s

purpose behind the law. See Thompson v. GMAC, LLC, 566

F.3d 699, 707 (7th Cir. 2009); Yarish v. Commissioner, 139

T.C. 290, 295 (2012). Sections 6662 and 6664 are ambiguous

with respect to the meaning of ‘‘underpayment’’ and, specifi-

cally, whether ‘‘tax shown’’ can be negative. The Court’s

strained attempt to arrive at the meaning of ‘‘tax shown’’

demonstrates as much. See Yarish v. Commissioner, 139 T.C.

at 295 (finding a statutory phrase ambiguous where ‘‘it is

susceptible of at least two different meanings’’). Accordingly,

it is appropriate to look to the purpose underlying section

6662 to determine the meaning of ‘‘underpayment’’ and ‘‘tax

shown’’.

The purpose of the section 6662 penalty is to deter tax-

payers from taking questionable tax return positions that

they hope that the IRS will not discover. Estate of Kluener

v. Commissioner, 154 F.3d 630, 637 (6th Cir. 1998) (section

6662), aff ’g in part, rev’g in part T.C. Memo. 1996–519;

Caulfield v. Commissioner, 33 F.3d 991, 994 (8th Cir. 1994)

(former section 6661), aff ’g T.C. Memo. 1993–423; Karpa v.

Commissioner, 909 F.2d 784, 786 (4th Cir. 1990) (former sec-

tion 6661), aff ’g T.C. Memo. 1989–535. Credits are reported

by taxpayers on income tax returns, just as items of gross

income and deductions are reported on income tax returns.

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408 141 UNITED STATES TAX COURT REPORTS (376)

See United States v. Gormley, 201 F.3d 290, 293 (4th Cir.

2000). 2 Taxpayers like Rand and Klugman, who make false

claims of credits on their tax returns, hope that the IRS will

not discover that they are not entitled to the credits. In the

case of refundable credits, the claimants hope that the IRS

will write them a refund check (as the IRS did for Rand and

Klugman). False claims of credits on returns are as difficult

for the IRS to detect as falsely reported items of gross income

or deductions. Treating a false claim of credits as part of the

‘‘tax shown’’ on the return, and treating a false claim to

refundable credits as potentially a report of negative tax, are

consistent with the purpose of section 6662.

Adopting this interpretation would result in imposing a

penalty on Rand and Klugman of $1,494. 3 This is not an

onerous penalty for filing the false return, considering the

false return was designed to generate an undeserved tax ben-

efit of $7,471. By contrast, the Court holds that the appro-

priate amount of the penalty is 20% of $144, or $29. That is

only about 0.39% (less than one two-hundredth) of the tax

benefit sought.

The second reason I contest the Court’s holding is that it

relies unduly on section 6211(b)(4). The Court uses an elabo-

rate scheme of statutory construction to divine the meaning

of ‘‘underpayment’’. The Court assumes that, because ‘‘tax

shown’’ is used in both section 6664 (defining ‘‘under-

payment’’) and section 6211 (defining ‘‘deficiency’’), the

phrase has the same meaning in both sections. Further,

because section 6211(b)(4), which applies exclusively to the

definition of ‘‘deficiency’’, contains a negative tax provision,

the Court infers that ‘‘tax shown’’, in the absence of the sub-

section (b)(4) modification, cannot be negative. On the basis

2 Professor Lawrence Zelenak in his article ‘‘Tax or Welfare? The Admin-

istration of the Earned Income Tax Credit’’, 52 UCLA L. Rev. 1867, 1869

(2005), observes:

In common with other taxpayer-favorable provisions of the federal in-

come tax, the EITC [the earned income tax credit] is administered on the

basis of self-declared eligibility. As with persons claiming other income

tax deductions, exclusions, and credits, the EITC claimant makes the en-

tries on her tax return required to determine the amount of EITC to

which she is entitled, and pays less tax or receives a bigger refund as

a result. * * *

3 Twenty percent of $7,471 is $1,494. See sec. 6662.

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(376) RAND v. COMMISSIONER 409

of these two assumptions, the Court holds that ‘‘tax shown’’

for purposes of defining ‘‘underpayment’’ cannot be negative.

This reasoning is flawed for four reasons.

First, the Court’s holding implicitly (and incorrectly)

assumes that there is a sure meaning of ‘‘tax shown’’ (as used

in section 6211(a)) without the negative tax provision found

in subsection (b)(4). This assumption is incorrect, as is illus-

trated by the fact that the Judges in this case cannot agree

on the meaning of ‘‘tax shown’’ in the absence of subsection

(b)(4). Because its meaning is unclear, the Court should not

rely on it in defining ‘‘tax shown’’ in the definition of ‘‘under-

payment’’. The Court holds that ‘‘tax shown’’ (in the absence

of subsection (b)(4)) means the tax reported on the return,

reduced for credits, but not below zero and that subsection

(b)(4) only provides the mechanism by which we reduce ‘‘tax

shown’’ into negative territory when calculating a deficiency.

Judge Gustafson adopts the view that ‘‘tax shown’’ means the

tax reported, unreduced for credits, and that subsection (b)(4)

provides the mechanism by which we reduce ‘‘tax shown’’ by

credits in calculating a deficiency and reduce ‘‘tax shown’’

below zero. Under this view, in the absence of subsection

(b)(4), ‘‘tax shown’’ is not reduced by credits at all. These

divergent views demonstrate that, while we know the bot-

tom-line result of subsection (b)(4)—that refundable credits

can reduce ‘‘tax shown’’ below zero when calculating a defi-

ciency—we do not know how it achieves this result. This sug-

gests that the concept of ‘‘tax shown’’ (as used in section

6211(a), without subsection (b)(4)), is an unreliable indicator

of Congress’s intended meaning of underpayment and that

the Court should not rely on it.

Second, portions of the opinion of the Court suggest that

the concepts of deficiency and underpayment are separate,

yet the Court draws heavily from section 6211 (defining

‘‘deficiency’’) in defining ‘‘tax shown’’ (as used in the defini-

tion of ‘‘underpayment’’) and, indirectly, in defining ‘‘under-

payment’’. The Court’s approach is inconsistent with

Congress’s intent. Congress separated the meaning of

‘‘underpayment’’ from the meaning of ‘‘deficiency’’ in 1989.

The Court acknowledges as much: ‘‘[O]ur conclusion breaks

the historical link between the definitions of a deficiency and

an underpayment; however, it was Congress that made that

break.’’ See op. Ct. p. 391. Yet the Court adopts a definition

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410 141 UNITED STATES TAX COURT REPORTS (376)

of ‘‘underpayment’’ that is necessarily, if indirectly, linked to

the meaning of ‘‘deficiency’’. Despite Congress’s attempt to

separate the two terms, the Court’s holding requires us to

scrutinize the meaning of ‘‘deficiency’’ to determine the

meaning of ‘‘underpayment’’. The consequences of this

approach are illustrated by the role that amendments to sec-

tion 6211(b)(4) have inadvertently played in the Court’s defi-

nition of ‘‘tax shown’’ (for purposes of an underpayment). Sec-

tion 6211(b)(4) has been amended twice since 1989—in 2000

and in 2008—to incorporate the child tax credit and the

recovery rebate credit. 4 Each of these amendments changed

the definition of ‘‘deficiency’’. Under the Court’s view, both of

these amendments also affected the definition of ‘‘under-

payment’’ because they indirectly changed the meaning of

‘‘tax shown’’ in the definition of ‘‘underpayment’’. Further,

there is nothing in the Court’s opinion that suggests that

future amendments to section 6211(b)(4) will not similarly

affect the meaning of ‘‘tax shown’’ and, as a result, ‘‘under-

payment’’. In recognition of the fact that Congress broke the

link between deficiency and underpayment in 1989, the

better approach would be to ignore section 6211(b)(4) entirely

in arriving at the meaning of ‘‘tax shown’’.

A related problem is that the Court’s holding is not sup-

ported by the legislative history it cites. See op. Ct. p. 391

(citing H.R. Rept. No. 101–247, at 1394 (1989), 1989

U.S.C.C.A.N. 1906, 2864). The committee report stated that

the establishment of a separate definition of ‘‘underpayment’’

in 1989 (separate from the definition of ‘‘deficiency’’) was not

intended to change the definition of ‘‘underpayment’’. H.R.

Rept. No. 101–247, at 1394, 1989 U.S.C.C.A.N. at 2864. But

taken literally this would mean that the definition of ‘‘under-

payment’’ remained unchanged from its pre-1989 definition.

4 In 1997 Congress added the additional child tax credit to the Code, and

in 2000 it incorporated the credit in the negative-tax provision of sec.

6211(b)(4). Consolidated Appropriations Act, 2001, Pub. L. No. 106–554,

sec. 1(a)(7), 114 Stat. at 2763 (amending sec. 6211(b)(4)); Taxpayer Relief

Act of 1997, Pub. L. No. 105–34, sec. 101(a), 111 Stat. at 796 (adding sec.

24). In 2007 Congress added the rebate recovery credit to the Code and

incorporated the credit in the negative-tax provision of sec. 6211(b)(4). Eco-

nomic Stimulus Act of 2008, Pub. L. No. 110–185, sec. 101(b)(1), 122 Stat.

at 615 (amending sec. 6211(b)(4)); id. sec. 101(a), 122 Stat. at 613 (amend-

ing sec. 6428(a)).

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(376) RAND v. COMMISSIONER 411

Because its pre-1989 definition included the negative-tax

provision of section 6211(b)(4), that would mean that the ‘‘tax

shown’’ on the return, which could be negative before 1989,

can still be negative now. 5 But this would mean that the

5 Before

1989 former sec. 6653(a)(1) and (b)(1) imposed penalties equal

to percentages of the portions of an underpayment due to negligence (5%)

or fraud (75%), respectively. Former sec. 6661(a) (repealed 1989) also im-

posed a penalty equal to 25% of the portion of an underpayment due to

a substantial understatement of income tax. An underpayment was not de-

fined by sec. 6661(a). An underpayment for purposes of the 5% negligence

penalty and the 75% fraud penalty was generally defined the same as a

deficiency for income tax returns. This rule was found in former sec.

6653(c): ‘‘the term ‘underpayment’ means * * * a deficiency as defined in

[section 6211]’’. See Feller v. Commissioner, 135 T.C. 497, 506–507 (2010).

In 1988 Congress amended sec. 6211(b)(4) to add the negative-tax provi-

sion we summarized above. Technical and Miscellaneous Revenue Act of

1988, Pub. L. No. 100–647, sec. 1015(r)(2), 102 Stat. at 357 (amending sec.

6211(b)(4)). At the time, of the three types of credits Rand and Klugman

claimed, only the earned income credit was in existence and referenced in

the negative-tax provision of sec. 6211(b)(4). Thus, sec. 6211(b)(4) provided:

For purposes of subsection (a) —

(A) any excess of the sum of the credits allowable under sections

* * * 32 and 34 over the tax imposed by subtitle A (determined with-

out regard to such credits), and

(B) any excess of the sum of such credits as shown by the taxpayer

on his return over the amount shown as the tax by the taxpayer on

such return (determined without regard to such credits),

shall be taken into account as negative amounts of tax.

Because of the cross-reference of former sec. 6653(c) to the definition of

‘‘deficiency’’, the 1988 amendment modified the definition of ‘‘under-

payment’’ for purposes of sec. 6653(a)(1) and (b)(1). One year later, in 1989,

Congress revamped the system of civil tax penalties. Omnibus Budget Rec-

onciliation Act of 1989 (OBRA), Pub. L. No. 101–239, sec. 7721(a), (c), 103

Stat. at 2395, 2399. It repealed former sec. 6653; it added sec. 6662 (the

accuracy-related penalty), sec. 6663 (the fraud penalty—equal to 75% of

the portion of the underpayment attributable to fraud), and sec. 6664 (set-

ting forth definitions of terms used in secs. 6662 and 6663). OBRA sec.

7721(a), (c)(1). The word ‘‘underpayment’’, used in sec. 6662 (and sec.

6663), is defined by sec. 6664(a). Secs. 6662(a), 6663(a). The 1988 amend-

ment modifying the definition of ‘‘deficiency’’ remained in the Code, but

after 1989 it no longer expressly affected the definition of ‘‘underpayment’’.

This is because in 1989 the definition of ‘‘underpayment’’ was detached

from the definition of ‘‘deficiency’’. See Feller v. Commissioner, 135 T.C. at

507–508 (‘‘The definition of an underpayment is no longer tied to the defi-

nition of a deficiency under section 6211, as it had been in section

6653(c)’’.). Despite the detachment of the definition of ‘‘underpayment’’

Continued

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412 141 UNITED STATES TAX COURT REPORTS (376)

‘‘tax shown’’ on Rand and Klugman’s return should be

reduced to –$7,327. This is the opposite of what the Court

holds. The Court holds that the ‘‘tax shown’’ on the return in

underpayment calculations cannot be negative. And it holds

that the ‘‘tax shown’’ on Rand and Klugman’s return is zero.

The Court’s holding, whatever its other merits, is not sup-

ported by the Ways and Means Committee report.

The fourth problem with the Court’s reliance on section

6211(b)(4) in defining ‘‘tax shown’’ (for purposes of an under-

payment) is that the approach relies too heavily on principles

of statutory construction. Recall that the Court’s reasoning

employs not one, but two principles of statutory construction:

the principle that the same phrase means the same thing

wherever it appears in the statute and the principle that all

statutory phrases must be given effect. It has been recog-

nized that principles of statutory construction rest upon the

assumption that Congress is all-knowing. See, e.g., Edwards

v. United States, 814 F.2d 486, 488 (7th Cir. 1987). Thus, for

example, when Congress uses the same phrase in a statute,

it is assumed to do so deliberately because it knows the

phrase will be construed the same way wherever it appears.

This assumption can give rise to inaccurate readings, espe-

cially where, as here, two principles of statutory construction

are chained together. For example, it may be reasonable to

assume that, in using the phrase ‘‘tax shown’’ in sections

6664 and 6211, Congress intended that ‘‘tax shown’’ would

carry the same meaning in both sections; however, it seems

inherently less reasonable to assume further that Congress

intended for section 6211(b)(4) (defining ‘‘deficiency’’) to be

relied upon to define ‘‘tax shown’’ (as used in defining

‘‘underpayment’’). The Court’s chain of reasoning seems espe-

cially suspect in the light of Congress’s express intent to

separate the definition of underpayment from the definition

of deficiency. See op. Ct. p. 391.

Finally, the majority contends that its holding, which occa-

sions a puny $29 penalty for Rand and Klugman’s false claim

for $7,471 in tax credits, does not result in a gap in the pen-

from the definition of ‘‘deficiency’’, a report of the House Ways and Means

Committee asserted that the definition of ‘‘underpayment’’ under the 1989

amendments was ‘‘not intended to be substantively different’’ from pre-

vious law. H.R. Rept. No. 101–247, at 1394 (1989), 1989 U.S.C.C.A.N.

1906, 2864.

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(376) RAND v. COMMISSIONER 413

alty regime because there are penalties for false or excessive

claims for credits found in section 32(k) and section 6676.

Section 32(k), enacted in 1997, provides that a false claim to

the earned income credit for one tax year results in the

denial of the earned income credit for the next two tax years

‘‘[if] there was a final determination that the taxpayer’s

claim of credit * * * was due to reckless or intentional dis-

regard of rules and regulations’’. 6 Many taxpayers who

falsely claim the earned income credit for one year will not

qualify for the credit for the subsequent two years anyway.

Rand and Klugman, for example, claimed earned income

credits for 2006, 2007, and 2008, even though, as they have

now stipulated, they were not entitled to the earned income

credit for any of the three years. For such taxpayers as Rand

and Klugman, section 32(k), even if applicable, 7 deprives

them of nothing to which they would otherwise be entitled.

It is doubtful that Congress intended section 32(k) to be the

only penalty potentially applicable to false refund claims

related to earned income credits.

Section 6676, enacted in 2007, imposes a 20% penalty on

overstated claims to various types of credits, including the

additional child tax credit and the recovery rebate credit. 8 It

is unlikely that Congress thought the section 6676 penalty

was a sufficient (or exclusive) penalty for returns that seek

refunds based on false claims of tax credits. First, the section

6676 penalty does not apply to claims to the earned income

credit. 9 See sec. 6676(a). Second, the percentage of the sec-

6 Theperiod of disallowance is 10 years if the claim of credit is due to

fraud.

7 Sec. 32(k) is conditioned upon ‘‘reckless or intentional disregard of rules

and regulations.’’ Sec. 6662 is not. See sec. 6662(b)(2).

8 The Court seems to take the IRS to task for failing to assert the sec.

6676 penalty against Rand and Klugman. The opinion states: ‘‘Such a pen-

alty might have applied here, if respondent [the IRS] had asserted it.’’ See

op. Ct. p. 395. However, the record does not disclose whether the IRS has

asserted a sec. 6676 penalty. This is not surprising. The present pro-

ceeding is a deficiency proceeding under sec. 6214. In a deficiency pro-

ceeding the Tax Court does not have authority to redetermine a taxpayer’s

liability for a sec. 6676 penalty, which the IRS can assess without a notice

of deficiency. See sec. 6671(a).

9 It is the earned income credit that makes up the largest portion of the

refundable tax credits claimed by Rand and Klugman on their 2008 return.

They claimed an earned income credit of $4,824, an additional child tax

Continued

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414 141 UNITED STATES TAX COURT REPORTS (376)

tion 6676 penalty is only 20%; however, the penalty related

to fraudulent returns is 75%. Sec. 6663(a). Und

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