UNITED STATES TAX COURT
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135 T.C. No.
25
UNITED STATES TAX COURT
RICK D. FELLER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4325-07.
Filed November 8,
2010.
P overstated his prepayment credits on his Federal.
income tax returns in order to claim refunds for 1992
through 1997.
On Nov. 22, 2006, R issued two notices of
deficiency determining that P was subject to the fraud
penalty of I.R.C. sec. 6663 because his overstated
prepayment credits resulted in underpayments of income tax
pursuant to I.R.C. sec. 6664 and sec. 1.6664-2(c) (1) and
(g),
Example
(3),
Income Tax Regs.
On Nov.
27,
2006, R
assessed, by use of the mathematical error assessment
procedures of I.R.C. sec. 6213 (b) (1), adjustments related to
P's overstatement of prepayment credits for 1992 through
1997.
P argues that (1) I.R.C. sec. 6501 bars the issuance of
the notices of deficiency and (2) sec. 1.6664-2(c) (1) ·and
(g), Example (i), Income Tax Regs., under which overstated
prepayment credits result in underpayments of income tax, is
invalid because it violates the intent of Congress in
enacting I.R.C. sec. 6664 and that he is not subject to the
fraud penalty.
SERVED NGV -8 20ig
- 2 We apply the test set forth in Chevron U.S.A. Inc. v.
Natural Res. Def. Council,
Inc.,
467 U.S.
837
(1984),
to
determine the validity of the regulation.
Under Chevron
step 1, we find that I.R.C. sec. 6664 is ambiguous
regarding the definition of "underpayment". Under Chevron
step 2, we find that the regulation is bas'ed on a
permissible construction of I.R.C. sec. 6664.
Held: P filed false returns with the intent to evade
tax within the meaning of I.R.C. sec. 6501(c); therefore the
issuance of the deficiency notices was not time barred.
Held,
further,
secl.
1.6664-2(c) (1)
and (g), Example
(3), Income Tax Regs., is valid.
Held, further, P is subject to the fraud penalty
pursuant to I.R.C. sec. 6663 for each year at issue.
Terry W. Vincent, for petitioner.
Cathy J. Horner and Dennis G. Driscoll, for respondent.
HAINES, Judge:
Rick D. Feller petitioned the Court for
redetermination of the following penalties:
Penalty
Hereafter,
Year
Sec.
1992
1993
1994
1995
1996
1997
$78,481
56,689
43,566
58,660
59,963
58,552
the years 1992,
'
·
,
1993,
1994,
be referred to as the years at issue.
issues for decision are:
1995,
6663
1996 and 1997 will
After concessions, the
(1) Whether the issuance of the notice
of deficiency for each of the years at issue is barred by the
- 3 expiration of the -limitations period for assessment under section
6501; and (2) whether petitioner's overstated prepayment credits
for the years at issue resulted in underpayments of income tax
attributable to fraud pursuant to sections 6663 and 6664.1
In so
deciding, we must determine the validity of section 1.66642(c) (1) and (g), Example (3), Income Tax Regs.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, together with the attached-exhibits, is
incorporated herein by this reference.
At the time petitioner
filed his petition, he resided in Ohio.
Petitioner's Business
Petitioner earned a bachelor of science degree in accounting
from the University of Akron in 1976 and received a certified
I
public accountant certificate from the State of Ohio in 1980.
In
1984 petitioner became a partner in the small accounting firm of
Skonk, Feller, Tuber & Brown.2
In 1992 petitioner and two additional partners of the firm
became 100-percent owners of stock in SFT Health Care.Corp.
IUnless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
2The firm went through several name changes.
It was
originally called Tuber & Shonberg, Inc., then Skonk, Feller &
Tuber, and finally Skonk, Feller, Tuber & Brown.
t
(SFT).
-
4
-
SFT owned two nursing homes, Red Carpet Health Care
Center and Southeastern Health Care Center.
Petitioner served as
president of the nursing homes throughout the years at issue.
In
his capacity as president, petitioner visited the nursing homes
once or twice a week and oversaw their operations.
He also was
responsible for the financial reporting and preparation of tax
returns associated with the nursing homes and SFT.
Red Carpet Health Care Center Forms W-2
For the years at issue petitioner attached to his Federal
income tax returns Forms W-2, Wage and Tax Statement, reporting
actual wages from Red Carpet Health Care Center of $17,781,
$17,602,
$19,202,
$33,571,
withholdings of $366,
respectively.
$300,
$19,016, and $23,580 with Federal
$464,
$1,025,
$350, and zero,
Petitioner also attached to his Federal income tax
returns for the years at issue fictitious Forms W-2 purportedly
issued by Red Carpet Health Care Center and reporting fictitious
wages of $120,000, $100,000, $75,000, ·$75,000, $75,000, and
$72,500 and fictitious Fedefal withholdings of $65,000, $52,000,
$39,000,
$40,500,
$40,750,
ánd $41,750,
respectively.
Southeastern/Barnesville Health Care Center Forms W-2
For 1992 petitioner attached to his Federal income tax
return a Form W-2 issued by Southeastern Health Care Center
reporting actual wages of $23,739 and Federal withholding of
$1,334.
Petitioner also attached to his Federal income tax
- 5 -
return a second, fictitious Form W-2 purportedly issued by
Southeastern Health Care Center reporting fictitious wages of
$120,000 and fictitious withholding of $70,000.
For 1993,
1994,
1995,
1996, and 1997 petitioner attached to
his Federal income tax returns Forms W-2 issued by Barnesville
Health Care CenterS reporting actual wages of $25,536, $28,161,
$47,960,
$80,119, and $80,119 with Federal withholdings reported
of $1,253,
$650,
$990,
$2,210, and $2,210,
respectively.
Petitioner also attached to his Federal income tax return
fictitious Forms W-2 purportedly issued by Barnesville Health
Care Center reporting fictitious wages of $100,000,
$80,000,
$75,000,
$80,000, and $75,000 with fictitious Federal
withholdings reported -of $52,000,
$39,000,
$43,500,
$44,500, and
$42,500, respectively.
Other Falsifications
For each of the years at issue petitioner included with his
Federal income tax return a Schedule E, Supplemental Income and
Loss, on which he reported a false amount of partnership losses
generated by his accounting firm.
Petitioner also included a
Schedule A, Itemized Deductions, in which he reported an inflated
itemized deduction for State and local income taxes paid that was
based on the fictitious Forms W-2 he prepared.
3Southeastern Health Care Center changed its name to
Barnesville Health Care Center in 1993.
- 6 Refund Claims
For 1992,
1993,
1994,
claimed refunds of $86,181,
1995,
1996, and 1997 petitioner
$57,349,
$34,686,
$48,776,
$48,703,
and $44,383, respectively.
Criminal Case
After a civil audit and a criminal investigation, criminal
proceedings were initiated against petitioner in the U.S.
District Court for the NorthŠrn District of Ohio.
On January 23,
2003, petitioner pleaded guiglty to willfully making and
submitting a false tax return for 1997 in violation of section
7206(1).
In his plea agreement, petitioner admitted that he
filed deliberately falsified personal tax returns for each of the
years at issue.
He also admitted that for each of the years at
issue he claimed a false income tax refund when he knew he
actually owed income taxes and that he attached to his return a
fictitious Form W-2 for each nursing home.
On November 22, 2006, respondent mailed petitioner two
notices of deficiency, one for 1992-95 and the other for 1996-97.
The Form 4549-B, Income Tax2Examination Changes, attached to each
notice, among other things
educed income by the amount of
fictitious wages, increased income for fictitious losses claimed
from the partnership, and reduced itemized deductions by the
amount of State taxes claimëd on the fictitious Forms W-2.
For
each year the corrected tax liability was less than the tax shown
- 7 on the return petitioner filed if claimed prepayment tax credits
were ignored.
However, section 1.6664-2(c) (1) and (g), Example (.3), ,Income
Tax Regs., requires excess withholding tax credits to be included
in determining an underpayment under section 6663.
Accordingly,
the notices of deficiency determined fraud penalties under
section 6663 based upon underpayments of income tax pursuant to
section 6664 of $104,642,
$78,073 for 1992,
1993,
$75,584,
1994,
$58,087,
1995,
1996,
$78,214,
$80,993, and
and 1997,
respectively.
On November 27, 2006, respondent assessed adjustments related to
petitioner's overstatement of withholding tax credits for each of
the years at issue through the mathematical error assessment
procedures of section 6213(b) (1) and section 301.6201-1(a) (3),
Proced. & Admin. Regs.
On February 22, 2007, petitioner sought redeterminations,
asserting that (1) pursuant to section 6501, the statute of
limitations applied to bar assessment for each of the years at
issue, and (2)
section 1.6664-2(c) (1)
and (g),
Example
(.3),
Income Tax Regs., -including petitioner's overstated withholding
tax credits in the calculation of his underpayments is invalid.
OPINION
I.
Period of Limitations on Assessment
Petitioner argues that the issuance of the notices of
deficiency was barred by section 6501(a).
Section 6501(a)
- 8 provides the general rule that the amount of any tax imposed must
be assessed within 3 years after the return is filed.
An
exception to the 3-year rule is provided in section 6501(c) (1):
(1) False Return.- In the rcase of a false or fraudulent
return with the intent to evade tax, the tax may be
assessed, or a proceeding in.court for collection of such
tax may be begun without assessment, at any time.
Respondent argues that the period of limitations in section
6501(a) does not apply because petitioner filed false returns
with the intent to evade taxes for the years at issue.
See sec.
6501(c) (1).
The burden of proof is upon respondent to prove that
petitioner has filed a false return with the intent to evade tax
for each year at issue.
See sec. 7454(a); Rule 142(b).
Because
direct evidence of an intent to evade tax is rarely available,
intent may be proved by circumstantial evidence and reasonable
inferences from the facts.
661,
699
Petzoldt v. Commissioner, 92 T.C.
(1989).
Petitioner pleaded guilty to willfully making and submitting
a false tax return for 1997 in violation of section 7206(1) and
admitted, in his plea agreement, that to obtain refunds he
falsified personal.tax returns for each of the years at issue by
attaching to his returns fictitious Forms W-2 which overstated
income tax withheld.
Throu hout the 6 years at issue,
petitioner was licensed as a certified public accountant
practicing in an accounting firm that prepared income tax returns
- 9 for clients.
He held himself out to the public as sophisticated
and knowledgeable in the preparation of tax returns.
He prepared
his own returns and those needed for businesses in which he had
invested.
Critically, petitioner falsified his own returns and Forms
W-2 for the businesses in the same manner for 6 consecutive years
and stopped only when confronted by the authorities.
On each of
his returns, among other things, he overstated and falsified (1)
partnership losses,
(2) itemized deductions for State taxes
withheld, and (3) Federal withholding credits.
Through his
conduct he obtained $320,078 in Federal refunds to which he was
not entitled over the 6-year period.
Petitioner testified that
he intended to pay back the refunds he received as soon as he
overcame troubles in his personal life, but there is no evidence
that petitioner at any; time made an effort to repay even after
his conduct was discovered.
Petitioner's explanation for his
behavior is implausible.
We find that respondent has shown by clear and convincing
evidence that petitioner filed his returns for the years at issue
with the intent to evade tax.
Fed. Cl. 214 (1996)
See Brister v. United.States, 35
(involving an accountant and bookkeeper who
overstated withholding credits to obtain refunds).
Therefore,
the 3-year period of limitations under section 6501(a) does not
- 10 apply for any of the years at issue, and respondent was not
barred from issuing the notices of deficiency for those years.
II.
Sections 6663 and 6664
Section 1.6664-2(c),
Income Tax
Regs.
Respondent has established that petitioner intended to evade
tax and thus engaged in fraudulent conduct.
However, before
there can be an imposition of a fraud penalty, respondent must
also prove that the fraud resulted in underpayments of tax
required to be shown on the returns.
Section 6663(a) sets out
the fraud penalty:
SEC. 6663 (a). Imposition of Penalty.--If any part of
any underpayment of tax required to be shown on a return is
due to fraud, there shall be added to the tax an amount
equal to 75 percent of othe portion of the underpayment which
is attributable to fraud.
The term "underpayment" is defined in section 6664(a) 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 without assessment), over
(2) the amount of rebates made.
For purposes of paragraph (2), the term "rebate" means so
much of an abatement, credit, refund, or other repayment, as
was made on the grounde that tax imposed was less than the
excess of the amount sbecified in paragraph (1) over the
rebates previously made.
Neither paragraph (1) (B) not (2) applies in this case.
- 11 Section 1.6664-2(c) (1), Income Tax Regs., interprets the
definition of "underpayment" in section 6664 by stating that -the
tax shown on the return -is reduced by the excess of:
(i) The amounts shown by the taxpayer on his
return as credits for tax withheld under section 31
(relating to tax withheld on wages) * * * over
(ii) The amounts actually withheld, * * * with
respect to a taxable year before the return is filed
for suoh taxable year.
The regulation extends the meaning of "underpayment" to include a
taxpayer's overstated credits for withholding.
Example (3), Income Tax Regs.
Sec. 1.6664-2(g),
Accordingly, if a taxpayer
overstates prepayment credits, such as the credit for wages
withheld, the overstatement decreases the amount of tàx shown on
the return and increases the underpayment of tax.
Commissioner,
113 T.C.
99,
103
Sadler v.
(1999).
Petitioner contends that section 1.6664-2(c) (1) and '(g),
Example (3), Income Tax Regs., is invalid because the statute
which it interprets, section 6664, does not refer to credits for
tax withheld, and it was not Congress' intent to include
withholding credits in the calculation of an underpayment.
Petitioner notes that repealed section 6653, Êhich previously had
imposed the fraud penalty, defined an underpayment with reference
to a deficiency as defined in section 6211.
Section 6211(b) (1)
excludes credits for taxes withheld'from the calculation of a
deficiency, and consequently such credits did not affect the
- 12 -
calculation of an underpayment under repealed section 6653(c).
Therefore, petitioner bases his argument in legislative history
that the definition of an underpayment in section 6664(a) as in
effect for the years at issue was "not intended to be
substantively different from * * *
101-247, at 1394
[previous]
law."
H. Rept.
(1989).
Respondent argues that Congress enacted a new penalty regime
and significantly reworded the definition of "underpayment" for
income tax purposes, thereby justifying the Secretary's
clarification of the treatment of overstated prepayment credits.
As a threshold matter, both parties agree that the
regulation was issued under section 7805(a
and is applicable to
the computation of the underpayments in the instant case.
Accordingly, our next step is to determine, whether the regulation
warrants judicial deference.
III.
Judicial Deference
Much ink has been spilled on the question of the level of
judicial deference to be afforded to regulations.
See, e.g.,
Berg, "Judicial Deference to Tax Regulations: A Reconsideration
in Light of National Cable, Swallows Holding, and Other
Developments", 61 Tax Law. á81 (2008).
The Court of Appeals for
the Sixth Circuit, to which(any appeal of this case would lie
absent a written stipulation to the contrary, has held that
regulations issued under the general authority of the Secretary
- 13 to promulgate necessary rules, with notice and comment
procedures, are entitled to judicial deference as outlined by the
U.S. Supreme Court in Chevron U.S.A. Inc. v. Natural Res. Def.
Council,
v.
Inc.,
467 U.S.
Commissioner,
54 T.C.
837
(1984).
See sec.
7482(b) (2); Golsen
742
(1970),
affd. 445 F.2d 985
Cir.
1971); Estate of Timken v. United States,
435
(6th Cir.
2010); Estate of Gerson v. Commissioner,
435
(6th Cir.
2007)", affg.
127 T.C.
139
(10th
601 F.3d 431,
434-
507 F.3d
(2006).
In Chevron, the Supreme Court addressed the circumstances in
which the judiciary is to afford an agency discretion to
interpret the statutes the agency administers.
In what is
commonly referred to as the two-step "Chevron analysis", the
Supreme Court stated:
When a court reviews an agency's construction of
the statute which it administers, it is confronted with
two questions.
First, always, is the question whether
Congress has directly spoken to the precise question at
issue.
If the intent of Congress is clear, that is the
end of the matter; for the court, as well as the
agency, must give effect to the unambiguously expressed
intent of Congress.
If, however, the court determines
Congress has not directly addressed the precise
question at iàsue, the court does not simply impose its
own construction on the statute, as would be necessary
in the absence of an administrative interpretation.
Rather, if the statute is silent or ambiguous with
respect to the specific issue, the question for the
court is whether the agency's answer is based on a
permissible construction of the statute.
Id. at 842-843
(fn. refs. omitted).
Chevron step 1 requires us
to determine whether the statute.clearly expresses the intent of
Congress.
If the statute is silent or ambiguous with respect to
- 14 the specific issue before the Court, Chevron step 2 requires us
to determine whether the regulation is based upon a permissible
construction of the statute.
"[T]he cardinal rule [is] that a statute is to be read as a
whole * * * since the meaning of statutory language, plain or
not, depends on context."
215,
221
(1991).
King v. St. Vincent's Hosp., 502 U.S.
Sections 6663 and 6664 impose a fraud penalty
when taxpayers, with intent to evade, underpay the income tax
shown on their returns.
We will examine the language and history
of those sections to determine what the term "underpayment" means
in the context of a fraud statute.
The examination requires us
to analyze the definitions of a "deficiency" and of an
"underpayment" and their interrelationship,
if any, in
I
interpreting sections 6663 and 6664.
We must consider whether an
underpayment can exist without a deficiency.
The definition of a deficiency in section 6211(a) as it
relates to income tax has rëmained essentially unchanged since
the 1954 codification of the internal revenue laws.4
The basic
*SEC. 6211. DEFINITION ÎOF A DEFICIENCY.
I
(a) In General.--For purposes of this title * * * the
term "deficiency" meaná the amount by which the tax imposed
by Subtitle A or B * * * exceeds the excess of-(1) the sum of
(A) the amount shown as the tax by the
taxpayer upon his return, if a return was made by
(continued...)
- 15 formula is to determine the correct tax and reduce it by the tax
reported by the taxpayer.
deficiency.
The 'resulting amount is the
In calculating the deficiency, estimated tax
payments and withholding credits are ignored.
Sec. 6211(b) (1).
The definition of an underpayment -for purposes of the civil
fraud penalty remained unchanged from the 1954 codification of
the Internal Revenue Code until 1989.
In 1989 Congress repealed
sections of the Code;" including section 6653, that imposed
accuracy-related penalties, and neplaced them with sections 6662
through 6665.
Omnibus Budget Reconciliation Act of 1989, Pub. L.
101-239,
7721(a),
sec.
103 Stat.
2395.
Congress' primary focus
4(...continued)
the taxpayer and an amount was shown as the tax by
the taxpayer thereon, plus
(B) the amount previously assessed (or
collected without assessment) as a deficiency,
over-(2) the amount of rebates, as defined ¯in
subsection (b) (2), made.
(b)
Rules for Application of Subsection (a).--For
purposes of this section-(1) The tax imposed by subtitle A and the tax
shown on the return shall both be determined without
regard to payment on account of estimated tax, without
regard to the credit under section 31 * * *
sSecs. 6653, 6659, 6659A, 6660, and 6661. Omnibus Budget
Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(c), 103
Stat. 2399.
6662.
Sec. 6662 was stricken and replaced by -a new sec.
Id. sec. 7721(a), 103 Stat. 2395.
-
16
-
in enacting a new penalty regime was to alleviate taxpayer
confusion and the difficulties of administration of several
different penalties relatingjto the accuracy of a tax return.
Rept. 101-247, supra at 13883
H.
The House report also stated that
the definition of "underpayment" in section 6664(a) was not
"intended to be substantively different from * * * [previous]
law."
Id. at 1394.
Repealed section 6653 (b) (1) provided that if any part of any
underpayment (as defined in subsection (c)) of tax required to be
shown on a return was due to fraud, certain penalties applied.'
Section 6653(c) tied the definition of an underpayment to the
definition of a deficiency.
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 caåe of a tax to which section 6211
(relating to incode, estate, gift, and certain excise
taxes) is applicable, a deficiency as defined in that
section (except that, for this purpose, the tax shown
on a return referÿed to in section 6211(a) (1) (A) shall
be taken into account only if such return was filed on
or before the last day prescribed for the filing of
such return, determined with regard to any extension of
time for such filing) * * *
The basic formula (correct tax - reported tax = underpayment)
applied and, because of the application of section 6211(b) (1),
'The amount of penalty was increased in stages over the
years from 50 percent of the underpayment to 75 percent of the
underpayment and 50 percent of the interest payable under sec.
6601.
- 17 -
estimated payments and withholding credits did not enter into the
calculation.
Sections 6663 and 6664 replaced repealed section 6653.
For
convenience, we again set out the pertinent portions of sections
6663 and 6664.
Section 6663(a) deals with imposition of the
fraud penalty:
SEC. 6663(a). Imposition of Penalty.--If any part of
any underpayment of tax required to be shown on a return is
due to fraud, there shall be added to the tax an amount
equal to 75 percent of the portion of the underpayment which
is attributable .to fraud.
The term "underpayment" is defined in section 6664(a) as 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, * * *
The basic formula (correct tax - reported tax = underpayment) is
retained and, to that extent, the definition of an underpayment
is not substantively different from previous law.
In a case
involving a deficiency and fraud in which no excess withholding
credits are claimed, the calculation of an underpayment is
unchanged.
In that context, the terms "deficiency" and
"underpayment" can be used interchangeably.
However, in a fraud case where there is no deficiency but
excess withholding credits have been claimed, as is the case
here, or in a fraud case where there is a deficiency and such
- 18 credits have been claimed
the effect -of the statutory changes;
in relation to the amount of any underpayment, is unclear from ,
sections 6663 and 6664 (a) or their face.
The definition of an
underpayment is no longer tied to the definition of a deficiency
under section 6211, as it hid been in section 6653 (c) , and the
restrictions in section 6211(b) (1) , excluding estimated tax and
withholding-credits from the calculation of a deficiency, no
longer apply to an underpay ent by explicit cross-reference.
Consequently, the statutes do not speak expressly to the precise
issue whether withholding c edits can be taken into account when
calculating an underpayment for purposes of sections 6663 and
6664 (a) .
Therefore, we find under Chevron step 1 that for the
determination of an underpayment, Congress seems to have retained
the basic formula (correct tax - reported tax = underpayment) in
section 6664 but has deleted the express cross-reference to the
definition of a deficiency in section 6211.
Section 6664 is
silent and ambiguous with respect to the issue before us; i.e.,
Congress has not directly addressed the meaning of the term
"underpayment" when a taxpayer has overstated withholding
credits.
The Secretary has promulgated section 1.6664-2 (c) (1) and
(g), Example (1), Income Tax Regs., to address the issue.
Under
Chevron step 2 we must determine whether the regulation is based
- -19 upon a permissible construction of the statute.
We "need not
conclude that the agency construction was the only one it:
permissibly could have adopted toruphold the construction, or
even the reading * * *
[we] would have reached if the question
had arisen in a judicial proceeding."
Chevron U.S.A. Inc. v.
Natural Res. Def. Council, Inc., 467 U.S. at 843 n.11..
Rather,
"considerable weight should be accorded to an executive
department's construction of a statutory scheme it is entrusted
to administer."
Id. at 844.
The Court should not disturb the
agency's action unless it appears from the statute.or its
legislative history that it is one that Congress would not have
sanctioned.
Id. at 845.
On March 4, 1991, the Federal Register published a notice of
proposed rulemaking regarding the accuracy-related penalty under
section 6662; the fraud penalty under section 6663, and the
definitions and rules for purposes of both penalties under section 6664.
See Notice of Proposed Rulemaking, 56 Fed. Reg.
8943 (Mar. 4, 1991).
explained that:
The preamble to the proposed regulations
(1) Overstated prepayment credits increase the
amount of an underpayment but have no effect on the calculation
of a deficiency;
(2) whether a position with respect to an item
has substantial authority or is disclosed on a return is relevant
to the determination of the amount of a deficiency, but not to
the determination of the amount of an underpayment; and (3) the
a - 20 -
amount of an underpayment ià reduced by amounts not shown on the
return-that have been previdusly assessed (or collected without
assessment),.but the amount of a deficiency is not.
Commentators on the propose
Id. at-8947.
regulation objected to factoring in
overstated prepayment credits in the calculation of the
underpayment.
The basis of their objection was that the
overstated:prepayment credi s are not taken into -account ins
computing the amount of a.déficiency under section 6211. 3 = A public hearing was held on June 3, 1991.
The proposed regulatio s were adopted and published as final
regulations.on December 31, å991.
T.D.
8381,
1992-1 C.B.
374.
The preamble to the accuracf-related penalty final regulations
rejected the position of the commentators and-stated:
"There are
differences in the section 6664 definition of 'underpayment' and
the section 6211-definition of 'deficienay', that warrant taking
overstated prepayment credits into account for purposes of the
accuracy-related penalty."
Id., 1992-1 C.B. at 379.
For convenience, we will again set out the pertinentiportion
of the regulations.
Sectio
1.6664-2(c) (1), Income Tax Regs.,
interprets the definition of "underpayment" in section 6664 by
stating that the tax shown on the return.is reduced by the excess
of:
(i) The amounts sÑown by the taxpayer 'on his
return as credits for dax withheld under section 31
(relating to tax withhéld on wages) * * * over
- 21 -
(ii) The amounts actually withheld, * * * with
respect to a taxable year before the return is filed
for such taxable year.
Petitioner contends athat the regulation is inconsistent with
congressional intent."
He stresses the House report which stated
that the definition of "underpayment" in section 6664(a) was not
"intended to be'substantively different from * * *
law."
H. Rept. 101-247, supra at 1394.
[previous]
On the basis of that
statement, petitioner argues that the definition of an
underpayment, as contemplated by section 6664, should not be
different from what it was under section 6653(c) and thus
withholding credits should be excluded from the computation of an
underpayment.
We disagree with petitioner's position.
Neither section
6664(a) nor the -regulation differs substantively from prior law.
The basic formula (correct tax - reported tax = underpayment) is
retained,' and in cases involving a deficiency in which no excess
withholding credits are claimed, the calculation of an
underpayment, for purposes of section 6664 and its regulations,
7Petitioner cites several cases in support of the
proposition that the term "underpayment" is equivalent to the
term "deficiency" under current law. See Estate of Capehart v.
Commissioner,
125 T.C. 211, 224
(2005); Downing v.
Commissioner, T.C. Memo. 2005-73, supplementing T.C. Memo. 2003347; Estate of Johnson v. Commissioner, T.C. Memo. 2001-182,
affd. 129 Fed. Appx. 597 (11th Cir. 2005).
Each of these cases
dealt with a situation in which the taxpayer's underpayment under
sec. 6664 also constituted the deficiency under sec. 6211. None
dealt with the overstatement of prepayment credits.
- 22 -
is no different from what i
would have been under former section
6653(c) (1).
If Congress had intend d the old and the:new penalty-regimes
to be identical in every respect,- we may infer that it twould have
1
equated the term."underpayme'nt" with "deficiency" and carried
forward section 6653(c) (1)
Congress did not do so.
erbatim into section 6664(a).
Co gress has amended section 6664 on,
three occasions but has not faltered the definition of-the term,
"underpayment" in response do the regulation.
See Pension
Protection Act of 2006,
1219,
Pub.t| L.
1083,; 'Gulf Opportunity Zone
109-280,
sec.
ct of 2005,e Pub. L.
120 Stat.s
109-135,
sec.
403, 119 Stat. 2615; Americ n Jobs Creation Act of 2004, Pub. L.
108-357, sec. 812, 118 Stat
1577.
The Secretary has folldwed Congress' intent to carve out a
specialized set of rules fo
accuracy of a return.
the penalties applicable to the
The application of the regulation is by
its terms specifically limi ed to underpayments for purposes of
section 6662
(relating to tNe accuracy-related penalty) and
section 6663
(relating to the fraud penalty) for purposes of
income taxes imposed under
ubtitle A.
-
Sec. 1.6664-2(a), Income
"One salient change was the'omission from the'new statute of
the parenthetical clause foùnd in sec. 6653(c), under which the
tax shown on a late return did not count. This created a gap
that- the Secretary has fillåd-by regulations taking account of
the tax.shown on a "qualifidd amended return." Sec. 1;66642(c) (2) and (3),
Income Tax Regs.
- 23 -
Tax Regs.
By fleshing out the mechanics' of what factors into the
section 6664 underpayment calculation when a deficiency is not
present, it promotes fairness in the'administration of the
penalties.
It also facilitates the stàndardization of the
reasonable cause/good faith exception criteria for the
application of all accuracy-related penalties.
Our examination of whether the regulation is based on a
permissible construction of section 6664 reveals that the
Secretary réasonably construed the
regulation.
taEute"throágh the
Accordingly, we hold the regulation to be valid.
See Estate of Gerson v.
Commissioner,
507 F.3d at 441.
If the Commissioner proves that any portion of an
underpayment is due to fraud, the entire underpayment will be
treated as attributable to fraud for purposes of the penalty
under section 6663 (b), except any portion of the underpayment
that the taxpayer establishes by a preponderance of the evidence
is not attributable to fraud.
2005-6.
Knauss v. Commissioner, T.C. Memo.
Respondent has proved that petitioner committed fraud in
filing his returns for the years at issue.
Petitioner has not
shown that any portion of the underpayment in any year at issue
is not attributable to fraud.
Therefore, the underpayments for
the years at issue are subject in their entirety to fraud
penalties.
Sec.
6663(b).
-
24
-
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not imentioned above, we
conclude they are moot, -irr levant, or without merit.
To reflect the foregoir g,
Decision will be entered
f or respondent .
Reviewed by the Court .
COLVIN,
COHEN, WELLS,
GALE
THORNTON, GOEKE, KROUPA, HOLMES,
PARIS, and MORNISON, JJ., acree with this majority opinion.
L
is
- 25 THORNTON, J., concurring:
I agree with the majority opinion
and write separately to respond to some of the dissenters'
concerns.
Judge Gustafson contends that section 1.6664-2(c) (1), Income
Tax Regs., contradicts the plain meaning of section 6664(a) (1) (A)
by defining "the amount shown as the tax by the taxpayer on his
return" so as to remove excess withhol_ding credits.
respectfully disagree.
I
As explained in more detail below, the
Code authorizes the IRS to process an assessment to recover or
disallow excess withholding credits as an adjustment to the tax
shown on the return on which the credit was claimed.
Consistent
with those provisions, the regulation permissibly treats the
amount shown on the return as reflecting such an adjustment.
The IRS summarily assessed petitioner's erroneous refunds
pursuant to section 6201(a) (3), which authorizes assessment of
excess ("overstated") withholding credits in generally the same
manner as mathematical or clerical errors (for simplicity, math
errors):
If on any return or claim for refund of income taxes
under subtitle A there is an overstatement of the
credit for income tax withheld at the source, or of the
amount paid as estimated income tax, the amount so
overstated which is allowed against the tax shown on
the return or which is allowed as a credit or refund
may be assessed by the Secretary in the same manner as
in the case of a mathematical or clerical error
appearing upon the return, except that the provisions
of section 6213(b) (2) (relating to abatement of
mathematical or clerical error assessments) shall not
- 26 apply with regard to any assessment under this
paragraph.
The contemporaneous 1954 legislative history sheds some
light on this provision:
Under this new paragraph refunds caused by erroneous
prepayment credits may e recovered by assessment in
the same manner as in dhe case of a mathematical error
on the return.
For exa nple, assume a da'se in which the
tax shown on the return is $100, the claimed prepayment
credit is $125, and refund of $25 is made, and that it
is later determined that the prepayment credits should
have been only $70 . Ur der existing law, $30 (the tax of $100 as shown on the return less the $70 credit) can
be immediately assessed as tax shown on the return
which was not paid, but the remaining $25 must be
recovered by suit in'cdurt.
Under the new provision,- the entire $55 can be assessed and collected.
[H.
Rept.
1337,
83d Cong.,
2d Sess. A404
(1954) .]
As this history indicates, the legislative impetus for
section 6201(a) (3) was the
erceived need to give the IRS a
means, previously lacking,
f recouping erroneous refunds
at~tributable to overstated
ithholding credits without having to
Šile suÎt.'
The legialative solution, 'as effected in section
6201(a) (3), was to permit tle IRS to assess,
"in the same manner
as in the case of a mathematical or clerical error appeariný upon
the return, " not only the e roneous refund ($25 in the above
example) , but also the amou t of òverstated withholding credits
that the IRS had previously "allowed" against the tax shown on
- 27 -
the return but that had not generated a refund ($30 in the
»
example).
Section 6201(a) (3) authoriies ovanstated withholding credits
to be "assessed".
And because under secti'on 6201(a) the IRS'
assessment authority pertains only to "taxes", 'it follows that
assessment of overstated withholding credits under'section
6201(a) (3) is properly considered as assessment of additional
taxes.3
Furthermore, because. section 6213 (b) is the only Code
provision that expressly addresses the process for making
9M: first blush it may seem paradoxical to speak, as dòes
sec. 6201(a) (3), of an "overstated" withholding credit as being
"allowed".
One would not ordinarily think of an "overstated"
amount as being allowed or allowable. .But from the example in
the above-quoted legislative history it seems clear that the
withholding credits were "allowed" only provisionally until the
IRS "later determined" that they were overstated.
Ultimately,
the overstated withholding credits, by virtue of being
overstated, were not in fact "allowéd" but instead were made
subject to the summary assessment provisions of sec. 6201(a) (3).
Similarly, although the statute refers to overstatements as being
"allowed against the tax shown on ,the return", and hence (as ,
Judge Gustafson notes) as being di'stinct from the tax shown on
the return, this phrase merely describes which "allowed"
"overstated" amounts are made subject to the operation of sec.
6201(a) (3). The more meaningful consideration is the effect of
the statute's operation upon these amounts. As described in more
detail infra, in permitting these overstated amounts to be
assessed in the same manne'r as math errors "appearing upon on the
return", the effect of sec. 6201(a) (3) is to treat the overstated
withholding credits as part of*the amount shown (erroneously) on
the return.
TIndeed, in the example in the legislative history, in order
to recoup the $25 erroneous refund in the manner provided in sec.
6201(a) (3), the IRS must assess not only the original $100 shown
on the return but also the $25 associated with the erroneous
refund, as an additional amount of tax.
- 28 assessments arising out of math errors, it is reasonable to
conclude that section 6201(a) (3), in directing that overstated
withholding credits may be assessed "in the same manner as in the
case of a mathematical or clerical error appearing upon the
return," means in the same a nner as -described in section
6213 (b) .
Otherwise , this directive would not . be .meaning ful .
Consequently, we look to section 6213 (b) for guidance.
Pursuant to section 6213 (b) (1) y summary assessment is -
--
permitted (i.e., the restrictions applicable to deficiencies are
made inapplicable) if a math error on a return gives rise to 'an
amount of tax "in excess of that shown on the return" .
From this
phrase it is clear that the tax "shown on the return" is the
amount the taxpayer has sho n oå thè r$turn before any adjustment
is made to correct the math error; i.e., the amount "shown.on the
return" is the amount that reflects the math error.
Because
there is no suggestion in tl e Code that the amount of tax "shown
on the return" should mean
iffîrent things in different
sections, the same analysis holds true in determining the impact
of a math error on the tax "shown * * *
section 6211(a)'(1)
(definin
amoünt of tax shown on thé
[on the] return" under
"deficiency" by reference to the
eturn) and section 6664 (a) (1)
(defining "underpayment" by reference to the amount of tax shown
on the' return) .
- 29 -
Furthermore, because section 6201(a) (3) directs that
overstated withholding credits be assessed in the same manner as
math errors, it is reasonable to conclude that the.same analysis
holds true for overstated withholding credits.
In other words,
for overstated withholding credits under section 6201(a) (3), as
for other types of math errors under section 6213 (b) (1), summary
assessment is permitted if overstated withholding credits give
rise to an amount of tax "in excess of that shown on the return".
Sec. 6213 (b) (1).
As with math errors, this means that the amount
of tax "shown on the return" is the amount shown by the taxpayer
that reflects the overstated withholding credits.
Again, absent
some contrary statutory signal, it is reasonable to conclude that
this result carries over to section 6664(a) (1), where tax "shown
* * *
[on the] return" is a relevant consideration.3
In short,
under this statutory framework the "amount shown as the tax by
the taxpayer on his return" under section 6664(a) (1) (A) is the
amount that reflects reduction for excess withholding credits.
This is precisely the result achieved by the regulation.4
3A prominent example of a contrary statutory signal appears
in sec. 6211(b) (1), which expressly excludes withholding credits
from the amount "shown on the return".for purposes of determining
a deficiency. Although the old "underpayment" definition-of
former sec. 6653(c) (1) incorporated these provisions by crossreference, "this linkage between the sec. 6211 "deficiency"
definition and the current sec. 6664(a) definition was broken in
1989, as discussed in more detail infra.
4The effect is to increase the amount of the underpayment by
the amount of overstated withholding credits.
It might be noted
(continued...)
- 30 -
The legislative histor
of-section 6664(a) indicates that
its new (in 1989) definitio
of "underpayment" was not intended
to differs "substantively" from prior.law.
1394 (1989).
H. Rept. 101-247, at
But in the sa e sentence this-legislative history
states that the new definition was intended to "simplify and .
coordinate" diverse "underpfyment" definitions under former law.
Id.
And in fact the new "udderpayment" definition in section
6664(a) differs in various
ays.from the old "underpayment"
definitions which it replaced.5
present purposes, it differ
of special importance.for
from the former section 6653(c) (1)
definition by dropping the cross-reference to the section 6211
"deficiency" def-inition wit
its directive-that the "tax imposed"
and the :"tax -shown on the:réturn" should be "determined without
regard to" withholding cred ts, among other things.
(...continued)
.
1
that to be evenhanded the r gulation conversely permits unclaimed
but otherwise allowable witgholding credits to reduce the amount
of any underpayment.
See sdc. 1.6664-3(c), Income Tax Regs.
sThe new-"underpayment" definition in sec. 6664(a) replaced
at least two different "underpayment" definitions that appeared
in-these sections of.prior aw;
(1) Former sec. 6653(c) (1),
pertaining to additions to ax for negligence and fraud for
purposes of income, estate, gift, and certain excise taxes; and
(2) former sec. 6653(c) (2), pertaining, to additions to tax fornegligence and, fraud relating:to,taxes other than as described in
sec. 6653(c) (1). Of these dwo former "underpayment" definitions,
only the first incorporated by cross-reference the sec. 6211
"deficiency" definition with its directive that withholding taxes
should be disregarded in de ermining the "tax imposed" and the
"tax 'shown.on the return".
l
- 31 -
Judge Gustafson suggests that this striking difference
between these two "underpayment" definitions is of no
consequence.
Citing the 1944 legislative history of section
6211, he contends that the phrase "determined without regard to"
was meant merely to clarify that "refunds" of claimed
overpayments of withheld tax should not increase any deficiency.
He suggests that this "clarification" was omitted from the
section 6664(a)
"underpayment" definition merely because section
6664 defined "rebates" in such a manner as to eliminate the
former confusion about "refunds", making the phrase "determined
without regard to",redundant and unnecessary.'
pp.
See Gustafson op.
66-67.
But this analysis fails to take into account the problem of
erroneous refunds arising from overstated withholding credits.
As we have seen, Congress separately addressed that problem in
1954 with the enactment of section 6201(a) (3), authorizing the
IRS to process an assessment to recover or disallow excess
withholding credits as an adjustment to the income tax return on
which the credit was claimed..
The former section 6653(c) (1)
'Under this analysis it might be thought that the phrase
"determined without regard to" was also unnecessary and redundant
in sec. 6211, since it contains the same definition of "rebate"
as does sec.
language).
6664(a).
See secs.
6211(b) (2),
6664(a)
(flush
But of course interpretations that render statutory
language unnecessary or redundant are generally disfavored.
See
2A Singer & Singer, Sutherland Statutory Construction, sec. 46:6
(7th ed.
2007).
- 32 "underpayment" definition excluded such amounts from an
underpayment only by virtue of. the definition's express linkager
to the "determined without regard to" phrase of section 6211(b) .
The breaking of that linkage in -1-989 in the new sections6664 (a)
"underpayment" definition had the consequence of permitting 4
overstated withholding cred ts to be factored into an
underpayment, as provided b
the regulation.7 -
In the final analysis, "the amount shown as the tax by the
taxpayer on his return" is
term of art, as is the section
6664 (a) definition of "unde payment" of which it is a component.
That the meanings of these terms of art may not be immediately
plain on their face is attributable in part to the intricate
interplay of Code provision .
But the regulation is based upon a
construction of <these terms and of the larger statutory framework
that is, in my view, not merely permissible but correct.
For -
'For similar reasons, I) also respectfully disagree with
Judge Wherry's dissent, whi h depends in large measure on the
assumption that "the amount shown as the tax by the taxpayer on
his return" under sec. 6664 (a) (1) (A) cannot reflect any reduction
for excess withholding credits.
I also respectfully disagree
with certain technical aspe ts of Judge Wherry's analysis,
particularly his suggestion that overstated witihholding credité
are properly considered,amounts "collected without assessment"
under sec . 1. 6664 -2 (d) , Income Tax. Regs . , which pertains to sec .
31 credits which are. "allowable" . By definition, overstated
withholding credïts are not "allowable", and in all, likelihood
(as is true in the case befcre us) the amounts on which they are
predicated have never been ' collected" ; Properly construed, the
regulation does not give ri e to the "double-counting error" that
concerns Judge Wherry.
See Wherry op. p. 49.
- 33 -
these rèasons and the reasons stated sin the imajority opinion, the
regulation is valid.
COLVIN,
COHEN, GALE, MARVEL, GOEKE, KROUPA, HOLMES, and
HAINES, JJ;, agree with this concurring opinion.
- 34 -
WHERRY, _J. , dissenting:
I disagree with the majority to the
extent it holds section 1. 6664 -2 (c ) (1) , Income Tax Regs . ,
to obe
a permissible construction of section 6664 (a) (1) (A) , for, many of
the reasons Judge Gustafson Êartícùlates in his finely crafted ~
dissent .
Not only is section 1. $664 -2 (c ) (1) , Income Tax Regs . , at
variance with the statute it purports to interpret; it also
renders the totality of the Commissioner' s regulatory scheme, as
set f orth in section 1. 6664 -2, Income Tax Regs . , contradictory
and unreasonable.
I would, therefore, hold invalid section
1. 6664 -2 (c ) (1) , Income Tax 1(egs . , and certain regulatory examples
inextricably linked with it.
Ignoring these provisions, I find
that the remainder of sectiÊn 1.6664-2, Income Tax Regs., is
sufficiently consistent, bogh with the statute and among its
i
constituent parts, to sustain a section 6663 civil fraud penalty
Sec. 1.6664-2(c), Incoöle Tax Regs., was adopted on Jan. 9,
2007, pursuant to T.D. 9309, 2007-1 C.B. 497, which also removed
sec. 1.6664-2T, Temporary Ir come Tax Regs., 70 Fed. Reg. 10037
(March 2, 2005).
The latte , in turn, had replaced the prior
f inal regulation, sec . 1. 6664 -2 (c) , Income Tax Regs . , adopted on
Dec. 31, 1991, pursuant to 3.D. 8381, 1992-1 C.B. 374.
The
temporary regulation, issued to modify the rules relating to
qualified amended returns cdntained in the prior final
regulation, had retained pa . (c) (1) of that regulation
unchanged. The current version of sec. 1.6664-2(c) (1), Income
Tax Regs., adopted on Jan. i, 2007, is identical to the version
adopted on Dec. 31, 1991, ard in effect during the tax years at
issue. Also, "both parties agree that the regulation * * * is
applicable to the computaticn of the underpayments in the instant
case." See majority op. p. 12.
2See infra note 9.
35 -
here .
I would, however, aimpose that epenalty not on the entire
amount by which petitioner overstated-his -withho]/ding credits,
but only on the -portion of the ovérstated withnolding credists
that he fraudulently claimed and received as a refund.
Openiñq the - Door to Withholdinq - Credit s
The majority asserts, without explanation, that "Neither
paragrapli (1) (B) "[of section 666d. rèlating to amountiä collected
without assessment]Gnož (2)
applies in this "case:"
[of seátiön 6664 'relat ing do rebates]
See majority cú. p." 1Ó.
The majority,
thus, ,icceptin respóndent' s claini~that - in -each ò'Î petitioner' s tax
years .at issùe the aniodnt of a section 6664 (a) (2) rebåte Êiaá,
respectively; zéro
In faisling torsúßject this claim"to
scrutiny, t he-majo ity lias *denied-itse'lf the'toþportùnity to
appreaiáte the"áreativity-and 'comp]existy underlying section
1.6664123(d)
Inicome Tá
Rees.
'Ì'his'séction of thi tegulaéîons is
not rientionedain either petitidridr' s orNespondent ' s briefs Ùut,
nonetheless, constitútés the baÃis~ for arriving at respondent's
result - under sectic n 1 a66442 (c ) (1)
I làome Tak Regs . , "which
petitioner challenges and 'respondeíît def ends .
Siding with respondent, the majority accurately observes
that
"the ståtütes do not espeak expiessly to the precise issue
whether eitnho!Lding credits can be talken into account when
caldulating an'ùnderpayment for
6664 (a) . "
urposes of sections 6663 and
See "majority op. ý . -18 .
I suggest thát "responderit
- 36 finds the - statutory hook fo
his regulatory innovation not in
section 6664 (a) (1) (A) , whose plain meaning, as Judge Gustafson
points out,- could hardly be clearer, but instead in section
6664 (a) (1) (B),.
A.
Section 6664 (a) (1) (B) , Not Section 6664 (a) (1) (A) , Turns
the Key
,Section 6664 (a),(1) (A)
plicates the operative language of
section 6211(a) (1) (A) , the p rallel provision in the definition
of deficiency ("the amount shown as the tax by the taxpayer on
his return"-) .
In contrast, section 6664 (a) (1) (B) uses words
slightly4different from-thos
section 6211(a) (1) (B) .,
of its deficiency counterpart,
Whereas section 6664 (a) (1) (B)
"amounts not so shown previ
specifies
sly assessed (or collected without
assessment) ", section 6211(a) (1) (B) refers to "amounts previously
assessed (or collected with
(Emphasis - supplied . )
t assessment)-- as a deficiency".
When compared with section 6211 (a) (1) (B) ,
section. 6664 (a) (1) (B) contains the additional qualifying phrase
"not so shown" before "previously assessed" but omits the
qualifying phrase "as a deficiency" after the parenthetical " (or
collected without assessment ) " .
Rely.ing on that omission, the Commissioner has concludedrin
sec tion 1. 6664 -2 (d) ,- Income Tax Regs . , that the additional -
a
qualifier "not so shown" -in section 6664 (a) (1) (B) does not apply
to the parenthetical " (or collected without assessment)," .
In
-= 37 -
other words, the Commissioner reads section 6664(a) (1) (:B) as
referring to two different kinds of amounts:
(1) Those not shown
on the return that were previously assessed; and (2) those that
were collected without assessment.
This taxonomy, in turn,
allows the Commissioner to define the latter amounts as
the amount by which the total of the credits allowable
under section 31 (relating to tax withheld on wages)
and section 33 (relating to tax withheld at source on
nonresident aliens and foreign corporations), estimated
tax payments, and other payments in satisfaction of tax
liability made before the return is filed, exceed the
tax shown on the return (provided such excess has not
been refunded or allowed as a credit to the taxpayer).
Sec.
1.6664-2(d),
Income Tax Regs.
Section 6664(a) (1) (B), and its differences with section
6211(a) (1) (B), creates an opening, through which the Commissioner
has dragged withholding credits'into the equation for calculating
an underpayment.3
B.
Withholding Credit Is Amount Collected Without
Assessment Except When I Say It Is Not
Unfortunately for the Commissioner, neither the preamble to
the proposed or final regulations nor the regulations themselves
3As evidence, consider the preamble to the proposed
regulations, which had justified the inclusion of withholding
credits in amounts collected without assessment under sec.
6664(a) (1) (B), even though such credits are excluded under sec.
6211(a) (1) (B), by arguing that the amount of an underpayment is
reduced by amounts collected without assessment whereas the
amount of a deficiency is not. Notice of Proposed Rulemaking, 56
Fed. Reg. 8947
(Mar. 4,
1991).
- 38 -
clarify why including withh lding credits in amounts -collected
without assessment, under s ction 6664 (a) (1) (B) ,ealso requires
that we reduce amounts show
as tax under section 6664 (a) (1) (A)
by any overstated withholding credits.
Even worse, under the
plain meaning of the Commissioner' s own regulations, in a case
where there is no deficienc
as defined in section 6211(a) , a
refund of overstated withholding credits would constitute a
rebate under section 6664 (a) (2) .
Consequently, the regulations
would count this refunded a ount twice in calculating an
underpayment, once by reducing the amount shonn 'as the tax
pursuant to section 1.6664-2(a) and (c) (1), Income Tax Regs., and
then again as a rebate pursdant to section 1.6664-2(a) and (e),
Income Tax Regs .
Respondent tries to dis vow,this anomalous effect of his own
handiwork.
Respondent's po ttrial brief and section 1.6664-2(g),
Example s (1) and (.3_) , Income Tax Regs . , imply that when
withholding credits are ref nded,- they cease to be aniounts
collected without assessmenth and this cessation -somehow has
retroactive effect so that the refund does not constitute a
rebate within the meaning of section 6664 (a) (2) .
Reaching this
conclusion, however, requir s reversing the laws of space and
time, the rules of logic and grammar, and the force of our own
precedent.
- 39 -
Respondent presumably relies on the parenthetical "(provided
such excess has not been refunded or allowed as a credit tò the
taxpayer)" in section 1.6664-2(d), Income Tax Regs., to conclude
that when withholding credits are refunded, they no longer
constitute amounts collected without assessment.
Therefore,
according to respondent, the refund cannot be a rebate under
section 6664(a) (2).
This flies in the face of the obvious
implication of the regulatory text itself that until such time as
a withholding credit is refunded, it remains an amount collected
without assessment.
In fact, section 1.6664-2(g), Example (2),
Income Tax Regs., suggests as much.
It should follow that as
long as the tax shown on the return is no less than the tax
imposed, so that there is no deficiency under section 6211(a),
any refund of the withholding credit could only have been "made
on the ground that the tax imposed was less than * * * Amounts
not so shown previously assessed (or collected without
assessment)".
C.
Sec. 1.6664-2(e), Income Tax Regs.
In A Galaxy Far,
Far Away
Respondent appears to construct a multiverse version of
reality in which the moment a withholding credit is refunded, it
enters a parallel universe, as it were, where the refunded amount
was never an amount collected without assessment to begin with.
Tax law, alas, must inhabit our universe where the arrow of time
can move in only one direction and cause must precede its effect.
- 40 -
If a withholding credit is
n amount collected without
assessment, then it must re ain so until it is refunded.
And if
the refund, when made, is m de on the ground that the tax imposed
is less than the amount of
ithholding credits, then that refund
must constitute a rebate under section 6664(a) (2).»
Respondent's difficult
lies in the fact that the statutory
design envisions any amount collected without assessment as
potentially affecting the c lculation of an underpayment in two ways:
(1)
Negatively, unde
section 6664(a) (1) (B);~and (2)
positively, under section 6664(a) (2).* Because respondent has
included withholding credité in amounts collected without
*Sec. 6664(a) establish s the following relationshiþ between
underpayment and an amount ollected without assessment:
Underpayment equals th amount of tax imposed minus (the
amount shown as the tax by the taxpayer on his return plus all
amounts not so shown previodsly assessed, or collected without
assessment, minus the amounŠ of rebates made).
Sec. 1.6664-2(a), Incode Tax Regs., accurately represents
this relationship in the folilowing algebraic expression:
Underpayment = W - (X 4 Y - Z), where W - the amount of
income tax imposed; X y the amohnt shown as the tax by
the taxpayer on his redurn; Y = amounts not so shown
previously assessed (o collected without assessment);
and Z = the amount of ebates made.
Rearranging the terms yield
Underpayment =
the following equivalent expression:
(W + Z) 0- ,(X +, Y) .
It is easy to see that gua increase of $1 in the amount
collected without assessmen(increases- Y and, thereby, reduces
underpayment by $1.
Howeveä, to the extent that this $1 is
refunded "on the ground thad the tax imposed was less than the
excess of * * * [(X + Y)] o er the rebates previously made", sec.
6664(a) (2), the resulting i crease i:ba Z will increase
underpayment by the same amount.
- 41 assessment under section 6664(a) (1) (]B), his attempt to deny their
existence in computing a rebate under section 6664(a) (2) is
logically irreconcilable.
Grammar and our own precedent also undermine respondent's
cause.
The Commissioner's own words in the regulations refer to
the amount by which withholding credits "and other payments in
satisfaction of tax liability made before the return is -filed,
exceed the tax shown on the return (provided such excess has not
been refunded or allowed as a credit to the taxpayer)."
1.6664-2(d), Income Tax Regs.
(emphasis supplied).
Sec.
The use of
the present perfect tense in the parenthetical dictates that the
parenthetical apply at the time that the underpayment is
calculated.
We have long maintained that for purposes of the
civil fraud penalty, the base on which the penalty is imposed be
determined as of the time when the return is filed and not any
later time such as when the notice of deficiency is issued.
e.g., Stewart v. Commissioner, 66 T.C. 54
See,
(1976).
Underpinning such decisions was the rationale that
a taxpayer should not, after fraudulently understating
his tax liability, retain the power to avoid the fraud
penalty by the simple expedient of later paying the
remainder of his correct tax upon discovering his
return -was under audit. * * *
Id. at 58-59.
It would surely be perverse to allow respondent's
discretion in handling a refund claim to affect the amount of
petitioner's underpayment well after petitioner has filed his
return.
- 42 -
Clearly, then, so long
section 6211(a) , the plain
s a taxpayer has .no 'deficiency under
aning of the regulations' language
would cause a refund of a withholding credit to be a rebate under
section 6664 (a) (2) .5
Furthe , any refund that this taxpayer
obtains by overstating withh lding credits would also constitute
a section 6664 (a) (2) rebate since this refund must necessarily
have been "made on the grour d that the tax imposed was less than"
(emphasis supplied) the amou ts collected without assessment.
Sec. 6664 (a) .
In fact, the e could exist no other grounds for
making this refund.
II.
Taking the Blue Pencil to the Commissioner' s Drafting
Finally, to the case' of Rick D. Feller, where the notices of
deficiency,evidence "the absence of a section 6211-(a) defióiency
in .each of the tax years at issue.
For the reasons discussed
SA sec. 6211(a) deficie icy could arguably cause a rebate
under sec . 6664 (a) (2) to be smaller by the same amount .
To see
this, consider a situation here "the amount by which the tax
imposed * * * exceeds * * * the amount shown as the tax by the
taxpayer upon his return" is $1. This would create a deficiency
of $1 under sec . 6211 (a) .
It may be argued that this $1 could
not be included in "so much Êof * * * [a refund] as was made on
the ground that the tax impc sed was less than the excess of
* * * [ (X + Y) , as¯ defined Supra note 4] over the rebates
previously made . "
Sec . 666((a) .
Under this argument , any sec .
6664(a) (2) rebate would be reduced by $1. Even though a sec.
6211(a) deficiency may resuÈt in a smaller rebate under sec.
6664 (a) (2) , the sec . 6664 (a)i formula for underpayment would
automatically pick up the dåficiency to leave the amount of
underpayment, if any, uncharÍged. See supra note 4 for the
algebraic formula for computŠing the underpayment.
See also infra
note ,10, discussing the con0erse case, where the tax shown on the
return exceeds the tax iinposed, and infra note 11, deriving the
numerical results for such å converse case.
- 43 -
above, section 1.6664-2(d) and (e), Income Tax Regs., would cause
petitioner's section 6664(a) underpayment to include so much of
his overstated withholding credits that he claimed and received
as a refund.
However, if the challenged regulation, section
1.6664-2(c) (1), Income Tax Regs., is valid, we would consider the
overstatement of withholding credits yet again.
Specifically, we
would adjust ,the tax shown on -the return by subtracting from it
the entire amount of the overstated withholding credits.'
We
would then use this adjusted figure, rather than the actual tax
shown on the return, to calculate petitioner's underpayment.
The
refunded portion of the overstated withholding credits would,
'It is unclear from the regulations whether the challenged
adjustment under sec. 1.6664-2(c) (1),.Income Tax Regs., to the
amount of tax shown on the return also purports to cover the
calculation of a sec.
6664(a) (2)
rebate under sec.
1.6664-2(e),
Income Tax Regs.
Compare sec. 1.,6664-2(a) (1) (i), Income Tax
Regs. ("The amount shown as the tax by the taxpayer on his return
(as defined in paragraph (c) of this section)"), with sec.
1.6664-2(e) (1) (i), Income Tax Regs. ("The amount shown as the tax
by the taxpayer on his return" without a cross-reference to
"paragraph (c) of this section"). However, the final amount of
any sec. 6664(a) (2) rebate calculated under sec. 1.6664-2(e),
Income Tax Regs., would remain unchanged, whether or not sec.
1.6664-2(c) (1), Income Tax Regs., applies.
Applying sec. 1.6664-2(c) (1), Income Tax Regs., to this
calculation would have two equal and opposite effects that would
cancel each other out. On the one hand, the amount of tax shown
on the return under sec. 1.6664-2(e) (1) (i), Income Tax Regs.,
would be reduced by the amount of the challenged adjustment.
On
the other hand, however, amounts collected without assessment
under sec. 1.6664-2(e) (1) (ii), Income Tax Regs., would be
increased by the same amount.
See sec. 1.6664-2(d), Income Tax
Regs. (restricting amounts collected without assessment to those
that "exceed the tax shown on the return").
Since the
calculation of a sec. 6664(a) (2) rebate entails adding the
respective amounts under sec. 1.6664-2(e) (1) (i) and (ii), Income
Tax Regs., the net effect would be zero.
- 44 -
thus, be counted one more t me.7
This bizarre result is
untenable, and either secti n 1.6664-2(c) (1), Income Tax Regs.,
or both section 1.6664-2(c) (1) and (d), Income Tax Regs., must
give way."
'See infra note 11 showing such double-counting of
overstated withholding cred ts for petitioner's 1992 tax year.
®Quite apart from the d uble-counting of the refunded
portion of overstated withhclding credits, the challenged
adjustment under sec . 1. 666 -2 (c ) (1) , Income Tax Regs . ,
introduces another inconsist ency, and a potentially fatal one,
with the eremaining provisions of the m regulations . Unde& sec .
1.6664-2(d), Income Tax Regê., "amount 'collected without
assessment' is the amount b which * * * [withholding credits]
and other payments in satisfaction of tax liability made before
the return is filed, exceed the tax 'shown on the return (provided
such excess has not been refunded or allowed as a credit to the
taxpayer)."
(Emphasis supplied.)
Sec. 1.6664-2(c) (1), Income
Tax Regs . , says that the adjustment to the tax shown on the
return applies "For purposes of- paragraph (a) of this section" .
And though the term -"amount collected without assessment" is
fully defined only in sec. 1L6664-2(d), Income Tax Regs.,
"paragraph (a) of this sect(on" certainly mentions and uses it as
an input in the underpayment formula set forth there. A literal
reading of this applicabilit y provision would require the
challenged adjustment to be made to all the terms that go into
the underpayment f ormula of sec . 1. 6664 -2 (a) , Income Tax Regs . ,
including, amount collected ithout assessment . As a consequence,
depending upon the. fa'cts. of a particular situation, none, some or
all of the benefits that reápondent seeks from the challenged
adjustment in par. (a)
would have to be, given up in par. . (d) .
The results could be startling in a case, such as petitioner's,
where respondent has relied don the challenged adjustment to
reduce the amount shown as t ax to a negative number.
. ~
-Invalidat.ing sec .
1.-6664 -2 (a ) (1) ,
Income Tax- Regs . , would, , thus ,
confer the added benefit of precluding this self-defeating
construction and salvaging the remainder of sec. 1.6664-2, Income
Tax Regs .
By -comparison, invalid ting sec. 1.6664-2(d), Income Tax
Regs . , would eviscerate the entire regulatory venture . I do not
believe that in.the absence of sec. 1.6664-2(d), Income Tax
Regs . , sec . 1. 6664 -2 (c ) (1) , Income Tax Regs . , or for that matter,
any other provision of -sec. 01.6664-2, Income Tax Regs:, can stand
on its own since, as explained above, sec. 1.6664-2(d), Income
(continued. . . )
I agree with Judge Gustafson, that "section 6664 (a) (1) (A) is
not -ambiguous, and under the Supreme Court' s Chevron analysis,
the inquiry stops there."
Gustafson op. 7. 76.
"Moreover, as I
have shown, section 1.6664=2(c) (1), Income Tax'Regs., as
currently written, causes the Commissioner' s regulatory scheme to
generate results that are incorrect, illogical and incoherent.
I
would, therefore, invalidate sectional 6664-2 (c) (1) , Income Tax
Regs."
- However, I also believe that the omission of the phrase "as
a deficiency" in section 6664 (a) (1) (B) , when~compared with
section 6211(a) , leaves the former sufficiently ambiguous to
invite regulatory interpretation.
Under "step 2" of a Chevron
analysis, I would then consider whether the interpretation that
the Commissioner has provided in.section 1.6664-2(d), Income Tax
Regs,, 'is "based on a permissible construction of the statute."
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837,
843
(1984) .
The Commissioner' s interpretation is by no means "the only
one * * * .[he) permissibly could have adopted" .
Id. n.11.
But I
can find nothing in the statute that would indicate that Congress
( . . continued)
Tax Regs., is the provision that enables taking withholding
credit s into account in computing an underpayment .
"I would also invalidate sec-." 1.6664-2 (g) , Examples (.;1._) and
(3.) , Income Tax Regs . , holding them to be unreasonable and
impermi-ssible constructions of the Commissioner' s own text
contained in sec. 1.6664-2(d), Income Tax Regs.
- 46 -
would not have sanctioned idcluding withholding credits in
amounts previously collected without assessment.
See tid. at 845.
Further, as the majority dijcusses at length, there is-sufficient
legislative history to supp rt the proposition that Congress
wanted to distinguish an underpayment under section 6664 (a) from
a deficiency under section 6211(a) .
I would, therefore, defer to
respondent ' s interpre tation of sec tion 6664 (a) (1) (B) , which ,he
provides in section 1.6664-2(d), Income Tax Regs.
Applying the unambiguous plain language of that regulation
section to petitioner's cas( and tracing its consequences
sequentially through section 1.26664-2(e) and (a), Income Tax
Regs., I would find underpa ments in the amounts of the
overstated withholding credits claimed and received as refunds. °
I would, therefore, sustain a section 6663 civil fraud penalty
not on the entire amount by which petitioner overstated,his
withholding- credits for eacl tax year at issue but only on such
°Resþondent did Not de ermine a sec.
6211(a)
deficiency for
any of petitioner' s tax yea s at issue . However, for one or more
of these years petitioner had in fact overstated his tax
liability, so that the amoudt shown on the return exceeded the
tax imposed. Ceteris parib s, this would cause, a sec. 6664 (a) (2)
rebate to be larger by the amount of the overstatement . However,
the sec . 6664 (a) underpayme$t would remain unchanged in the
amount of the total refund. See infra note 11, establishing this
result for petitioner's 1992 tax year, where the amount shown as
tax did, in fact, exceed thd tax imposed. , Cf. supra note 5
(discussing the case of a säc. 6211(a) deficiency) .
- e
- 47 -
portion of the overstated withholding credits as he had claimed
and received as a refund."
"This is the exact amount that one obtains as a sec.
6664(a) underpayment by applying the formula set forth in sec.
1.666422(a) (2), Income Tax Regs., and discussed supra note 4,
without giving effect to the challenged adjustment under sec.
1.6664E2(c) (1), Income Tax Regs.' I formally demonstrate this
below for petitioner's 1992 tax year. I then show the impact of
the challenged adjustment on petitioner's 1992 underpayment
amount, highlighting the double-counting of the refunded portion
of the overstated withholding credits.
Finally, I compare
petitioner's 1992 underpayment amount, computed with and without
the challenged adjustment, to the underpayment that respondent
actually determined.
Recall from supra note 4 that the required inputs for the
underpayment formula are:
W = the amount of income tax imposed;
X = the amount shown as the tax by the taxpayer on his
return;
Y = amounts not so shown previously assessed (or collected
without assessment); and
Z = the amount òf rebates made.
For his 1992 tax year petitioner claimed and received a
refund of $86,181, $5,328 of which consisted of claimed excess
Social Security tax withheld.
The record is silent on the
legitimacy or otherwise of such claimed withholdings, and
respondent has not treated them as overstated withholdings in
applying the challenged adjustment under sec. 1.6664-2(c) (1),
Income Tax Regs.
For purposes of this exercise, therefore, I
will ignore the claimed excess Social Security withholdings and
assume a refund amount of $86/181 less $5,328, or $80,853.
Respondent determined petitioner's 1992 tax liability to be
$30,022, whereas petitioner had written a figure of ·$57,244 on
line 53 of his 1992 Form 1040, U.S. Individual Income Tax Return,
against the words "This is your total tax".
Petitioner claimed
withholdings of $138,097, of which $3,097 were actual and the
remaining $135,000 were fictitious. Thus, in the underpayment
formula, W is $30,022 and X is $57,244. Also, Y is zero and Z is
$108,075.
Note that Y consists of amounts actually collected without
assessment, but only to the extent they "exceed the tax shown on
the return". Sec. 1.6664-2(d), Income Tax Regs. Since actual
withholdings of $3,097 were less than the $57,244 of tax shown on
the return, Y is set to be zero.
Further, Z is the amount of'the
sec. 6664(a) (2) rebate, calculated pursuant to sec. 1.6664-2(e),
Income Tax Regs., as follows. The rebate would consist of the
(continued...)
- 48 -
"(...continued)
excess of the tax imposed over the amount specified in sec.
1.6664-2(e) (1), Income Tax Regs. The latter is the higher ~of the
amount shown as the tax, or $57, 244, and the total claimed
withholdings, or $138 , O97 . This yields :
$138, 0 97: - $30 , 022
$108,075, which is larger tlÏan the refund of $80,853 by exactly
the amount by which petitiorfer overstated his tax liability or
$27, 222 .
This $27, 222
(in Šddition to. the $8 0 , 853 refund)¿ is
also a rebate, and one trivially so in the sense ,that it is an abatement or credit of a sellf -reported and immediately assessable
tax,liability, and such abat ement or credit must necessarily have
been "made on the ground th t the tax imposed was less than the * * * [tax -shown on the return] " . . Sec . 1. 6664 -2 (e ) , Income
Tax Regs .
Begin with the formula for underpayment from supra note 4,
Underpayment
=
(W + Z) - (X + Y) .
Since Y is zero, the formul can be simplified,
Underpayment
=
W
Z - X.
The numbers for W, Z, and X, from above, are $30, 022,
$57, 244, and $108, 075, resp ctively. Plugging these numbers in
the formula,
Underpayment
=
=
=
W
Z - X
$30, 022 +,-$108, 075 - $57, 244
. $1 8, 097 - $57, 244 = $80, 853 .
The $80, 853 underpaymer t equals the amount of the refund and
this proves the claim made t the outset . Now, consider the
impact of the challenged adjustment under sec. 1.6664-2(c) (1),
Income Tax Regs . The adjust ment would reduce the amount of tax
shown on the return of $5'7, 44 by the fictitious withholdings of
$135, O O O and, thus , - arrive at à negative snumber f or X of
-$77,756. »The -numbers for , - Z, and Y would be unchanged; i.er,
$30 , 022, ,$108 , 075, and zero respectively . Plugging these
numbers in the formula
UncÌerpayment
=
W
Z - X .
=
$30 , 022 + $108, 075 $138, 097 + $77, 756 =
The $215,853 underpaym nt is larger than
fictitious withholdings by xactly .the refund
(-$77, 756)
$215, 853 .
the $135,000
amount of $80,853,
demonstrating that the refu ded portion of the fictitious
withholdings has been count d twice .
. e .
Respondent actually de ermined a 1992 underpayment amount
for petitioner of only $104 642. Presumably.under,authority -of
sec . 1. 6664-2 (g) , Example ( ) , Income Tax' Regs . , and
notwithstanding the plain långuage of sec : 1. 6664 -2 (d) , and (e ) /
Income Tax Regs., responden( declined to recognize the $80;853
refund as a sec . 6664 (a) (2) rebate . Curiously, respondent also
did not consider as a rebate the $27,222-by, which petitioner -had
(continued. . . )
-.49 -
III. Conclusion
I believe that the Commissioner could have drafted an
expanded version of the current section 1.6664-2(d), Income Tax
Regs., in a manner that delivered results mathematically
identical to those that section 1.666422(c) (1),
seeks to attain.
Income Tax Regs.,
He could have done so without the double-
counting error that plagues the current set of regulations.
Our
mandate, however, is to test the validity of the regulations as
the Commissioner has drafted them and seeks to apply them, not to
improve or improvise upon them in order to achieve a "just"
result.
I would hold section 1.6664-2(c) (1), Income Tax Regs.,
"(...continued)
overstated his 1992 tax liability. Petitioner had shown this
amount as tax, but respondent determined it not to be so and
chose not to assess it. Consequently, sec. 1.6664-2(g), Example
(1), Income Tax Regs., would not apply, and this amount would
appear to be a rebate, not just for sec. 6664(a) (2) purposes, but
even in the deficiency context. See sec. 6211(b) (2).
Ignoring
it as a rebate caused petitioner's 1992 underpayment to be lower
by $27,222.
Respondent's munificence to petitioner did not end there.
Instead of using the actual $57,244 figure that petitioner had
handwritten as his tax on his return, respondent used an "as
adjusted" amount of $60,380 as the tax shown.
We, and other
courts, have consistently held that a postfiling adjustment or
payment cannot mitigate a fraud that was perpetrated when the
return was filed.
See text supra between notes 4 and 5; see also
Badaracco v. Commissioner,
464 U.S.
386
(1984).
Taking a
postfiling adjustment of $3,136 into account caused petitioner's
1992 underpayment amount to be lower by the same amount.
In the underpayment formula, respondent set Z to be zero and
derived X as follows.
Starting with $60,380 as the tax shown,
respondent reduced that amount by the fictitious withholdings of
$135,000 and, thus, arrived at a negative number for X of
-$74,620. Plugging these numbers in the formula,
Underpayment
=
W + Z - X
=
=
$30,022 + $0 - (-$74,620)
$30,022 + $74,620 = $104,642.
- 50 -
to be an impermissible construction of section 6664 (a) (1),(A) .
respectfully dissent .
HALPERN and GUSTAFSON,
TJ. , agree with this dissent . -
.I
I
-
-51
GUSTAFSON, J., dissenting:
-
I would hold invalid the
regulation on which the fraud penalty at issue depends.
Section 6664(a) (1) (A) states an unambiguous term, i.e., "the
amount shown as the tax by the taxpayer on his return"; but the
IRS's corresponding regulation--26 C.F.R. section 1.6664-2(c) (1),
Income Tax Regs.--gives a definition that contradicts almost
every substantive word in that statutory term.
The regulation
modifies the term to mean an amount that-•
is not "shown" but rather has to be derived;
•
is not an amount of "tax" but rather is tax reduced by
excess credits;
•
is not shown "by the taxpayer" but rather is asserted
by the IRS as the result of its examination, in
contradiction of what was shown "by the taxpayer"; and
•
is not shown "on the return" but rather must be derived
from information that is not "on the return".
The regulation thereby undertakes to impose the penalty to an
extent that the statute does not.
I.
Introduction
Petitioner Rick D. Feller filed income tax returns for 1992
through 1997 on which he reported income tax liabilities greater
than he actually owed, because he incorrectly reported as wages
certain amounts that he did not in fact receive.
For example,
- 52 -
for 1992 he reported a tota] tax liability of $60, 380,1 whereas
the IRS determined that in fact he owed only $30, 022. , «That is,
Mr. Feller's returns overstated his total tax liability.
However, Mr. Feller also incorrectly reported, as Federal
tax withholding from wages, certain'amounts that were-not in fact
withheld from his
ages (be ause the wages were fictit ious) .
For
example, for 1992 he report d total tax withholding from wages as
$138,097, whereas only $3,097 was actually withheld
and $135;600
was a fraudulent overstatement of his withholding.
As a result,
Mr. Feller reported on his deturns net amounts due that were much
less than he actually owed.
That is, his returns understated his
net amount due to the IRS a d in fact claimed instead for 1992
(for example) a refund of $86,181.
When Mr. Feller was diåcovered, he pleaded guilty to
submitting a false tax retu n for one of the years in issue.
For
his crime he was sentenced t o 15 months in prison.
The IRS also determined against Mr. Feller a civil fraud.
penalty pursuant to section 6663 (a) , which penalty applies " [i] f
any part of any underpayment of tax required to be shown on a
return is due to fraud".
( mphasis added.)
The~ tierm
The actual amount of " otal tax" shown "on line ~53 of
Mr. Feller's 1992 return is $57,.244.58; but on line 19 of the
IRS's notice of deficiency the "Total tax shown on 'return or as
previously adjusted" is $60 380 . Presumably there are previous
adjustments that would accoùnt for the difference; but the record
does not show them.
For si plicity's sake and ease of
comparison, I use the IRS' s amount .
- 53 "underpayment" is defined in section 6664(a) of the Internal
Revenue Code and in section 1.6664-2(a) of the Income Tax
Regulations (26 C.F.R.).
This case turns on the meaning of
"underpayment" in section 6664(a), which in turn depends on the
meaning of the term "amount shown as the tax by the taxpayer on
his return" that appears in that statute.
II.
The statute and regulation at issue
A.
The statute:
section 6664(a)
Section 6664(a) defines the "underpayment" to which the
fraud penalty of section 6663(a) applies.
In simplified terms,
the "underpayment" is the excess of one's actual liability over
his reported liability--i.e., tax "imposed" minus tax "shown"
equals "underpayment".
Section 6664(a) provides as follows:
SEC. 6664(a).
Underpayment.--For purposes of this
part, the term "underpayment" means the amount by which
any tax imposed by this title exceeds the excess of-(1) the sum of-(A) the amount shown as the tax by the
taxpayer on his return, plus
(B) amounts not so shown previously
assessed (or collected without assessment),
over
(2) the amount of rebates made.
For purposes of paragraph (2), the term "rebate" means
so much of an abatement, credit, refund, or other
repayment, as was made on the ground that the tax
- 54 -
imposed was less than the excess of the amount
specified in paragraph (1) over the rebates previously
made."
This defiAition of "underpa ment" follows closely the definition
of a tax "deficiency" in se tion E211(a), employing terms useå in
that section ("tax imposed"
"exceeds the excess",
"amount
~
shown", "previously assessed"); and the definition of "rebate"
follows closely the definition of the÷same term in
section 6211(b) (2).
- However, unlike the definition of "underpayment" in
section 6664 (a) , the def init ion of "def iciency" in
section 6211(a)
is qualified by section 6211(b) (1), which
a
provides that "For purposes of this section [i.e., not "For
purposes of this title":] *
** [t]he tax imposed by subtitle A.
and the tax shown on the redurn shall both be determined * * *
2The definition of "reb te" in section 6664(a) incorporates
"the amount specified in pa agraph (1)", in which subparagraph
(A) lacks the phrase "as a deficiency" when compared to the
equivalent term in section 211(a) (1) (B). Whether this might
render a portion of the erroneous refunds made to Mr. Feller to
be rebates (and thus to inc ease the underpayment) is a question
the parties have not addresåed in any detail., Respondent makes
no contention that Mr. Fell r had any "amount of rebates made",
sec. 6664(a) (2), or any "amgunts not so shown previously assessed
(or collected without assessment)," sec.
6664(a) (1) (B), but
rather states in his calculŠtions that those amounts are zero.
I
therefore disregard rebates in this discussion and use the
shorthand definition of "underpayment" (i.e., tax "imposed" minus
tax "shown" equals "underpayment"). However, Judge Wherry shows
that respondent has a mista en understanding of section 6664(a)
"rebates" that wrongly equates them with section 6211(b) (2)
"rebates" despite the phraså "as a deficiency" that is present in
section 6211(b) (2) but is aßsent from section 6664(a). When this
error is corrected, the penalty appears to be owing on the
portion of the excess credi that was actually refunded.
- 55 -
without regard to the credit under section 31'[i.e.,
Withheld on Wages"]".
"Tax
Withholding credits are thus explicitly
excluded from the Code's "deficiency" equation; but the Code's
"underpayment" equation in section 6664(a) that is at issue here
does not mention withholding credits.
I
B.
The regulation:
26 C.F.R. section 1.6664-2
The regulation implementing the fraud penalty largely
repeats the definition of "underpayment" given in the statute.
Moreover, the regulation defines "tax imposed" in a manner
consistent with the use of that term in the deficiency context.
That is, even though section 6664(a) is, as we have noted, silent
about withholding credits, the regulation borrows from the
deficiency context (section 6211(a)) and explicitly defines the
minuend of the equation--"tax imposed"--without regard to
withholding credits:3
3That is, the regulation does not give a special definition
to the minuend, "tax imposed"; and neither respondent nor the
majority suggests that the statute i's ambiguous in referring to
"tax imposed". Much mischief or absurdity might result if "tax
imposed by this title" were ambiguous and might refer to tax net
of withholding credits.
In that event, other Code sections that
are like section 6664(a)--i.e., sections that refer to "tax
imposed by this title" but do not explicitly exclude the netting
of credits--might become problematic. These include section 6001
(requiring that "Every person liable for any tax imposed by this
title * * * shall keep such records * * * as the Secretary may
from time to time prescribe"), section 6011(a) (requiring that a
return be filed by "any person made liable for any tax imposed by
this title"), section 6501(a) (providing for assessment of "tax
imposed by this title"), and section 6511(a) (setting a deadline
for the filing of a claim for refund of "any tax imposed by this
title").
These provisions have always been (rightly) understood
(continued...)
56 -
(b) - Amount of income tax imposed. For purposes
of paragraph (a) of this section, the "amount of income
tax imposed" is the amoþnt of ,tax imposed son the
taxpayer under subtitle A for the taxable year,
determined without regard tor(1)
The credits får tax withheld under sections
31 (relating to tax withheld on wages) and 33 (relating
to tax withheld at source on nonresident aliens and
foreign corporations) * * *.
26 C.F.R. sec. 1.6664-2(b), Income Tax Regs.
(emphasis added) .
However, in defining the sul rahend of the equation--the "amcunt
shown as the tax"--the regu ation makes one significant
emendation:
(c) Amount shown as the .tax by the taxpayer on his
return-- (1) Defined. For purposes of paragraph (a) of
this section, the "amodnt shown as the tax by the
taxpayer on his return"3 is the tax liability shown by
the taxpayer on his retåurn, determined without .regard
to the items listed in §§1. 6664 -2 (b) (1) ,
(2) , and (3) ,
except that it is reduded by the excess of-
(i)
The amounts shown by the taxpayer on his
return as credits for dax withheld under section 31
(relating to tax withh ld on wages) * * * over
(ii) The amounts 4ctually withheld * * *
taxable year.
for such
'26 C.F.R. sec. 1.6664-2(c), Income Tax Regs.- (emphasis added) .
Under this regulation, the
amount shown" is thus first
determined "Without regard
o the items listed in
3 ( . . . continued)
to apply where there is a tAx liability, whether or not that
liability has been satisfied by withholding credits
- 57 §1.6664-2(b) (1)"--i.e., without regard to withholding credits-but is then reduced by excess withholding credits.
Without this' provision, if Mr. Feller's -"amount shown as the
tax"
($60, 380 for 1992)
is subtracted from his "tax imposed"
($30,358), then the difference is less than zero, he has no
underpayment at all, and he is not subject to the fraud penalty.
The effect of this regulatory provision, however, is to reduce
the "amount shown as the tax"
excess withholding credits
(Mr. Feller's $60,380) by the
($135, 000 for 19.92) in order to reveal
the extent to which the taxpayer under-reported his net
liability.
For Mr. Feller this modification yields an "amount
shown" that is negative ($60,360 - $135,000 = -$74,640) and that
therefore, when subtracted from "tax imposed", does not decrease
his "underpayment" but rather increases it.
This regulation thus
aims to measure the true culpability of a return like
Mr. Feller's, rather than overlooking the excess credits in the
computation of'the penalty.
III.
Regulations as law
Under our Constitution, it is Congress that enacts laws.
See U.S. Const., art. I, sec. 7.
The first enumerated power
given to Congress (and not to the Executive) is the "Power To lay
and collect Taxes, Duties, Imposts and Excises".
Id. sec. 8, cl.
- 58 -
1.'
As ·the Supreme Court ob erved in Whitman v. Am. Trucking
Associations, 531 U.S. 457, 472
(2001) :
Article I, § 1, of the Constitution vests " [a]11
legislative Powers herein grantied . . . in a Congress of
the United States . "
This text permits no delegation of,
those powers * * *.
Only the legislature can le islate.
Only Congress can enact tax
laws .
However, -since at least as early as 1828
(i.e., 40 years
after the Constitution was
atified) , the Secretary of the
Treasury has-been explicitl
authorized by statute to promulgate
"regulations" .5
Such regulations acquire the force of law only
4Article I, section 7,
lause 1 includes an additional
democratic provision particdlar to tax law: ' "All bills for
raising revenue shall origir ate in the House of
Representat ives " - - 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 authorit * * * 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 major ty of the people") . Article I,
section 9, clause 4 of the Constitution originally prohibited
"direct" taxes; and when thå Constitution was amended to curtail
that prohibition, the Sixteenth Amendment provided (echoing
Article I, section 8) that ' The Congress shall have =power to lay
and collect taxes on incomed" .
sSee Act of May 19,
1828, ch.
55,
sec.
10,
4. Stat. 274
("it
shall be the duty of the Seåretary of the Treasury, under ther
direction of the President df the United States, from time to
time, to establish such rulês and regulations, not inconsistent
with the laws of the United )States, as the President of the
United States shall think pioper, to secure a just, faithful, and
impartial appraisal of" impdrted goods, for purposes of customs
duties) .
- 59 -
derivatively, through statutes enacted by Congress--either
because a statute explicitly authorizes an agency to promulgate
"legislative regulations" or because the,agency that is charged
by law with administering a statute issues "interpretive
regulations"6 that interpret the statute, and the courts defer to
that interpretation.
Def. Council,
Inc.,
See Chevron, U.S.A. Inc. v. Natural Res.
467 U.S.
837,
843-845
(1984).
The pa¯rties and the majority of this Court acknowledge that
the regulation at issue--26 C.F.R. section 1.6664-2(c) (1)--is in
the second category desóribed in Chevron--i.e., so-called
"interpretive regulations".
Such interpretive regulations embody
the Treasury "department's construction of a statutory scheme it
is entrusted to administer", Chevron, 467 U.S. at 844, and are
generally authorized in section 7805(a)
("the Secretary shall
'Judicial deference to interpretive regulations is
relatively recent.
Through the mid-20th century, courts and
commentators concluded that a general rulemaking grant (such as
section 7805(a)) authorizing interpretive regulations that have
the force of law would be an unconstitutional delegation of
legislative authority. See Kristin E. Hickman, "The Need for
Mead: Rejecting Tax Exceptionalism in Judicial Deference",
90 Minn. L. Rev.
1537,
1567
(2006).
However,
"The 1960s and
1970s saw a virtual explosion of agency rulemaking", id. at 1574,
and there followed the modern deference regimes (culminating in
Chevron), to which the nondelegation doctrine is no longer
perceived as an impediment. But see Whitman v. Am. Trucking
Associations, Inc.,
531 U.S. 457, 487 (2001)
(Thomas, J.,
concurring) ("none of the parties to these cases has examined the
text of the Constitution or asked us to reconsider our precedents
on cessions of legislative power. On a future day, however, I
would be willing to address the question whether our delegation
jurisprudence has strayed too far from our Founders'
understanding of separation of powers").
i
- 60 -
prescribe all needful rules and-regulations for the enforcement
of this title")
In reviewing interpreti e rëgulations, "a court" may not
substitute its own" construction of :a statuto y provision for á
reasonable interpretation ma e by the =administrator of an
agency."
Id._ at 844.
As t
majority explains, following
Chevron we conduct a two-step reŸiew of the regulation:
First;
we ask "whether Congress, has directly spoken to the precise
question at issue"; and second, if the statute is "silent or
ambiguous", we ask whether t he regulation reflects a reasonable
construction of the statute.
Majority op. pp 13-14 (citing,
Chevron,' 467 U.S. at 842-843) .
IV.
Diècussion
There is no question tl at the deliberate reporting of
fictitious withholding credits is fraudulent.
There is no
question that Congress could well impose a civil penalty on such
fraud (in addition to the c iminal penalties that it has imposed
and that Mr. Feller has bor e) .
The question is whether in fact
Congress did so when it imp sed thesfraud penalty on
,"underpayments", defined as "tax imposed" minus "amount shown"
or whether instead the Trea ury Department went beyond the
statute when it promulgated the regulation.
- 61 -
A.
The plain meaning of the statute is not ambiguous.
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 actuál tax liability) to yield the
"underpayment".
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".
Section 1.6664-2(c) (1) of the
regulations, however, employs the "tax liability shown * * *
except that it is reduced by" excess credits, which are
determined by reference to "amounts actually withheld" as
compared to "amounts shown by the taxpayer on his return as
credits".
(Emphasis added.)
In Mr. Feller's case, the resulting
negative number (-$74,640) is not shown anyWhere on his 1992
return, nor does the return show the constituent numbers
necessary to yield that negative number.
Rather, Mr. Feller hid
the amount "actually withheld"--i.e., $3,097--and certainly did
not cause it to be "shown" on his return.
The regulation thus
looks to what is deliberately not shown and thereby ignores the
plain language of the statute that describes an amount "shown".
-- 62 Second,a the amount in section 6664 (a) (1) (A) is "tax" .
Of
course, the Code also has p(ovisions about other kinds of
amounts--e.g., of income, de uctions, 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 .
Section 1.6664-2 (c) (1) of t e regulations, on the other hand,
though it properly begins with the "tax" shown, reduces it by
excess withholding credits t o yield not the taxpayer's tax shown
but a number--in Mr. Feller's case, a fictitious negative number
(-$74,640 for 1992) --that i
neither his actual tax liability nor
his reported tax liability.
This negative number is instead a
number that, when used in tl e underpayment calculation, shows the
size of his net liability to the IRS.
However, the plain meaning
of the statutory language restricts us to "tax" that is shown on
the return, and the statuto y language gives no warrant for
injecting excess credits in o the equation.
Third, the amount in sdction 6664 (a) (1) (A)
taxpayer".
is shown "by the
Of course, the dode authorizes the IRS to make its
own determinations of amount s relevant to tax liabilities; but
plainly section 6664 (a) (1) ( ) describes an amount shown "by the
taxpayer".
Section 1.6664-2(c) (1) of the regulations, on the
other hand, corrects the amäunt shown "by the taxpayer" on his
return and replaces it with a number determiged by the
RS.
The
formula in the regulation t us wanders from the plain language of
- 63 -
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 "on his return".
If Mr. Feller's 1992 return had included
a $135,000 entry explicitly for "excess credits"
(or an amount of
tax reduced by $135,000 of excess credits), then there could
hardly have been fraud on the return, since that candid reporting
would have confessed the very fabrication that was perpetrated on
the return.
But of course the excess withholding credit amount
of $135,000 was an amount that did not appear as such anywhere
on, and could not be derived from, his- return.
By bringing that
undisclosed amount into the computation, the regulation
contradicts the plain meaning of the statutory description of an
amount "on the return".
It is true that some terms in the Code are "terms of art"
whose true meaning "may not be immediately plain on their face".
Concurring op. p. 32.
But this is a term so explicit, so at odds
with the regulatory definition, and.so consistent with the tax
return itself that it cannot be explained away in this fashion.
The Form 1040 tax return does not raise any question about the
plain meaning of the term but faithfully corresponds to it--and
not to the artful revision of the regulation.
The return
includes a line for "total tax", and withholding credits are
- 64 -
reported on the return only after that "total tax" entry.'
One
looks in vain on the Form 1040 for any "show [ing] " of excess
withholding credits.
More
mportant, one looks in vain on the
Form 1040 for any entry dendminated "tax" that takes into account
any withholding credits, wh th r "actual" or "shown". , Instead,
the ,only "amount shown as the tax by the taxpayer on his retu n"
is a "total tax" amount befdre any payments or credits.
Mr. Feller's tax return for 1992, that "total tax"
On
(before
withholding credits) that wäs "shown as the tax by the taxpayer
on [line 53 of] his return" was no less than $60,380.
note 1..)
. (See supra
Since the "tax im osed" was less than this amount,
there was no "underpayment" reflected on the return.
70n the Form 1040 for 1988--the year before sections 6663
and 6664 were enacted--the "Tax Computation" section (consisting
of lines 32 through 40) incfudes, after the computation of
taxable income, a line 38 oË which one is to "Enter tax", a line
39 for "Additional t'axes", Énd a line 40 that totals lines 38 and
39. The next section, entit led "Credits" (lines 41 through 47),
consists not of credits in the nature of payments againát the tax
liability but instead credit s (such as the child care credit and
the foreign tax credit ) tha( are taken into account in figuring
the tax liability.
(Not inc luded in this section is the "credit"
for withheld tax, which "is in the nature of a payment.)
Thereafter, a section of "Other Taxes" (lines 48 through 53)
includes, for eiample,' the Êelf-employment tax and the
alternative minimum tax; and it ends with line 53, which reads:
"Add lines 47 through 52.
Ýhis is your total tax" (bold in
original) . Only after this "total tax" on line 53 does the
return include E
54) for "Federal income t ax
withheld", in the section of the return entitled "Payments". The
net aniount due after payments and credits is not referred to as
tax, but is either an "amouÄt OVERPAID" (line 62) or an "AMOUNT
YOU OWE" (line 65) . The Fo ms 1040 for Mr. Feller's years at
issue were the same, with o ly slight dif ferences in some line
number s .
- 65 B.
The statutory silence about "credits" is no warrant for
the innovation in the regulation.
The majority observes, however, that-the statutes do not speak expressly to the precise
issue whether withholding credits can be taken into
account when calculating an underpayment for purposes
of sections 6663 and 6664(a).
* * * Section 6664 is silent and ambiguous with
respect to the issue before us; i.e., Congress has not
directly addressed the meaning of the term
"underpayment" when a taxpayer has overstated
withholding credits.
Majority op. p. 18.
It is true (to put it more precisely) that
section 6664(a) (1) (A) does not state whether "the amount shown as
the tax by the taxpayer on his return" does or does not take into
account withholding credits.
However, the very term at issue is
"tax" shown, and the unremarkable lack of any mention of
"credits" is simply consistent with the statute's meaning what it
says:
To state the obvious,
to tax.
"the amount shown as the tax" refers
Withholding credits under section 31 are another matter.
Section 6664(a) (1) (A) can be said to be "silent" about
withholding credits--but only in the same way that it is silent
about the fuel credit under section 34, silent about payments
designated to the Presidential Election Campaign Fund under
section 6096, silent about interest under section 6601, and
silent about a host of other provisions in the Code that Congress
could have incorporated into the ,"underpayment" definition but
did not.
It is true that when a statute is "silent", that
- 66 -
silence may leave a gap that can legitimately be filled by
regulation, see Chevron, 467 U.S. at 843; but for this purpose a
statute can fairly be called "silent" only when it cannot be said
that "the intent of Congress is clear", see id. at 842.
Statutory specificity about
ne subject cannot sensibly be
construed as gap-creating "silence" about other subjects.
In
section 6664 (a) (1) (A) Congress was silent about withholding
credits because it was prov ding a rule about tax. • When Congress
states a plain and unambiguo s term involving "the amount shown
as the tax by the taxpayer on his return" , the IRS cannot take
1.
that enactment as an occasidn to craft rules about different
subject matter not addressed in the statute--i.e., excess
withholding credits not shown by the taxpayer and not appearing
on the return--as if Congress had left a gap to be filled in.
C.
Different language in the deficiency statute does not
justify the innovition in the regulation.
The majority's apparent basis for discerning ambiguity in
"the amount shown as the ta " is this:
That term appears both in
the definition of "underpayment" in section 6664 (a) and in the.
similar but not identical définition of a "deficiency" in section
6211(a) .
See majority op. p. 18.
For purposes of defining a
"deficiency", section 6211( ) (1) provides:
"The tax imposed by
subtitle A and the tax showr on the return" shall both be
"The term "amount shown as tax by. the taxpayer on his
return" in section 6664 (a) (1) (A) is not identical to the phrase
(continued; . . )
- 67 determined without regard to", inter alia, withholding credits.
(Emphasis added.)
Section 6664(a) defining "underpayment", on
the other hand, has no equivalent "without regard to" provision.
This contrast evidently prompts the suggestion that,. for purposes
of defining a "deficiency", the tax "shown on the return" should
be determined without regard to withholding credits; but for
purposes of defining an "underpayment", the tax "shown on the
return" should be determined with regard to withholding credits.
However, an examination of the origin of section 6211(b) (1) shows
that this suggestion is not warranted.
The basic definition of a "deficiency" in section 271 of the
1939 Code, like today's definition in section 6211(a), was "tax
imposed" minus "amount shown as the tax"; but in the 1939 Code
the "amount shown" "was "decreased by the amounts previously
abated, credited; refunded, or otherwise repaid in respect of
such tax"
(emphasis added); and the deficiency was therefore
increased by those amounts.
The 1939 Code had no provision that
"tax imposed" or "amount shown" should be "determined without
regard to" withholding credits, since those credits had yet to be
invented.
"(...continued)
"tax shown on the return" in section 6211(b) (1). However, the
latter term in section 6211(b) (1) is evidently shorthand for
"amount shown as tax by the taxpayer upon his return" in
section 6211(a) (1) (A), so we assume it is equivalent to the same
term in section 6664(a) (1) (A).
81
- 68 The 1939 provision tha
a "deficiency" would ,be increased by
amounts "refunded" began to be awkward in 1943, when the Current
Tax Payment Act of 1943,
ch.) 120,
57 Stat.
126, provided for the
now-familiar mechanism of p yroll withholding.
time, employers withheld ta
For the first
from wages, id. sec. 2, and the
employee claimed that withholding as a credit (i.e., a payment)·
on his return, id. sec. 3,
57 Stat. 139.
If that resulted in an
overpayment of tax, then the overpayment was refunded to the
employee.
Id. sec. 4, 57 S at. 140.
The next year Congress-
noted that this regime rais d questions about the definition of a
"deficiency'
858,
(i.e.,
"See S. Rept.
887:
"tax im osed" over "amount shown" minus
885,
78th Cong.,
2d Sess.
38
(1944),
1944 C.B.
Under the systemgof ta collection which now obtains
with respect to individuals, it is apparent that in
- certain cases the estidated tax payments and the tax,
withheld at source may exceed the tax shown by the
taxpayer on his return
Under the procedure instituted,
by the Commissioner fo handling such cases it is
contemplated that the éxcess of such payments ,
(estimated tax and tax withheld at source) over the tax
shown on the return shall be refunded to the taxpayer
as expeditiously as po sible.
If, in such cases, it is
subsequently- determined that the tax imposed under
chapter 1 is greater than the tax shown on the return,
the existing definitioñ of deficiency would produce an
improper result if the amount so refunded is taken into
account in ascertaining the amount of the deficiency.
For example, if the taZpayer filed a return disclosing
a tax of $600 and clai ing a credit of $900 for tax
withheld at source, $300 would be immediately refunded.
If the Commissioner su sequently determines that the
correct tax should be $800, the amount of the tax
liability in controver y is $200 and, hence, the
deficiency should be $200. However, the definition
. contained in existing law would indicate«a deficiency
4. (continued ..)
- 69 -
"refunds"), which now needed to be revised to make clear that a
mere refund of a claimed overpayment of withheld tax (what is now
called a "non-rebate refund") did not skew the computation by
reducing tax "shown".
Congress therefore deleted from
section 271 the phrase "decreased by the amounts previously
abated, credited, refunded, or otherwise repaid" and in its place
incorporated and defined the term "rebate".
After this 1944
amendment, section 271 provided (in language very similar to
current section 6211):
SEC. 271.
DEFINITION OF DEFICIENCY.
(a)
In General.--* * * "deficiency" means the amount
by which the tax imposed by this. chapter exceeds the excess
of-(1)
the sum of (A) the amount shown as the tax by
the taxpayer upon his return, * * * plus (B) the
amounts previously assessed (or collected without
assessment) as a deficiency, over-(2)
the amount of rebates, as defined in
subsection (b) (2), made.
9(...continued)
of $500, that is, the excess of $800 [actual tax] over
($600 [taxishown] minus $300 [refund]). The proposed
amendment corrects this defect by providing that the
amount of any such refund shall not be taken into
account.
This 1944 legislative history makes it clear that the "determined
without regard to" language of former section 271 (now
section 6211) is'present in the "deficiency" definition only
because non-rebate "refunds" once muddled the deficiency
definition.
That definitional problem never arose with respect
to "underpayment", for tax shown was never reduced by "refunds".
- '70 -
(b)
Rules "for App ication of Subsection (a) . --For the
purposes of this sectio
(1) The tax imposed by t-his chapter and the
tax shown on the råturn shall both be determined
without regard to ayments on account of . estimated tax,
[and] without rega d to the credit under section 35
* * *;
(2)
The term "rebate" means so much òf an
abatement, credit, refund, or other repayment, as was
made on the ground that the tax imposed by this chapter
was less than the xcess of the amount specified in
subsection (a) (1) byer the amount of rebates previously
made * * *.
[Emph sis added.]
Individual Income Tax Act of 1944, ch.« 210, sec. 14(a), 58 Stat.
245.
Under subsection (b) (2) of the amended statute
today' s Code) , the "rebate"
(as under
hat decreases "amount shown"
(and
thereby increases the "deficiency") includes a refund only if the
refund is "made on the ground that the tax imposed" is less than
what the taxpayer reported, and does not include re-funds made on
the mere ground that payment s and credits exceed the tax that the
taxpayer reported as due.
nd, lest there be any doubt,
subsection (b) (1) makes cle r that prepayments and withholding
credits do not affect the "tax imposed"1° or the "tax shown".
1°It seems a truism to aay that "tax imposed" does not
include credits; -a "credit" is not "imposed"; and the problem
that Congress addressed in 944 concerned tax "shown", not tax
"imposed". It is therefore hard to discern the potential error
that Congress sought to cor0ect by this clarification as to "tax
imposed" . However, the phrÅse "tax imposed" does appear in both
the basic definition of a dåficiency (i.e., "tax imposed" over
tax "shown" minus "rebates" and in the definition of the term
"rebates"; and :the latter inclusion may have made the
clarification seem more nec ssary. The provision survives today
(continued. . . )
- 71 -
When the current penalty regime was enacted in 1989,"
Congress preempted any equivalent confùsion about the effect of-
non-rebate- refunds on the computation of an "underpayment".
It
did so'by enacting in section 6664(a) a definition of
"underpayment"~ that, like the 1944 "deficiency" definition,
omitted any mention of "refunds" and instead subtracted "rebates"
from the t'ax shown on the return-.
Admittedly, this new
"underpayment" definition did not include any instruction that
"tax imposed" or "tax shown" is determined without regard to
withholding credits and other prepayments.
.
However, the 1944
origin of that language in the deficiency context, set out above,
shows that the'absence of that instruction in section 6,664(a) is
not significant.
The provision about, and the definition of,
"rebates" made such an instruction unnecessary.
The "underpayment" definition, new in 1989, never included
any mention of non-rebate "refunds" that might have skewed the
definition.
That 1943-era confusion as to deficiencies was
solved in 1944 by the "rebate" provision; and any potential
similar confusion as to underpayments was preemptively solved in
1°(.:.continued)
in section 6211(b) (1).
"The negligence and fraud penalties on "underpayment[s]"
were first enacted in 1954 in former section 6653(a) and (b).
The definition of "underpayment" in section 6653(c) (1) explicitly
incorporated by reference the definition of "deficiency" as
corrected in 1944, so that the problem of (non-rebate) "refunds"
confusing the definition of "underpayment" never arose under
former section 6653.
- 72 -
1989 when the "underpayment" definition included, in the first
instance, the equivalent. "rebate" provision.
There was therefore
never an occasion for includ ng in section 6664 (a) a provision
that withholding credits sho ld not affect the -computation of tax
shown.
Such a provision would have been redundant.
absence in section 6664 (a) c
(And the
any reminder that "tax imposed" is
determined without regard to withholding credits did not prevent
the agency .from so providinc , in section 1.6664-2(b) of its
regulation,
-
for purposes of computing an underpayment . )
D. ~ ' Section 6201(a) (3) does not -iustify the- innovation--in
tÏ1e regulation.
Section 6201(a) (3). ref rs to excess withholding credits that,
are allowed against "tax shc wn on the return" .
opinion observes the following:
Thee concurring
Section 6201(a) (3) provides that
such overstated withholding amounts are to be "assessed by the
Secretary in the same manne
as in the case. of a mathematical, or
clerical error", and the pr vision cross-references
section 6213 (b) .
Concurrinc op . pp 27 -28 .
provides for an assessment
Section ,6213 (b) (1)
f an amount of tax "in excess of . that
shown on the return", so that the amount "shown on the return"
I
must be an amount that refldcts the math error.
p. 28.
Concurring op.
With excess withholciing credits, "[als with math errors,
* * * t he .amount of tax 'shown on the return' is the amount shown
by the taxpayer that reflect s the overstated withholding,
s
credits.." . That is, tax "sh wn" under section 6201(a) (3)) must
- 73 mean tax reduced by excess credits- (as^ the regulation provides
under section 6664(a)). -Concurring op. p. 29.
It is su el
proper to attempt to bring these other sections
to bear on the meaning of tax ishoun" in section 6664(a), but I
submit that there are skips and fiaws "in this an'alysis of
sections 6201(a) (3) and 6213(b).
The House Report that the
concurring opinion cites'clearly states that then-current law
(before section 6201(a) (3)) already allowed the IRS to retrieve,
without deficiency procedures, any excess credit that had been
mistakenly allowed against the tax liability.
Retrieval of those
credids that had been mistakènly allowed against tax liability
did not require any new assessment authority to be enacted in
section 6201(a) (3).
fo
What was new in that section was a procedure
retrieval of refunded credits.
-Section 6201(a) (3) does not
. cross-reference 'section 6213(b) (1)--the paraÿraph critical to the
argument in the concurring opinion--but refers only to
section 6213(b) (2)
(to make cleaf that it does not apply).
Section 6201(a) (3) does not state or'even imply that excess
credits are a constituent of tax "shown".' -On the contrary, the
statute conceives of the tax liability- and excess credits as
distinct, since it refers to excess credit "allowed against the
tax shown on the return".
(Emphasis added.)
"To the same -effect, the-House Report that the concurring
opinion cites reflects a clear understanding that "tax shown" is
tax (not tax reduced by excess credits, -as in section
1.6664-2(c) (1), Income Tax*Regs.)". In- presenting its'example,
(continued...)
- .74 -
Furthermore, it. is far from clear what the statute means
when it states that an overstated credit allowed against tax
shown on the return may be "assessed" .
Payments that are
credited (or not credited) a ainst the -tax liability do not
increase or decrease the amdunt of the tax liability.
If an
ostensible payment or credit that was originally allowed against
that, liability proves in fact to be no good, that hardly
increases the amount of tax; instead it decreases the amount oft
payments that should be entered.
The Internal Revenue Manual
(IRM) reflects this distinction.
It states that an excess
withholding credit, once discovered, .is in fact not assessed by
the IRS as additional tax.
Instead, excess credits are recovered
either by "an assessment (a TC 290) for the amount of the
overstated withholding credit or in limited circumstances with a
reversal (TC 807) of the ovérstated amount."
IRM pt.
" ( . . . continued)
the report twice states that the "tax shown" is $100--not the $70
that would be yielded by suNtracting the excess credit of $30
from -the tax of $100.
H. R pt.
1337,
83d Cong.,
2d Sess. A404
(1954) . Similarly, the repdrt refers to the excess credits as
"$30 (the tax of $100 shown in the return less the [proper] $70
credit)"; and the report sa s that this $30 amount "can be
immediately assessed as tax shown on the return which was not ,
paid" .
That is, the excess credits are (correctly) described not
as affecting the amount of the "tax shown" but rather as
.
af fecting the amount of the tax shown that has not been paid. By
contrast, an "underpayment" in section 6664 (a) is calculated by
reference to tax "shown", nöt by reference to "tax shown that has
not been paid" . The House Report states that the excesa 'creditss
can be "assessed as tax shoån on thes return which was not paid" .
That is, the means by -which ther IRS is to get the $30 is (the
report suggests) an assessmènt ("as tax shown * * * which was not
paid") .a This describes not the character, of the. amount but the
means of collection, and it therefore does not address our issue;
- 75 21.4.5.4.3(4)
(Jan.
24,
2008).
("TC 290" is the code for
"Additional Tax Assessment", and "TC 807" is the code for
"Withholding Credits Reversed".)"
What is that "limited
circumstance" that gets TC 807 treatment?--It is none other than
excess credits that have been wrongly applied to the reported
liability.
The IRM makes it clear that these excess credits
wrongly applied are "recovered with a reversal of the credit
(i.e., TC 807 * * *)"
additional tax.
(emphasis added), not by an assessment of
IRM pt.
21.4.5.4.3(6)
(Jan.
24,
2008).
The IRM
gives an example:
Mary Smith filed her 2008 income tax return reporting a
tax liability of $700 and withholding credits of $500.
She overstated her withholding by $100 and the error
was not corrected when IRS processed the return.
Since
Ms. Smith did not claim the overstated amount as a
refund (she reported a balance due) and the overstated
amount did not result in a refund, a TC 807 may be used
to correct -the overstatement.
[Id.]
The House Report indicates that the provisions added in 1954 were
codifying existing law, so that today's law as to correction of
non-refunded excess credits, illustrated in the IRM, is the same
as pre-1954 law.
The meaning of tax "shown" in section 6664(a)
illuminated by section 6201(a) (3).
is not
Section' 6201(a) (3) does not
state or imply that"excess withholding credits that were wrongly
allowed against the tax liability are later assessed as part of
"See Non-Master File Pocket Guide, IRS Document 10978 (Rev.
10-2006).
tax "shown".,
They.are reversed (despite the statute's loose
reference to their being "assessed"), and the suggestion thats
they are assessed as tax "sh wn" requires subtle and creative
cross-referencing not warran ed in the statute.
E.
- Even if section 6664 (a) (1) (A) were ambiguous , the
regulation is incdnsistent with congressional intent .
For the reasons stated above, section 6664 (a) (1) (A) is not
ambiguous, and under the Su reme Court's Chevron analysis, the,
inquiry stops there.
Howev r, if we were to assume arquendo that
the statute is ambiguous and were to proceed to Chevron' s
"step 2", we would then need to determine "whether the agency's
answer is based on a permis ible construction of the statute" .
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
at 843.
Undertaking that step 2 analysis, I find"that the
definition of "amount shown as the tax" in section 1.6664-2'(c) (1)
of the regulations (i.e., t x shown reduced by excess credits) is
not a permissible construction of ethe statute.
Because the penalty pr vision in former secti'on 6653 (a)
incorporated the deficiency definition into the definit ion of
"underpayment", the pre-198
penalties did not reach excess
withholding credits (which, as we have noted, are expressly
excluded from the -"deficien y" calculation by
section 6211 (b) (1) ) .
As th
majority .acknowledges, majority op.
p. 21, the 1989 legislative history includes a statement in a
House Report "that the defi ition of 'underpayment' in section
- 77 -
6664-(a) was not 'intended to be substantively different from
* * * [previous]
law.'
H. Rept. 101-247, supra at 1394."
A.
regulation that would impose the penalty on a new circumstance
(excess withholding credits) that had not formerly been reached
by the penalty is "substantivel:y different" from thë prior law-.
The IRS's interpretation is therefore at odds with express
congressional intent.
If in 1989 Congress had intended to impose a penalty that
reached not only under-reporting of "the amount shown as the tax"
but also over-reporting of withholding credits, then it would not
have used the language that appears in section 6664(a) (1) (A).
A
different penalty provision in section 6694, enacted in 1976,
sheds a helpful light in this regard.
Section 6694 imposes an
assessable penalty on a tax return preparer for an
"Understatement of Taxpayer's Liability".
The definition of that
"understatement" is telling:
SEC. 6694(e).' Understatement of Liability
Defined.--For purposes of this section, the term
"understatement of liability" means any understatement
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. * * *
This lianguage from section 6694(e) reflects the concept--i.e.,
net tax liability after credits--that the regulation would
attempt to read into section 6664(a).
However, that language has
been in section 6694(e) since 1976--i.e., 13 years before section
6664 was added in 1989--and was therefore at the ready when
- 78. -
Congress enacted the new pen lty regime; but .Congress did not -
employ such language in sect .on 6664.
Section 6694 shows that
when Congress wants to penalize an understatement of a net amount
due (or an overstatement, of
do so.
It did so in section 6694 but not by its provision in
section ,6664 (a) (1) (A)
V.
reditable amounts) , it knows chow to
as to
ax "shown" .
Conclusion
Only the legislature can legislate; only Congress can impose
a penalty.
I would hold that the penalty that the IRS has
determined here--a fraud peralt~y on overstated withholding
credits--has simply not been enacted to the extent that the
regulation provides.
The regulation's imaginative definition of
"amount shown as the tax by the taxpayer on his return" is not a
reasonable interpretation oÉ t-he statute but is the agency' s
impermissible attempt to sugplement the statute .
HALPERN and WHERRY, JJA, agree with this dissent.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.