Estate of Smith v. Commissioner

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT October 31, 2005

Charles R. Fulbruge III
Clerk
No. 04-60911

ESTATE OF ALGERINE ALLEN SMITH, Deceased,
JAMES ALLEN SMITH, Executor

Petitioner-Appellee,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellant.

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Appeal from the Decision
of the United States Tax Court

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Before DAVIS, JONES, and GARZA, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

The Commissioner of the Internal Revenue Service appeals the

Tax Court’s order granting the Estate of Algerine Allen Smith’s

Rule 260 Motion. In granting that motion, the Tax Court

concluded that the parties’ Rule 155 calculation and stipulation

of overpayment of estate tax included the IRS’s claim for

additional unpaid interest which precluded the Commissioner from

offsetting the unpaid interest against the overpayment due to the

Estate. Based on our conclusion that the Tax Court was without

jurisdiction to review the offset, we vacate its judgment.
 I.

The decedent, Algerine Allen Smith, died on November 16,

1990. The Estate filed its initial tax return on July 12, 1991,

and included a payment of $60,164 to satisfy the tax due reported

on the return. In 1994, the Commissioner issued a notice of

deficiency of $663,785, and an accuracy-related penalty of

$132,785. The Estate filed a petition in Tax Court seeking

redetermination of the deficiency. In February 1998, the Tax

Court held that there was a deficiency in estate taxes in the

amount of $564,429, but no accuracy-related penalty.

The Estate then remitted a payment of $646,325 in March 1998

to cover the Commissioner’s estimate of tax and interest due. In

May 1998, the Commissioner assessed the $564,429 estate tax

deficiency, plus underpayment interest of $410,848.1 The

Commissioner applied $501,377 of the Estate’s March 1998 payment

and an income tax overpayment credit of $63,052 from the Estate’s

1992 return to satisfy the estate tax deficiency.2 The balance

1
“Underpayment interest” is interest the IRS charges
taxpayers who fail to pay the correct amount of tax on the date
due. It accrues from the due date of the return until the date
paid.
2
The $501,377 applied to the tax deficiency was the
balance due on the $564,429 deficiency after applying the
overpayment credit of $63,052.
The Estate makes arguments that seem to suggest that the
interest liability disputed in this case arose merely as a result
of the Commissioner’s bookkeeping allocations of payments between
tax and interest. These arguments are without merit as a
different allocation simply changes the balance of over and
underpayments between interest and tax, but not the net amount

2
of the March 1998 payment, $144,947 ($646,325 less $501,377), was

applied to the assessed interest.

Litigation continued throughout this period. In December

1999, this court reversed the Tax Court’s judgment and remanded

for further proceedings. Estate of Smith v. Commissioner, 198

F.3d 515 (5th Cir. 1999). In November 2001, the Tax Court issued

its opinion on remand. Estate of Smith v. Commissioner, 82

T.C.M. (CCH) 909 (2001). In January 2002, after the remand, the

parties entered a stipulated computation under Tax Court Rule

155.3

due to the Estate.
3
Rule 155 reads, in relevant part,

(a) Agreed Computations. Where the Court has filed or
stated its opinion determining the issues in a case, it
may withhold entry of its decision for the purpose of
permitting the parties to submit computations pursuant
to the Court’s determination of the issues, showing the
correct amount of the deficiency, liability, or
overpayment to be entered as the decision. If the
parties are in agreement as to the amount of the
deficiency or overpayment to be entered as the decision
pursuant to the findings and conclusions of the Court,
then they, or either of them, shall file promptly with
the Court an original and two copies of a computation
showing the amount of the deficiency, liability, or
overpayment and that there is no disagreement that the
figures shown are in accordance with the findings and
conclusions of the Court. In the case of an
overpayment, the computation shall also include the
amount and date of each payment made by the petitioner.
The Court will then enter its decision.

T.C.R. 155(a).

3
 The Respondent’s Computation for Entry of Decision, which

documents the parties’ stipulation under Rule 155, presents the

parties’ agreement that the attached computation is in accordance

with the opinion of the Tax Court, but without prejudice to the

Commissioner to contest the correctness of that decision.

Pursuant to the agreement, the Commissioner and the Estate agreed

to an estate tax liability of $385,747 and an overpayment of

$238,847. The attached computation consists of seven pages

starting with a summary Computation Statement on Remand,

reflecting the agreed tax liability and overpayment, with a

statement that the details of the computation are set forth on

the attached pages 2 through 7. Pages two and three detail the

recomputed estate tax and adjustments. Pages four, five and six

are computations leading to the determination of the “Total

Federal Interest Deduction” of $209,943. This is the agreed

amount of underpayment interest due by the Estate that was

allowed to be deducted in the computation of the stipulated

estate tax liability. Form 3623, Statement of Account, on page

seven, presents a summary of tax assessments and payments

resulting in the computed overpayment of $238,847. Although the

parties agreed on the amount of Total Federal Interest Deduction

of $209,943 on page six of the computation, the interest

assessment was not adjusted and the interest column on Form 3623

Statement of Account contains only the original assessment and

March 1998 payment “For Information Only.”

4
 A summary of the tax overpayment computation is set forth

below:

Agreed Estate Tax Liability $385,747
Payments:
With original return $60,164

1992 Income Tax
Overpayment Applied $63,052

March 1998 Payment $501,378

Total Payments $624,594

Overpayment of Estate Tax $238,847

In accordance with this computation, on January 24, 2002, the Tax

Court entered its judgment that the Estate had an “overpayment in

estate tax” of $238,847. The Estate appealed to this court,

which affirmed. Estate of Smith v. Commissioner, 54 Fed. Appx.

413 (5th Cir. 2002).

In May 2002, the Commissioner entered adjustments to its own

accounts to reflect the Tax Court’s judgment. It made a tax

abatement of $238,847 to the Estate’s account so the account

properly reflected the agreed overpayment of tax. The

Commissioner also abated $180,564 in underpayment interest on the

Estate’s account. As a result, the Estate’s account reflected a

balance of $85,336 of assessed, but unpaid interest.

The same month the Commissioner refunded $153,510 to the

Estate, crediting the difference between the refund and the

overpayment of $85,336 against the assessed but unpaid

underpayment interest owed by the Estate. Later in May 2002, the

5
Commissioner discovered a timing error in applying the 1992

income tax overpayment to the estate tax liability which resulted

in an error in the calculation of interest to the Estate. To

correct the error, the Commissioner abated and refunded $20,341

of the underpayment interest. The net result was that the Estate

received $173,851 of the $238,847 overpayment. The difference,

$64,996 represents the balance of interest that was allowed to be

deducted by the Estate in determining the final agreed estate tax

liability and overpayment, but had not been paid as summarized

below.

May 1998 Interest Assessment $410,848

Less Abatements:
May 2002 $180,564
May 2002 $20,341
Total Abatements ($200,905)

Corrected Interest Assessment $209,943
Less March 1998 Payment ($144,947)

Assessed but Unpaid
Federal Interest $64,996

Overpayment of Estate Tax $238,847
Less unpaid Federal Interest (64,996)

Net Refund to the Estate
($153,510 + 20,341) $173,851

The Estate filed a Motion for Proceeding to Enforce

Overpayment Decision under IRC 6512(b)(1) and Tax Court rule 260,

seeking an additional $85,336 plus interest, from the

Commissioner. The Commissioner opposed the motion. In July

6
2004, the Tax Court granted the motion and ordered the

Commissioner to refund the full amount of the taxpayer’s

overpayment plus interest, less any amounts that had previously

been refunded. The full Tax Court participated in the decision,

with thirteen holding in favor of the Estate and five dissenting.

Estate of Smith v. Commissioner, 123 T.C. 15 (2004).

The majority opinion begins with a holding that an

“overpayment” of tax includes any underpayment interest due

thereon. The majority opinion rested on the premise that the

overpayment determination in the stipulation and judgment

included interest due, and absent evidence of fraud on the court

or a clerical error discovered after the decision had become

final, this decision could not be altered. Because neither of

these exceptions was present here, the Tax Court held that it

could not alter the judgment and the litigation had come to an

end (even if it resulted in a windfall for the Estate). Judge

Laro’s concurring opinion contended that the Tax Court was not

powerless to change a final decision, but that any claim for

additional relief must meet the requirements of Fed.R.Civ.P.

60(b).4

Judge Goeke’s dissent took issue with the majority’s

interpretation of Tax Court Rule 155 and the Tax Court’s

4
Judge Thornton also wrote a concurring opinion in which
he noted that the decision should not be construed as resolving
this issue with respect to unassessed underpayment interest.

7
jurisdiction. This dissent agreed with the Commissioner that the

Rule 155 computation did not take the past interest into account,

and thus construed the stipulation as silent on the question of

interest. Additionally, Judge Goeke contended that the Tax Court

lacked jurisdiction to consider the Estate’s challenge to the

Commissioner’s crediting of the unpaid interest against the

agreed overpayment of tax.5

Following the Tax Court’s opinion, the Commissioner, acting

on the cue offered by Judge Laro’s concurrence, filed a motion

for leave to file a motion to vacate the January 24, 2002

decision under Fed.R.Civ.P. 60(b)(6). The Tax Court denied this

motion. The Commissioner now appeals to this court.6

II.

We must first consider the Commissioner’s argument that the

Tax Court was without jurisdiction to review the Commissioner’s

offset of unpaid interest against the previously determined

5
Judge Holmes’ dissent agreed with the majority that the
Tax Court had jurisdiction but disagreed with the result. Judge
Holmes opined that the Estate was improperly trying to avoid the
consequences of its acquiescence in the Rule 155 calculation
which did not resolve the question of interest and thus placed no
limitation on the Commissioner’s ability to apply the overpayment
to unpaid interest of the Estate.
6
The Tax Court’s decision on the merits was appealed in
Case No. 04-60911. The Tax Court’s decision on the
Commissioner’s Rule 60 Motion was appealed separately in Case No.
04-61176. The cases were consolidated for purposes of this
appeal.

8
overpayment of tax. Jurisdictional questions are questions of

law which are reviewed de novo. Treaty Pines Invs. P’ship v.

Commissioner, 967 F.2d 206, 210 (5th Cir. 1992).

The Tax Court is an Article I court of limited jurisdiction.

See 26 U.S.C. (I.R.C.) § 7442 (“The Tax Court . . . shall have

such jurisdiction that is conferred on. . . [it] by this title. .

. “). The Tax Court may exercise jurisdiction only to the extent

that jurisdiction has been conferred upon it by Congress.

Commissioner v. McCoy, 484 U.S. 3, 7 (1987).

To determine whether the Tax Court had jurisdiction in this

situation it is helpful to review the bases of the Tax Court’s

jurisdiction throughout this case. The Tax Court originally

acquired jurisdiction over this case when the Estate appealed the

notice of deficiency asserted by the Commissioner. 26 U.S.C. §§

6211, 6213; Wright, Miller & Cooper, Federal Practice &

Procedure: Jurisdiction 2d § 4102. When the Tax Court found that

there was a deficiency but that the taxpayer had made an

overpayment of tax, the Tax Court had jurisdiction to determine

the amount of the overpayment. 26 U.S.C. § 6512(b). The Tax

Court did so when it approved and entered judgment on the Rule

155 stipulation of the parties that the overpayment of tax in

this case was $238,847. When that judgment of the Tax Court

became final, the Commissioner was required to credit or refund

that amount to the Estate. 26 U.S.C. § 6512(b)(1).

9
 The Commissioner argues that it complied with the judgment

by crediting a portion of the overpayment towards the assessed

unpaid interest expense and refunding the remainder. The

Commissioner argues that this practice is specifically allowed

under Section 6402(a). This section allows the Commissioner to

credit the amount of an overpayment against “any liability in

respect of an internal revenue tax” and to refund only the

balance remaining, if any, after such crediting. 26 U.S.C. §

6402(a). If the Commissioner is correct, the Tax Court has no

jurisdiction to review that offset under 26 U.S.C. § 6512(b)(4),

which provides that “The Tax Court shall have no jurisdiction

under this subsection to restrain or review any credit or

reduction made by the Secretary under section 6402.” 26 U.S.C. §

6512(b)(4); see also Savage v. Commissioner, 112 T.C. 46 (1999)

(holding that, after the Commissioner has offset an overpayment

against some other tax liability, §6512(b)(4) is a jurisdictional

bar to the Tax Court’s reviewing the merits of the Commissioner’s

assessment of that liability.)

The Tax Court held that overpayment judgments necessarily

include both interest and tax due by the Estate. In its view,

the Commissioner had no right to offset interest already taken

into account and incorporated in its judgment because the offset

had the effect of decreasing the refund due the Estate under the

Tax Court judgment. Accordingly, it held that it had

10
jurisdiction to hear and adjudicate the Estate’s motion under

I.R.C. § 6512(b)(2). That section reads, in pertinent part,

(2) Jurisdiction to enforce. -- If, after 120 days
after a decision of the Tax Court has become final, the
Secretary has failed to refund the overpayment
determined by the Tax Court, together with the interest
thereon as provided in subchapter B of chapter 67, then
the Tax Court, upon motion by the taxpayer, shall have
jurisdiction to order the refund of such overpayment
and interest.

The Commissioner’s and the Tax Court’s differing views on

jurisdiction are a product of their differing views regarding

whether an overpayment judgment covers only overpayment of the

estate tax or whether it resolves a taxpayer’s total overpayment

of both tax and underpayment interest. Based on our review of

the above provisions and other provisions relating to the Tax

Court’s jurisdiction, we conclude that the Tax Court erred in

holding that an overpayment of tax always includes any

underpayment interest due thereon.

As pointed out by Judge Goeke’s dissent, the statutory

scheme related to review of taxpayer overpayments “is intended to

permit the offset of overpayments with interest liabilities even

arising in the same statutory year.” Any issues related to

overpayment or underpayment of interest can be raised in a

subsequent proceeding. Section 7481 of the Internal Revenue Code

allows the Tax Court to determine any interest overpayment or

underpayment after the Tax Court has determined that there is an

overpayment of tax pursuant to section 6512(b). 26 U.S.C. §

11
7481(c)(1) and(2)(B). If the Tax Court determines that there has

been an overpayment of interest or the Commissioner has made an

underpayment of interest, “that determination shall be treated

under section 6512(b)(1) as a determination of an overpayment of

tax” which order is then reviewable in the same manner as a

decision of the Tax Court. 26 U.S.C. § 7481(c)(3). As stated by

Judge Goeke,

Section 7481(c)(2)(B) would be unnecessary if the
adopted opinion were correct, and the reference to the
term “overpayment of tax” in section 7481(c)(3) is
inconsistent with the whole rationale of the report and
points out the inherent ambiguity in the term
“overpayment.” It is telling that Congress did not
simply say “overpayment.” In adding interest disputes
to this Court’s jurisdiction, Congress deemed it
necessary to include section 6512(b) determinations and
to provide that our interest determinations would be
reviewable similar to our “overpayment of tax”
determinations. This congressional action would have
been unnecessary if overpayment decisions included
interest liability.

123 T.C. 15, 31 (2004). In other words, the statutes

specifically contemplate that the Tax Court can make a final

determination of a tax overpayment without incorporating a final

determination of interest due, because procedures are in place to

consider, sequentially if necessary, any overpayment or

underpayment of interest related to the original tax deficiency

under section 7481.

The above outlined statutes indicate that the Tax Court

erred in its initial holding in this case that an overpayment

determination necessarily decides any underpayment interest due

12
thereon. It is true however that the Tax Court can determine

overpayment interest as part of its jurisdiction to determine an

overpayment of tax, at least in some circumstances. In Estate of

Baumgardner v. Commissioner, 85 T.C. 445 (1985), the Tax Court

held that, at least when interest has been assessed and paid, it

has jurisdiction to determine an overpayment of interest as part

of its jurisdiction to determine an overpayment of tax on which

the interest was paid. If that had occurred in this case, the

Tax Court’s view of its jurisdiction under 26 U.S.C. § 6512(b)(2)

would be correct. If interest was already incorporated into the

judgment and the Commissioner offset the interest liability

against the refund, the Estate would have received less than the

overpayment due to it under the court’s judgment. In that

circumstance, the Commission would have “failed to refund the

overpayment determined by the Tax Court” and the court would have

jurisdiction “to order the refund of such overpayment and

interest.” 26 U.S.C. § 6512(b)(2).7

Based on our review of the record however, it is clear that

the overpayment decision in this case did not decide the question

of underpayment interest. Although the parties were in

possession of information that would have allowed the interest

7
We also note that in that circumstance, §6512(b)(4) would
not remove the Tax Court’s jurisdiction. The Tax Court held
§6512(b)(4) inapplicable “where [that court’s] final decision in
the same case precludes the existence of tax liabilities to which
the Commissioner attempts to apply the overpayment.” Our opinion
does not conflict with that holding.

13
underpayment to be decided, i.e., the interest expense deduction

allowed and interest payments made, the issue was not in fact

incorporated in the stipulation and judgment. The interest

computations in the stipulation were clearly marked “For

Information Only” and did not reflect the final interest

deduction allowed. Also, as set forth above, the overpayment

computation incorporated into the stipulation and judgment dealt

only with tax assessments, abatements and payments allocated to

the tax liability, not interest.

In this case, where the record reflects that the Estate’s

liability for underpayment interest was not decided in

determining the taxpayer’s overpayment, we conclude that the Tax

Court exceeded its jurisdiction under §6512(b)(2) by ordering the

Commissioner to refund the full amount of the overpayment. The

Commissioner properly exercised his authority under §6402 to

offset the unpaid interest against the overpayment of tax.

Because the Tax Court had not decided the Estate’s liability for

underpayment interest in its overpayment determination, its

jurisdiction to enforce that determination did not include

ordering the Commissioner not to offset the refund against that

liability. Similarly, in this situation, the Tax Court’s actions

constitute a review of the Commissioner’s offset, which the Tax

Court specifically lacks jurisdiction to do under §6512(b)(4).

IV.

14
 For the foregoing reasons, the judgment of the Tax Court is

VACATED.

15