Clayton v. Commissioner

T.C. Memo. 1997-327

UNITED STATES TAX COURT

FREDERIC S. CLAYTON and MARLENE B. CLAYTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 4665-95. Filed July 21, 1997.

Robert S. Grodberg, for petitioners.

Christopher W. Schoen, for respondent.

MEMORANDUM OPINION

HAMBLEN, Judge: Respondent determined a deficiency in

petitioners' Federal income tax for taxable year 1985 in the

amount of $73,068. By amendment to answer, respondent asserted

an increased deficiency in the amount of $81,211. Unless

otherwise indicated, all section references are to the Internal
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Revenue Code as in effect for the year at issue, and Rule

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

After concessions by the parties, the sole issue is whether

respondent correctly calculated petitioners' deficiency for

taxable year 1985. This case was submitted without a trial

pursuant to Rule 122. The facts related herein were either

stipulated or derived from statements of various individuals that

the parties stipulated could be considered in this proceeding.

Background

Petitioners resided in Brookline, Massachusetts, at the time

they filed the petition herein. Petitioners timely filed their

1985 joint Federal income tax return. On audit in 1988,

respondent determined an adjustment in the amount of $16,812 for

taxable year 1985. Petitioners agreed to the adjustment and

waived restrictions on assessment of the additional tax due.

Petitioners incurred net operating losses (NOL or NOLs) in

1987 and 1988 and reported the losses on their joint Federal

income tax returns (Forms 1040) for those years. In December

1990, petitioners filed a Form 1040X, Amended U.S. Individual

Income Tax Return, for taxable year 1985, carrying back the NOL

arising in taxable year 1988 (first amended return). As a result

of the first amended return, petitioners had an overpayment of

$97,312. The prior assessment of $16,812, however, was still

due. On February 11, 1991, respondent reduced the overpayment by
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the assessment plus additions to tax, fees, and accrued interest

and issued a refund check.

On October 8, 1991, petitioners filed another Form 1040X for

taxable year 1985 (second amended return) and sought to carry

back the remainder of the NOL from 1988 and part of their NOL

from 1987. Respondent returned the second amended return and

advised petitioners that NOLs, arising in different taxable

years, must be carried back on separate Forms 1040X.

In response to respondent's letter, Mr. Kevin Wulff,

petitioners' accountant, prepared two separate Forms 1040X for

1985. One return carried back part of the NOL from 1987 and

reflected an overpayment of $65,937 (third amended return). The

other return carried back the NOL from 1988 and increased

petitioners' alternative minimum tax by $72,747 (fourth amended

return). In addition, Mr. Wulff prepared an amended return for

taxable year 1984, carrying back the balance of the NOL arising

in 1987 and reflecting an overpayment of $56,956 (fifth amended

return).

Petitioners included the overpayments on line 23 (refunds to

be received) of the third and fifth amended returns. Neither

return included a statement requesting that the overpayments be

applied to petitioners' additional liability of $72,747, which

was reflected in the fourth amended return. Mr. Wulff, however,

prepared a cover letter addressed to respondent indicating his

intention to call and request that the overpayments from the
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third and fifth amended returns be applied to the additional

liability (cover letter).

Mr. Fleishman, the partner supervising Mr. Wulff's work,

signed and mailed all three returns to petitioners. Petitioners

filed the third and fifth amended returns and a copy of the cover

letter with respondent's Atlanta Service Center.

Mr. Wulff called respondent's Atlanta Service Center during

November 1991 and again during January 1992. He informed

respondent's employee that petitioners did not have the funds to

pay the additional liability due with the fourth amended return

and requested that the liability be set off by the overpayments.

As a result of the third and fifth amended returns,

respondent issued refund checks to petitioners for $65,937 and

$56,956, respectively, plus interest. Shortly thereafter,

petitioners received and cashed both checks.

Respondent's Atlanta Service Center searched for the fourth

amended return but found no record of having received or

processed it. Respondent found the filed copy of the third

amended return at the Federal Records Center but did not find an

envelope or any other evidence of a postmark attached to it.

Petitioners do not have a postmark, certified mail receipt, or

registered mail receipt to establish that the fourth amended

return was actually mailed.

Respondent's Brooklyn office audited the 1987 and 1988

Federal tax returns of the Frederic Clayton Defined Benefit
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Pension Plan. In connection with that audit, petitioners'

accountant gave respondent's agent copies of all of petitioners'

original and amended tax returns for taxable years 1984 through

1987.

In determining petitioners' 1985 deficiency, respondent

increased the deficiency by the refund of $65,937. Petitioners

and respondent timely executed several Consent to Extend Time to

Assess Tax (Forms 872) for the taxable years 1987 and 1988,

extending the statute of limitation on assessment for both years.

Discussion

The issue for decision is whether respondent correctly

calculated petitioners' 1985 deficiency. Section 6211(a) defines

the term "deficiency" as the amount by which the tax actually

imposed exceeds--

(1) the sum of

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

(B) the amounts previously assessed (or
collected without assessment) as a deficiency,
over--

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

Section 6211(b)(2) defines a "rebate" as an abatement, credit,

refund, or other repayment made on the ground that the tax

imposed was less than the amount shown on the return and the
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amounts previously assessed or collected without assessment.1

Section 6402(a) grants the Commissioner authority to issue

refunds.2

Not all refunds are rebates. See Clark v. United States, 63

F.3d 83 (1st Cir. 1995); O’Bryant v. United States, 49 F.3d 340

(7th Cir. 1995); Groetzinger v. Commissioner, 69 T.C. 309 (1977);

Lesinski v. Commissioner, T.C. Memo. 1997-234; sec. 301.6211-

1(f), Proced. & Admin. Regs. A rebate refund is issued on the

basis of some substantive recalculation of tax owed. A nonrebate

refund, however, is issued not because of a determination by the

Commissioner that the tax paid is not owing, but for some other

1
Sec. 6211(b) provides in pertinent part:

(b) Rules for Application of Subsection (a).--For
purposes of this section--

* * * * * * *

(2) The term "rebate" means so much of an
abatement, credit, refund, or other payment, as
was made on the ground that the tax imposed by
subtitle A * * * was less than the excess of the
amount specified in subsection (a)(1) over the
rebates previously made.
2
Sec. 6402(a) provides in pertinent part:

General Rule.--In the case of any overpayment, the
Secretary, within the applicable period of limitations,
may credit the amount of such overpayment, including
any interest allowed thereon, against any liability in
respect of an internal revenue tax on the part of the
person who made the overpayment and shall * * * refund
any balance to such person.
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reason such as a mistake made by the Commissioner. O’Bryant v.

United States, supra at 342.

The distinction between rebate and nonrebate refunds is

pertinent to what options the Commissioner has available in

recovering a refund. Clark v. United States, supra at 88. The

Commissioner may recover a rebate refund under the deficiency

procedures set forth in sections 6211 through 6216. O’Bryant v.

United States, supra at 342. If the deficiency procedure is

employed, the statutory period of limitations of section 6501(a)

and (h)3 is applicable.

The Commissioner, however, may recover a nonrebate refund

only under section 74054 or under administrative collection

procedures if those are available. Clark v. United States, supra

at 88. Section 7405(b) authorizes the United States to recover

erroneous nonrebate refunds pursuant to a civil suit, but such a

3
Sec. 6501(h) provides in pertinent part:

In the case of a deficiency attributable to the
application to the taxpayer of a net operating loss
carryback * * *, such deficiency may be assessed at any
time before the expiration of the period within which a
deficiency for the taxable year of the net operating
loss * * * which results in such carryback may be
assessed.
4
Sec. 7405(b) provides as follows:

Refunds Otherwise Erroneous.--Any portion of a tax
imposed by this title which has been erroneously
refunded (if such refund would not be considered as
erroneous under section 6514) may be recovered by civil
action brought in the name of the United States.
 - 8 -

suit ordinarily must be filed within 2 years after the making of

the refund. Sec. 6532(b).5

Neither party disputes the following facts relating to

taxable year 1985: Petitioners' actual tax liability is

$185,097;6 the amount of tax due shown on petitioners' 1985

Federal income tax return (Form 1040) was $250,323; respondent

determined an additional adjustment in the amount of $16,812; and

petitioners received a refund of $97,312. Finally, the parties

also agree that respondent never assessed the additional

liability of $72,747 shown on the fourth amended return and that

petitioners owe the above amount but did not remit a payment.

Petitioners claim that there was no overpayment for taxable

year 1985 and that the refund of $65,937 is a nonrebate refund.

Respondent, however, having accepted the third amended tax return

and issued a refund based upon the overpayment reflected therein,

5
Sec. 6532(b) provides as follows:

Suits by United States for Recovery of Erroneous
Refunds.--Recovery of an erroneous refund by suit under
section 7405 shall be allowed only if such suit is
begun within 2 years after the making of such refund,
except that such suit may be brought at any time within
5 years from the making of the refund if it appears
that any part of the refund was induced by fraud or
misrepresentation of a material fact.
6
We granted respondent's motion for leave to file an
amendment to answer out of time. By this motion, respondent
revised petitioners' income tax liability and deficiency to
$185,097 and $81,211, respectively.
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argues the payment is a rebate refund, subject to recovery by the

deficiency procedures.

We must determine the basis upon which respondent issued the

refund of $65,937 in the instant case. The answer to this

question depends upon what that payment represents. If the

payment is a refund related to the recalculation of petitioners'

1985 tax liability, then it constitutes a rebate. If the

payment, however, is unrelated to a recalculation of their tax

liability, then it is properly characterized as a nonrebate

refund. Clark v. United States, supra; O’Bryant v. United

States, supra; Groetzinger v. Commissioner, supra at 315 (1977).

Ultimately, we agree with respondent. As we discuss below, the

refund of $65,937 is a rebate within the meaning of section

6211(b)(2) because it is based on a recalculation of petitioners'

tax liability. Accordingly, the refund is subject to the

deficiency regime of sections 6211 through 6216.

Respondent's determination is presumed correct, and

petitioners bear the burden of proving otherwise. Rule 142(a);

Welch v. Helvering, 290 U.S. 111 (1933). Petitioners argue that

respondent did not have the authority, pursuant to section

6402(a), to issue the refund of $65,937 because petitioners did

not have an overpayment in taxable year 1985 when all of their

tax liabilities and overpayments for the year are considered.

Petitioners' argument assumes that respondent must view all

transactions together in determining whether an overpayment
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exists, for purposes of section 6402(a), and that the fourth

amended return was properly mailed, creating a presumption of

delivery.

We need not address whether respondent must treat the third

and fourth amended returns as filed concurrently for purposes of

determining whether they had an overpayment pursuant to section

6402(a). We are not convinced that Mr. Clayton properly mailed

the fourth amended return. In the instant case, there can be no

presumption of delivery because of the absence of credible proof

of mailing. Leather v. Commissioner, T.C. Memo. 1991-534. Proof

of mailing requires some proof that the return was placed in an

envelope that was properly addressed, stamped, postmarked, and

placed in the mail. See Hiner v. Commissioner, T.C. Memo. 1993-

608.

The only direct evidence introduced by petitioners is Mr.

Clayton's self-serving statement that he properly addressed,

stamped, and mailed the third, fourth, and fifth amended returns.

A trier of fact is not bound to accept the self-serving testimony

of the parties in a case. United States v. Jimenez-Perez, 869

F.2d 9, 12 (1st Cir. 1989). Mr. Clayton did not supply details

to corroborate the mailings. For example, he could not remember

how many envelopes he used to mail the returns or how much

postage was affixed. Evidence of habit is not sufficient to

satisfy petitioners' burden of proof. See Hiner v. Commissioner,

supra. The statement of Mr. Wulff, petitioners' accountant,
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likewise, does not help petitioners in any material respect. His

statement was without direct bearing upon whether Mr. Clayton

mailed the fourth amended return.

The documentary evidence is also unpersuasive. Petitioners

produced a cover letter written by Mr. Wulff, which was attached

to the third and fifth amended returns. This letter offers very

limited support because Mr. Wulff did not mail the letter to

respondent but to petitioners.

Petitioners, in this case, have not produced credible

evidence that the fourth amended return was timely mailed and

postmarked. The evidence is simply insufficient to satisfy

petitioners' burden of proof regarding the mailing of the fourth

amended return. Rule 142(a); Welch v. Helvering, 290 U.S. 111

(1933). Without the proper filing of the fourth amended return,

petitioners had an overpayment of $65,937 for taxable year 1985.

Petitioners further argue respondent was obligated to

determine petitioners' correct tax liability when determining a

refund or credit. In support, petitioners rely upon Lewis v.

Reynolds, 284 U.S. 281 (1932), and Rev. Rul. 81-87, 1981-1 C.B.

580. In Lewis, the Supreme Court held that a taxpayer is

entitled to a refund only if he has "overpaid" his tax. Although

the statutes authorizing refunds do not specifically empower the

Commissioner to reaudit a return whenever repayment is claimed,

authority to do so is necessarily implied. An overpayment must

result before refund is authorized. Although the statute of
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limitations may have barred the assessment and collection of any

additional sum, it does not obviate the right of the United

States to retain payments already received when they do not

exceed the amount which might have been properly assessed and

demanded. Id. at 283.

Rev. Rul. 81-87 merely restates the holding in Lewis v.

Reynolds, supra. Angle v. United States, 996 F.2d 252, 255-256

(10th Cir. 1993). Rev. Rul. 81-87 provides that when the

taxpayers timely file a claim that would reduce their taxes, the

IRS, in determining whether they are to receive a credit or

refund will consider all proper adjustments, whether or not

time-barred. It makes clear, however, that the claimants may

recover only on the claim, which they filed before expiration of

the period of limitations, and then only to the extent to which

they would be entitled to a refund if their tax liability were

properly calculated without regard to the statute of limitations.

Neither Lewis v. Reynolds, supra, nor Rev. Rul. 81-87,

supra, helps petitioners here. The additional tax and the

overpayment resulted from carrying back NOLs arising in different

years. The Commissioner cannot be expected to ferret out all

conceivable upward adjustments to a taxpayer's liability when

making a refund determination. See Angle v. United States, supra

at 256; Herrington v. United States, 416 F.2d 1029, 1032 (10th

Cir. 1969). Although the Supreme Court concluded in Lewis that

respondent has an implied power to audit a taxpayer's return when
 - 13 -

a refund is claimed, such power does not create an obligation of

respondent to do so. See United States v. Memphis Cotton Oil

Co., 288 U.S. 62, 70-71 (1933); Taranto v. Commissioner, T.C.

Memo. 1975-372. We are convinced that section 6402(a) does not

require respondent to use his resources in such a matter before

issuing a refund. Cf. Clark v. Commissioner, 158 F.2d 851 (6th

Cir. 1946), affg. a Memorandum Opinion of this Court. Viewing

the facts in total, we are satisfied that respondent was

justified in issuing a refund in the amount of $65,937.

Alternatively, petitioners argue that there was no

overpayment in taxable year 1985 because respondent should have

treated the additional tax due as part of the amount "shown as

the tax by the taxpayer upon his return" for purposes of section

6211(a)(1)(A). Petitioners contend that the cover letters and

Mr. Wulff's telephone conversations with respondent's employees

were sufficient to alert respondent as to their additional

liability. In other words, petitioners argue that the additional

tax, which they acknowledge was due notwithstanding their failure

to file a return reporting the tax, qualifies as an "amount shown

as the tax by the taxpayer upon his return" within the meaning of

section 6211(a)(1)(A). We disagree.

Section 6211 defines a deficiency as the amount by which the

correct tax due exceeds the sum of: (1) The amount shown by the

taxpayer as the tax due on his return if a return was made and

(2) amounts previously assessed or collected without assessment.
 - 14 -

Sec. 6211(a)(1)(A) and (B). It is apparent from the language of

section 6211(a)(1)(A) that at a minimum the taxpayer must file a

return for the amount of tax reflected therein to reduce the

taxpayer's deficiency.

Every document a taxpayer files containing computations, and

tax information is not a return. Friedman v. Commissioner, 97

T.C. 606, 610 (1991); Thompson v. Commissioner, 78 T.C. 558, 562

(1982); Reiff v. Commissioner, 77 T.C. 1169 (1981). For example,

to qualify as a return, the Form 1040 must state specifically the

amounts of gross income and the deductions and credits claimed.

Thompson v. Commissioner, supra. The same rationale regarding

Form 1040 is equally applicable to an amended tax return.

After the due date of the original return, an amended return

constitutes a supplement or amendment to the original Form 1040.

See Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934).

Accordingly, to qualify as an amended return, the document must

supply sufficient data from which the Commissioner can compute

and assess the taxpayers' new tax liability. At a minimum, such

data should include the nature and amount of the change. In our

self-reporting tax system, the Commissioner should not be forced

to accept as a return a document which plainly is not intended to

give the required information. United States v. Moore, 627 F.2d

830, 835 (7th Cir. 1980); McCaskill v. Commissioner, 77 T.C. 689,

698-699 (1981). Neither the cover letter filed by petitioners

nor the conversations between petitioners' accountant and
 - 15 -

respondent's employees explained what item petitioners were

changing or the reason for the change. We find that neither

constituted an amended return.

To support their argument, petitioners rely upon section

6103(b) and section 9781.348.2 of 6 Administration, Internal

Revenue Manual (CCH), 28,689-5 through 28,690 (I.R.M. or manual).

Section 6103(b) provides in pertinent part:

Definitions.--For purposes of this section--

(1) Return.--The term “return” means any tax or
information return, declaration of estimated tax, or
claim for refund required by, or provided for or
permitted under, the provisions of this title which is
filed with the Secretary by, on behalf of, or with
respect to any person, and any amendment or supplement
thereto, including supporting schedules, attachments,
or lists which are supplemental to, or part of, the
return so filed.

* * * * * * *

(2) Return Information.-- The term "return
information" means

(A) a taxpayer's identity, the nature,
source, or amount of his income, payments,
receipts, deductions, exemptions, credits, assets,
liabilities, net worth, tax liability, tax
withheld, deficiencies, overassessments, or tax
payments, whether the taxpayer's return was, is
being, or will be examined or subject to other
investigation or processing, or any other data,
received by, recorded by, prepared by, furnished
to, or collected by the Secretary with respect to
a return or with respect to the determination of
the existence, or possible existence, of liability
(or the amount thereof) of any person under this
title for any tax, penalty, interest, fine,
forfeiture, or other imposition or offense, and *
* * be associated with or otherwise identify,
directly or indirectly, a particular taxpayer.
 - 16 -

Section 9781.348.2 of the manual provides:

(1) A "return" is any tax return or information
return, schedules, and attachments thereto, including
any amendment or supplement, which is required or
permitted to be filed and is in fact filed by a
taxpayer with the Secretary of the Treasury. Examples
include:

(a) Forms 1040, Schedules A, B, C and Forms
W-2.

(b) A taxpayer has filed an income tax return
and subsequently submits a letter to IRS
explaining an item on the original return. The
letter is within the definition of return.

(2) The statutory definition of "return
information" is very broad. It includes any information
other than a taxpayer's return itself which IRS has
obtained from any source or developed through any means
which relates to the potential liability of any person
under the Code for any tax, penalty, interest, fine,
forfeiture or other imposition or offense.

Petitioners' reliance on the above provisions is misplaced

in the context of the present case. The intent of both section

6103(b)(2) and section 9781.348.2 of the manual is to require

respondent's agents to maintain the confidentiality of taxpayers'

information. By its own terms, section 6103(b)(1) limits its

definition of the term "return". It is defined only “For

purposes of this section”. Sec. 6103(b)(1). Moreover, section

9781.348.2 of the manual defines the terms "return" and "return

information" for purposes of the rule in section 9781.348.1,

which requires special agents in criminal tax investigations to

treat return information as confidential. I.R.M., supra sec.

9781.348.1 at 28,689-5. Although we do not see any inconsistency
 - 17 -

between the definition of "return" as found in sections 6103(b)

of the Code and 9781.348.2 of the manual and "return" as used in

section 6211 or defined in section 6213(g)(1), we also do not see

how those definitions help petitioners. Consequently, we

conclude that the cover letter and the conversations between

their accountant and respondent's employees do not constitute a

return.

Respondent issued a refund to petitioners for the amount

requested on the third amended return. Accordingly, we hold that

there was no erroneous action by respondent and that the refund

was based on a recalculation of petitioners' tax liability and

that the refund of $65,937 does come within the statutory

framework of section 6211 for purposes of calculating

petitioners' 1985 tax deficiency. We have considered all of the

other arguments made by petitioners and, to the extent we have

not addressed them, find them to be without merit.

To reflect the foregoing,

Decision will be entered

under Rule 155.