Fayeghi v. Commissioner

T.C. Memo. 1998-297

UNITED STATES TAX COURT

FARAMARZ FAYEGHI AND SHELLI FAYEGHI, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 457-98. Filed August 17, 1998.

Richard F. Armknecht III, for petitioners.

Paul L. Dixon and Deborah Swann, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Chief Special

Trial Judge Peter J. Panuthos pursuant to the provisions of

section 7443A(b)(4) and Rules 180, 181, and 183.1 The Court

1
All section references are to the Internal Revenue Code
(continued...)
 - 2 -

agrees with and adopts the opinion of the Chief Special Trial

Judge, which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

PANUTHOS, Chief Special Trial Judge: This case is before

the Court on petitioners' motion to restrain collection, as

supplemented, filed pursuant to section 6213(a) and Rule 55.

Because we conclude that we lack jurisdiction to restrain

collection in this case, we will deny petitioners' motion.

Background

On or about October 22, 1991, petitioners filed a joint

Federal income tax return for 1990 in which they reported tax in

the amount of $107,771, tax withholding in the amount of $828,

and tax owing in the amount $106,943. Petitioners did not remit

payment of the tax with their return.

On November 25, 1991, respondent assessed the following

against petitioners with respect to their tax liability for 1990:

Item Amount

Tax $107,771.00
Late payment penalty 4,277.72
Interest 6,767.67

On January 13, 1993, petitioners submitted to respondent an

amended tax return for 1990 (Form 1040X) in which they claimed

1
(...continued)
in effect for the years in issue, unless otherwise indicated.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 3 -

that their correct tax liability was $7,045, that they had paid

$107,771, and that they were entitled to a refund in the amount

of $100,726. Petitioners' claim that they had paid $107,771 in

tax for 1990 was incorrect.

Respondent did not accept petitioners' amended return. To

the contrary, respondent treated petitioners' amended return as a

claim for abatement with respect to $100,726 of the $107,771

amount that respondent had assessed on November 25, 1991.

On or about December 31, 1995, following an examination of

petitioners' tax liability for 1990, respondent issued a so-

called 30-day letter to petitioners proposing a deficiency in

their tax liability for 1990 in the amount of $321,079.

Specifically, respondent proposed to determine that petitioners

failed to report $1,139,425 of ordinary income attributable to

petitioners' investment in an S corporation known as GMF, Inc.

An examination report attached to the 30-day letter states:

On 1/13/93 you filed claim form 1040X or an
informal claim for an abatement of $100,726 for 1990.
As a result of our examination, we have disallowed your
claim. GMF, Inc. was owned by taxpayer in 1990 and was
an S corporation at that time. The Internal Revenue
Code has no provision for filing tax abatement claims.
If you do not agree with our determination, you may,
after paying the additional tax due, file an amended
return or claim for refund. There is no provision for
appealing this unless the original balance due is paid.
* * *

On April 15, 1996, and April 15, 1997, respondent applied

overpayment credits of $5,923.05 and $6,666.69 associated with
 - 4 -

petitioners' tax returns for 1995 and 1996, respectively, to

partially offset the assessment made against petitioners for

1990. After making an additional assessment against petitioners

in the amount of $14 for collection costs, the assessment made

against petitioners for 1990 totaled $105,412.65.

On September 10, 1997, respondent issued to petitioners a

final notice of intent to levy listing $207,743.97 as the amount

purportedly due from petitioners for the 1990 taxable year. The

$207,743.97 amount is identified as $112,065.34 (assessed amount

unpaid from prior notices) and $95,678.63 (additional penalty and

interest).

On October 9, 1997, respondent issued a notice of deficiency

to petitioners determining a deficiency in their Federal income

tax for 1990 in the amount of $321,079, and an accuracy-related

penalty pursuant to section 6662(a) in the amount of $64,216.

The notice of deficiency is based on the proposed adjustments

that were outlined in respondent's 30-day letter described above.

Also on October 9, 1997, respondent issued a notice of

deficiency to petitioners determining deficiencies in and

additions to their Federal income taxes for 1991, 1992, and 1993.
 - 5 -

On January 8, 1998, petitioners filed a timely petition for

redetermination contesting the notices of deficiency for 1990,

1991, 1992, and 1993.2

After respondent filed an answer to the petition,

petitioners filed a motion to restrain collection. Relying on

Powerstein v. Commissioner, 99 T.C. 466 (1992), petitioners

maintain that respondent is engaged in improper collection

efforts respecting their income tax liability for 1990.

Respondent filed an objection to petitioners' motion arguing that

respondent's collection efforts are directed at the tax that

petitioners reported due on their original 1990 tax return.

Relying on Meyer v. Commissioner, 97 T.C. 555 (1991), respondent

contends that the amount of tax that petitioners reported due on

their original return is subject to immediate collection.

Respondent denies any effort to collect the tax deficiency for

1990 is at issue in this case.

Petitioners filed a supplement to their motion to restrain

collection attaching a copy of their 1990 amended return.

Petitioners also filed a response to respondent's objection in

which they contend that their amended return for 1990 serves to

bar respondent from attempting to collect the tax that

2
At the time the petition was filed, petitioners resided
at Las Vegas, Nevada.
 - 6 -

petitioners reported due in their original 1990 tax return.

Petitioners' response states in pertinent part:

First, the amended return on its face clearly indicates
that a taxpayer will change the original return by
filing the amended return. Second, an amended return
constitutes a claim for refund where the amount of tax
liability reported on the amended return is less than
the amount reported on the original return. Where the
tax was not paid with the original return (as
Petitioners did not do in this case), the IRS cannot,
of course, "refund" what was not initially paid.
However, the reduced amount of tax reported constitutes
a "rebate" as such term is defined at section
6211(b)(2) of the Internal Revenue Code (essentially,
the taxpayer effects a repayment of a previous
liability). By either rationale, the amended return
filed by Petitioners reduced the amount that they had
self assessed. If Respondent asserts that Petitioners
owe more than the amount of such self assessment, then
the difference constitutes a deficiency. See Section
6211(a) of the IRC.

Respondent filed a response to petitioners' response citing Dover

Corp. v. Commissioner, T.C. Memo. 1997-339, affd. per curiam

F.3d. ___ (2d Cir., June 4, 1998), for the proposition that the

Commissioner's rejection of a taxpayer's amended return does not

convert the disallowed claim for refund or abatement into a tax

deficiency within the meaning of section 6211(a).

Petitioners subsequently filed a response to respondent's

response, citing Russell v. United States, 592 F.2d 1069, 1072

(9th Cir. 1979), and arguing that respondent should be barred

from attempting to collect any amounts for 1990 because the Court

has jurisdiction to decide "the entire gamut of possible issues
 - 7 -

that controlled the determination of the amount of tax liability

for the year in question".

This matter was called for hearing at the Court's motions

session in Washington, D.C. Counsel for respondent appeared at

the hearing and presented argument in opposition to petitioners'

motion. Although no appearance was made by or on petitioners'

behalf at the hearing, petitioners did file a written statement

with the Court pursuant to Rule 50(c).

Discussion

Section 6213(a) provides that the Commissioner generally is

precluded from assessing or collecting a deficiency until a

notice of deficiency authorized under section 6212(a) is mailed

to the taxpayer with respect to the deficiency and until the

expiration of the 90-day or 150-day period for filing a timely

petition for redetermination with this Court. Upon the filing of

a petition for redetermination contesting the notice of

deficiency, the Commissioner is further precluded from assessing

or collecting the deficiency until the decision of the Court

becomes final. Powerstein v. Commissioner, supra at 471; Powell

v. Commissioner, 96 T.C. 707, 710-711 (1991).

The term "deficiency" is defined in section 6211(a), which

provides in pertinent part:

SEC. 6211(a). In General.--For purposes of this
title in the case of income, estate, and gift taxes
imposed by subtitles A and B * * * the term
 - 8 -

"deficiency" means 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 * * *, 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.

In short, a deficiency arises when respondent determines that the

amount of tax imposed exceeds the sum of the amount of tax shown

on the return and the amount of tax previously assessed.

Although the Commissioner must issue a notice of deficiency

and respect the deficiency procedures prior to the assessment and

collection of a deficiency, the Commissioner is required to

immediately "assess all taxes determined by the taxpayer or by

the Secretary as to which returns or lists are made under this

title". Sec. 6201(a)(1). As explained in Meyer v. Commissioner,

supra at 559, the Commissioner is authorized to immediately

"assess and collect the amount of taxes that are computed and

shown due on a taxpayer's original income tax return, as well as

the amount of any additional taxes computed and shown due on a

subsequently filed amended income tax return." The Commissioner

likewise is authorized to immediately assess and collect the

addition to tax under section 6651(a)(2) and the addition to tax

under section 6651(a)(1) if such additions are measured by the
 - 9 -

amount of tax shown on the taxpayer's return. Meyer v.

Commissioner, supra at 559-560, and cases cited therein. Such

summary assessments are not subject to the normal deficiency

procedures. Id. at 560.

Section 6213(a) was amended, effective with respect to

orders entered after November 10, 1988, to extend to this Court

jurisdiction to restrain assessment and collection of a

deficiency in cases where "a timely petition for a

redetermination of the deficiency has been filed and then only in

respect of the deficiency that is the subject of such petition."

Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100-647,

sec. 6243(a), 102 Stat. 3749; Kamholz v. Commissioner, 94 T.C.

11, 15 (1990). Consistent with the Court's statutorily

prescribed jurisdiction in this area, resolution of petitioners'

Motion to Restrain Collection depends upon whether respondent has

assessed and is attempting to collect the deficiency that is the

proper subject of petitioners' timely filed petition for

redetermination. Powerstein v. Commissioner, 99 T.C. at 471-472,

and cases cited therein.

In the instant case, it is clear that the amount that

respondent has assessed, and is attempting to collect, consists

of the tax that petitioners reported due on their original income

tax return for 1990, as well as statutory interest and penalties

imposed as a consequence of petitioners' failure to remit payment
 - 10 -

of such tax with their return. It follows that the disputed

amount does not constitute a deficiency within the meaning of

section 6211(a) and that respondent is free to collect the

disputed amount pursuant to section 6201(a)(1). Consistent with

the foregoing, respondent was not required to (and indeed did

not) include the disputed amount in the notice of deficiency for

1990. In this regard, the instant case is virtually

indistinguishable from Meyer v. Commissioner, 97 T.C. 555 (1991).

In an effort to avoid the conclusion that the Court lacks

the authority under section 6213(a) to bar respondent's

collection efforts in this case, petitioners maintain that their

amended return for 1990 provides a basis for the Court to grant

their motion to restrain collection. We disagree.

Petitioners contend that a taxpayer is free to "change" the

amount of tax that has been "self-assessed" by filing an amended

return, and that the Commissioner should be obliged to accept

amended tax returns regardless of whether the taxpayer is

reporting an increase or a decrease in tax liability. We are not

persuaded by petitioners' position. See Dover Corp. v.

Commissioner, supra. An amended return constitutes a claim for

refund that the Commissioner may review and adjust either by way

of an immediate rejection of the refund claim, see McCabe v.

Commissioner, T.C. Memo. 1983-325, and cases discussed therein,

or by tentative allowance, subsequent audit, and, if necessary,
 - 11 -

issuance of a notice of deficiency. See Terry v. Commissioner,

91 T.C. 85, 87 (1988); Owens v. Commissioner, 50 T.C. 577, 583

(1968), and cases cited therein.

Here, respondent treated petitioners' amended return as an

informal claim for abatement. Further, following an examination

of petitioners' 1990 tax return, respondent considered and

rejected the merits of the claim, as evidenced by the discussion

of the matter in the 30-day letter that respondent issued to

petitioners on December 31, 1995. We agree with respondent that

the rejection of a claim for refund or abatement in an amended

return does not convert the disallowed claim into a deficiency.

See Koch v. Alexander, 561 F.2d 1115, 1117-1118 (4th Cir. 1977);

see also Curry v. United States, 774 F.2d 852, 854 n.1 (7th Cir.

1985).

Petitioners further contend that the Court could treat their

amended return as the equivalent of a rebate within the meaning

of section 6211(b)(2).3 Petitioners suggest that their amended

return "essentially * * * effects a repayment of a previous

liability." We disagree. Considering the reality that

3
The term "rebate" is defined in sec. 6211(b)(2) as
follows:
(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
or B or chapter 41, 42, 43, or 44 was less than the
excess of the amount specified in subsection (a)(1)
over the rebates previously made.
 - 12 -

petitioners have failed to pay the tax reported due on their

original 1990 return, and respondent's rejection of their amended

return, there is no basis for finding an abatement, credit, or

refund in this case.

Petitioners' reliance on Powerstein v. Commissioner, supra,

likewise is misplaced. In Powerstein v. Commissioner, supra, the

Commissioner issued a notice of deficiency to the taxpayers for

the taxable years 1984 through 1988. After filing a petition

with the Court, and after the Commissioner filed an answer, the

taxpayers filed amended returns for the years in dispute in an

apparently misguided effort to generate a net tax refund. The

Commissioner accepted the amended returns in which the taxpayers

reported increased tax liabilities and rejected the amended

returns in which the taxpayers reported reduced tax liabilities.

Under the particular facts of that case, we concluded that the

Commissioner had erred in treating the increased taxes reported

in the amended returns as amounts "shown upon his return" within

the meaning of section 301.6211-1(a), Proced. & Admin. Regs. To

the contrary, we held that the additional taxes represented

amounts that the taxpayers were "protesting rather than

admitting" within the meaning of the same regulation. Id. at

474.

The facts presented in the instant case are readily

distinguishable from those presented in Powerstein v.
 - 13 -

Commissioner, supra. Most notably, unlike Powerstein, respondent

is attempting to collect the tax that petitioners reported as due

on their original return--an amount that is properly

characterized as an amount "shown upon his return" within the

meaning of section 301.6211-1(a), Proced. & Admin. Regs.

Finally, petitioners contend that the Court may bar

respondent's collection efforts based on Russell v. United

States, 529 F.2d at 1072, which petitioners cite for the

proposition that the Court has jurisdiction to decide "the entire

gamut of possible issues that controlled the determination of the

amount of tax liability for the year in question". Although

Russell v. United States, supra at 1072, correctly states that

the Court has broad jurisdiction to decide the correct amount of

tax liability for a taxable year properly before the Court,

Russell does not address the question of the scope of the Court's

jurisdiction to restrain collection. As previously discussed,

section 6213(a) expressly limits the Court's authority to

restrain collection to "the deficiency that is the subject of [a

timely filed] petition". However, we have concluded that

respondent is not attempting to collect the deficiency that is

the subject of the petition filed in this case.4

4
Consistent with Russell v. United States, 592 F.2d 1069
(9th Cir. 1979), we do observe that, if petitioners were to pay
the amount that respondent seeks to collect, petitioners may seek
leave to file an amended petition with the Court which includes
(continued...)
 - 14 -

In conclusion, we are satisfied that respondent has not

assessed, and is not attempting to collect, the deficiency for

1990 in dispute in this case. Because we lack the authority to

bar collection under the circumstances presented, we will deny

petitioners' motion to restrain collection as supplemented.

To reflect the foregoing,

An order will be entered

denying petitioners' motion to

restrain collection as

supplemented.

4
(...continued)
allegations invoking the Court's jurisdiction to determine an
overpayment pursuant to sec. 6512(b). See, e.g., Dover Corp. v.
Commissioner, T.C. Memo. 1997-339, affd. per curiam F.3d ___
(2d Cir., June 4, 1998).