T.C. Memo. 2005-238
UNITED STATES TAX COURT
JAMES WILSON RICHMOND, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7438-04L. Filed October 12, 2005.
James Wilson Richmond, Jr., pro se.
Innessa Glazman Molot, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS, Judge: This case arises from a petition for
judicial review pursuant to section 63301 of respondent’s
determination to proceed with collection by levy with respect to
petitioner’s income tax liability for 2000. The issue we must
1
Section references are to the Internal Revenue Code in
effect at relevant times.
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decide is whether respondent’s determination constituted an abuse
of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits submitted therewith are
incorporated herein by this reference.
At the time the petition was filed, petitioner resided in
Silver Spring, Maryland.
Petitioner, a self-employed attorney during the relevant
years, filed income tax returns for 1999 and 2000 on August 21,
2001. He properly filed a Form 1040, U.S. Individual Income Tax
Return, for 1999 (the 1999 return) but improperly filed a Form
1040A,2 Individual Income Tax Return, for 2000 (the 2000 return).
The income petitioner reported on both the 1999 and 2000 returns
consisted of business income as reflected on Schedules C, Profit
or Loss from Business, attached to the returns. Because the 2000
return did not have a line for reporting Schedule C income,
petitioner improperly reported that income as wages, salaries,
tips, etc.
On the 1999 return, petitioner reported total tax of $3,223,
total payments of $6,000, and an overpayment of $2,777. On the
2
The instructions to the 2000 Form 1040A direct individuals
with business income to file a Form 1040 rather than a Form
1040A.
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return, petitioner directed that the overpayment be applied to
his 2000 estimated tax.
On the 2000 return, petitioner reported gross receipts of
$64,957.98, total expenses of $21,400.36, and net profit of
$43,557.62. He also reported a $400 IRA distribution as income
and claimed an IRA deduction of $1,000. He reported adjusted
gross income of $42,957.62. He claimed the standard deduction of
$4,400, deducted $2,800 for one exemption, and reported taxable
income of $35,757.62 ($42,957.62 - $4,400 - $2,800). Petitioner
reported tax of $6,605 without regard to his self-employment tax.
Petitioner made numerous mistakes in calculating his 1999
and 2000 tax liabilities. In computing his self-employment tax
for 2000, petitioner correctly reported his net earnings from
self-employment to be $40,225; i.e., 92.35 percent of his
Schedule C net profit ($43,558 x 0.9235). However, petitioner
erroneously calculated his self-employment tax to be $1,665, as
follows:
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Line Item Amount
1 Net farm profit from Schedule F --
2 Net profit from Schedule C $43,557.62
3 Combine lines 1 and 2 43,557.62
4a Multiply line 3 by 0.9235 40,225.00
4b Optional method amount --
4c Combine lines 4a and 4b 40,225.00
5b Church employee income --
6 Net earning from self-employment
(combine lines 4c and 5b) 40,225.00
7 Maximum amount of combined wages
and self-employment earnings subject
to social security tax for 2000 76,200.00
8a Total social security wages and tips --
8b Unreported tips --
8c Add lines 8a and 8b 43,557.00
9 Subtract line 8c from line 7 --
10 Multiply the smaller of line 6 or
1
line 9 by 0.124 498.79
11 Multiply line 6 by 0.029 1,166.53
12 Self-employment tax
(add lines 10 and 11) 1,665.31
1
This number is incorrect; the product of $40,225
(line 6 amount) and 0.124 is $4,987.90.
Petitioner erroneously reported total tax of $7,437.65,
which he computed by adding $832.65 (approximately 50 percent of
the $1,665.31 self-employment tax he computed) to the $6,605 tax
on his taxable income.
Without regard to the 1999 overpayment, petitioner made
three estimated tax payments ($1,331.50, $5,233, and $1,374.37)
totaling $7,938.87 for 2000. He claimed total 2000 estimated tax
payments of $10,705.87 that included the estimated tax payments
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plus the amount applied from the 1999 return.3 On the 2000
return, he claimed an overpayment of $3,268.22 and directed that
it be applied to his 2001 estimated tax.
Although petitioner reported payments totaling $6,000 for
1999, in fact he made payments totaling $6,600 and had an
overpayment of $3,377 ($3,223 - $6,600) in 1999. Respondent did
not apply that overpayment to petitioner’s 2000 estimated tax as
petitioner directed on the 1999 return. Instead, respondent
credited, as of April 15, 2000, the $3,377 overpayment from 1999
to petitioner’s unpaid tax for 1994.4
With respect to 2000, respondent assessed a total tax of
$11,091.22, rather than the $7,437.65 petitioner reported on the
2000 return. The tax assessed was calculated on $40,350 of
adjusted gross income, $33,150 of taxable income, and $5,214 of
self-employment tax. Respondent attributed the increase in the
tax assessed over that reported on petitioner’s return to
mathematical errors on the 2000 return. As a result of
respondent’s adjustments, respondent determined that petitioner
underreported his income tax by $3,653.57 ($11,091.22 -
$7,437.65). Because respondent credited petitioner’s overpayment
3
We note the tax payments so claimed correctly total
$10,715.87 ($7,938.87 + $2,777).
4
The transcript of petitioner’s 1999 account shows that
petitioner’s 1999 overpayment was credited to his 1994 liability
during the 40th week of 2001. The Court takes judicial notice
that the 40th week of 2001 was the first week in October 2001.
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from 1999 to taxes petitioner owed for 1994 and applied only
petitioner’s three estimated tax payments for 2000 totaling
$7,938.87 to petitioner’s 2000 tax liability, respondent
determined that petitioner underpaid his taxes for 2000 by
$3,152.35 ($11,091.22 - $7,938.87). Respondent also assessed a
penalty for underpayment of estimated tax and interest.
The transcript of petitioner’s 2000 taxes shows that on
November 5 and 12, 2001, respondent sent petitioner notices of
balance due for his 2000 taxes. On July 30, 2002, petitioner
filed a petition for bankruptcy under 11 U.S.C chapter 7 seeking
discharge of his tax liabilities for 1992-95. On November 13,
2002, the bankruptcy court granted petitioner a discharge of
those taxes.
On October 14, 2003, respondent issued a Final Notice of
Intent to Levy and Notice of Right to a Hearing with respect to
petitioner’s 2000 tax liability. Petitioner filed a timely
request for a hearing.
On March 24, 2004, Appeals Officer Jacquelyn Sansbury met
with petitioner. Appeals Officer Sansbury had no prior
involvement with regard to petitioner’s tax liabilities. At the
meeting, petitioner asserted the proposed collection of the 2000
taxes was improper because the Internal Revenue Service (IRS)
ignored his direction to apply the 1999 overpayment to his 2000
estimated taxes.
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OPINION
A. Section 6330
Section 6330 entitles a taxpayer to notice and an
opportunity for a hearing before the IRS can begin the process of
tax collection by lien and/or levy. Upon request, a taxpayer is
entitled to a fair hearing before an impartial officer from the
IRS Office of Appeals. Sec. 6330(b)(1), (3). At the hearing,
the Appeals officer is required to verify that the requirements
of any applicable law or administrative procedure have been met
and to consider any relevant issue the taxpayer raises relating
to the unpaid tax or the proposed levy. Sec. 6330(c)(1) and
(2)(A).
A taxpayer may generally raise any relevant issue relating
to his/her unpaid tax liability or the proposed levy during the
hearing. Relevant issues include an appropriate spousal defense,
challenges to the appropriateness of the collection action, and
offers of collection alternatives. Sec. 6330(c)(2)(A). The
taxpayer may challenge the existence or amount of the underlying
tax liability if he/she did not receive a statutory notice of
deficiency for the tax liability or did not have an opportunity
to dispute it. Sec. 6330(c)(2)(B).
Following the hearing, the Appeals officer must determine
whether the collection action is to proceed, taking into account
the verification the Appeals officer has made, the issues raised
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by the taxpayer at the hearing, and “whether any proposed
collection action balances the need for the efficient collection
of taxes with the legitimate concern of the * * * [taxpayer] that
any collection action be no more intrusive than necessary.” Sec.
6330(c)(3).
If the Commissioner issues a determination letter to the
taxpayer following an administrative hearing, the taxpayer may
file a petition for judicial review of the administrative
determination. Sec. 6330(d)(1); Davis v. Commissioner, 115 T.C.
35, 37 (2000); Goza v. Commissioner, 114 T.C. 176, 179 (2000).
We have jurisdiction over this matter because petitioner
filed a timely petition for review in response to respondent’s
valid notice of determination to proceed with collection. See
sec. 6330(d)(1); Lunsford v. Commissioner, 117 T.C. 159 (2001);
Sarrell v. Commissioner, 117 T.C. 122 (2001); Sego v.
Commissioner, 114 T.C. 604, 610 (2000); Offiler v. Commissioner,
114 T.C. 492, 498 (2000); Hochschild v. Commissioner, T.C. Memo.
2002-195. In a proceeding commenced under section 6330(d), the
Court applies a de novo standard to determine a taxpayer’s
underlying tax liability, when and if it is at issue, and an
abuse of discretion standard to review certain other
administrative determinations of the Commissioner. Sego v.
Commissioner, supra at 610.
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The crux of petitioner’s complaint is that had respondent
applied petitioner’s 1999 overpayment as an estimated tax payment
toward his 2000 tax liability, petitioner’s 2000 tax liability
would have been paid. Thus, petitioner challenges his underlying
tax liability for the year at issue. See Landry v. Commissioner,
116 T.C. 60, 62 (2001).
Respondent did not issue, and petitioner did not receive, a
statutory notice of deficiency for 2000. Petitioner’s 2000 taxes
were not discharged in his bankruptcy proceeding, and he did not
otherwise have an opportunity to argue that his 1999 overpayment
should be applied to his 2000 tax liability. Consequently,
petitioner may challenge that liability, and we have jurisdiction
to consider it. We also have jurisdiction to consider
petitioner’s tax liabilities for 1999 and 1994, years that were
not the subject of the notice of determination, insofar as they
are relevant to computing petitioner’s 2000 tax liability. See
Freije v. Commissioner, 125 T.C. 14 (2005).
B. Verification That Requirements of Applicable Law and
Administrative Procedure Have Been Met
Section 6330 requires the Appeals officer to verify that
the requirements of any applicable law or administrative
procedure have been met. Consequently, the Appeals officer must
verify that the underlying tax was properly assessed.
Section 6201 authorizes the Secretary to assess all taxes
reported by the taxpayer on his/her return. Generally, the
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Secretary may not assess tax greater than that reported on the
return without issuing a statutory notice of deficiency.5 An
exception to the general rule permits the Secretary to assess an
additional amount resulting from a mathematical or clerical error
appearing on the return. Sec. 6213(b). Additionally, if a tax
return or claim for refund of income taxes under subtitle A of
the Internal Revenue Code contains an overstatement of the amount
paid as estimated income tax, the Secretary may assess the
overstated amount “in the same manner as in the case of a
mathematical or clerical error appearing upon the return”. Sec.
6201(a)(3); see Schlosser v. Commissioner, 94 T.C. 816, 824-825
(1990), affd. without published opinion 2 F.3d 404 (11th Cir.
1993).
1. Mathematical and Clerical Errors
The term “mathematical or clerical error” is defined to
include an error in addition, subtraction, multiplication, or
division; incorrect use of any table that is apparent from the
return; inconsistent entries on the return; omission of
information required to substantiate an entry; and an entry on a
5
Sec. 6211(a) provides in pertinent part that in the case of
income taxes imposed by subtit. A the term “deficiency” means the
amount by which the tax imposed by subtit. A exceeds the amount
of tax shown by the taxpayer on his/her return. Sec. 1401, which
imposes the tax on self-employment income, is a part of subtit.
A of the Internal Revenue Code.
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return of a deduction or credit in an amount that exceeds a
statutory limit. Sec. 6213(g)(2).
On his 2000 return, petitioner reported a total tax
liability of $7,437.65--$6,605 tax on taxable income of
$35,757.62 plus $832.65 (approximately 50 percent of the
$1,665.31 self-employment tax he computed). Respondent assessed
a total tax of $11,091.22, rather than the $7,437.65 petitioner
reported on the return. Respondent determined that the
deficiency was attributed to a mathematical error and did not
issue a notice of deficiency. The statutory notice of balance
due explaining the changes in the amount of tax assessed is not
in the record.
The transcript of petitioner’s 2000 taxes reflects that
respondent assessed petitioner’s taxes on the basis of $40,350 of
adjusted gross income, $33,150 of taxable income, and $5,214 of
self-employment tax. On the basis of those numbers, we conclude
that respondent assessed income tax of $5,877 ($11,091 - $5,214)
on $33,150 of taxable income, consistent with the tax table for
2000. As a result of respondent’s adjustments, respondent
determined that petitioner underreported his income tax by
$3,653.57 ($11,091.22 - $7,437.65).
There is no notice of deficiency to explain how respondent
computed petitioner’s 2000 tax liability. At the trial of this
case and on brief, respondent explained the correction of
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mathematical errors (using petitioner’s method of computing the
self-employment tax) as follows:
1 Net farm profit from Schedule F --
2 Net profit from Schedule C $43,557.62
3 Combine lines 1 and 2 43,557.62
4a Multiply line 3 by 0.9235 40,225.00
4b --
4c Combine lines 4a and 4b 40,225.00
5b --
6 Net earning from self-employment 40,225.00
(combine lines 4c and 5b)
7 Maximum amount of combined wages and
self-employment earnings subject to
social security tax for 2000 76,200.00
8a Total social security wages and tips --
8b Unreported tips --
8c Add lines 8a and 8b 43,557.00
9 Subtract line 8c from line 7 32,643.00
10 Multiply the smaller of line 6 or
line 9 by 0.124 4,047.73
11 Multiply line 6 by 0.029 1,166.53
12 Self-employment tax. Add lines 10 and 11. 5,214.26
In computing petitioner’s self-employment tax, respondent
erroneously subtracted $43,558 (petitioner’s Schedule C net
profit which petitioner reported on line 7 of Form 1040A as
wages, salaries, and tips) from $76,200 (the maximum amount of
combined wages and self-employment earning subject to Social
Security tax for 2000). Petitioner had no employment income
other than Schedule C income.
Petitioner had a net profit of $43,558 in 2000 as reflected
on Schedule C attached to his 2000 return. Thus, for purposes of
computing his self-employment tax, petitioner had net earnings
from self-employment of $40,225; i.e., 92.35 percent of his
Schedule C net profit ($43,558 x 0.9235). Petitioner’s correct
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self-employment tax was $6,154; i.e., 15.3 percent of his net
earnings from self-employment ($40,225 x 0.153), rather than
$1,665 as he reported on the 2000 return.
Petitioner’s correct tax liability for 2000 is $11,891,
computed as follows:
Business income (Schedule C) $43,558
Total IRA distributions 400
Total income 43,958
IRA deduction $1,000
One-half self-employment tax 3,077
4,077
Adjusted gross income 39,881
Standard deduction 4,400
Exemption 2,800
7,200
Taxable income 32,681
Tax on taxable income $5,737
Self-employment tax 6,154
Total tax 11,891
Petitioner understated his 2000 tax liability by $4,453
($11,891 - $7,438). That understatement is attributable to
mathematical and clerical errors, and respondent was not required
to issue a notice of deficiency. Respondent did not assess tax
greater than the amount properly computed on the income
petitioner reported on his return or greater than that
attributable to petitioner’s mathematical and clerical errors.
To the contrary, respondent made an error in the calculation of
petitioner’s self-employment tax and consequently assessed
petitioner $800 less than he actually owed. Therefore,
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respondent was not required to issue a notice of deficiency, and
the taxes were properly assessed.
Petitioner filed his 1999 return on August 21, 2001. The 3-
year period for assessing additional tax for petitioner for 1999
has expired. See sec. 6501(a). Hence, respondent may collect
only the amount previously assessed.
2. Overstatement of Estimated Taxes
A deficiency for a given year is the correct amount of tax
less the amount shown as tax on the tax return. Sec. 6211(a);
Laing v. United States, 423 U.S. 161, 173 (1976). Both the
correct amount of tax and the amount shown on the return are
computed without regard to credits for estimated tax payments.
Secs. 31, 6211(a) and (b)(1); sec. 301.6211-1(b), Proced. &
Admin. Regs. An assessment by the Commissioner of tax greater
than that reported on the return attributable to a taxpayer’s
overstatement of estimated tax payments is not a deficiency
within the meaning of section 6211. See Hutchinson v. United
States, 677 F.2d 1322, 1326 (9th Cir. 1982); Judge v.
Commissioner, 88 T.C. 1175, 1183 (1987); Bregin v. Commissioner,
74 T.C. 1097 (1980); Keefe v. Commissioner, 15 T.C. 947, 955
(1950).
If a tax return or claim for refund of income taxes under
subtitle A of the Internal Revenue Code contains an overstatement
of the amount paid as estimated income tax, the overstated amount
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“may be assessed by the Secretary in the same manner as in the
case of a mathematical or clerical error appearing upon the
return”. Sec. 6201(a)(3); see Schlosser v. Commissioner, 94
T.C. at 824-825. Consequently, respondent was not required to
issue a notice of deficiency for the underpayment of tax
attributable to any overstatement of petitioner’s estimated tax
payments.
3. The Right of Setoff Under Section 6402(a)
When a taxpayer makes voluntary payments to the IRS, he/she
has a right to direct the application of those payments to
whatever liability he chooses. Wood v. United States, 808 F.2d
411, 416 (5th Cir. 1987); Muntwyler v. United States, 703 F.2d
1030, 1032 (7th Cir. 1983); O’Dell v. United States, 326 F.2d
451, 456 (10th Cir. 1964). Under the voluntary payment rule,
when a taxpayer who has outstanding tax liabilities voluntarily
makes a payment, the IRS usually will honor a taxpayer’s request
as to how to apply that payment. United States v. Ryan, 64 F.3d
1516, 1522 (11th Cir. 1995). However, section 6402(a) and the
regulations promulgated thereunder demonstrate that a taxpayer’s
right to designate his/her voluntary payments does not extend to
an overpayment reported on a return.
Section 6402(a) allows the IRS to credit an “overpayment,
including any interest allowed thereon, against any liability in
respect of an internal revenue tax on the part of the person who
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made the overpayment” and, subject to certain limitations, refund
any balance to the person. In lieu of a refund, a taxpayer can
instruct the IRS to credit his overpayment against the estimated
tax for the taxable year immediately succeeding the year of the
overpayment. Sec. 301.6402-3(a)(5), Proced. & Admin. Regs. It
is well settled that the IRS need only refund, or apply to the
taxpayer’s estimated tax, that portion of the overpayment that
exceeds the taxpayer’s “outstanding liability for any tax”. Sec.
301.6402-3(a)(6)(i), Proced. & Admin. Regs.; see N. States Power
Co. v. United States, 73 F.3d 764, 767 (8th Cir. 1996) (quoting
United States v. Ryan, supra at 1523 (“[Section 6402], ‘plainly
gives the IRS the discretion to apply overpayments to any tax
liability’”)); Pettibone Corp. v. United States, 34 F.3d 536, 538
(7th Cir. 1994) (section 6402(a) “leaves to the Commissioner’s
discretion whether to apply overpayments to delinquencies or to
refund them to the taxpayer”); Kalb v. United States, 505 F.2d
506, 509 (2d Cir. 1974) (rejecting the argument that because the
tax overpayment was voluntary, the IRS was bound to comply with
the taxpayer’s direction about how to apply that payment; section
6402(a) “clearly gives the IRS discretion to apply a refund to
‘any liability’ of the taxpayer”).
Respondent’s application of petitioner’s 2000 overpayment to
petitioner’s 1994 tax liability falls within respondent’s
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authority to credit overpayments to any liability for any tax
year and, therefore, was proper.
4. Violation of Automatic Bankruptcy Stay
Petitioner asserts that the bankruptcy court discharged his
1994 tax liability when it granted petitioner a discharge on
November 13, 2002, and that respondent’s application of the
$3,377 from petitioner’s 1999 account to his 1994 tax liability
violated the automatic stay imposed under 11 U.S.C. sec. 362.
We have jurisdiction in this levy proceeding to determine whether
petitioner’s unpaid liabilities were discharged in bankruptcy.
See Washington v. Commissioner, 120 T.C. 114 (2003).
The Certificates of Official Record for petitioner’s 1994
and 1999 tax years reflect that the $3,377 overpayment from
petitioner’s 1999 account was applied to petitioner’s outstanding
1994 tax liability in October 2001. Petitioner did not file his
bankruptcy petition until July 30, 2002. Thus, there could not
have been a violation of the automatic bankruptcy stay before the
filing of a bankruptcy petition. We conclude, therefore, that
respondent’s application of the funds from petitioner’s 1999
overpayment was permitted. Moreover, since the funds were
applied to petitioner’s 1994 tax liability before petitioner
filed for bankruptcy, petitioner was no longer liable for that
portion of the 1994 liability when he filed for bankruptcy.
Consequently, any of petitioner’s 1994 tax liability discharged
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by the bankruptcy court did not include amounts paid before his
filing his petition with the bankruptcy court.
Aside from challenging his underlying tax liability,
petitioner did not raise any relevant issue relating to the
proposed levy. He offered no collection alternatives. On the
basis of the foregoing we conclude that there was no abuse of
discretion by respondent’s Appeals officer. All the requirements
of section 6330 have been satisfied, and respondent may proceed
with the proposed levy to collect the tax liability assessed
against petitioner for 2000.
To reflect the foregoing,
Decision will be entered
for respondent.