T.C. Memo. 2006-165
UNITED STATES TAX COURT
ALFONSO J. AND ELENA L. DIAZ DEL CASTILLO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1514-05. Filed August 14, 2006.
Alfonso J. and Elena L. Diaz Del Castillo, pro sese.
Scott A. Hovey, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent determined a $2,327.40 deficiency
in petitioners’ 2001 Federal income tax. Respondent’s
determination was based on the disallowance of a deduction
claimed on petitioners’ 2001 joint Federal income tax return for
an $8,448 charitable contribution carryover. Petitioners
contend, alternatively, that they are not liable for the
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deficiency under any of the following three theories: (1) The
statutory notice of deficiency is invalid; (2) respondent is
contractually estopped from determining a deficiency for the 2001
tax year; and (3) the manufacturer of the software used by
petitioners to prepare their return was responsible for the
deficiency, and petitioners should be allowed to interplead and
make the software manufacturer a responsible party in this
proceeding.
FINDINGS OF FACT
Petitioners resided in Pomfret, Maryland, at the time that
their petition was filed in this proceeding. Petitioners timely
filed a joint Federal income tax return for 2001 that they
prepared using Intuit TurboTax software (Turbotax). The Turbotax
software programs are designed so that a taxpayer’s responses to
questions, ostensibly, are automatically placed onto approved
forms, and the tax due or overpaid is automatically computed.
The promotional material on the software packaging states that it
“double-checks for overlooked deductions, missing information and
entries that could trigger an audit * * * [and] [e]ven gives you
personalized advice as you go.” By this methodology, petitioners
provided answers to Turbotax’s questions and were able to produce
and print a copy of their return, which they signed and submitted
to respondent for filing.
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Petitioners’ Turbotax-generated Federal return contained an
$8,448 deduction of a charitable contribution carryover on line
17 of Schedule A, Itemized Deductions, labeled “Gifts to Charity”
“Carryover from prior year”. Petitioners were not entitled to
deduct an $8,448 charitable contribution carryover from prior
years. Petitioners believe that the $8,448 on line 17 was caused
by faulty software in the Turbotax product. Approximately 2
years after petitioners’ 2001 return was filed, on May 13, 2004,
respondent sent a letter to petitioners notifying them of a 2001
income tax examination solely involving their claimed “Gifts to
Charity.” In that same letter, respondent advised of the
intention to disallow their deduction of an “amount you claimed
on Line 17 of Schedule A as a carryover contribution from a prior
year.”
Subsequently, respondent, in a July 7, 2004, letter,
provided petitioners with an examination report (30-day letter)
explaining the proposed changes to petitioners’ 2001 return. The
first page of the July 7, 2004, transmittal letter advised
petitioners that they owed income tax in the amount of $1,153.23.
On Form 4549, Income Tax Examination Changes, however, the amount
of tax due was shown as $2,327.40. On two other pages of the 30-
day letter, the tax due was also shown as $2,327.40, along with
interest computed to August 6, 2004, of $201.37, for total tax
and interest of $2,528.77.
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In response to respondent’s July 7, 2004, 30-day letter,
petitioners sent a letter, dated July 24, 2004, along with their
check in the amount of $1,153.23 to respondent. In that letter,
petitioners explained that the $8,448 claimed contribution
carryover deduction was an error attributable to Turbotax
software. In a September 7, 2004, letter, respondent answered
petitioners’ July 24 letter, and among other matters, advised
petitioners that the changes to their 2001 tax return resulted in
a total tax obligation (apparently including interest to August
6, 2004) of $2,528.77. Respondent, on November 5, 2004, sent
petitioners a statutory notice of deficiency for their 2001 year
determining an income tax deficiency in the amount of $2,327.40.
Petitioners thereafter commenced this proceeding.
OPINION
The controverted item in this case is an $8,448 contribution
carryover deduction. Petitioners do not contend that they were
entitled to that deduction. Instead, they make a collateral
attack, contending, alternatively, that respondent’s deficiency
notice was invalid, or that respondent agreed to a lesser
deficiency, or that the tax preparation software manufacturer is
liable.
Petitioners’ first argument is that the 2001 notice of
deficiency is invalid. Petitioners argue that the notice has
errors and does not reflect the correct amount of income tax
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deficiency. In particular, petitioners argue that the $2,327.40
income tax deficiency determined in the notice differs from the
$1,153.23 referenced in the 30-day letter. That discrepancy,
according to petitioners, makes the deficiency notice unclear,
inaccurate, and invalid.1
The basic minimum requirements for a notice of deficiency
are the following: (1) It must advise a taxpayer that respondent
has determined a deficiency for a particular year; (2) it must
specify the amount of the deficiency; and (3) it must provide
sufficient information to permit the computation of the
deficiency. Portillo v. Commissioner, 932 F.2d 1128, 1132 (5th
Cir. 1991), affg. in part and revg. in part T.C. Memo. 1990-68.
The notice of deficiency sent to petitioners is in no way
contradictory or unclear on its face. It meets or exceeds the
minimum standards and provides petitioners with the amount, year,
and means to compute the deficiency.
Petitioners are correct in their observation that the
various tax liability amounts set forth in the 30-day letter are
inconsistent. They are also correct in observing that the
1
It is not clear how respondent treated the $1,153.23
payment made by petitioners prior to issuance of the notice of
deficiency. It appears that the $1,153.23 was not treated as an
assessable payment of tax because the notice determines a
$2,327.40 deficiency. See Rev. Proc. 2005-18, 2005-1 C.B. 798.
In any event, respondent has acknowledged petitioners’ payment,
and the Court expects that petitioners will not be required to
pay more than $2,327.40, plus any applicable interest.
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amounts on the first page of the 30-day letter and the deficiency
notice differ. Petitioners do not argue or contend that the
$2,327.40 determined in the deficiency notice is not the correct
income tax deficiency that would result based upon the
disallowance of the claimed $8,448 contribution carryover
deduction.
Respondent counters that the $2,327.40 income tax deficiency
set forth in the deficiency notice constitutes a valid
determination under the statute. Respondent points out that the
deficiency notice is the jurisdictional document upon which this
proceeding is based. Additionally, respondent points out that no
agreement was reached with petitioners regarding the amount of
deficiency attributable to the adjustment disallowing the $8,448
that was erroneously claimed as a contribution carryover.
Respondent admits that the $1,153.23 amount stated on the first
page of the 30-day transmittal letter that forwarded the
examination report to petitioners was incorrect but nevertheless
contends that it is not binding.
We agree with respondent. The notices that may precede the
statutory notice of deficiency during the administrative portion
of the controversy are generally irrelevant to establishing the
deficiency amount. See Greenberg’s Express, Inc. v.
Commissioner, 62 T.C. 324 (1974). It is the determination in the
deficiency notice that constitutes respondent’s determination or
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position from which a taxpayer may appeal to this Court.
Accordingly, we hold that the deficiency notice is adequate and
valid.
Petitioners’ second argument is that respondent is limited
to assessing or collecting the $1,153.23 amount stated on the
first page of the 30-day transmittal letter. In that regard,
petitioners correctly point out that respondent stated, albeit
erroneously, that $1,153.23 was the liability that resulted from
the $8,448 correction to their claimed contribution deduction.
In addition, petitioners make the point that they, in reliance on
respondent’s statement, paid the $1,153.23 amount. Those events,
contend petitioners, bind the parties to the $1,153.23.
Respondent agrees with petitioners’ characterization of the
circumstances and counters that those circumstances do not rise
to the level of a binding agreement or form the basis for an
estoppel. Respondent makes clear that in response to
petitioners’ payment of the $1,153.23, he sent a letter followed
by a deficiency notice advising that petitioners’ income tax
deficiency was $2,327.40. Respondent also points out that the
Form 4549, forwarded with the 30-day letter and seeking
petitioners’ consent to the tax liability, was not executed or
returned by petitioners.
We agree with respondent that payment of the $1,153.23 set
forth in the 30-day letter does not, by itself, rise to the
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status of constituting a binding agreement between petitioners
and respondent. Nor did these events provide the basis for an
estoppel that would have affected the parties’ rights. Section
71212 permits the Commissioner to enter into binding closing
agreements regarding the amount of a taxpayer’s income tax
liability. A closing agreement, as provided in section 7121, is
the prescribed method for the Commissioner to bind himself to a
particular tax liability, and other approaches are generally not
approved by the courts. See, e.g., Estate of Meyer v.
Commissioner, 58 T.C. 69 (1972); see also sec. 301.6213-1(b)(3),
Proced. & Admin. Regs.
Respondent’s error in the 30-day letter, followed by
petitioners’ payment, by itself did not result in a meeting of
the minds or formal agreement. This is especially so here, where
respondent clearly communicated the correct amount of the income
tax deficiency in subsequent, but contemporaneous, correspondence
and in the notice of deficiency. Accordingly, we hold that
respondent is not contractually bound to the lesser amount shown
on the first page of the 30-day letter.
Petitioners’ final argument, in essence, is that the
software manufacturer that produces and sells Turbotax is at
fault for any tax deficiency determined in this case.
2
Section references are to the Internal Revenue Code as
amended and in effect for the period under consideration.
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Petitioners believe that software flaws in the Turbotax program
they used to prepare their return caused the erroneous $8,448
contribution carryover deduction.3 Petitioners appear to base
their theory on Commissioner’s Rev. Rul. 85-189, 1985-2 C.B. 341,
which considers the question of who is an “income tax return
preparer” for purposes of section 7701(a)(36). In addition, that
revenue ruling discusses software developers’ potential for
liability under tax return preparer penalty provisions. See
secs. 6107(a), 6695(a).4 Respondent counters that this case does
not involve preparer penalties5 and that the software
manufacturer is not relevant to the resolution of this income tax
deficiency case. Finally, respondent points out that the only
issue we consider is whether petitioners are entitled to an
$8,448 contribution carryover deduction.
Petitioners have not asserted that they are entitled to the
$8,448 contribution deduction. The focus of their argument is
that the software manufacturer should be responsible because of
petitioners’ belief that the deficiency was caused by Turbotax.
3
Procedurally, petitioners amended their petition in an
attempt to interplead the software manufacturer into this income
tax deficiency proceeding. Petitioners also attempted to call an
officer of the software manufacturer as a witness. Ultimately,
petitioners were not permitted to interplead the manufacturer.
4
Respondent did not determine any penalties against
petitioners with respect to their 2001 tax year.
5
If such penalties were in issue, we note that this Court
does not have jurisdiction over them.
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Petitioners’ argument must fail in this proceeding because our
jurisdiction is limited to deciding whether petitioners are
liable for the deficiency determined by respondent. This Court
is without jurisdiction to join unrelated third parties to an
individual taxpayer’s deficiency proceeding under the
circumstances of this case.6
Accordingly, we hold that petitioners are liable for the
$2,327.40 income tax deficiency for their 2001 tax year.7 To
reflect the foregoing,
Decision will be entered
for respondent.
6
We note that it is petitioners’ belief that the software
caused the error on their return. The record in this case does
not support or reject petitioners’ belief.
7
As discussed, we note that respondent has acknowledged
petitioners’ payment of $1,153.23 in response to respondent’s 30-
day letter. Accordingly, the amount of tax due from petitioners
will be less than the determined deficiency.