Feller v. Commissioner

RICK D. FELLER, PETITIONER v. COMMISSIONER OF
INTERNAL REVENUE, RESPONDENT
Docket No. 4325–07. Filed November 8, 2010.

P overstated his prepayment credits on his Federal income
tax returns in order to claim refunds for 1992 through 1997.
On Nov. 22, 2006, R issued two notices of deficiency deter-
mining that P was subject to the fraud penalty of I.R.C. sec.
6663 because his overstated prepayment credits resulted in
underpayments of income tax pursuant to I.R.C. sec. 6664 and
sec. 1.6664–2(c)(1) and (g), Example (3), Income Tax Regs. On
Nov. 27, 2006, R assessed, by use of the mathematical error
assessment procedures of I.R.C. sec. 6213(b)(1), adjustments
related to P’s overstatement of prepayment credits for 1992
through 1997. P argues that (1) I.R.C. sec. 6501 bars the
issuance of the notices of deficiency and (2) sec. 1.6664–2(c)(1)
and (g), Example (3), Income Tax Regs., under which over-
stated prepayment credits result in underpayments of income
tax, is invalid because it violates the intent of Congress in
enacting I.R.C. sec. 6664 and that he is not subject to the
fraud penalty. We apply the test set forth in Chevron U.S.A.
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), to
determine the validity of the regulation. Under Chevron step
1, we find that I.R.C. sec. 6664 is ambiguous regarding the
definition of ‘‘underpayment’’. Under Chevron step 2, we find
that the regulation is based on a permissible construction of
I.R.C. sec. 6664. Held: P filed false returns with the intent to
evade tax within the meaning of I.R.C. sec. 6501(c); therefore
the issuance of the deficiency notices was not time barred.
Held, further, sec. 1.6664–2(c)(1) and (g), Example (3), Income
Tax Regs., is valid. Held, further, P is subject to the fraud
penalty pursuant to I.R.C. sec. 6663 for each year at issue.

Terry W. Vincent, for petitioner.
Cathy J. Horner and Dennis G. Driscoll, for respondent.
HAINES, Judge: Rick D. Feller petitioned the Court for
redetermination of the following penalties:

497

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 498 135 UNITED STATES TAX COURT REPORTS (497)

Penalty
Year sec. 6663
1992 ..................................................................... $78,481
1993 ..................................................................... 56,689
1994 ..................................................................... 43,566
1995 ..................................................................... 58,660
1996 ..................................................................... 59,963
1997 ..................................................................... 58,552

Hereafter, the years 1992, 1993, 1994, 1995, 1996, and
1997 will be referred to as the years at issue. After conces-
sions, the issues for decision are: (1) Whether the issuance of
the notice of deficiency for each of the years at issue is
barred by the expiration of the limitations period for assess-
ment under section 6501; and (2) whether petitioner’s over-
stated prepayment credits for the years at issue resulted in
underpayments of income tax attributable to fraud pursuant
to sections 6663 and 6664. 1 In so deciding, we must deter-
mine the validity of section 1.6664–2(c)(1) and (g), Example
(3), Income Tax Regs.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.
The stipulation of facts, together with the attached exhibits,
is incorporated herein by this reference. At the time peti-
tioner filed his petition, he resided in Ohio.
Petitioner’s Business
Petitioner earned a bachelor of science degree in
accounting from the University of Akron in 1976 and
received a certified public accountant certificate from the
State of Ohio in 1980. In 1984 petitioner became a partner
in the small accounting firm of Skonk, Feller, Tuber &
Brown. 2
In 1992 petitioner and two additional partners of the firm
became 100-percent owners of stock in SFT Health Care Corp.
(SFT). SFT owned two nursing homes, Red Carpet Health Care
Center and Southeastern Health Care Center. Petitioner
1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code),

as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
2 The firm went through several name changes. It was originally called Tuber & Shonberg,

Inc., then Skonk, Feller & Tuber, and finally Skonk, Feller, Tuber & Brown.

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 (497) FELLER v. COMMISSIONER 499

served as president of the nursing homes throughout the
years at issue. In his capacity as president, petitioner visited
the nursing homes once or twice a week and oversaw their
operations. He also was responsible for the financial
reporting and preparation of tax returns associated with the
nursing homes and SFT.
Red Carpet Health Care Center Forms W–2
For the years at issue petitioner attached to his Federal
income tax returns Forms W–2, Wage and Tax Statement,
reporting actual wages from Red Carpet Health Care Center
of $17,781, $17,602, $19,202, $33,571, $19,016, and $23,580
with Federal withholdings of $366, $300, $464, $1,025, $350,
and zero, respectively. Petitioner also attached to his Federal
income tax returns for the years at issue fictitious Forms W–
2 purportedly issued by Red Carpet Health Care Center and
reporting fictitious wages of $120,000, $100,000, $75,000,
$75,000, $75,000, and $72,500 and fictitious Federal
withholdings of $65,000, $52,000, $39,000, $40,500, $40,750,
and $41,750, respectively.
Southeastern/Barnesville Health Care Center Forms W–2
For 1992 petitioner attached to his Federal income tax
return a Form W–2 issued by Southeastern Health Care
Center reporting actual wages of $23,739 and Federal with-
holding of $1,334. Petitioner also attached to his Federal
income tax return a second, fictitious Form W–2 purportedly
issued by Southeastern Health Care Center reporting ficti-
tious wages of $120,000 and fictitious withholding of $70,000.
For 1993, 1994, 1995, 1996, and 1997 petitioner attached
to his Federal income tax returns Forms W–2 issued by
Barnesville Health Care Center 3 reporting actual wages of
$25,536, $28,161, $47,960, $80,119, and $80,119 with Federal
withholdings reported of $1,253, $650, $990, $2,210, and
$2,210, respectively. Petitioner also attached to his Federal
income tax return fictitious Forms W–2 purportedly issued
by Barnesville Health Care Center reporting fictitious wages
of $100,000, $75,000, $80,000, $80,000, and $75,000 with
3 Southeastern Health Care Center changed its name to Barnesville Health Care Center in

1993.

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 500 135 UNITED STATES TAX COURT REPORTS (497)

fictitious Federal withholdings reported of $52,000, $39,000,
$43,500, $44,500, and $42,500, respectively.
Other Falsifications
For each of the years at issue petitioner included with his
Federal income tax return a Schedule E, Supplemental
Income and Loss, on which he reported a false amount of
partnership losses generated by his accounting firm. Peti-
tioner also included a Schedule A, Itemized Deductions, in
which he reported an inflated itemized deduction for State
and local income taxes paid that was based on the fictitious
Forms W–2 he prepared.
Refund Claims
For 1992, 1993, 1994, 1995, 1996, and 1997 petitioner
claimed refunds of $86,181, $57,349, $34,686, $48,776,
$48,703, and $44,383, respectively.
Criminal Case
After a civil audit and a criminal investigation, criminal
proceedings were initiated against petitioner in the U.S. Dis-
trict Court for the Northern District of Ohio. On January 23,
2003, petitioner pleaded guilty to willfully making and
submitting a false tax return for 1997 in violation of section
7206(1). In his plea agreement, petitioner admitted that he
filed deliberately falsified personal tax returns for each of the
years at issue. He also admitted that for each of the years
at issue he claimed a false income tax refund when he knew
he actually owed income taxes and that he attached to his
return a fictitious Form W–2 for each nursing home.
On November 22, 2006, respondent mailed petitioner two
notices of deficiency, one for 1992–95 and the other for 1996–
97. The Form 4549–B, Income Tax Examination Changes,
attached to each notice, among other things reduced income
by the amount of fictitious wages, increased income for ficti-
tious losses claimed from the partnership, and reduced
itemized deductions by the amount of State taxes claimed on
the fictitious Forms W–2. For each year the corrected tax
liability was less than the tax shown on the return petitioner
filed if claimed prepayment tax credits were ignored.

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 (497) FELLER v. COMMISSIONER 501

However, section 1.6664–2(c)(1) and (g), Example (3),
Income Tax Regs., requires excess withholding tax credits to
be included in determining an underpayment under section
6663. Accordingly, the notices of deficiency determined fraud
penalties under section 6663 based upon underpayments of
income tax pursuant to section 6664 of $104,642, $75,584,
$58,087, $78,214, $80,993, and $78,073 for 1992, 1993, 1994,
1995, 1996, and 1997, respectively. On November 27, 2006,
respondent assessed adjustments related to petitioner’s over-
statement of withholding tax credits for each of the years at
issue through the mathematical error assessment procedures
of section 6213(b)(1) and section 301.6201–1(a)(3), Proced. &
Admin. Regs.
On February 22, 2007, petitioner sought redeterminations,
asserting that (1) pursuant to section 6501, the statute of
limitations applied to bar assessment for each of the years at
issue, and (2) section 1.6664–2(c)(1) and (g), Example (3),
Income Tax Regs., including petitioner’s overstated with-
holding tax credits in the calculation of his underpayments
is invalid.

OPINION

I. Period of Limitations on Assessment
Petitioner argues that the issuance of the notices of defi-
ciency was barred by section 6501(a). Section 6501(a) pro-
vides the general rule that the amount of any tax imposed
must be assessed within 3 years after the return is filed. An
exception to the 3-year rule is provided in section 6501(c)(1):
(1) FALSE RETURN.—In the case of a false or fraudulent return with the
intent to evade tax, the tax may be assessed, or a proceeding in court for
collection of such tax may be begun without assessment, at any time.

Respondent argues that the period of limitations in section
6501(a) does not apply because petitioner filed false returns
with the intent to evade taxes for the years at issue. See sec.
6501(c)(1).
The burden of proof is upon respondent to prove that peti-
tioner has filed a false return with the intent to evade tax
for each year at issue. See sec. 7454(a); Rule 142(b). Because
direct evidence of an intent to evade tax is rarely available,
intent may be proved by circumstantial evidence and reason-

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 502 135 UNITED STATES TAX COURT REPORTS (497)

able inferences from the facts. Petzoldt v. Commissioner, 92
T.C. 661, 699 (1989).
Petitioner pleaded guilty to willfully making and submit-
ting a false tax return for 1997 in violation of section 7206(1)
and admitted, in his plea agreement, that to obtain refunds
he falsified personal tax returns for each of the years at issue
by attaching to his returns fictitious Forms W–2 which over-
stated income tax withheld. Throughout the 6 years at issue,
petitioner was licensed as a certified public accountant prac-
ticing in an accounting firm that prepared income tax
returns for clients. He held himself out to the public as
sophisticated and knowledgeable in the preparation of tax
returns. He prepared his own returns and those needed for
businesses in which he had invested.
Critically, petitioner falsified his own returns and Forms
W–2 for the businesses in the same manner for 6 consecutive
years and stopped only when confronted by the authorities.
On each of his returns, among other things, he overstated
and falsified (1) partnership losses, (2) itemized deductions
for State taxes withheld, and (3) Federal withholding credits.
Through his conduct he obtained $320,078 in Federal refunds
to which he was not entitled over the 6-year period. Peti-
tioner testified that he intended to pay back the refunds he
received as soon as he overcame troubles in his personal life,
but there is no evidence that petitioner at any time made an
effort to repay even after his conduct was discovered. Peti-
tioner’s explanation for his behavior is implausible.
We find that respondent has shown by clear and con-
vincing evidence that petitioner filed his returns for the
years at issue with the intent to evade tax. See Brister v.
United States, 35 Fed. Cl. 214 (1996) (involving an account-
ant and bookkeeper who overstated withholding credits to
obtain refunds). Therefore, the 3-year period of limitations
under section 6501(a) does not apply for any of the years at
issue, and respondent was not barred from issuing the
notices of deficiency for those years.
II. Sections 6663 and 6664; Section 1.6664–2(c), Income
Tax Regs.
Respondent has established that petitioner intended to
evade tax and thus engaged in fraudulent conduct. However,

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 (497) FELLER v. COMMISSIONER 503

before there can be an imposition of a fraud penalty,
respondent must also prove that the fraud resulted in under-
payments of tax required to be shown on the returns. Section
6663(a) sets out the fraud penalty:
SEC. 6663(a). IMPOSITION OF PENALTY.—If any part of any under-
payment of tax required to be shown on a return is due to fraud, there
shall be added to the tax an amount equal to 75 percent of the portion of
the underpayment which is attributable to fraud.

The term ‘‘underpayment’’ is defined in section 6664(a) as fol-
lows:
SEC. 6664(a). UNDERPAYMENT.—For purposes of this part, the term
‘‘underpayment’’ means the amount by which any tax imposed by this title
exceeds the excess of—
(1) the sum of—
(A) the amount shown as the tax by the taxpayer on his return, plus
(B) amounts not so shown previously assessed (or collected without
assessment), over
(2) the amount of rebates made.
For purposes of paragraph (2), the term ‘‘rebate’’ means so much of an
abatement, credit, refund, or other repayment, as was made on the ground
that tax imposed was less than the excess of the amount specified in para-
graph (1) over the rebates previously made.

Neither paragraph (1)(B) nor (2) applies in this case.
Section 1.6664–2(c)(1), Income Tax Regs., interprets the
definition of ‘‘underpayment’’ in section 6664 by stating that
the tax shown on the return is reduced by the excess of:
(i) The amounts shown by the taxpayer on his return as credits for tax
withheld under section 31 (relating to tax withheld on wages) * * * over
(ii) The amounts actually withheld, * * * with respect to a taxable year
before the return is filed for such taxable year.

The regulation extends the meaning of ‘‘underpayment’’ to
include a taxpayer’s overstated credits for withholding. Sec.
1.6664–2(g), Example (3), Income Tax Regs. Accordingly, if a
taxpayer overstates prepayment credits, such as the credit
for wages withheld, the overstatement decreases the amount
of tax shown on the return and increases the underpayment
of tax. Sadler v. Commissioner, 113 T.C. 99, 103 (1999).
Petitioner contends that section 1.6664–2(c)(1) and (g),
Example (3), Income Tax Regs., is invalid because the statute
which it interprets, section 6664, does not refer to credits for
tax withheld, and it was not Congress’ intent to include with-

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 504 135 UNITED STATES TAX COURT REPORTS (497)

holding credits in the calculation of an underpayment. Peti-
tioner notes that repealed section 6653, which previously had
imposed the fraud penalty, defined an underpayment with
reference to a deficiency as defined in section 6211. Section
6211(b)(1) excludes credits for taxes withheld from the cal-
culation of a deficiency, and consequently such credits did
not affect the calculation of an underpayment under repealed
section 6653(c). Therefore, petitioner bases his argument in
legislative history that the definition of an underpayment in
section 6664(a) as in effect for the years at issue was ‘‘not
intended to be substantively different from * * * [previous]
law.’’ H. Rept. 101–247, at 1394 (1989).
Respondent argues that Congress enacted a new penalty
regime and significantly reworded the definition of ‘‘under-
payment’’ for income tax purposes, thereby justifying the Sec-
retary’s clarification of the treatment of overstated prepay-
ment credits.
As a threshold matter, both parties agree that the regula-
tion was issued under section 7805(a) and is applicable to the
computation of the underpayments in the instant case.
Accordingly, our next step is to determine whether the regu-
lation warrants judicial deference.
III. Judicial Deference
Much ink has been spilled on the question of the level of
judicial deference to be afforded to regulations. See, e.g.,
Berg, ‘‘Judicial Deference to Tax Regulations: A Reconsider-
ation in Light of National Cable, Swallows Holding, and
Other Developments’’, 61 Tax Law. 481 (2008). The Court of
Appeals for the Sixth Circuit, to which any appeal of this
case would lie absent a written stipulation to the contrary,
has held that regulations issued under the general authority
of the Secretary to promulgate necessary rules, with notice
and comment procedures, are entitled to judicial deference as
outlined by the U.S. Supreme Court in Chevron U.S.A. Inc.
v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). See
sec. 7482(b)(2); Golsen v. Commissioner, 54 T.C. 742 (1970),
affd. 445 F.2d 985 (10th Cir. 1971); Estate of Timken v.
United States, 601 F.3d 431, 434–435 (6th Cir. 2010); Estate
of Gerson v. Commissioner, 507 F.3d 435 (6th Cir. 2007), affg.
127 T.C. 139 (2006).

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 (497) FELLER v. COMMISSIONER 505

In Chevron, the Supreme Court addressed the cir-
cumstances in which the judiciary is to afford an agency
discretion to interpret the statutes the agency administers.
In what is commonly referred to as the two-step ‘‘Chevron
analysis’’, the Supreme Court stated:
When a court reviews an agency’s construction of the statute which it
administers, it is confronted with two questions. First, always, is the ques-
tion whether Congress has directly spoken to the precise question at issue.
If the intent of Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the unambiguously
expressed intent of Congress. If, however, the court determines Congress
has not directly addressed the precise question at issue, the court does not
simply impose its own construction on the statute, as would be necessary
in the absence of an administrative interpretation. Rather, if the statute
is silent or ambiguous with respect to the specific issue, the question for
the court is whether the agency’s answer is based on a permissible
construction of the statute. [Id. at 842–843; fn. refs. omitted.]

Chevron step 1 requires us to determine whether the statute
clearly expresses the intent of Congress. If the statute is
‘‘silent or ambiguous with respect to the specific issue’’ before
the Court, Chevron step 2 requires us to determine whether
the regulation ‘‘is based on a permissible construction of the
statute.’’
‘‘[T]he cardinal rule [is] that a statute is to be read as a
whole * * * since the meaning of statutory language, plain
or not, depends on context.’’ King v. St. Vincent’s Hosp., 502
U.S. 215, 221 (1991). Sections 6663 and 6664 impose a fraud
penalty when taxpayers, with intent to evade, underpay the
income tax shown on their returns. We will examine the lan-
guage and history of those sections to determine what the
term ‘‘underpayment’’ means in the context of a fraud
statute. The examination requires us to analyze the defini-
tions of a ‘‘deficiency’’ and of an ‘‘underpayment’’ and their
interrelationship, if any, in interpreting sections 6663 and
6664. We must consider whether an underpayment can exist
without a deficiency.
The definition of a deficiency in section 6211(a) as it
relates to income tax has remained essentially unchanged
since the 1954 codification of the internal revenue laws. 4 The
4 SEC. 6211. DEFINITION OF A DEFICIENCY.
(a) IN GENERAL.—For purposes of this title * * * the term ‘‘deficiency’’ means the amount by
Continued

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 506 135 UNITED STATES TAX COURT REPORTS (497)

basic formula is to determine the correct tax and reduce it
by the tax reported by the taxpayer. The resulting amount
is the deficiency. In calculating the deficiency, estimated tax
payments and withholding credits are ignored. Sec.
6211(b)(1).
The definition of an underpayment for purposes of the civil
fraud penalty remained unchanged from the 1954 codifica-
tion of the Internal Revenue Code until 1989. In 1989 Con-
gress repealed sections of the Code, 5 including section 6653,
that imposed accuracy-related penalties and replaced them
with sections 6662 through 6665. Omnibus Budget Reconcili-
ation Act of 1989, Pub. L. 101–239, sec. 7721(a), 103 Stat.
2395. Congress’ primary focus in enacting a new penalty
regime was to alleviate taxpayer confusion and the difficul-
ties of administration of several different penalties relating
to the accuracy of a tax return. H. Rept. 101–247, supra at
1388. The House report also stated that the definition of
‘‘underpayment’’ in section 6664(a) was not ‘‘intended to be
substantively different from * * * [previous] law.’’ Id. at
1394.
Repealed section 6653(b)(1) provided that if any part of any
underpayment (as defined in subsection (c)) of tax required
to be shown on a return was due to fraud, certain penalties
applied. 6 Section 6653(c) tied the definition of an under-
payment to the definition of a deficiency.
SEC. 6653(c). DEFINITION OF UNDERPAYMENT.—For purposes of this sec-
tion, the term ‘‘underpayment’’ means—
(1) INCOME, ESTATE, GIFT, AND CERTAIN EXCISE TAXES.—In the case of
a tax to which section 6211 (relating to income, estate, gift, and certain

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, if a return was made
by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus
(B) the amount previously assessed (or collected without assessment) as a deficiency,
over—
(2) the amount of rebates, as defined in subsection (b)(2), made.
(b) RULES FOR APPLICATION OF SUBSECTION (a).—For purposes of this section—
(1) The tax imposed by subtitle A and the tax shown on the return shall both be determined
without regard to payment on account of estimated tax, without regard to the credit under
section 31 * * *
5 Secs. 6653, 6659, 6659A, 6660, and 6661. Omnibus Budget Reconciliation Act of 1989, Pub.

L. 101–239, sec. 7721(c), 103 Stat. 2399. Sec. 6662 was stricken and replaced by a new sec. 6662.
Id. sec. 7721(a), 103 Stat. 2395.
6 The amount of penalty was increased in stages over the years from 50 percent of the under-

payment to 75 percent of the underpayment and 50 percent of the interest payable under sec.
6601.

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 (497) FELLER v. COMMISSIONER 507

excise taxes) is applicable, a deficiency as defined in that section (except
that, for this purpose, the tax shown on a return referred to in section
6211(a)(1)(A) shall be taken into account only if such return was filed
on or before the last day prescribed for the filing of such return, deter-
mined with regard to any extension of time for such filing) * * *

The basic formula (correct tax – reported tax = under-
payment) applied and, because of the application of section
6211(b)(1), estimated payments and withholding credits did
not enter into the calculation.
Sections 6663 and 6664 replaced repealed section 6653. For
convenience, we again set out the pertinent portions of sec-
tions 6663 and 6664. Section 6663(a) deals with imposition of
the fraud penalty:
SEC. 6663(a). IMPOSITION OF PENALTY.—If any part of any under-
payment of tax required to be shown on a return is due to fraud, there
shall be added to the tax an amount equal to 75 percent of the portion of
the underpayment which is attributable to fraud.

The term ‘‘underpayment’’ is defined in section 6664(a) as fol-
lows:
SEC. 6664(a). UNDERPAYMENT.—
For purposes of this part, the term ‘‘underpayment’’ means the amount
by which any tax imposed by this title exceeds the excess of—
(1) the sum of—
(A) the amount shown as the tax by the taxpayer on his return,
* * *

The basic formula (correct tax – reported tax = under-
payment) is retained and, to that extent, the definition of an
underpayment is not substantively different from previous
law. In a case involving a deficiency and fraud in which no
excess withholding credits are claimed, the calculation of an
underpayment is unchanged. In that context, the terms ‘‘defi-
ciency’’ and ‘‘underpayment’’ can be used interchangeably.
However, in a fraud case where there is no deficiency but
excess withholding credits have been claimed, as is the case
here, or in a fraud case where there is a deficiency and such
credits have been claimed, the effect of the statutory
changes, in relation to the amount of any underpayment, is
unclear from sections 6663 and 6664(a) on their face. The
definition of an underpayment is no longer tied to the defini-
tion of a deficiency under section 6211, as it had been in sec-
tion 6653(c), and the restrictions in section 6211(b)(1),

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 508 135 UNITED STATES TAX COURT REPORTS (497)

excluding estimated tax and withholding credits from the cal-
culation of a deficiency, no longer apply to an underpayment
by explicit cross-reference. Consequently, the statutes do not
speak expressly to the precise issue whether withholding
credits can be taken into account when calculating an under-
payment for purposes of sections 6663 and 6664(a).
Therefore, we find under Chevron step 1 that for the deter-
mination of an underpayment, Congress seems to have
retained the basic formula (correct tax – reported tax =
underpayment) in section 6664 but has deleted the express
cross-reference to the definition of a deficiency in section
6211. Section 6664 is silent and ambiguous with respect to
the issue before us; i.e., Congress has not directly addressed
the meaning of the term ‘‘underpayment’’ when a taxpayer
has overstated withholding credits.
The Secretary has promulgated section 1.6664–2(c)(1) and
(g), Example (3), Income Tax Regs., to address the issue.
Under Chevron step 2 we must determine whether the regu-
lation is based upon a permissible construction of the statute.
We ‘‘need not conclude that the agency construction was the
only one it permissibly could have adopted to uphold the
construction, or even the reading * * * [we] would have
reached if the question had arisen in a judicial proceeding.’’
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467
U.S. at 843 n.11. Rather, ‘‘considerable weight should be
accorded to an executive department’s construction of a
statutory scheme it is entrusted to administer.’’ Id. at 844.
The Court should not disturb the agency’s action unless it
appears from the statute or its legislative history that it is
one that Congress would not have sanctioned. Id. at 845.
On March 4, 1991, the Federal Register published a notice
of proposed rulemaking regarding the accuracy-related pen-
alty under section 6662, the fraud penalty under section
6663, and the definitions and rules for purposes of both pen-
alties under section 6664. See Notice of Proposed Rule-
making, 56 Fed. Reg. 8943 (Mar. 4, 1991). The preamble to
the proposed regulations explained that: (1) Overstated
prepayment credits increase the amount of an underpayment
but have no effect on the calculation of a deficiency; (2)
whether a position with respect to an item has substantial
authority or is disclosed on a return is relevant to the deter-
mination of the amount of a deficiency, but not to the

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 (497) FELLER v. COMMISSIONER 509

determination of the amount of an underpayment; and (3)
the amount of an underpayment is reduced by amounts not
shown on the return that have been previously assessed (or
collected without assessment), but the amount of a deficiency
is not. Id. at 8947. Commentators on the proposed regulation
objected to factoring in overstated prepayment credits in the
calculation of the underpayment. The basis of their objection
was that the overstated prepayment credits are not taken
into account in computing the amount of a deficiency under
section 6211. A public hearing was held on June 3, 1991.
The proposed regulations were adopted and published as
final regulations on December 31, 1991. T.D. 8381, 1992–1
C.B. 374. The preamble to the accuracy-related penalty final
regulations rejected the position of the commentators and
stated: ‘‘There are differences in the section 6664 definition
of ‘underpayment’ and the section 6211 definition of ‘defi-
ciency’ that warrant taking overstated prepayment credits
into account for purposes of the accuracy-related penalty.’’
Id., 1992–1 C.B. at 379.
For convenience, we will again set out the pertinent por-
tion of the regulations. Section 1.6664–2(c)(1), Income Tax
Regs., interprets the definition of ‘‘underpayment’’ in section
6664 by stating that the tax shown on the return is reduced
by the excess of:
(i) The amounts shown by the taxpayer on his return as credits for tax
withheld under section 31 (relating to tax withheld on wages) * * * over
(ii) The amounts actually withheld, * * * with respect to a taxable year
before the return is filed for such taxable year.

Petitioner contends that the regulation is inconsistent with
congressional intent. 7 He stresses the House report which
stated that the definition of ‘‘underpayment’’ in section
6664(a) was not ‘‘intended to be substantively different from
* * * [previous] law.’’ H. Rept. 101–247, supra at 1394. On
the basis of that statement, petitioner argues that the defini-
tion of an underpayment, as contemplated by section 6664,
7 Petitioner cites several cases in support of the proposition that the term ‘‘underpayment’’ is

equivalent to the term ‘‘deficiency’’ under current law. See Estate of Capehart v. Commissioner,
125 T.C. 211, 224 (2005); Downing v. Commissioner, T.C. Memo. 2005–73, supplementing T.C.
Memo. 2003–347; Estate of Johnson v. Commissioner, T.C. Memo. 2001–182, affd. 129 Fed.
Appx. 597 (11th Cir. 2005). Each of these cases dealt with a situation in which the taxpayer’s
underpayment under sec. 6664 also constituted the deficiency under sec. 6211. None dealt with
the overstatement of prepayment credits.

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 510 135 UNITED STATES TAX COURT REPORTS (497)

should not be different from what it was under section
6653(c) and thus withholding credits should be excluded from
the computation of an underpayment.
We disagree with petitioner’s position. Neither section
6664(a) nor the regulation differs substantively from prior
law. The basic formula (correct tax – reported tax = under-
payment) is retained, and in cases involving a deficiency in
which no excess withholding credits are claimed, the calcula-
tion of an underpayment, for purposes of section 6664 and its
regulations, is no different from what it would have been
under former section 6653(c)(1).
If Congress had intended the old and the new penalty
regimes to be identical in every respect, we may infer that
it would have equated the term ‘‘underpayment’’ with ‘‘defi-
ciency’’ and carried forward section 6653(c)(1) verbatim into
section 6664(a). 8 Congress did not do so. Congress has
amended section 6664 on three occasions but has not altered
the definition of the term ‘‘underpayment’’ in response to the
regulation. See Pension Protection Act of 2006, Pub. L. 109–
280, sec. 1219, 120 Stat. 1083; Gulf Opportunity Zone Act of
2005, Pub. L. 109–135, sec. 403, 119 Stat. 2615; American
Jobs Creation Act of 2004, Pub. L. 108–357, sec. 812, 118
Stat. 1577.
The Secretary has followed Congress’ intent to carve out a
specialized set of rules for the penalties applicable to the
accuracy of a return. The application of the regulation is by
its terms specifically limited to underpayments for purposes
of section 6662 (relating to the accuracy-related penalty) and
section 6663 (relating to the fraud penalty) for purposes of
income taxes imposed under subtitle A. Sec. 1.6664–2(a),
Income Tax Regs. By fleshing out the mechanics of what fac-
tors into the section 6664 underpayment calculation when a
deficiency is not present, it promotes fairness in the adminis-
tration of the penalties. It also facilitates the standardization
of the reasonable cause/good faith exception criteria for the
application of all accuracy-related penalties.
Our examination of whether the regulation is based on a
permissible construction of section 6664 reveals that the Sec-
8 One salient change was the omission from the new statute of the parenthetical clause found

in sec. 6653(c), under which the tax shown on a late return did not count. This created a gap
that the Secretary has filled by regulations taking account of the tax shown on a ‘‘qualified
amended return.’’ Sec. 1.6664–2(c)(2) and (3), Income Tax Regs.

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 (497) FELLER v. COMMISSIONER 511

retary reasonably construed the statute through the regula-
tion. Accordingly, we hold the regulation to be valid. See
Estate of Gerson v. Commissioner, 507 F.3d at 441.
If the Commissioner proves that any portion of an under-
payment is due to fraud, the entire underpayment will be
treated as attributable to fraud for purposes of the penalty
under section 6663(b), except any portion of the under-
payment that the taxpayer establishes by a preponderance of
the evidence is not attributable to fraud. Knauss v. Commis-
sioner, T.C. Memo. 2005–6. Respondent has proved that peti-
tioner committed fraud in filing his returns for the years at
issue. Petitioner has not shown that any portion of the
underpayment in any year at issue is not attributable to
fraud. Therefore, the underpayments for the years at issue
are subject in their entirety to fraud penalties. Sec. 6663(b).
In reaching our holdings herein, we have considered all
arguments made, and, to the extent not mentioned above, we
conclude they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered for respondent.
Reviewed by the Court.
COLVIN, COHEN, WELLS, GALE, THORNTON, GOEKE,
KROUPA, HOLMES, PARIS, and MORRISON, JJ., agree with this
majority opinion.

THORNTON, J., concurring: I agree with the majority
opinion and write separately to respond to some of the dis-
senters’ concerns.
Judge Gustafson contends that section 1.6664–2(c)(1),
Income Tax Regs., contradicts the plain meaning of section
6664(a)(1)(A) by defining ‘‘the amount shown as the tax by
the taxpayer on his return’’ so as to remove excess with-
holding credits. I respectfully disagree. As explained in more
detail below, the Code authorizes the IRS to process an
assessment to recover or disallow excess withholding credits
as an adjustment to the tax shown on the return on which
the credit was claimed. Consistent with those provisions, the
regulation permissibly treats the amount shown on the
return as reflecting such an adjustment.

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 512 135 UNITED STATES TAX COURT REPORTS (497)

The IRS summarily assessed petitioner’s erroneous refunds
pursuant to section 6201(a)(3), which authorizes assessment
of excess (‘‘overstated’’) withholding credits in generally the
same manner as mathematical or clerical errors (for sim-
plicity, math errors):
If on any return or claim for refund of income taxes under subtitle A there
is an overstatement of the credit for income tax withheld at the source, or
of the amount paid as estimated income tax, the amount so overstated
which is allowed against the tax shown on the return or which is allowed
as a credit or refund may be assessed by the Secretary in the same
manner as in the case of a mathematical or clerical error appearing upon
the return, except that the provisions of section 6213(b)(2) (relating to
abatement of mathematical or clerical error assessments) shall not apply
with regard to any assessment under this paragraph.

The contemporaneous 1954 legislative history sheds some
light on this provision:
Under this new paragraph refunds caused by erroneous prepayment
credits may be recovered by assessment in the same manner as in the case
of a mathematical error on the return. For example, assume a case in
which the tax shown on the return is $100, the claimed prepayment credit
is $125, and refund of $25 is made, and that it is later determined that
the prepayment credits should have been only $70. Under existing law,
$30 (the tax of $100 as shown on the return less the $70 credit) can be
immediately assessed as tax shown on the return which was not paid, but
the remaining $25 must be recovered by suit in court. Under the new
provision, the entire $55 can be assessed and collected. [H. Rept. 1337, 83d
Cong., 2d Sess. A404 (1954).]

As this history indicates, the legislative impetus for section
6201(a)(3) was the perceived need to give the IRS a means,
previously lacking, of recouping erroneous refunds attrib-
utable to overstated withholding credits without having to
file suit. The legislative solution, as effected in section
6201(a)(3), was to permit the IRS to assess, ‘‘in the same
manner as in the case of a mathematical or clerical error
appearing upon the return,’’ not only the erroneous refund
($25 in the above example), but also the amount of over-
stated withholding credits that the IRS had previously
‘‘allowed’’ against the tax shown on the return but that had
not generated a refund ($30 in the example). 1
1 At first blush it may seem paradoxical to speak, as does sec. 6201(a)(3), of an ‘‘overstated’’

withholding credit as being ‘‘allowed’’. One would not ordinarily think of an ‘‘overstated’’ amount
as being allowed or allowable. But from the example in the above-quoted legislative history it
seems clear that the withholding credits were ‘‘allowed’’ only provisionally until the IRS ‘‘later

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 (497) FELLER v. COMMISSIONER 513

Section 6201(a)(3) authorizes overstated withholding
credits to be ‘‘assessed’’. And because under section 6201(a)
the IRS’ assessment authority pertains only to ‘‘taxes’’, it fol-
lows that assessment of overstated withholding credits under
section 6201(a)(3) is properly considered as assessment of
additional taxes. 2 Furthermore, because section 6213(b) is
the only Code provision that expressly addresses the process
for making assessments arising out of math errors, it is
reasonable to conclude that section 6201(a)(3), in directing
that overstated withholding credits may be assessed ‘‘in the
same manner as in the case of a mathematical or clerical
error appearing upon the return,’’ means in the same manner
as described in section 6213(b). Otherwise, this directive
would not be meaningful. Consequently, we look to section
6213(b) for guidance.
Pursuant to section 6213(b)(1), summary assessment is
permitted (i.e., the restrictions applicable to deficiencies are
made inapplicable) if a math error on a return gives rise to
an amount of tax ‘‘in excess of that shown on the return’’.
From this phrase it is clear that the tax ‘‘shown on the
return’’ is the amount the taxpayer has shown on the return
before any adjustment is made to correct the math error; i.e.,
the amount ‘‘shown on the return’’ is the amount that reflects
the math error. Because there is no suggestion in the Code
that the amount of tax ‘‘shown on the return’’ should mean
different things in different sections, the same analysis holds
true in determining the impact of a math error on the tax
‘‘shown * * * [on the] return’’ under section 6211(a)(1)
(defining ‘‘deficiency’’ by reference to the amount of tax
shown on the return) and section 6664(a)(1) (defining ‘‘under-
determined’’ that they were overstated. Ultimately, the overstated withholding credits, by virtue
of being overstated, were not in fact ‘‘allowed’’ but instead were made subject to the summary
assessment provisions of sec. 6201(a)(3). Similarly, although the statute refers to overstatements
as being ‘‘allowed against the tax shown on the return’’, and hence (as Judge Gustafson notes)
as being distinct from the tax shown on the return, this phrase merely describes which ‘‘allowed’’
‘‘overstated’’ amounts are made subject to the operation of sec. 6201(a)(3). The more meaningful
consideration is the effect of the statute’s operation upon these amounts. As described in more
detail infra, in permitting these overstated amounts to be assessed in the same manner as math
errors ‘‘appearing upon on the return’’, the effect of sec. 6201(a)(3) is to treat the overstated
withholding credits as part of the amount shown (erroneously) on the return.
2 Indeed, in the example in the legislative history, in order to recoup the $25 erroneous refund

in the manner provided in sec. 6201(a)(3), the IRS must assess not only the original $100 shown
on the return but also the $25 associated with the erroneous refund, as an additional amount
of tax.

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 514 135 UNITED STATES TAX COURT REPORTS (497)

payment’’ by reference to the amount of tax shown on the
return).
Furthermore, because section 6201(a)(3) directs that over-
stated withholding credits be assessed in the same manner
as math errors, it is reasonable to conclude that the same
analysis holds true for overstated withholding credits. In
other words, for overstated withholding credits under section
6201(a)(3), as for other types of math errors under sec-
tion 6213(b)(1), summary assessment is permitted if over-
stated withholding credits give rise to an amount of tax ‘‘in
excess of that shown on the return’’. Sec. 6213(b)(1). As with
math errors, this means that the amount of tax ‘‘shown on
the return’’ is the amount shown by the taxpayer that
reflects the overstated withholding credits. Again, absent
some contrary statutory signal, it is reasonable to conclude
that this result carries over to section 6664(a)(1), where tax
‘‘shown * * * [on the] return’’ is a relevant consideration. 3
In short, under this statutory framework the ‘‘amount shown
as the tax by the taxpayer on his return’’ under section
6664(a)(1)(A) is the amount that reflects reduction for excess
withholding credits. This is precisely the result achieved by
the regulation. 4
The legislative history of section 6664(a) indicates that its
new (in 1989) definition of ‘‘underpayment’’ was not intended
to differ ‘‘substantively’’ from prior law. H. Rept. 101–247, at
1394 (1989). But in the same sentence this legislative history
states that the new definition was intended to ‘‘simplify and
coordinate’’ diverse ‘‘underpayment’’ definitions under former
law. Id. And in fact the new ‘‘underpayment’’ definition in
section 6664(a) differs in various ways from the old ‘‘under-
payment’’ definitions which it replaced. 5 Of special impor-
3 A prominent example of a contrary statutory signal appears in sec. 6211(b)(1), which ex-

pressly excludes withholding credits from the amount ‘‘shown on the return’’ for purposes of de-
termining a deficiency. Although the old ‘‘underpayment’’ definition of former sec. 6653(c)(1) in-
corporated these provisions by cross-reference, this linkage between the sec. 6211 ‘‘deficiency’’
definition and the current sec. 6664(a) definition was broken in 1989, as discussed in more detail
infra.
4 The effect is to increase the amount of the underpayment by the amount of overstated with-

holding credits. It might be noted that to be evenhanded the regulation conversely permits un-
claimed but otherwise allowable withholding credits to reduce the amount of any underpayment.
See sec. 1.6664–3(c), Income Tax Regs.
5 The new ‘‘underpayment’’ definition in sec. 6664(a) replaced at least two different ‘‘under-

payment’’ definitions that appeared in these sections of prior law: (1) Former sec. 6653(c)(1), per-
taining to additions to tax for negligence and fraud for purposes of income, estate, gift, and cer-
tain excise taxes; and (2) former sec. 6653(c)(2), pertaining to additions to tax for negligence and

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 (497) FELLER v. COMMISSIONER 515

tance for present purposes, it differs from the former section
6653(c)(1) definition by dropping the cross-reference to the
section 6211 ‘‘deficiency’’ definition with its directive that the
‘‘tax imposed’’ and the ‘‘tax shown on the return’’ should be
‘‘determined without regard to’’ withholding credits, among
other things.
Judge Gustafson suggests that this striking difference
between these two ‘‘underpayment’’ definitions is of no con-
sequence. Citing the 1944 legislative history of section 6211,
he contends that the phrase ‘‘determined without regard to’’
was meant merely to clarify that ‘‘refunds’’ of claimed over-
payments of withheld tax should not increase any deficiency.
He suggests that this ‘‘clarification’’ was omitted from the
section 6664(a) ‘‘underpayment’’ definition merely because
section 6664 defined ‘‘rebates’’ in such a manner as to elimi-
nate the former confusion about ‘‘refunds’’, making the
phrase ‘‘determined without regard to’’ redundant and
unnecessary. 6 See Gustafson op. pp. 535–536.
But this analysis fails to take into account the problem of
erroneous refunds arising from overstated withholding
credits. As we have seen, Congress separately addressed that
problem in 1954 with the enactment of section 6201(a)(3),
authorizing the IRS to process an assessment to recover or
disallow excess withholding credits as an adjustment to the
income tax return on which the credit was claimed. The
former section 6653(c)(1) ‘‘underpayment’’ definition excluded
such amounts from an underpayment only by virtue of the
definition’s express linkage to the ‘‘determined without
regard to’’ phrase of section 6211(b). The breaking of that
linkage in 1989 in the new section 6664(a) ‘‘underpayment’’
definition had the consequence of permitting overstated with-
holding credits to be factored into an underpayment, as pro-
vided by the regulation. 7
fraud relating to taxes other than as described in sec. 6653(c)(1). Of these two former ‘‘under-
payment’’ definitions, only the first incorporated by cross-reference the sec. 6211 ‘‘deficiency’’ def-
inition with its directive that withholding taxes should be disregarded in determining the ‘‘tax
imposed’’ and the ‘‘tax shown on the return’’.
6 Under this analysis it might be thought that the phrase ‘‘determined without regard to’’ was

also unnecessary and redundant in sec. 6211, since it contains the same definition of ‘‘rebate’’
as does sec. 6664(a). See secs. 6211(b)(2), 6664(a) (flush language). But of course interpretations
that render statutory language unnecessary or redundant are generally disfavored. See 2A Sing-
er & Singer, Sutherland Statutory Construction, sec. 46:6 (7th ed. 2007).
7 For similar reasons, I also respectfully disagree with Judge Wherry’s dissent, which depends

in large measure on the assumption that ‘‘the amount shown as the tax by the taxpayer on his
Continued

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 516 135 UNITED STATES TAX COURT REPORTS (497)

In the final analysis, ‘‘the amount shown as the tax by the
taxpayer on his return’’ is a term of art, as is the section
6664(a) definition of ‘‘underpayment’’ of which it is a compo-
nent. That the meanings of these terms of art may not be
immediately plain on their face is attributable in part to the
intricate interplay of Code provisions. But the regulation is
based upon a construction of these terms and of the larger
statutory framework that is, in my view, not merely permis-
sible but correct. For these reasons and the reasons stated in
the majority opinion, the regulation is valid.
COLVIN, COHEN, GALE, MARVEL, GOEKE, KROUPA, HOLMES,
and HAINES, JJ., agree with this concurring opinion.

WHERRY, J., dissenting: I disagree with the majority to the
extent it holds section 1.6664–2(c)(1), Income Tax Regs., 1 to
be a permissible construction of section 6664(a)(1)(A), for
many of the reasons Judge Gustafson articulates in his finely
crafted dissent.
Not only is section 1.6664–2(c)(1), Income Tax Regs., at
variance with the statute it purports to interpret; it also ren-
ders the totality of the Commissioner’s regulatory scheme, as
set forth in section 1.6664–2, Income Tax Regs., contradictory
and unreasonable. I would, therefore, hold invalid section
1.6664–2(c)(1), Income Tax Regs., and certain regulatory
examples inextricably linked with it. 2 Ignoring these provi-
sions, I find that the remainder of section 1.6664–2, Income
return’’ under sec. 6664(a)(1)(A) cannot reflect any reduction for excess withholding credits. I
also respectfully disagree with certain technical aspects of Judge Wherry’s analysis, particularly
his suggestion that overstated withholding credits are properly considered amounts ‘‘collected
without assessment’’ under sec. 1.6664–2(d), Income Tax Regs., which pertains to sec. 31 credits
which are ‘‘allowable’’. By definition, overstated withholding credits are not ‘‘allowable’’, and in
all likelihood (as is true in the case before us) the amounts on which they are predicated have
never been ‘‘collected’’. Properly construed, the regulation does not give rise to the ‘‘double-count-
ing error’’ that concerns Judge Wherry. See Wherry op. pp. 525–526.
1 Sec. 1.6664–2(c), Income Tax Regs., was adopted on Jan. 9, 2007, pursuant to T.D. 9309,

2007–1 C.B. 497, which also removed sec. 1.6664–2T, Temporary Income Tax Regs., 70 Fed. Reg.
10037 (Mar. 2, 2005). The latter, in turn, had replaced the prior final regulation, sec. 1.6664–
2(c), Income Tax Regs., adopted on Dec. 31, 1991, pursuant to T.D. 8381, 1992–1 C.B. 374. The
temporary regulation, issued to modify the rules relating to qualified amended returns contained
in the prior final regulation, had retained par. (c)(1) of that regulation unchanged. The current
version of sec. 1.6664–2(c)(1), Income Tax Regs., adopted on Jan. 9, 2007, is identical to the
version adopted on Dec. 31, 1991, and in effect during the tax years at issue. Also, ‘‘both parties
agree that the regulation * * * is applicable to the computation of the underpayments in the
instant case.’’ See majority op. p. 504.
2 See infra note 9.

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 (497) FELLER v. COMMISSIONER 517

Tax Regs., is sufficiently consistent, both with the statute
and among its constituent parts, to sustain a section 6663
civil fraud penalty here. I would, however, impose that pen-
alty not on the entire amount by which petitioner overstated
his withholding credits, but only on the portion of the over-
stated withholding credits that he fraudulently claimed and
received as a refund.
I. Opening the Door to Withholding Credits
The majority asserts, without explanation, that ‘‘Neither
paragraph (1)(B) [of section 6664(a) relating to amounts col-
lected without assessment] nor (2) [of section 6664(a) relating
to rebates] applies in this case.’’ See majority op. p. 503. The
majority, thus, accepts respondent’s claim that in each of
petitioner’s tax years at issue the amount of a section
6664(a)(2) rebate was, respectively, zero. In failing to subject
this claim to scrutiny, the majority has denied itself the
opportunity to appreciate the creativity and complexity
underlying section 1.6664–2(d), Income Tax Regs. This sec-
tion of the regulations is not mentioned in either petitioner’s
or respondent’s briefs but, nonetheless, constitutes the basis
for arriving at respondent’s result under section 1.6664–
2(c)(1), Income Tax Regs., which petitioner challenges and
respondent defends.
Siding with respondent, the majority accurately observes
that ‘‘the statutes do not speak expressly to the precise issue
whether withholding credits can be taken into account when
calculating an underpayment for purposes of sections 6663
and 6664(a).’’ See majority op. p. 508. I suggest that
respondent finds the statutory hook for his regulatory
innovation not in section 6664(a)(1)(A), whose plain meaning,
as Judge Gustafson points out, could hardly be clearer, but
instead in section 6664(a)(1)(B).
A. Section 6664(a)(1)(B), Not Section 6664(a)(1)(A), Turns
the Key
Section 6664(a)(1)(A) replicates the operative language of
section 6211(a)(1)(A), the parallel provision in the definition
of deficiency (‘‘the amount shown as the tax by the taxpayer
on his return’’). In contrast, section 6664(a)(1)(B) uses words
slightly different from those of its deficiency counterpart, sec-

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 518 135 UNITED STATES TAX COURT REPORTS (497)

tion 6211(a)(1)(B). Whereas section 6664(a)(1)(B) specifies
‘‘amounts not so shown previously assessed (or collected with-
out assessment)’’, section 6211(a)(1)(B) refers to ‘‘amounts
previously assessed (or collected without assessment) as a
deficiency’’. (Emphasis supplied.) When compared with sec-
tion 6211(a)(1)(B), section 6664(a)(1)(B) contains the addi-
tional qualifying phrase ‘‘not so shown’’ before ‘‘previously
assessed’’ but omits the qualifying phrase ‘‘as a deficiency’’
after the parenthetical ‘‘(or collected without assessment)’’.
Relying on that omission, the Commissioner has concluded
in section 1.6664–2(d), Income Tax Regs., that the additional
qualifier ‘‘not so shown’’ in section 6664(a)(1)(B) does not
apply to the parenthetical ‘‘(or collected without assess-
ment)’’. In other words, the Commissioner reads section
6664(a)(1)(B) as referring to two different kinds of amounts:
(1) Those not shown on the return that were previously
assessed; and (2) those that were collected without assess-
ment. This taxonomy, in turn, allows the Commissioner to
define the latter amounts as
the amount by which the total of the credits allowable under section 31
(relating to tax withheld on wages) and section 33 (relating to tax withheld
at source on nonresident aliens and foreign corporations), estimated tax
payments, and other payments in satisfaction of tax liability made before
the return is filed, exceed the tax shown on the return (provided such
excess has not been refunded or allowed as a credit to the taxpayer). [Sec.
1.6664–2(d), Income Tax Regs.]

Section 6664(a)(1)(B), and its differences with section
6211(a)(1)(B), creates an opening, through which the
Commissioner has dragged withholding credits into the equa-
tion for calculating an underpayment. 3
B. Withholding Credit Is Amount Collected Without Assess-
ment Except When I Say It Is Not
Unfortunately for the Commissioner, neither the preamble
to the proposed or final regulations nor the regulations them-
selves clarify why including withholding credits in amounts
collected without assessment, under section 6664(a)(1)(B),
3 As evidence, consider the preamble to the proposed regulations, which had justified the in-

clusion of withholding credits in amounts collected without assessment under sec. 6664(a)(1)(B),
even though such credits are excluded under sec. 6211(a)(1)(B), by arguing that the amount of
an underpayment is reduced by amounts collected without assessment whereas the amount of
a deficiency is not. Notice of Proposed Rulemaking, 56 Fed. Reg. 8947 (Mar. 4, 1991).

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 (497) FELLER v. COMMISSIONER 519

also requires that we reduce amounts shown as tax under
section 6664(a)(1)(A) by any overstated withholding credits.
Even worse, under the plain meaning of the Commissioner’s
own regulations, in a case where there is no deficiency as
defined in section 6211(a), a refund of overstated withholding
credits would constitute a rebate under section 6664(a)(2).
Consequently, the regulations would count this refunded
amount twice in calculating an underpayment, once by
reducing the amount shown as the tax pursuant to section
1.6664–2(a) and (c)(1), Income Tax Regs., and then again as
a rebate pursuant to section 1.6664–2(a) and (e), Income Tax
Regs.
Respondent tries to disavow this anomalous effect of his
own handiwork. Respondent’s posttrial brief and section
1.6664–2(g), Examples (1) and (3), Income Tax Regs., imply
that when withholding credits are refunded, they cease to be
amounts collected without assessment and this cessation
somehow has retroactive effect so that the refund does not
constitute a rebate within the meaning of section 6664(a)(2).
Reaching this conclusion, however, requires reversing the
laws of space and time, the rules of logic and grammar, and
the force of our own precedent.
Respondent presumably relies on the parenthetical ‘‘(pro-
vided such excess has not been refunded or allowed as a
credit to the taxpayer)’’ in section 1.6664–2(d), Income Tax
Regs., to conclude that when withholding credits are
refunded, they no longer constitute amounts collected with-
out assessment. Therefore, according to respondent, the
refund cannot be a rebate under section 6664(a)(2). This flies
in the face of the obvious implication of the regulatory text
itself that until such time as a withholding credit is
refunded, it remains an amount collected without assess-
ment. In fact, section 1.6664–2(g), Example (2), Income Tax
Regs., suggests as much. It should follow that as long as the
tax shown on the return is no less than the tax imposed, so
that there is no deficiency under section 6211(a), any refund
of the withholding credit could only have been ‘‘made on the
ground that the tax imposed was less than * * * Amounts
not so shown previously assessed (or collected without
assessment)’’. Sec. 1.6664–2(e), Income Tax Regs.

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 520 135 UNITED STATES TAX COURT REPORTS (497)

C. In a Galaxy Far, Far Away
Respondent appears to construct a multiverse version of
reality in which the moment a withholding credit is
refunded, it enters a parallel universe, as it were, where the
refunded amount was never an amount collected without
assessment to begin with. Tax law, alas, must inhabit our
universe where the arrow of time can move in only one direc-
tion and cause must precede its effect. If a withholding credit
is an amount collected without assessment, then it must
remain so until it is refunded. And if the refund, when made,
is made on the ground that the tax imposed is less than the
amount of withholding credits, then that refund must con-
stitute a rebate under section 6664(a)(2).
Respondent’s difficulty lies in the fact that the statutory
design envisions any amount collected without assessment as
potentially affecting the calculation of an underpayment in
two ways: (1) Negatively, under section 6664(a)(1)(B); and (2)
positively, under section 6664(a)(2). 4 Because respondent has
included withholding credits in amounts collected without
assessment under section 6664(a)(1)(B), his attempt to deny
their existence in computing a rebate under section
6664(a)(2) is logically irreconcilable.
Grammar and our own precedent also undermine respond-
ent’s cause. The Commissioner’s own words in the regula-
tions refer to the amount by which withholding credits ‘‘and
other payments in satisfaction of tax liability made before
the return is filed, exceed the tax shown on the return (pro-
4 Sec. 6664(a) establishes the following relationship between underpayment and an amount

collected without assessment:
Underpayment equals the amount of tax imposed minus (the amount shown as the tax by the
taxpayer on his return plus all amounts not so shown previously assessed, or collected without
assessment, minus the amount of rebates made).
Sec. 1.6664–2(a), Income Tax Regs., accurately represents this relationship in the following
algebraic expression:
Underpayment = W – (X + Y – Z), where W = the amount of income tax imposed; X = the
amount shown as the tax by the taxpayer on his return; Y = amounts not so shown previously
assessed (or collected without assessment); and Z = the amount of rebates made.
Rearranging the terms yields the following equivalent expression:
Underpayment = (W + Z) – (X + Y).
It is easy to see that an increase of $1 in the amount collected without assessment increases
Y and, thereby, reduces underpayment by $1. However, to the extent that this $1 is refunded
‘‘on the ground that the tax imposed was less than the excess of * * * [(X + Y)] over the rebates
previously made’’, sec. 6664(a)(2), the resulting increase in Z will increase underpayment by the
same amount.

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 (497) FELLER v. COMMISSIONER 521

vided such excess has not been refunded or allowed as a
credit to the taxpayer).’’ Sec. 1.6664–2(d), Income Tax Regs.
(emphasis supplied). The use of the present perfect tense in
the parenthetical dictates that the parenthetical apply at the
time that the underpayment is calculated. We have long
maintained that for purposes of the civil fraud penalty, the
base on which the penalty is imposed be determined as of the
time when the return is filed and not any later time such as
when the notice of deficiency is issued. See, e.g., Stewart v.
Commissioner, 66 T.C. 54 (1976).
Underpinning such decisions was the rationale that a taxpayer should
not, after fraudulently understating his tax liability, retain the power to
avoid the fraud penalty by the simple expedient of later paying the
remainder of his correct tax upon discovering his return was under audit.
* * * [Id. at 58–59.]

It would surely be perverse to allow respondent’s discretion
in handling a refund claim to affect the amount of peti-
tioner’s underpayment well after petitioner has filed his
return.
Clearly, then, so long as a taxpayer has no deficiency
under section 6211(a), the plain meaning of the regulations’
language would cause a refund of a withholding credit to be
a rebate under section 6664(a)(2). 5 Further, any refund that
this taxpayer obtains by overstating withholding credits
would also constitute a section 6664(a)(2) rebate since this
refund must necessarily have been ‘‘made on the ground that
the tax imposed was less than’’ (emphasis supplied) the
amounts collected without assessment. Sec. 6664(a). In fact,
there could exist no other grounds for making this refund.

5 A sec. 6211(a) deficiency could arguably cause a rebate under sec. 6664(a)(2) to be smaller

by the same amount. To see this, consider a situation where ‘‘the amount by which the tax im-
posed * * * exceeds * * * the amount shown as the tax by the taxpayer upon his return’’ is
$1. This would create a deficiency of $1 under sec. 6211(a). It may be argued that this $1 could
not be included in ‘‘so much of * * * [a refund] as was made on the ground that the tax imposed
was less than the excess of * * * [(X + Y), as defined supra note 4] over the rebates previously
made.’’ Sec. 6664(a). Under this argument, any sec. 6664(a)(2) rebate would be reduced by $1.
Even though a sec. 6211(a) deficiency may result in a smaller rebate under sec. 6664(a)(2), the
sec. 6664(a) formula for underpayment would automatically pick up the deficiency to leave the
amount of underpayment, if any, unchanged. See supra note 4 for the algebraic formula for com-
puting the underpayment. See also infra note 10, discussing the converse case, where the tax
shown on the return exceeds the tax imposed, and infra note 11, deriving the numerical results
for such a converse case.

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 522 135 UNITED STATES TAX COURT REPORTS (497)

II. Taking the Blue Pencil to the Commissioner’s Drafting
Finally, to the case of Rick D. Feller, where the notices of
deficiency evidence the absence of a section 6211(a) defi-
ciency in each of the tax years at issue. For the reasons dis-
cussed above, section 1.6664–2(d) and (e), Income Tax Regs.,
would cause petitioner’s section 6664(a) underpayment to
include so much of his overstated withholding credits that he
claimed and received as a refund. However, if the challenged
regulation, section 1.6664–2(c)(1), Income Tax Regs., is valid,
we would consider the overstatement of withholding credits
yet again. Specifically, we would adjust the tax shown on the
return by subtracting from it the entire amount of the over-
stated withholding credits. 6 We would then use this adjusted
figure, rather than the actual tax shown on the return, to
calculate petitioner’s underpayment. The refunded portion of
the overstated withholding credits would, thus, be counted
one more time. 7 This bizarre result is untenable, and either
section 1.6664–2(c)(1), Income Tax Regs., or both section
1.6664–2(c)(1) and (d), Income Tax Regs., must give way. 8
6 It is unclear from the regulations whether the challenged adjustment under sec. 1.6664–

2(c)(1), Income Tax Regs., to the amount of tax shown on the return also purports to cover the
calculation of a sec. 6664(a)(2) rebate under sec. 1.6664–2(e), Income Tax Regs. Compare sec.
1.6664–2(a)(1)(i), Income Tax Regs. (‘‘The amount shown as the tax by the taxpayer on his re-
turn (as defined in paragraph (c) of this section)’’), with sec. 1.6664–2(e)(1)(i), Income Tax Regs.
(‘‘The amount shown as the tax by the taxpayer on his return’’ without a cross-reference to
‘‘paragraph (c) of this section’’). However, the final amount of any sec. 6664(a)(2) rebate cal-
culated under sec. 1.6664–2(e), Income Tax Regs., would remain unchanged, whether or not sec.
1.6664–2(c)(1), Income Tax Regs., applies.
Applying sec. 1.6664–2(c)(1), Income Tax Regs., to this calculation would have two equal and
opposite effects that would cancel each other out. On the one hand, the amount of tax shown
on the return under sec. 1.6664–2(e)(1)(i), Income Tax Regs., would be reduced by the amount
of the challenged adjustment. On the other hand, however, amounts collected without assess-
ment under sec. 1.6664–2(e)(1)(ii), Income Tax Regs., would be increased by the same amount.
See sec. 1.6664–2(d), Income Tax Regs. (restricting amounts collected without assessment to
those that ‘‘exceed the tax shown on the return’’). Since the calculation of a sec. 6664(a)(2) rebate
entails adding the respective amounts under sec. 1.6664–2(e)(1)(i) and (ii), Income Tax Regs.,
the net effect would be zero.
7 See infra note 11 showing such double-counting of overstated withholding credits for peti-

tioner’s 1992 tax year.
8 Quite apart from the double-counting of the refunded portion of overstated withholding cred-

its, the challenged adjustment under sec. 1.6664–2(c)(1), Income Tax Regs., introduces another
inconsistency, and a potentially fatal one, with the remaining provisions of the regulations.
Under sec. 1.6664–2(d), Income Tax Regs., ‘‘amount ‘collected without assessment’ is the amount
by which * * * [withholding credits] and other payments in satisfaction of tax liability made
before the return is filed, exceed the tax shown on the return (provided such excess has not been
refunded or allowed as a credit to the taxpayer).’’ (Emphasis supplied.) Sec. 1.6664–2(c)(1), In-
come Tax Regs., says that the adjustment to the tax shown on the return applies ‘‘For purposes
of paragraph (a) of this section’’. And though the term ‘‘amount collected without assessment’’
is fully defined only in sec. 1.6664–2(d), Income Tax Regs., ‘‘paragraph (a) of this section’’ cer-
tainly mentions and uses it as an input in the underpayment formula set forth there. A literal

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 (497) FELLER v. COMMISSIONER 523

I agree with Judge Gustafson that ‘‘section 6664(a)(1)(A) is
not ambiguous, and under the Supreme Court’s Chevron
analysis, the inquiry stops there.’’ Gustafson op. p. 541.
Moreover, as I have shown, section 1.6664–2(c)(1), Income
Tax Regs., as currently written, causes the Commissioner’s
regulatory scheme to generate results that are incorrect,
illogical and incoherent. I would, therefore, invalidate section
1.6664–2(c)(1), Income Tax Regs. 9
However, I also believe that the omission of the phrase ‘‘as
a deficiency’’ in section 6664(a)(1)(B), when compared with
section 6211(a), leaves the former sufficiently ambiguous to
invite regulatory interpretation. Under ‘‘step 2’’ of a Chevron
analysis, I would then consider whether the interpretation
that the Commissioner has provided in section 1.6664–2(d),
Income Tax Regs., is ‘‘based on a permissible construction of
the statute.’’ Chevron U.S.A. Inc. v. Natural Res. Def.
Council, Inc., 467 U.S. 837, 843 (1984).
The Commissioner’s interpretation is by no means ‘‘the
only one * * * [he] permissibly could have adopted’’. Id. n.11.
But I can find nothing in the statute that would indicate that
Congress would not have sanctioned including withholding
credits in amounts previously collected without assessment.
See id. at 845. Further, as the majority discusses at length,
there is sufficient legislative history to support the propo-
sition that Congress wanted to distinguish an underpayment
under section 6664(a) from a deficiency under section
6211(a). I would, therefore, defer to respondent’s interpreta-
reading of this applicability provision would require the challenged adjustment to be made to
all the terms that go into the underpayment formula of sec. 1.6664–2(a), Income Tax Regs., in-
cluding amount collected without assessment. As a consequence, depending upon the facts of a
particular situation, none, some or all of the benefits that respondent seeks from the challenged
adjustment in par. (a) would have to be given up in par. (d). The results could be startling in
a case, such as petitioner’s, where respondent has relied on the challenged adjustment to reduce
the amount shown as tax to a negative number. Invalidating sec. 1.6664–2(c)(1), Income Tax
Regs., would, thus, confer the added benefit of precluding this self-defeating construction and
salvaging the remainder of sec. 1.6664–2, Income Tax Regs.
By comparison, invalidating sec. 1.6664–2(d), Income Tax Regs., would eviscerate the entire
regulatory venture. I do not believe that in the absence of sec. 1.6664–2(d), Income Tax Regs.,
sec. 1.6664–2(c)(1), Income Tax Regs., or for that matter, any other provision of sec. 1.6664–2,
Income Tax Regs., can stand on its own since, as explained above, sec. 1.6664–2(d), Income Tax
Regs., is the provision that enables taking withholding credits into account in computing an un-
derpayment.
9 I would also invalidate sec. 1.6664–2(g), Examples (1) and (3), Income Tax Regs., holding

them to be unreasonable and impermissible constructions of the Commissioner’s own text con-
tained in sec. 1.6664–2(d), Income Tax Regs.

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 524 135 UNITED STATES TAX COURT REPORTS (497)

tion of section 6664(a)(1)(B), which he provides in section
1.6664–2(d), Income Tax Regs.
Applying the unambiguous plain language of that regula-
tion section to petitioner’s case and tracing its consequences
sequentially through section 1.6664–2(e) and (a), Income Tax
Regs., I would find underpayments in the amounts of the
overstated withholding credits claimed and received as
refunds. 10 I would, therefore, sustain a section 6663 civil
fraud penalty not on the entire amount by which petitioner
overstated his withholding credits for each tax year at issue
but only on such portion of the overstated withholding
credits as he had claimed and received as a refund. 11
10 Respondent did not determine a sec. 6211(a) deficiency for any of petitioner’s tax years at

issue. However, for one or more of these years petitioner had in fact overstated his tax liability,
so that the amount shown on the return exceeded the tax imposed. Ceteris paribus, this would
cause a sec. 6664(a)(2) rebate to be larger by the amount of the overstatement. However, the
sec. 6664(a) underpayment would remain unchanged in the amount of the total refund. See infra
note 11, establishing this result for petitioner’s 1992 tax year, where the amount shown as tax
did, in fact, exceed the tax imposed. Cf. supra note 5 (discussing the case of a sec. 6211(a) defi-
ciency).
11 This is the exact amount that one obtains as a sec. 6664(a) underpayment by applying the

formula set forth in sec. 1.6664–2(a)(2), Income Tax Regs., and discussed supra note 4, without
giving effect to the challenged adjustment under sec. 1.6664–2(c)(1), Income Tax Regs. I formally
demonstrate this below for petitioner’s 1992 tax year. I then show the impact of the challenged
adjustment on petitioner’s 1992 underpayment amount, highlighting the double-counting of the
refunded portion of the overstated withholding credits. Finally, I compare petitioner’s 1992 un-
derpayment amount, computed with and without the challenged adjustment, to the under-
payment that respondent actually determined.
Recall from supra note 4 that the required inputs for the underpayment formula are:
W = the amount of income tax imposed;
X = the amount shown as the tax by the taxpayer on his return;
Y = amounts not so shown previously assessed (or collected without assessment); and
Z = the amount of rebates made.
For his 1992 tax year petitioner claimed and received a refund of $86,181, $5,328 of which
consisted of claimed excess Social Security tax withheld. The record is silent on the legitimacy
or otherwise of such claimed withholdings, and respondent has not treated them as overstated
withholdings in applying the challenged adjustment under sec. 1.6664–2(c)(1), Income Tax Regs.
For purposes of this exercise, therefore, I will ignore the claimed excess Social Security
withholdings and assume a refund amount of $86,181 less $5,328, or $80,853.
Respondent determined petitioner’s 1992 tax liability to be $30,022, whereas petitioner had
written a figure of $57,244 on line 53 of his 1992 Form 1040, U.S. Individual Income Tax Re-
turn, against the words ‘‘This is your total tax’’. Petitioner claimed withholdings of $138,097,
of which $3,097 were actual and the remaining $135,000 were fictitious. Thus, in the under-
payment formula, W is $30,022 and X is $57,244. Also, Y is zero and Z is $108,075.
Note that Y consists of amounts actually collected without assessment, but only to the extent
they ‘‘exceed the tax shown on the return’’. Sec. 1.6664–2(d), Income Tax Regs. Since actual
withholdings of $3,097 were less than the $57,244 of tax shown on the return, Y is set to be
zero. Further, Z is the amount of the sec. 6664(a)(2) rebate, calculated pursuant to sec. 1.6664–
2(e), Income Tax Regs., as follows. The rebate would consist of the excess of the tax imposed
over the amount specified in sec. 1.6664–2(e)(1), Income Tax Regs. The latter is the higher of
the amount shown as the tax, or $57,244, and the total claimed withholdings, or $138,097. This
yields: $138,097 – $30,022 = $108,075, which is larger than the refund of $80,853 by exactly
the amount by which petitioner overstated his tax liability, or $27,222. This $27,222 (in addition

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 (497) FELLER v. COMMISSIONER 525

III. Conclusion
I believe that the Commissioner could have drafted an
expanded version of the current section 1.6664–2(d), Income
Tax Regs., in a manner that delivered results mathematically
identical to those that section 1.6664–2(c)(1), Income Tax
Regs., seeks to attain. He could have done so without the
to the $80,853 refund) is also a rebate, and one trivially so in the sense that it is an abatement
or credit of a self-reported and immediately assessable tax liability, and such abatement or cred-
it must necessarily have been ‘‘made on the ground that the tax imposed was less than the
* * * [tax shown on the return]’’. Sec. 1.6664–2(e), Income Tax Regs.
Begin with the formula for underpayment from supra note 4,
Underpayment = (W + Z) – (X + Y).
Since Y is zero, the formula can be simplified,
Underpayment = W + Z – X.
The numbers for W, Z, and X, from above, are $30,022, $57,244, and $108,075, respectively.
Plugging these numbers in the formula,
Underpayment = W + Z – X
= $30,022 + $108,075 – $57,244
= $138,097 – $57,244 = $80,853.
The $80,853 underpayment equals the amount of the refund, and this proves the claim made
at the outset. Now, consider the impact of the challenged adjustment under sec. 1.6664–2(c)(1),
Income Tax Regs. The adjustment would reduce the amount of tax shown on the return of
$57,244 by the fictitious withholdings of $135,000 and, thus, arrive at a negative number for
X of –$77,756. The numbers for W, Z, and Y would be unchanged; i.e., $30,022, $108,075, and
zero, respectively. Plugging these numbers in the formula,
Underpayment = W + Z – X
= $30,022 + $108,075 – (–$77,756)
= $138,097 + $77,756 = $215,853.
The $215,853 underpayment is larger than the $135,000 fictitious withholdings by exactly the
refund amount of $80,853, demonstrating that the refunded portion of the fictitious withholdings
has been counted twice.
Respondent actually determined a 1992 underpayment amount for petitioner of only $104,642.
Presumably under authority of sec. 1.6664–2(g), Example (1), Income Tax Regs., and notwith-
standing the plain language of sec. 1.6664–2(d) and (e), Income Tax Regs., respondent declined
to recognize the $80,853 refund as a sec. 6664(a)(2) rebate. Curiously, respondent also did not
consider as a rebate the $27,222 by which petitioner had overstated his 1992 tax liability. Peti-
tioner had shown this amount as tax, but respondent determined it not to be so and chose not
to assess it. Consequently, sec. 1.6664–2(g), Example (1), Income Tax Regs., would not apply,
and this amount would appear to be a rebate, not just for sec. 6664(a)(2) purposes, but even
in the deficiency context. See sec. 6211(b)(2). Ignoring it as a rebate caused petitioner’s 1992
underpayment to be lower by $27,222.
Respondent’s munificence to petitioner did not end there. Instead of using the actual $57,244
figure that petitioner had handwritten as his tax on his return, respondent used an ‘‘as ad-
justed’’ amount of $60,380 as the tax shown. We, and other courts, have consistently held that
a postfiling adjustment or payment cannot mitigate a fraud that was perpetrated when the re-
turn was filed. See text supra between notes 4 and 5; see also Badaracco v. Commissioner, 464
U.S. 386 (1984). Taking a postfiling adjustment of $3,136 into account caused petitioner’s 1992
underpayment amount to be lower by the same amount.
In the underpayment formula, respondent set Z to be zero and derived X as follows. Starting
with $60,380 as the tax shown, respondent reduced that amount by the fictitious withholdings
of $135,000 and, thus, arrived at a negative number for X of –$74,620. Plugging these numbers
in the formula,
Underpayment = W + Z – X
= $30,022 + $0 – (–$74,620)
= $30,022 + $74,620 = $104,642.

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 526 135 UNITED STATES TAX COURT REPORTS (497)

double-counting error that plagues the current set of regula-
tions. Our mandate, however, is to test the validity of the
regulations as the Commissioner has drafted them and seeks
to apply them, not to improve or improvise upon them in
order to achieve a ‘‘just’’ result. I would hold section 1.6664–
2(c)(1), Income Tax Regs., to be an impermissible construc-
tion of section 6664(a)(1)(A). I respectfully dissent.
HALPERN and GUSTAFSON, JJ., agree with this dissent.

GUSTAFSON, J., dissenting: I would hold invalid the regula-
tion on which the fraud penalty at issue depends. Section
6664(a)(1)(A) states an unambiguous term, i.e., ‘‘the amount
shown as the tax by the taxpayer on his return’’; but the IRS’s
corresponding regulation—26 C.F.R. section 1.6664–2(c)(1),
Income Tax Regs.—gives a definition that contradicts almost
every substantive word in that statutory term. The regula-
tion modifies the term to mean an amount that—
• is not ‘‘shown’’ but rather has to be derived;
• is not an amount of ‘‘tax’’ but rather is tax reduced by
excess credits;
• is not shown ‘‘by the taxpayer’’ but rather is asserted by
the IRS as the result of its examination, in contradiction of
what was shown ‘‘by the taxpayer’’; and
• is not shown ‘‘on the return’’ but rather must be derived
from information that is not ‘‘on the return’’.
The regulation thereby undertakes to impose the penalty to
an extent that the statute does not.
I. Introduction
Petitioner Rick D. Feller filed income tax returns for 1992
through 1997 on which he reported income tax liabilities
greater than he actually owed, because he incorrectly
reported as wages certain amounts that he did not in fact
receive. For example, for 1992 he reported a total tax liability
of $60,380, 1 whereas the IRS determined that in fact he owed
1 The actual amount of ‘‘total tax’’ shown on line 53 of Mr. Feller’s 1992 return is $57,244.58;

but on line 19 of the IRS’s notice of deficiency the ‘‘Total tax shown on return or as previously
adjusted’’ is $60,380. Presumably there are previous adjustments that would account for the dif-
ference, but the record does not show them. For simplicity’s sake and ease of comparison, I use
the IRS’s amount.

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 (497) FELLER v. COMMISSIONER 527

only $30,022. That is, Mr. Feller’s returns overstated his total
tax liability.
However, Mr. Feller also incorrectly reported, as Federal
tax withholding from wages, certain amounts that were not
in fact withheld from his wages (because the wages were
fictitious). For example, for 1992 he reported total tax with-
holding from wages as $138,097, whereas only $3,097 was
actually withheld, and $135,000 was a fraudulent overstate-
ment of his withholding. As a result, Mr. Feller reported on
his returns net amounts due that were much less than he
actually owed. That is, his returns understated his net
amount due to the IRS and in fact claimed instead for 1992
(for example) a refund of $86,181.
When Mr. Feller was discovered, he pleaded guilty to
submitting a false tax return for one of the years in issue.
For his crime he was sentenced to 15 months in prison.
The IRS also determined against Mr. Feller a civil fraud
penalty pursuant to section 6663(a), which penalty applies
‘‘[i]f any part of any underpayment of tax required to be
shown on a return is due to fraud’’. (Emphasis added.) The
term ‘‘underpayment’’ is defined in section 6664(a) of the
Internal Revenue Code and in section 1.6664–2(a) of
the Income Tax Regulations (26 C.F.R.). This case turns on
the meaning of ‘‘underpayment’’ in section 6664(a), which in
turn depends on the meaning of the term ‘‘amount shown as
the tax by the taxpayer on his return’’ that appears in that
statute.
II. The statute and regulation at issue
A. The statute: section 6664(a)
Section 6664(a) defines the ‘‘underpayment’’ to which the
fraud penalty of section 6663(a) applies. In simplified terms,
the ‘‘underpayment’’ is the excess of one’s actual liability over
his reported liability—i.e., tax ‘‘imposed’’ minus tax ‘‘shown’’
equals ‘‘underpayment’’. Section 6664(a) provides as follows:
SEC. 6664(a). UNDERPAYMENT.—For purposes of this part, the term
‘‘underpayment’’ means the amount by which any tax imposed by this title
exceeds the excess of—
(1) the sum of—
(A) the amount shown as the tax by the taxpayer on his return, plus

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 528 135 UNITED STATES TAX COURT REPORTS (497)

(B) amounts not so shown previously assessed (or collected without
assessment), over
(2) the amount of rebates made.
For purposes of paragraph (2), the term ‘‘rebate’’ means so much of an
abatement, credit, refund, or other repayment, as was made on the ground
that the tax imposed was less than the excess of the amount specified in
paragraph (1) over the rebates previously made.[2]

This definition of ‘‘underpayment’’ follows closely the defini-
tion of a tax ‘‘deficiency’’ in section 6211(a), employing terms
used in that section (‘‘tax imposed’’, ‘‘exceeds the excess’’,
‘‘amount shown’’, ‘‘previously assessed’’); and the definition of
‘‘rebate’’ follows closely the definition of the same term in
section 6211(b)(2).
However, unlike the definition of ‘‘underpayment’’ in sec-
tion 6664(a), the definition of ‘‘deficiency’’ in section 6211(a)
is qualified by section 6211(b)(1), which provides that ‘‘For
purposes of this section [i.e., not ‘‘For purposes of this title’’]
* * * [t]he tax imposed by subtitle A and the tax shown on
the return shall both be determined * * * without regard to
the credit under section 31 [i.e., ‘‘Tax Withheld on Wages’’]’’.
Withholding credits are thus explicitly excluded from the
Code’s ‘‘deficiency’’ equation; but the Code’s ‘‘underpayment’’
equation in section 6664(a) that is at issue here does not
mention withholding credits.
B. The regulation: 26 C.F.R. section 1.6664–2
The regulation implementing the fraud penalty largely
repeats the definition of ‘‘underpayment’’ given in the
statute. Moreover, the regulation defines ‘‘tax imposed’’ in a
manner consistent with the use of that term in the deficiency
context. That is, even though section 6664(a) is, as we have
2 The definition of ‘‘rebate’’ in section 6664(a) incorporates ‘‘the amount specified in paragraph

(1)’’, in which subparagraph (A) lacks the phrase ‘‘as a deficiency’’ when compared to the equiva-
lent term in section 6211(a)(1)(B). Whether this might render a portion of the erroneous refunds
made to Mr. Feller to be rebates (and thus to increase the underpayment) is a question the par-
ties have not addressed in any detail. Respondent makes no contention that Mr. Feller had any
‘‘amount of rebates made’’, sec. 6664(a)(2), or any ‘‘amounts not so shown previously assessed
(or collected without assessment),’’ sec. 6664(a)(1)(B), but rather states in his calculations that
those amounts are zero. I therefore disregard rebates in this discussion and use the shorthand
definition of ‘‘underpayment’’ (i.e., tax ‘‘imposed’’ minus tax ‘‘shown’’ equals ‘‘underpayment’’).
However, Judge Wherry shows that respondent has a mistaken understanding of section 6664(a)
‘‘rebates’’ that wrongly equates them with section 6211(b)(2) ‘‘rebates’’ despite the phrase ‘‘as a
deficiency’’ that is present in section 6211(b)(2) but is absent from section 6664(a). When this
error is corrected, the penalty appears to be owing on the portion of the excess credit that was
actually refunded.

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 (497) FELLER v. COMMISSIONER 529

noted, silent about withholding credits, the regulation bor-
rows from the deficiency context (section 6211(a)) and explic-
itly defines the minuend of the equation—‘‘tax imposed’’—
without regard to withholding credits: 3
(b) Amount of income tax imposed. For purposes of paragraph (a) of this
section, the ‘‘amount of income tax imposed’’ is the amount of tax imposed
on the taxpayer under subtitle A for the taxable year, determined without
regard to—
(1) The credits for tax withheld under sections 31 (relating to tax with-
held on wages) and 33 (relating to tax withheld at source on nonresident
aliens and foreign corporations) * * *.
[26 C.F.R. sec. 1.6664–2(b), Income Tax Regs.; emphasis added.]

However, in defining the subtrahend of the equation—the
‘‘amount shown as the tax’’—the regulation makes one
significant emendation:
(c) Amount shown as the tax by the taxpayer on his return—(1) Defined.
For purposes of paragraph (a) of this section, the ‘‘amount shown as the
tax by the taxpayer on his return’’ is the tax liability shown by the tax-
payer on his return, determined without regard to the items listed in
§1.6664–2(b)(1), (2), and (3), except that it is reduced by the excess of—
(i) The amounts shown by the taxpayer on his return as credits for tax
withheld under section 31 (relating to tax withheld on wages) * * * over
(ii) The amounts actually withheld * * * for such taxable year.
[26 C.F.R. sec. 1.6664–2(c), Income Tax Regs.; emphasis added.]

Under this regulation, the ‘‘amount shown’’ is thus first
determined ‘‘without regard to the items listed in §1.6664–
2(b)(1)’’—i.e., without regard to withholding credits—but is
then reduced by excess withholding credits.
Without this provision, if Mr. Feller’s ‘‘amount shown as
the tax’’ ($60,380 for 1992) is subtracted from his ‘‘tax
imposed’’ ($30,358), then the difference is less than zero, he
has no underpayment at all, and he is not subject to the
3 That is, the regulation does not give a special definition to the minuend, ‘‘tax imposed’’; and

neither respondent nor the majority suggests that the statute is ambiguous in referring to ‘‘tax
imposed’’. Much mischief or absurdity might result if ‘‘tax imposed by this title’’ were ambiguous
and might refer to tax net of withholding credits. In that event, other Code sections that are
like section 6664(a)—i.e., sections that refer to ‘‘tax imposed by this title’’ but do not explicitly
exclude the netting of credits—might become problematic. These include section 6001 (requiring
that ‘‘Every person liable for any tax imposed by this title * * * shall keep such records * * *
as the Secretary may from time to time prescribe’’), section 6011(a) (requiring that a return be
filed by ‘‘any person made liable for any tax imposed by this title’’), section 6501(a) (providing
for assessment of ‘‘tax imposed by this title’’), and section 6511(a) (setting a deadline for the
filing of a claim for refund of ‘‘any tax imposed by this title’’). These provisions have always
been (rightly) understood to apply where there is a tax liability, whether or not that liability
has been satisfied by withholding credits.

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 530 135 UNITED STATES TAX COURT REPORTS (497)

fraud penalty. The effect of this regulatory provision, how-
ever, is to reduce the ‘‘amount shown as the tax’’ (Mr. Feller’s
$60,380) by the excess withholding credits ($135,000 for
1992) in order to reveal the extent to which the taxpayer
under-reported his net liability. For Mr. Feller this modifica-
tion yields an ‘‘amount shown’’ that is negative ($60,360 –
$135,000 = –$74,640) and that therefore, when subtracted
from ‘‘tax imposed’’, does not decrease his ‘‘underpayment’’
but rather increases it. This regulation thus aims to measure
the true culpability of a return like Mr. Feller’s, rather than
overlooking the excess credits in the computation of the pen-
alty.
III. Regulations as law
Under our Constitution, it is Congress that enacts laws.
See U.S. Const., art. I, sec. 7. The first enumerated power
given to Congress (and not to the Executive) is the ‘‘Power
To lay and collect Taxes, Duties, Imposts and Excises’’. Id.
sec. 8, cl. 1. 4 As the Supreme Court observed in Whitman v.
Am. Trucking Associations, 531 U.S. 457, 472 (2001):
Article I, § 1, of the Constitution vests ‘‘[a]ll legislative Powers herein
granted . . . in a Congress of the United States.’’ This text permits no
delegation of those powers * * *.

Only the legislature can legislate. Only Congress can enact
tax laws.
However, since at least as early as 1828 (i.e., 40 years
after the Constitution was ratified), the Secretary of the
Treasury has been explicitly authorized by statute to promul-
gate ‘‘regulations’’. 5 Such regulations acquire the force of law
only derivatively, through statutes enacted by Congress—
4 Article I, section 7, clause 1 includes an additional democratic provision particular to tax

law: ‘‘All bills for raising revenue shall originate in the House of Representatives’’—i.e., the
house that (in James Madison’s words) ‘‘speak[s] the known and determined sense of a majority
of the people’’. See The Federalist No. 58 (James Madison) (the two houses have ‘‘equal author-
ity * * * on all legislative subjects, except the originating of money bills’’, which authority is
conferred on ‘‘the House [of Representatives], composed of the greater number of members,
* * * and speaking the known and determined sense of a majority of the people’’). Article I,
section 9, clause 4 of the Constitution originally prohibited ‘‘direct’’ taxes; and when the Con-
stitution was amended to curtail that prohibition, the Sixteenth Amendment provided (echoing
Article I, section 8) that ‘‘The Congress shall have power to lay and collect taxes on incomes’’.
5 See Act of May 19, 1828, ch. 55, sec. 10, 4. Stat. 274 (‘‘it shall be the duty of the Secretary

of the Treasury, under the direction of the President of the United States, from time to time,
to establish such rules and regulations, not inconsistent with the laws of the United States, as
the President of the United States shall think proper, to secure a just, faithful, and impartial
appraisal of ’’ imported goods, for purposes of customs duties).

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 (497) FELLER v. COMMISSIONER 531

either because a statute explicitly authorizes an agency to
promulgate ‘‘legislative regulations’’ or because the agency
that is charged by law with administering a statute issues
‘‘interpretive regulations’’ 6 that interpret the statute, and the
courts defer to that interpretation. See Chevron U.S.A. Inc.
v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843–845
(1984).
The parties and the majority of this Court acknowledge
that the regulation at issue—26 C.F.R. section 1.6664–
2(c)(1)—is in the second category described in Chevron—i.e.,
so-called ‘‘interpretive regulations’’. Such interpretive regula-
tions embody the Treasury ‘‘department’s construction of a
statutory scheme it is entrusted to administer’’, Chevron, 467
U.S. at 844, and are generally authorized in section 7805(a)
(‘‘the Secretary shall prescribe all needful rules and regula-
tions for the enforcement of this title’’).
In reviewing interpretive regulations, ‘‘a court may not
substitute its own construction of a statutory provision for a
reasonable interpretation made by the administrator of an
agency.’’ Id. As the majority explains, following Chevron we
conduct a two-step review of the regulation: First, we ask
‘‘ ‘whether Congress has directly spoken to the precise ques-
tion at issue’ ’’; and second, if the statute is ‘‘ ‘silent or ambig-
uous’ ’’, we ask whether the regulation reflects a reasonable
construction of the statute. Majority op. p. 505 (quoting
Chevron, 467 U.S. at 842–843).
IV. Discussion
There is no question that the deliberate reporting of ficti-
tious withholding credits is fraudulent. There is no question
that Congress could well impose a civil penalty on such fraud
(in addition to the criminal penalties that it has imposed and
6 Judicial deference to interpretive regulations is relatively recent. Through the mid-20th cen-

tury, courts and commentators concluded that a general rulemaking grant (such as section
7805(a)) authorizing interpretive regulations that have the force of law would be an unconstitu-
tional delegation of legislative authority. See Kristin E. Hickman, ‘‘The Need for Mead: Rejecting
Tax Exceptionalism in Judicial Deference’’, 90 Minn. L. Rev. 1537, 1567 (2006). However, ‘‘The
1960s and 1970s saw a virtual explosion of agency rulemaking’’, id. at 1574, and there followed
the modern deference regimes (culminating in Chevron), to which the nondelegation doctrine is
no longer perceived as an impediment. But see Whitman v. Am. Trucking Associations, Inc., 531
U.S. 457, 487 (2001) (Thomas, J., concurring) (‘‘none of the parties to these cases has examined
the text of the Constitution or asked us to reconsider our precedents on cessions of legislative
power. On a future day, however, I would be willing to address the question whether our delega-
tion jurisprudence has strayed too far from our Founders’ understanding of separation of pow-
ers’’).

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 532 135 UNITED STATES TAX COURT REPORTS (497)

that Mr. Feller has borne). The question is whether in fact
Congress did so when it imposed the fraud penalty on
‘‘underpayments’’, defined as ‘‘tax imposed’’ minus ‘‘amount
shown’’, or whether instead the Treasury Department went
beyond the statute when it promulgated the regulation.
A. The plain meaning of the statute is not ambiguous.
The term at issue is ‘‘the amount [1] shown [2] as the tax
[3] by the taxpayer [4] on his return’’. Sec. 6664(a)(1)(A).
Under section 6664(a) this amount is subtracted from ‘‘tax
imposed’’ (i.e., the actual tax liability) to yield the ‘‘under-
payment’’. The plain meaning of this term could hardly be
clearer:
In the first place, the amount in section 6664(a)(1)(A) is an
amount ‘‘shown’’. It is therefore an amount that is visible.
The plain language steers us away from an amount that
would need to be determined by investigation or correction
and points us simply to what is ‘‘shown’’. Section 1.6664–
2(c)(1) of the regulations, however, employs the ‘‘tax liability
shown * * * except that it is reduced by’’ excess credits,
which are determined by reference to ‘‘amounts actually
withheld’’ as compared to ‘‘amounts shown by the taxpayer
on his return as credits’’. (Emphasis added.) In Mr. Feller’s
case, the resulting negative number (–$74,640) is not shown
anywhere on his 1992 return, nor does the return show the
constituent numbers necessary to yield that negative
number. Rather, Mr. Feller hid the amount ‘‘actually with-
held’’—i.e., $3,097—and certainly did not cause it to be
‘‘shown’’ on his return. The regulation thus looks to what is
deliberately not shown and thereby ignores the plain lan-
guage of the statute that describes an amount ‘‘shown’’.
Second, the amount in section 6664(a)(1)(A) is ‘‘tax’’. Of
course, the Code also has provisions about other kinds of
amounts—e.g., of income, deductions, costs, basis, exclusions,
credits, payments, penalties, and so on—but section
6664(a)(1)(A) refers to an amount of ‘‘tax’’, a term not at all
interchangeable with those other kinds of amounts. Section
1.6664–2(c)(1) of the regulations, on the other hand, though
it properly begins with the ‘‘tax’’ shown, reduces it by excess
withholding credits to yield not the taxpayer’s tax shown but
a number—in Mr. Feller’s case, a fictitious negative number

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 (497) FELLER v. COMMISSIONER 533

(–$74,640 for 1992)—that is neither his actual tax liability
nor his reported tax liability. This negative number is
instead a number that, when used in the underpayment cal-
culation, shows the size of his net liability to the IRS. How-
ever, the plain meaning of the statutory language restricts us
to ‘‘tax’’ that is shown on the return, and the statutory lan-
guage gives no warrant for injecting excess credits into the
equation.
Third, the amount in section 6664(a)(1)(A) is shown ‘‘by the
taxpayer’’. Of course, the Code authorizes the IRS to make its
own determinations of amounts relevant to tax liabilities; but
plainly section 6664(a)(1)(A) describes an amount shown ‘‘by
the taxpayer’’. Section 1.6664–2(c)(1) of the regulations, on
the other hand, corrects the amount shown ‘‘by the taxpayer’’
on his return and replaces it with a number determined by
the IRS. The formula in the regulation thus wanders from the
plain language of section 6664(a)(1)(A), which looks to an
amount shown ‘‘by the taxpayer’’.
Fourth, the amount in section 6664(a)(1)(A) is an amount
shown ‘‘on his return’’. If Mr. Feller’s 1992 return had
included a $135,000 entry explicitly for ‘‘excess credits’’ (or an
amount of tax reduced by $135,000 of excess credits), then
there could hardly have been fraud on the return, since that
candid reporting would have confessed the very fabrication
that was perpetrated on the return. But of course the excess
withholding credit amount of $135,000 was an amount that
did not appear as such anywhere on, and could not be
derived from, his return. By bringing that undisclosed
amount into the computation, the regulation contradicts the
plain meaning of the statutory description of an amount ‘‘on
the return’’.
It is true that some terms in the Code are ‘‘terms of art’’
whose true meaning ‘‘may not be immediately plain on their
face’’. Concurring op. p. 516. But this is a term so explicit,
so at odds with the regulatory definition, and so consistent
with the tax return itself that it cannot be explained away
in this fashion. The Form 1040 tax return does not raise any
question about the plain meaning of the term but faithfully
corresponds to it—and not to the artful revision of the regu-
lation. The return includes a line for ‘‘total tax’’, and with-
holding credits are reported on the return only after that

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 534 135 UNITED STATES TAX COURT REPORTS (497)

‘‘total tax’’ entry. 7 One looks in vain on the Form 1040 for
any ‘‘show[ing]’’ of excess withholding credits. More impor-
tant, one looks in vain on the Form 1040 for any entry
denominated ‘‘tax’’ that takes into account any withholding
credits, whether ‘‘actual’’ or ‘‘shown’’. Instead, the only
‘‘amount shown as the tax by the taxpayer on his return’’ is
a ‘‘total tax’’ amount before any payments or credits. On Mr.
Feller’s tax return for 1992, that ‘‘total tax’’ (before with-
holding credits) that was ‘‘shown as the tax by the taxpayer
on [line 53 of] his return’’ was no less than $60,380. (See
supra note 1.) Since the ‘‘tax imposed’’ was less than this
amount, there was no ‘‘underpayment’’ reflected on the
return.
B. The statutory silence about ‘‘credits’’ is no warrant for
the innovation in the regulation.
The majority observes, however, that—
the statutes do not speak expressly to the precise issue whether with-
holding credits can be taken into account when calculating an under-
payment for purposes of sections 6663 and 6664(a).
* * * Section 6664 is silent and ambiguous with respect to the issue
before us; i.e., Congress has not directly addressed the meaning of the
term ‘‘underpayment’’ when a taxpayer has overstated withholding credits.
[Majority op. p. 508.]

It is true (to put it more precisely) that section 6664(a)(1)(A)
does not state whether ‘‘the amount shown as the tax by the
taxpayer on his return’’ does or does not take into account
withholding credits. However, the very term at issue is ‘‘tax’’
shown, and the unremarkable lack of any mention of
‘‘credits’’ is simply consistent with the statute’s meaning
7 On the Form 1040 for 1988—the year before sections 6663 and 6664 were enacted—the ‘‘Tax

Computation’’ section (consisting of lines 32 through 40) includes, after the computation of tax-
able income, a line 38 on which one is to ‘‘Enter tax’’, a line 39 for ‘‘Additional taxes’’, and a
line 40 that totals lines 38 and 39. The next section, entitled ‘‘Credits’’ (lines 41 through 47),
consists not of credits in the nature of payments against the tax liability but instead credits
(such as the child care credit and the foreign tax credit) that are taken into account in figuring
the tax liability. (Not included in this section is the ‘‘credit’’ for withheld tax, which is in the
nature of a payment.) Thereafter, a section of ‘‘Other Taxes’’ (lines 48 through 53) includes, for
example, the self-employment tax and the alternative minimum tax; and it ends with line 53,
which reads: ‘‘Add lines 47 through 52. This is your total tax’’. Only after this ‘‘total tax’’ on
line 53 does the return include an entry (at line 54) for ‘‘Federal income tax withheld’’, in the
section of the return entitled ‘‘Payments’’. The net amount due after payments and credits is
not referred to as tax, but is either an ‘‘amount OVERPAID’’ (line 62) or an ‘‘AMOUNT YOU
OWE’’ (line 65). The Forms 1040 for Mr. Feller’s years at issue were the same, with only slight
differences in some line numbers.

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 (497) FELLER v. COMMISSIONER 535

what it says: To state the obvious, ‘‘the amount shown as the
tax’’ refers to tax. Withholding credits under section 31 are
another matter.
Section 6664(a)(1)(A) can be said to be ‘‘silent’’ about with-
holding credits—but only in the same way that it is silent
about the fuel credit under section 34, silent about payments
designated to the Presidential Election Campaign Fund
under section 6096, silent about interest under section 6601,
and silent about a host of other provisions in the Code that
Congress could have incorporated into the ‘‘underpayment’’
definition but did not. It is true that when a statute is
‘‘silent’’, that silence may leave a gap that can legitimately
be filled by regulation, see Chevron, 467 U.S. at 843; but for
this purpose a statute can fairly be called ‘‘silent’’ only when
it cannot be said that ‘‘the intent of Congress is clear’’, see
id. at 842. Statutory specificity about one subject cannot sen-
sibly be construed as gap-creating ‘‘silence’’ about other sub-
jects. In section 6664(a)(1)(A) Congress was silent about
withholding credits because it was providing a rule
about tax. When Congress states a plain and unambiguous
term involving ‘‘the amount shown as the tax by the taxpayer
on his return’’, the IRS cannot take that enactment as an
occasion to craft rules about different subject matter not
addressed in the statute—i.e., excess withholding credits not
shown by the taxpayer and not appearing on the return—as
if Congress had left a gap to be filled in.
C. Different language in the deficiency statute does not
justify the innovation in the regulation.
The majority’s apparent basis for discerning ambiguity in
‘‘the amount shown as the tax’’ is this: That term appears
both in the definition of ‘‘underpayment’’ in section 6664(a)
and in the similar but not identical definition of a ‘‘defi-
ciency’’ in section 6211(a). See majority op. p. 507. For pur-
poses of defining a ‘‘deficiency’’, section 6211(b)(1) provides:
‘‘The tax imposed by subtitle A and the tax shown on the
return [8] shall both be determined without regard to’’, inter
8 The term ‘‘amount shown as tax by the taxpayer on his return’’ in section 6664(a)(1)(A) is

not identical to the phrase ‘‘tax shown on the return’’ in section 6211(b)(1). However, the latter
term in section 6211(b)(1) is evidently shorthand for ‘‘amount shown as tax by the taxpayer
upon his return’’ in section 6211(a)(1)(A), so we assume it is equivalent to the same term in
Continued

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 536 135 UNITED STATES TAX COURT REPORTS (497)

alia, withholding credits. (Emphasis added.) Section 6664(a)
defining ‘‘underpayment’’, on the other hand, has no equiva-
lent ‘‘without regard to’’ provision. This contrast evidently
prompts the suggestion that, for purposes of defining a ‘‘defi-
ciency’’, the tax ‘‘shown on the return’’ should be determined
without regard to withholding credits; but for purposes of
defining an ‘‘underpayment’’, the tax ‘‘shown on the return’’
should be determined with regard to withholding credits.
However, an examination of the origin of section 6211(b)(1)
shows that this suggestion is not warranted.
The basic definition of a ‘‘deficiency’’ in section 271 of the
1939 Code, like today’s definition in section 6211(a), was ‘‘tax
imposed’’ minus ‘‘amount shown as the tax’’; but in the 1939
Code the ‘‘amount shown’’ was ‘‘decreased by the amounts
previously abated, credited, refunded, or otherwise repaid in
respect of such tax’’ (emphasis added); and the deficiency was
therefore increased by those amounts. The 1939 Code had no
provision that ‘‘tax imposed’’ or ‘‘amount shown’’ should be
‘‘determined without regard to’’ withholding credits, since
those credits had yet to be invented.
The 1939 provision that a ‘‘deficiency’’ would be increased
by amounts ‘‘refunded’’ began to be awkward in 1943, when
the Current Tax Payment Act of 1943, ch. 120, 57 Stat. 126,
provided for the now-familiar mechanism of payroll with-
holding. For the first time, employers withheld tax from
wages, id. sec. 2, and the employee claimed that withholding
as a credit (i.e., a payment) on his return, id. sec. 3, 57 Stat.
139. If that resulted in an overpayment of tax, then the over-
payment was refunded to the employee. Id. sec. 4, 57 Stat.
140. The next year Congress noted that this regime raised
questions about the definition of a ‘‘deficiency’’ 9 (i.e., ‘‘tax
section 6664(a)(1)(A).
9 See S. Rept. 885, 78th Cong., 2d Sess. 38 (1944), 1944 C.B. 858, 887:

Under the system of tax collection which now obtains with respect to individuals, it is apparent
that in certain cases the estimated tax payments and the tax withheld at source may exceed
the tax shown by the taxpayer on his return. Under the procedure instituted by the Commis-
sioner for handling such cases it is contemplated that the excess of such payments (estimated
tax and tax withheld at source) over the tax shown on the return shall be refunded to the tax-
payer as expeditiously as possible. If, in such cases, it is subsequently determined that the tax
imposed under chapter 1 is greater than the tax shown on the return, the existing definition
of deficiency would produce an improper result if the amount so refunded is taken into account
in ascertaining the amount of the deficiency. For example, if the taxpayer filed a return dis-
closing a tax of $600 and claiming a credit of $900 for tax withheld at source, $300 would be
immediately refunded. If the Commissioner subsequently determines that the correct tax should
be $800, the amount of the tax liability in controversy is $200 and, hence, the deficiency should

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 (497) FELLER v. COMMISSIONER 537

imposed’’ over ‘‘amount shown’’ minus ‘‘refunds’’), which now
needed to be revised to make clear that a mere refund of a
claimed overpayment of withheld tax (what is now called a
‘‘non-rebate refund’’) did not skew the computation by
reducing tax ‘‘shown’’. Congress therefore deleted from sec-
tion 271 the phrase ‘‘decreased by the amounts previously
abated, credited, refunded, or otherwise repaid’’ and in its
place incorporated and defined the term ‘‘rebate’’. After this
1944 amendment, section 271 provided (in language very
similar to current section 6211):
SEC. 271. DEFINITION OF DEFICIENCY.
(a) IN GENERAL.—* * * ‘‘deficiency’’ means the amount by which the tax
imposed by this chapter 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.
(b) RULES FOR APPLICATION OF SUBSECTION (a).—For the purposes of this
section—
(1) The tax imposed by this chapter and the tax shown on the return
shall both be determined without regard to payments on account of esti-
mated tax, [and] without regard to the credit under section 35 * * *;
(2) The term ‘‘rebate’’ means so much of an abatement, credit, refund,
or other repayment, as was made on the ground that the tax imposed
by this chapter was less than the excess of the amount specified in sub-
section (a)(1) over the amount of rebates previously made * * *.
[Individual Income Tax Act of 1944, ch. 210, sec. 14(a), 58 Stat. 245;
emphasis added.]

Under subsection (b)(2) of the amended statute (as under
today’s Code), the ‘‘rebate’’ that decreases ‘‘amount shown’’
(and thereby increases the ‘‘deficiency’’) includes a refund
only if the refund is ‘‘made on the ground that the tax
imposed’’ is less than what the taxpayer reported, and does
not include refunds made on the mere ground that payments
and credits exceed the tax that the taxpayer reported as due.
And, lest there be any doubt, subsection (b)(1) makes clear
be $200. However, the definition contained in existing law would indicate a deficiency of $500,
that is, the excess of $800 [actual tax] over ($600 [tax shown] minus $300 [refund]). The pro-
posed amendment corrects this defect by providing that the amount of any such refund shall
not be taken into account.
This 1944 legislative history makes it clear that the ‘‘determined without regard to’’ language
of former section 271 (now section 6211) is present in the ‘‘deficiency’’ definition only because
non-rebate ‘‘refunds’’ once muddled the deficiency definition. That definitional problem never
arose with respect to ‘‘underpayment’’, for tax shown was never reduced by ‘‘refunds’’.

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 538 135 UNITED STATES TAX COURT REPORTS (497)

that prepayments and withholding credits do not affect the
‘‘tax imposed’’ 10 or the ‘‘tax shown’’.
When the current penalty regime was enacted in 1989, 11
Congress preempted any equivalent confusion about the
effect of non-rebate refunds on the computation of an ‘‘under-
payment’’. It did so by enacting in section 6664(a) a defini-
tion of ‘‘underpayment’’ that, like the 1944 ‘‘deficiency’’ defi-
nition, omitted any mention of ‘‘refunds’’ and instead sub-
tracted ‘‘rebates’’ from the tax shown on the return. Admit-
tedly, this new ‘‘underpayment’’ definition did not include
any instruction that ‘‘tax imposed’’ or ‘‘tax shown’’ is deter-
mined without regard to withholding credits and other
prepayments. However, the 1944 origin of that language in
the deficiency context, set out above, shows that the absence
of that instruction in section 6664(a) is not significant. The
provision about, and the definition of, ‘‘rebates’’ made such
an instruction unnecessary.
The ‘‘underpayment’’ definition, new in 1989, never
included any mention of non-rebate ‘‘refunds’’ that might
have skewed the definition. That 1943-era confusion as to
deficiencies was solved in 1944 by the ‘‘rebate’’ provision; and
any potential similar confusion as to underpayments was
preemptively solved in 1989 when the ‘‘underpayment’’ defi-
nition included, in the first instance, the equivalent ‘‘rebate’’
provision. There was therefore never an occasion for
including in section 6664(a) a provision that withholding
credits should not affect the computation of tax shown. Such
a provision would have been redundant. (And the absence in
section 6664(a) of any reminder that ‘‘tax imposed’’ is deter-
mined without regard to withholding credits did not prevent
the agency from so providing, in section 1.6664–2(b) of its
regulation, for purposes of computing an underpayment.)
10 It seems a truism to say that ‘‘tax imposed’’ does not include credits; a ‘‘credit’’ is not ‘‘im-

posed’’; and the problem that Congress addressed in 1944 concerned tax ‘‘shown’’, not tax ‘‘im-
posed’’. It is therefore hard to discern the potential error that Congress sought to correct by this
clarification as to ‘‘tax imposed’’. However, the phrase ‘‘tax imposed’’ does appear in both the
basic definition of a deficiency (i.e., ‘‘tax imposed’’ over tax ‘‘shown’’ minus ‘‘rebates’’) and in the
definition of the term ‘‘rebates’’; and the latter inclusion may have made the clarification seem
more necessary. The provision survives today in section 6211(b)(1).
11 The negligence and fraud penalties on ‘‘underpayment[s]’’ were first enacted in 1954 in

former section 6653(a) and (b). The definition of ‘‘underpayment’’ in section 6653(c)(1) explicitly
incorporated by reference the definition of ‘‘deficiency’’ as corrected in 1944, so that the problem
of (non-rebate) ‘‘refunds’’ confusing the definition of ‘‘underpayment’’ never arose under former
section 6653.

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 (497) FELLER v. COMMISSIONER 539

D. Section 6201(a)(3) does not justify the innovation in
the regulation.
Section 6201(a)(3) refers to excess withholding credits that
are allowed against ‘‘tax shown on the return’’. The concur-
ring opinion observes the following: Section 6201(a)(3) pro-
vides that such overstated withholding amounts are to be
‘‘assessed by the Secretary in the same manner as in the case
of a mathematical or clerical error’’, and the provision cross-
references section 6213(b). Concurring op. pp. 512–513. Sec-
tion 6213(b)(1) provides for an assessment of an amount of
tax ‘‘in excess of that shown on the return’’, so that the
amount ‘‘shown on the return’’ must be an amount that
reflects the math error. Concurring op. p. 513. With excess
withholding credits, ‘‘[a]s with math errors, * * * the
amount of tax ‘shown on the return’ is the amount shown by
the taxpayer that reflects the overstated withholding
credits.’’ That is, tax ‘‘shown’’ under section 6201(a)(3) must
mean tax reduced by excess credits (as the regulation pro-
vides under section 6664(a)). Concurring op. p. 514.
It is surely proper to attempt to bring these other sections
to bear on the meaning of tax ‘‘shown’’ in section 6664(a), but
I submit that there are skips and flaws in this analysis of
sections 6201(a)(3) and 6213(b). The House report that the
concurring opinion cites clearly states that then-current law
(before section 6201(a)(3)) already allowed the IRS to retrieve,
without deficiency procedures, any excess credit that had
been mistakenly allowed against the tax liability. Retrieval of
those credits that had been mistakenly allowed against tax
liability did not require any new assessment authority to be
enacted in section 6201(a)(3). What was new in that section
was a procedure for retrieval of refunded credits. Section
6201(a)(3) does not cross-reference section 6213(b)(1)—the
paragraph critical to the argument in the concurring
opinion—but refers only to section 6213(b)(2) (to make clear
that it does not apply). Section 6201(a)(3) does not state or
even imply that excess credits are a constituent of tax
‘‘shown’’. On the contrary, the statute conceives of the tax
liability and excess credits as distinct, since it refers to

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 540 135 UNITED STATES TAX COURT REPORTS (497)

excess credit ‘‘allowed against the tax shown on the return’’.
(Emphasis added.) 12
Furthermore, it is far from clear what the statute means
when it states that an overstated credit allowed against tax
shown on the return may be ‘‘assessed’’. Payments that are
credited (or not credited) against the tax liability do not
increase or decrease the amount of the tax liability.
If an ostensible payment or credit that was originally allowed
against that liability proves in fact to be no good, that hardly
increases the amount of tax; instead it decreases the amount
of payments that should be entered. The Internal Revenue
Manual (IRM) reflects this distinction. It states that an excess
withholding credit, once discovered, is in fact not assessed by
the IRS as additional tax. Instead, excess credits are recov-
ered either by ‘‘an assessment (a TC 290) for the amount of
the overstated withholding credit or in limited circumstances
with a reversal (TC 807) of the overstated amount.’’ IRM pt.
21.4.5.4.3(4) (Jan. 24, 2008). (‘‘TC 290’’ is the code for ‘‘Addi-
tional Tax Assessment’’, and ‘‘TC 807’’ is the code for ‘‘With-
holding Credits Reversed’’. 13) What is that ‘‘limited cir-
cumstance’’ that gets TC 807 treatment?—It is none other
than excess credits that have been wrongly applied to the
reported liability. The IRM makes it clear that these excess
credits wrongly applied are ‘‘recovered with a reversal of the
credit (i.e., TC 807 * * *)’’ (emphasis added), not by an
assessment of additional tax. IRM pt. 21.4.5.4.3(6) (Jan. 24,
2008). The IRM gives an example:
Mary Smith filed her 2008 income tax return reporting a tax liability of
$700 and withholding credits of $500. She overstated her withholding by
$100 and the error was not corrected when IRS processed the return. Since
12 To the same effect, the House report that the concurring opinion cites reflects a clear under-

standing that ‘‘tax shown’’ is tax (not tax reduced by excess credits, as in section 1.6664–2(c)(1),
Income Tax Regs.). In presenting its example, the report twice states that the ‘‘tax shown’’ is
$100—not the $70 that would be yielded by subtracting the excess credit of $30 from the tax
of $100. H. Rept. 1337, 83d Cong., 2d Sess. A404 (1954). Similarly, the report refers to the ex-
cess credits as ‘‘$30 (the tax of $100 shown in the return less the [proper] $70 credit)’’; and the
report says that this $30 amount ‘‘can be immediately assessed as tax shown on the return
which was not paid’’. That is, the excess credits are (correctly) described not as affecting the
amount of the ‘‘tax shown’’ but rather as affecting the amount of the tax shown that has not
been paid. By contrast, an ‘‘underpayment’’ in section 6664(a) is calculated by reference to tax
‘‘shown’’, not by reference to ‘‘tax shown that has not been paid’’. The House report states that
the excess credits can be ‘‘assessed as tax shown on the return which was not paid’’. That is,
the means by which the IRS is to get the $30 is (the report suggests) an assessment (‘‘as tax
shown * * * which was not paid’’). This describes not the character of the amount but the
means of collection, and it therefore does not address our issue.
13 See Non-Master File Pocket Guide, IRS Document 10978 (Rev. 10–2006).

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 (497) FELLER v. COMMISSIONER 541

Ms. Smith did not claim the overstated amount as a refund (she reported
a balance due) and the overstated amount did not result in a refund, a TC
807 may be used to correct the overstatement. [Id.]

The House report indicates that the provisions added in 1954
were codifying existing law, so that today’s law as to correc-
tion of non-refunded excess credits, illustrated in the IRM, is
the same as pre-1954 law.
The meaning of tax ‘‘shown’’ in section 6664(a) is not illu-
minated by section 6201(a)(3). Section 6201(a)(3) does not
state or imply that excess withholding credits that were
wrongly allowed against the tax liability are later assessed
as part of tax ‘‘shown’’. They are reversed (despite the stat-
ute’s loose reference to their being ‘‘assessed’’), and the
suggestion that they are assessed as tax ‘‘shown’’ requires
subtle and creative cross-referencing not warranted in the
statute.
E. Even if section 6664(a)(1)(A) were ambiguous, the regula-
tion is inconsistent with congressional intent.
For the reasons stated above, section 6664(a)(1)(A) is not
ambiguous, and under the Supreme Court’s Chevron anal-
ysis, the inquiry stops there. However, if we were to assume
arguendo that the statute is ambiguous and were to proceed
to Chevron’s ‘‘step 2’’, we would then need to determine
‘‘whether the agency’s answer is based on a permissible
construction of the statute’’. Chevron U.S.A. Inc. v. Natural
Res. Def. Council, Inc., 467 U.S. at 843. Undertaking that
step 2 analysis, I find that the definition of ‘‘amount shown
as the tax’’ in section 1.6664–2(c)(1) of the regulations (i.e.,
tax shown reduced by excess credits) is not a permissible
construction of the statute.
Because the penalty provision in former section 6653(a)
incorporated the deficiency definition into the definition of
‘‘underpayment’’, the pre-1989 penalties did not reach excess
withholding credits (which, as we have noted, are expressly
excluded from the ‘‘deficiency’’ calculation by section
6211(b)(1)). As the majority acknowledges, majority op. p.
509, the 1989 legislative history includes a statement in a
House report ‘‘that the definition of ‘underpayment’ in section
6664(a) was not ‘intended to be substantively different from
* * * [previous] law.’ H. Rept. 101–247, supra at 1394.’’ A

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 542 135 UNITED STATES TAX COURT REPORTS (497)

regulation that would impose the penalty on a new cir-
cumstance (excess withholding credits) that had not formerly
been reached by the penalty is ‘‘substantively different’’ from
the prior law. The IRS’s interpretation is therefore at odds
with express congressional intent.
If in 1989 Congress had intended to impose a penalty that
reached not only under-reporting of ‘‘the amount shown as
the tax’’ but also over-reporting of withholding credits, then
it would not have used the language that appears in section
6664(a)(1)(A). A different penalty provision in section 6694,
enacted in 1976, sheds a helpful light in this regard. Section
6694 imposes an assessable penalty on a tax return preparer
for an ‘‘Understatement of Taxpayer’s Liability’’. The defini-
tion of that ‘‘understatement’’ is telling:
SEC. 6694(e). UNDERSTATEMENT OF LIABILITY DEFINED.—For purposes of
this section, the term ‘‘understatement of liability’’ means any understate-
ment of the net amount payable with respect to any tax imposed by this
title or any overstatement of the net amount creditable or refundable with
respect to any such tax. * * *

This language from section 6694(e) reflects the concept—i.e.,
net tax liability after credits—that the regulation would
attempt to read into section 6664(a). However, that language
has been in section 6694(e) since 1976—i.e., 13 years before
section 6664 was added in 1989—and was therefore at the
ready when Congress enacted the new penalty regime; but
Congress did not employ such language in section 6664. Sec-
tion 6694 shows that when Congress wants to penalize an
understatement of a net amount due (or an overstatement of
creditable amounts), it knows how to do so. It did so in sec-
tion 6694 but not by its provision in section 6664(a)(1)(A) as
to tax ‘‘shown’’.
V. Conclusion
Only the legislature can legislate; only Congress can
impose a penalty. I would hold that the penalty that the IRS
has determined here—a fraud penalty on overstated with-
holding credits—has simply not been enacted to the extent
that the regulation provides. The regulation’s imaginative
definition of ‘‘amount shown as the tax by the taxpayer on
his return’’ is not a reasonable interpretation of the statute

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 (497) FELLER v. COMMISSIONER 543

but is the agency’s impermissible attempt to supplement the
statute.
HALPERN and WHERRY, JJ., agree with this dissent.

f

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