T.C. Summary Opinion 2011-68
UNITED STATES TAX COURT
HARLEY G. WEROS AND MURIEL B. WEROS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12862-09S. Filed June 13, 2011.
Harley G. Weros and Muriel B. Weros, pro sese.
John P. Healy, Reid Michael Huey, and James L. Gessford, for
respondent.
VASQUEZ, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code (Code) in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all section references are to
the Code, as amended, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a $4,182 deficiency in petitioners’
Federal income tax for 2006. After concessions,2 the issues for
decision are whether respondent may use the normal deficiency
procedures to collect an erroneous refund paid to petitioners,
and whether petitioners underreported their income from capital
gains by $8,869.
Petitioners resided in North Dakota when the petition was
filed.
Background
Petitioners received $25,572 in Social Security benefits in
2006. They also received $4,406 in capital gain distributions
from Fidelity Select Health Care Fund (Select) and $15,439 in
capital gain distributions from Fidelity Magellan Fund (Magellan)
in 2006. Petitioners received $1,031 in dividend income in 2006
from multiple funds, including Select and Magellan. The
dividends were reinvested in the respective funds.
2
Respondent concedes that petitioners are entitled to a
$12,500 standard deduction for 2006, an increase of $2,000 from
the $10,500 deduction for which they were given credit.
Petitioners concede that they understated interest income by $241
and taxable dividends by $131 in 2006. Some of the dividends may
be qualified dividends that are subject to a reduced tax rate,
and petitioners’ concession may require new computations.
Accordingly, the decision in this case will be entered under Rule
155.
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Petitioners timely filed a joint Form 1040, U.S. Individual
Income Tax Return, for 2006, and paid the $4,828.48 balance of
tax due with their return. Petitioners reported only $10,976.85
in taxable capital gain distributions for 2006 despite receiving
combined distributions of $19,845 from Select and Magellan.
Petitioners properly reported $21,736.20 in taxable Social
Security benefits on line 20b of their 2006 return. However,
respondent inadvertently omitted the taxable portion of
petitioners’ Social Security benefits when processing
petitioners’ 2006 return. In other words, an Internal Revenue
Service (IRS) employee, when entering the information from
petitioners’ return into the IRS computer system, entered zero as
the amount of petitioners’ taxable Social Security benefits.
This error lead to respondent’s issuing a refund to petitioners
of $2,873.04 on June 11, 2007.3 On March 30, 2009, respondent
issued to petitioners a notice of deficiency, adjusting
petitioners’ income from capital gains, Social Security benefits,
interest, and dividends.
Discussion
I. Social Security Benefits
Petitioners argue that respondent was grossly dishonest and
has forfeited his right to recover the amounts refunded to them.
3
Petitioners reported a $6,202.84 total tax on their 2006
return, but respondent assessed only $3,329.80. Accordingly, the
$2,873.04 difference refunded to petitioners was never assessed.
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They believe respondent should have to pay the price for his
unilateral mistake and should be estopped from determining a
deficiency.
The Commissioner has more than one remedy to recover
erroneous refunds; these include bringing a civil suit under
section 7405 and following the deficiency procedures under
sections 6211 through 6215. Beer v. Commissioner, 733 F.2d 435,
437 (6th Cir. 1984), affg. T.C. Memo. 1982-735; Lesinski v.
Commissioner, T.C. Memo. 1997-234. However, the Commissioner may
use the deficiency procedures to collect an erroneous refund only
if the refund gives rise to a deficiency. See Interlake Corp. v.
Commissioner, 112 T.C. 103, 110 (1999); Lesinski v. Commissioner,
supra.
Section 6211(a) defines the term “deficiency” as the amount
by which the tax actually imposed exceeds--
(1) the sum of
(A) the amount shown as the tax by the taxpayer
upon his return, if a return was made by the taxpayer
and an amount was shown as the tax by the taxpayer
thereon, plus
(B) the amounts previously assessed (or collected
without assessment) as a deficiency, over--
(2) the amount of rebates, as defined in subsection
(b)(2), made.[4]
4
Reduced to mathematical terms, the statutory definition
of the term “deficiency” may be stated as follows:
(continued...)
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Section 6211(b)(2) defines a “rebate” as an abatement,
credit, refund, or other repayment made on the ground that the
tax imposed was less than the amount shown on the return and the
amounts previously assessed or collected without assessment. See
also Groetzinger v. Commissioner, 69 T.C. 309, 314 (1977).
Accordingly, not all refunds are rebates. See O’Bryant v. United
States, 49 F.3d 340 (7th Cir. 1995); Groetzinger v. Commissioner,
supra at 312. Generally, a rebate refund is issued on the basis
of a substantive recalculation of the tax owed. See O’Bryant v.
United States, supra at 342. A nonrebate refund, however, is
issued not because of a determination by the Commissioner that
the tax paid is not owing but for some other reason, such as a
mistake made by the Commissioner. Id. The rebate versus
nonrebate distinction arises from the definition of the term
“deficiency” in section 6211; rebate refunds can be
included in deficiency computations, while nonrebate refunds
cannot. Id.
Respondent’s error in failing to include petitioners’ Social
Security benefits in income gave rise to a nonrebate refund.
Consequently, respondent may not seek to recover the erroneous
4
(...continued)
Deficiency = correct tax - (tax on return + prior
assessments - rebates) = correct tax - tax on
return - prior assessments + rebates
See Midland Mortg. Co. v. Commissioner, 73 T.C. 902, 907 (1980);
Kurtzon v. Commissioner, 17 T.C. 1542, 1548 (1952).
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refund through the deficiency procedures; respondent may pursue
recovery of the refund in U.S. District Court under section 7405
unless the appropriate limitations period has expired. See
Lesinski v. Commissioner, supra.
II. Capital Gains
Petitioners argue that the adjustment to their income from
capital gains is the result of an unfair and dishonest procedure.
At trial Mr. Weros stated that “capital gains have become the
cash cow for the Federal government”. He contended that IRS
rules and procedures are wrong and unfair, and he even expressed
his disapproval of the marriage penalty. In their posttrial
brief petitioners state: “It is totally unfair, bordering on
cheating. We have paid taxes on the same dollars three times in
the last twenty years due to a fluid market and poor IRS
procedure. We urge the IRS to study the procedure and make
honest changes.”
Aside from making various policy arguments, which we have no
authority to entertain, petitioners do not dispute the
information reported on their Forms 1099-DIV, Dividends and
Distributions, or the fact that respondent correctly calculated
the adjustment to their income from capital gains. Accordingly,
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respondent’s determination with respect to the adjustment in
petitioners’ income from capital gains is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.