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 determining that P was subject to the fraud penalty of
P argues that (1)
We apply the test set forth in
Held: P filed false returns with the intent to evade tax within the meaning of
Held, further,
Held, further, P is subject to the fraud penalty pursuant to
*497 HAINES, Judge: Rick D. Feller petitioned the Court for redetermination of the following penalties:*498
| Penalty | |
| Year | Sec. 6663 |
| 1992 | $78,481 |
| 1993 | 56,689 |
| 1994 | 43,566 |
| 1995 | 58,660 |
| 1996 | 59,963 |
| 1993 | 58,552 |
Hereafter, the years 1992, 1993, 1994, 1995, 1996 and 1997 will be referred to as the years at issue. After concessions, 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 assessment under
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 petitioner filed his petition, he resided in Ohio.
Petitioner's BusinessPetitioner 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 *44 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 *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-2For 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, *45 and $41,750, respectively.
Southeastern/Barnesville Health Care Center Forms W-2For 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 withholding 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 fictitious 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*46 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 *500 fictitious Federal withholdings reported of $52,000, $39,000, $43,500, $44,500, and $42,500, respectively.
Other FalsificationsFor 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. Petitioner 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 ClaimsFor 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 CaseAfter a civil audit and a criminal investigation, criminal proceedings were initiated against petitioner in the U.S. District 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
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 fictitious 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.
*501 However,
On February 22, 2007, petitioner sought redeterminations, asserting that (1) pursuant to
Petitioner argues that the issuance of the notices of deficiency was barred by
(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 inThe burden of proof is upon respondent to prove that petitioner has filed a false return with the intent to evade tax for each year at issue. See
Petitioner pleaded guilty to willfully making and submitting a false tax return for 1997 in violation of
Critically, petitioner falsified his *50 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. Petitioner 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. Petitioner's explanation for his behavior is implausible.
We find that respondent has shown by clear and convincing evidence that petitioner filed his returns for the years at issue with the intent to evade tax. See
Respondent has established that petitioner intended to evade tax and thus engaged in fraudulent conduct. However, *503 before there can be an imposition of a fraud penalty, respondent must also prove that the fraud resulted in underpayments of tax required to be shown on the returns.
(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, *52 as was made on the ground that tax imposed was less than the excess of the amount specified in paragraph (1) over the rebates previously made.Neither paragraph (1)(B) nor (2) applies in this case.(i) The amounts shown by the taxpayer on his return as credits for tax withheld under
(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.Petitioner contends that
Respondent argues that Congress enacted a new penalty regime and significantly reworded the definition of "underpayment" for income tax purposes, thereby justifying the Secretary's clarification of the treatment of overstated prepayment credits.
As a threshold matter, both parties agree that the regulation was issued under
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 Reconsideration in Light of National Cable, Swallows Holding, and Other Developments",
*505 In Chevron, the Supreme Court addressed the circumstances in which the judiciary is to afford an agency *55 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 question 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.
"[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."
The definition of a deficiency in
The definition of an underpayment for purposes of the civil fraud penalty remained unchanged from the 1954 codification of the Internal Revenue Code until 1989. In 1989 Congress repealed sections of the Code, 5 including
Repealed
(1) Income, estate, gift, and certain excise taxes.—In the case of a tax to which section 6211 (relating *59 to income, estate, gift, and certain *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, determined with regard to any extension of time for such filing) * * *
The basic formula (correct tax - reported tax = underpayment) applied and, because of the application 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 = underpayment) 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 "deficiency" 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
Therefore, we find under Chevron step 1 that for the determination of an underpayment, Congress seems to have retained the basic formula (correct tax - reported tax = underpayment) in
The Secretary has promulgated
On March 4, 1991, the Federal Register published a notice of proposed rulemaking regarding the accuracy-related penalty under
The proposed regulations were adopted and published as final regulations on December 31, 1991.
For convenience, we will again *64 set out the pertinent portion of the regulations.
(i) The amounts shown by the taxpayer on his return as credits for tax withheld under
(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*65 He stresses the House report which stated that the definition of "underpayment" in
We disagree with petitioner's position. Neither
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 "deficiency" and carried forward
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
Our examination of whether the regulation is based on a permissible construction of
If the Commissioner proves that any portion of an underpayment is due to fraud, the entire underpayment will be treated as attributable to fraud for purposes of the penalty under
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 dissenters' concerns.
Judge Gustafson contends that
*512 The IRS summarily assessed petitioner's *69 erroneous refunds pursuant to
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
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 *70 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
*513
Pursuant to
Furthermore, because
The legislative history of
Judge Gustafson suggests that this striking difference between these two "underpayment" definitions is of no consequence. Citing the 1944 legislative history of
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
*516 In the final analysis, "the amount shown as the tax by the taxpayer on his return" is a term of art, as is the
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
Not only is
The majority asserts, without explanation, that "Neither paragraph (1)(B) [of
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
Relying on that omission, the Commissioner has concluded in
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 *84 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).
Unfortunately for the Commissioner, neither the preamble to the proposed or final regulations nor the regulations themselves clarify why including withholding credits in amounts collected without assessment, under
Respondent tries to disavow this anomalous effect of his own handiwork. Respondent's posttrial brief and
Respondent presumably relies on the *86 parenthetical "(provided such excess has not been refunded or allowed as a credit to the taxpayer)" in
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 *87 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 direction 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 constitute a rebate under
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
Grammar and our own precedent also undermine respondent's cause. The Commissioner's own words in the regulations refer to the amount by which withholding credits "and other payments in *89 satisfaction of tax liability made before the return is filed, exceed the tax shown on the return (provided *521 such excess has not been refunded or allowed as a credit to the taxpayer)."
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. * * *
Clearly, then, so long as a taxpayer *90 has no deficiency under
Finally, to the case of Rick D. Feller, where the notices of deficiency evidence the absence of a
*523 I agree with Judge Gustafson that "
However, I also believe that the omission of the phrase "as a deficiency" in
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
Applying the unambiguous plain language of that regulation section to petitioner's case and tracing its consequences sequentially through
I believe that the Commissioner could have drafted an expanded version of the current
HALPERN and GUSTAFSON, JJ., agree with this dissent.
GUSTAFSON, J., dissenting: I would hold invalid the regulation on which the fraud penalty at issue depends.
• 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. IntroductionPetitioner Rick D. Feller filed income tax returns for 1992 through 1997 on which he reported income tax liabilities *105 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 *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 withholding from wages as $138,097, whereas only $3,097 was actually withheld, and $135,000 was a fraudulent overstatement of his withholding. As a result, Mr. Feller reported on his returns net amounts due that were much less than he actually owed. That *106 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
(1) the sum of—
(A) the amount shown as the tax by the taxpayer on his return, plus
*528 (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*108 This definition of "underpayment" follows closely the definition of a tax "deficiency" inHowever, unlike the definition of "underpayment" in
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
(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, *110 determined without regard to—
(1) The credits for tax withheld under sections 31 (relating to tax withheld on wages) and 33 (relating to tax withheld at source on nonresident aliens and foreign corporations) * * *.
(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 taxpayer on his return, determined without regard to the items listed in
(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.
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 *530 fraud penalty. The effect of this regulatory provision, however, 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 modification 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 penalty.
III. Regulations as lawUnder our Constitution, it is Congress that enacts laws. See
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 promulgate "regulations". 5 Such regulations acquire the force of law only derivatively, through statutes enacted by Congress—*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*115 that interpret the statute, and the courts defer to that interpretation. See
The parties and the majority of this Court acknowledge that the regulation *116 at issue—
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."
There is no question that the deliberate reporting of fictitious withholding credits is fraudulent. There is no question that Congress could well impose a civil penalty on such *117 fraud (in addition to the criminal penalties that it has imposed and *532 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".
In the first place, the amount in
Second, the amount in
Third, the amount in
Fourth, the amount in
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. 32. 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 regulation. The return includes a line for "total tax", and withholding credits are reported on the return only after that *534 "total tax" entry. 7*122 One looks in vain on the Form 1040 for any "show[ing]" of excess withholding credits. More important, one looks in vain on the Form 1040 for *121 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 withholding 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 withholding credits can be taken into account when calculating an underpayment for purposes of
* * *
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
The basic definition of a "deficiency" in
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,
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 estimated 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 *128 that the tax imposed by this chapter was less than the excess of the amount specified in subsection (a)(1) over the amount of rebates previously made * * *. [Emphasis added.]
Individual Income Tax Act of 1944,When the current penalty regime was enacted in 1989, 11Congress preempted any equivalent confusion about the effect of non-rebate refunds on the computation of an "underpayment". It did so by enacting in
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 *132 underpayments was preemptively solved in 1989 when the "underpayment" definition included, in the first instance, the equivalent "rebate" provision. There was therefore never an occasion for including in
It is surely proper to attempt to bring these other sections to bear on the meaning of tax "shown" in
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 *136 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 recovered 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."
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 *541 Ms. Smith did not claim the overstated amount as a refund (she reported a *137 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 correction of non-refunded excess credits, illustrated in the IRM, is the same as pre-1954 law.The meaning of tax "shown" in
For the reasons stated above,
Because the penalty provision in former
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
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 withholding 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 *543 but is the agency's impermissible attempt to supplement the statute.
HALPERN and WHERRY, JJ., agree with this dissent.
Footnotes
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.↩
3. Southeastern Health Care Center changed its name to Barnesville Health Care Center in 1993.
4.
SEC. 6211 . DEFINITION OF A DEFICIENCY.(a) In General.—For purposes of this title * * * the term "deficiency" means the amount by which the tax imposed by Subtitle A or B * * * exceeds the excess of—
(1) the sum of
(A) the amount shown as the tax by the taxpayer upon his return, 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 , and6661 . Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(c), 103 Stat. 2399.Sec. 6662 was stricken and replaced by a newsec. 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 underpayment to 75 percent of the underpayment and 50 percent of the interest payable under
sec. 6601↩ .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">125 T.C. 211 , 224 (2005);Downing v. Commissioner, T.C. Memo 2005-73">T.C. Memo 2005-73 , supplementingT.C. Memo. 2003-347 ;Estate of Johnson v. Commissioner, T.C. Memo. 2001-182 , affd.129 Fed. Appx. 597">129 Fed. Appx. 597 (11th Cir. 2005). Each of these cases dealt with a situation in which the taxpayer's underpayment undersec. 6664 also constituted the deficiency undersec. 6211↩ . None dealt with the overstatement of prepayment credits.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.↩ 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 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 ofsec. 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 ofsec. 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 ofsec. 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.3. A prominent example of a contrary statutory signal appears in
sec. 6211(b)(1) , which expressly excludes withholding credits from the amount "shown on the return" for purposes of determining a deficiency. Although the old "underpayment" definition of formersec. 6653(c)(1) incorporated these provisions by cross-reference, this linkage between thesec. 6211 "deficiency" definition and the currentsec. 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 withholding credits. It might be noted that to be evenhanded the regulation conversely permits unclaimed but otherwise allowable withholding credits to reduce the amount of any underpayment. See
sec. 1.6664-2(c), Income Tax Regs.↩ 5. The new "underpayment" definition in
sec. 6664(a) replaced at least two different "underpayment" definitions that appeared in these sections of prior law: (1) Formersec. 6653(c)(1) , pertaining to additions to tax for negligence and fraud for purposes of income, estate, gift, and certain excise taxes; and (2) formersec. 6653(c)(2) , pertaining to additions to tax for negligence and fraud relating to taxes other than as described insec. 6653(c)(1) . Of these two former "underpayment" definitions, only the first incorporated by cross-reference thesec. 6211↩ "deficiency" definition 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 doessec. 6664(a) . Seesecs. 6211(b)(2) ,6664(a)↩ (flush language). But of course interpretations that render statutory language unnecessary or redundant are generally disfavored. See 2A Singer & 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 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" undersec. 1.6664-2(d), Income Tax Regs. , which pertains tosec. 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-counting error" that concerns Judge Wherry. See Wherry op. p. 49.1.
Sec. 1.6664-2(c), Income Tax Regs. , was adopted on Jan. 9, 2007, pursuant toT.D. 9309, 1 C.B. 497">2007-1 C.B. 497 , which also removedsec. 1.6664-2T, Temporary Income Tax Regs. ,70 Fed. Reg. 10037 (March 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 toT.D. 8381, 1 C.B. 374">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 retainedpar. (c)(1) of that regulation unchanged. The current version ofsec. 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. 12.2. See infra↩ note 9.
3. As evidence, consider the preamble to the proposed regulations, which had justified the inclusion of withholding credits in amounts collected without assessment under
sec. 6664(a)(1)(B) , even though such credits are excluded undersec. 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) .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.5. A
sec. 6211(a) deficiency could arguably cause a rebate undersec. 6664(a)(2) to be smaller by the same amount. To see this, consider a situation where "the amount by which the tax imposed * * * exceeds * * * the amount shown as the tax by the taxpayer upon his return" is $1. This would create a deficiency of $1 undersec. 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, anysec. 6664(a)(2) rebate would be reduced by $1. Even though asec. 6211(a) deficiency may result in a smaller rebate undersec. 6664(a)(2) , thesec. 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 computing 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.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 asec. 6664(a)(2) rebate undersec. 1.6664-2(e), Income Tax Regs. Comparesec. 1.6664-2(a)(1)(i), Income Tax Regs. ("The amount shown as the tax by the taxpayer on his return (as defined in paragraph (c) of this section)"), withsec. 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 anysec. 6664(a)(2) rebate calculated undersec. 1.6664-2(e), Income Tax Regs. , would remain unchanged, whether or notsec. 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 undersec. 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 assessment undersec. 1.6664-2(e)(1)(ii), Income Tax Regs. , would be increased by the same amount. Seesec. 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 asec. 6664(a)(2) rebate entails adding the respective amounts undersec. 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 petitioner's 1992 tax year.
8. Quite apart from the double-counting of the refunded portion of overstated withholding credits, 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. Undersec. 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), Income 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 insec. 1.6664-2(d), Income Tax Regs. , "paragraph (a) of this section" certainly mentions and uses it as an input in the underpayment formula set forth there. A literal reading of this applicability provision would require the challenged adjustment to be made to all the terms that go into the underpayment formula ofsec. 1.6664-2(a), Income Tax Regs. , including 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 inpar. (a) would have to be given up inpar. (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. Invalidatingsec. 1.6664-2(c)(1), Income Tax Regs. , would, thus, confer the added benefit of precluding this self-defeating construction and salvaging the remainder ofsec. 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 ofsec. 1.6664-2(d), Income Tax Regs. ,sec. 1.6664-2(c)(1), Income Tax Regs. , or for that matter, any other provision ofsec. 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 underpayment.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 contained insec. 1.6664-2(d), Income Tax Regs.↩ 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 asec. 6664(a)(2) rebate to be larger by the amount of the overstatement. However, thesec. 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 asec. 6211(a)↩ deficiency).11. This is the exact amount that one obtains as a
sec. 6664(a) underpayment by applying the formula set forth insec. 1.6664-2(a)(2), Income Tax Regs. , and discussed supra note 4, without giving effect to the challenged adjustment undersec. 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 underpayment amount, computed with and without the challenged adjustment, to the underpayment 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 Return, 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 underpayment 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 thesec. 6664(a)(2) rebate, calculated pursuant tosec. 1.6664-2(e), Income Tax Regs. , as follows. The rebate would consist of the excess of the tax imposed over the amount specified insec. 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 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 credit 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 notwithstanding the plain language ofsec. 1.6664-2(d) and(e), Income Tax Regs. , respondent declined to recognize the $80,853 refund as asec. 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. Petitioner 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 forsec. 6664(a)(2) purposes, but even in the deficiency context. Seesec. 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 adjusted" 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 return was filed. See text suprabetween notes 4 and 5; see also
Badaracco v. Commissioner, 464 U.S. 386">464 U.S. 386 , 104 S. Ct. 756">104 S. Ct. 756, 78 L. Ed. 2d 549">78 L. Ed. 2d 549 (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.↩
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 difference, but the record does not show them. For simplicity's sake and ease of comparison, I use the IRS's amount.↩
2. The definition of "rebate" in
section 6664(a) incorporates "the amount specified in paragraph (1)", in whichsubparagraph (A) lacks the phrase "as a deficiency" when compared to the equivalent term insection 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 parties 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 ofsection 6664(a) "rebates" that wrongly equates them withsection 6211(b)(2) "rebates" despite the phrase "as a deficiency" that is present insection 6211(b)(2) but is absent fromsection 6664(a)↩ . When this error is corrected, the penalty appears to be owing on the portion of the excess credit that was actually refunded.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 includesection 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"), andsection 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.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 authority * * * 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 Constitution was amended to curtail that prohibition, theSixteenth Amendment provided (echoingArticle 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">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).6. Judicial deference to interpretive regulations is relatively recent. Through the mid-20th century, 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 unconstitutional delegation of legislative authority. See Kristin E. Hickman, "The Need for Mead: Rejecting Tax Exceptionalism in Judicial Deference",90 Minn. L. Rev. 1537">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 seeWhitman v. Am. Trucking Associations, Inc., 531 U.S. 457">531 U.S. 457 , 487, 121 S. Ct. 903">121 S. Ct. 903, 149 L. Ed. 2d 1">149 L. Ed. 2d 1↩ (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 delegation jurisprudence has strayed too far from our Founders' understanding of separation of powers").7. On the Form 1040 for 1988—the year before
sections 6663 and6664 were enacted—the "Tax Computation" section (consisting of lines 32 through 40) includes, after the computation of taxable 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" (bold in original). 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.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" insection 6211(b)(1) . However, the latter term insection 6211(b)(1) is evidently shorthand for "amount shown as tax by the taxpayer upon his return" insection 6211(a)(1)(A) , so we assume it is equivalent to the same term insection 6664(a)(1)(A)↩ .9. See S. Rept. 885, 78th Cong., 2d Sess. 38 (1944),
1944 C.B. 858">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 Commissioner 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 taxpayer 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 disclosing 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 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 proposed 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 formersection 271 (nowsection 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".10. It seems a truism to say that "tax imposed" does not include credits; a "credit" is not "imposed"; and the problem that Congress addressed in 1944 concerned tax "shown", not tax "imposed". 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" insection 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 formersection 6653↩ .12. To the same effect, the House Report that the concurring opinion cites reflects a clear understanding 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 excess 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" insection 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).↩