Decision will be entered under
Ps filed a joint income tax return for 2008 improperly claiming three refundable credits: an earned income credit, an additional child tax credit, and a recovery rebate credit. As a result, they claimed a tax refund of $7,327. The parties agree that the correct tax liability was $144. The parties also agree that an accuracy-related penalty applies, but they dispute how the penalty should be calculated, specifically what should be used as the amount shown as the tax on the return. This number affects the amount of the underpayment that serves as the base upon which an accuracy-related penalty is computed.
Held: When determining the amount shown as tax on the return under
141 T.C. 376">*377 BUCH, Judge: Respondent determined deficiencies, additions to tax, and penalties with respect to petitioners' joint Federal income tax as follows:
| Addition to tax | Penalty | ||
| Year | Deficiency | ||
| 2006 | $3,540 | $100 | $708.00 |
| 2007 | 3,901 | 100 | 780.20 |
| 2008 | 8,127 | -0- | 1,625.40 |
Because the parties have resolved all other issues by stipulation, the only issue for the Court to decide is the amount of the penalty under
Respondent argues that the amount shown as tax on the return is reduced by the refundable credits claimed on the return. Under this approach, the amount shown as tax on the return is -$7,327. Petitioners argue that the amount shown as tax on the return is calculated without regard to refundable credits. Under this approach, the amount shown as tax on the return would be $144. The Cardozo Tax Clinic argues in its amicus brief (and petitioners argue in the alternative) that the amount shown as tax on the return is reduced by the refundable credits but not below zero. Under this approach, the amount shown as tax on the return would be zero. This last result is correct, because it is the only approach supported by principles of statutory construction.
BackgroundPetitioners Rand and Klugman, who were a married couple during 2008, timely filed a 2008 joint Federal income tax 141 T.C. 376">*378 return on Form 1040, U.S. Individual Income Tax Return. On line 7 of their Form 1040 they reported "Wages, salaries, tips, etc." of $17,200. They attached to the Form 1040 a Form 4852, Substitute 2013 U.S. Tax Ct. LEXIS 32">*35 for Form W-2,3 that Rand signed and that stated that he had earned $17,200 in "Wages, tips, and other compensation". Petitioners reported business income of $1,020 from Rand's work as a tutor. Lastly, they deducted $72 for one-half of the self-employment tax liability imposed by
This income was reduced to zero by various deductions. Petitioners claimed a standard deduction of $10,900 and a deduction of $14,000 resulting from four personal exemptions. The result on line 43, where taxable income is reported, was zero, which in turn resulted in a tax liability on line 44 also of zero.
The 2008 Form 1040 has several lines that set forth amounts of tax. Starting with a tax of zero on line 44, petitioners reported $144 of self-employment tax on line 57. This resulted in a "total tax" on line 61 of $144.
Credits and RefundThe total tax of $144 was reduced, below zero, by refundable tax credits. Petitioners 2013 U.S. Tax Ct. LEXIS 32">*36 claimed an earned income credit of $4,824, an additional child tax credit of $1,447, and a recovery rebate credit of $1,200. They reported that they had two qualifying children for the purpose of calculating the earned income credit and the additional child tax credit, and they further reported that each child lived with them in the United States during all 12 months of 2008.
To determine qualification, both the earned income tax credit and the additional child tax credit take into account the amount of earned income, and petitioners reported earned income of $18,148 on Schedule 8812, Child Tax Credit. This amount represents $17,200 of wages and $1,020 of self-employment earnings, reduced by $72 for one-half of self-employment taxes. After taking into account the refundable credits, petitioners claimed an overpayment of $7,327 on 141 T.C. 376">*379 line 72 of their return, and on line 73, they requested that the full amount be refunded to them.
On May 4, 2009, the Internal Revenue Service (IRS) refunded the $7,327.
Agreed AdjustmentsThe IRS sent a notice of deficiency to petitioners on December 10, 2010. The notice sets forth adjustments to tax and penalties for tax years 2006, 2007, and 2008, but only 2013 U.S. Tax Ct. LEXIS 32">*37 the penalty for 2008 remains at issue. The parties have resolved all issues for 2006 and 2007 by stipulation.
For 2008 the notice of deficiency contains several adjustments, nearly all of which the parties have resolved by stipulation.42013 U.S. Tax Ct. LEXIS 32">*38 As is relevant to the dispute before us, the notice of deficiency determined that petitioners were not entitled to the earned income tax credit or the child tax credit; petitioners agreed. Also, the notice of deficiency determined that an accuracy-related penalty under
In addition to the adjustments set forth in the notice of deficiency, respondent filed an amendment to his answer in which he asserted that petitioners were not entitled to the 141 T.C. 376">*380 recovery rebate credit (along with a corresponding increase in the penalty under
Thus, after concessions, the sole 2013 U.S. Tax Ct. LEXIS 32">*39 issue remaining to be decided is whether there is an "underpayment" upon which an accuracy-related penalty can be computed.
Positions of the PartiesThe parties submitted the case without trial pursuant to
For the purposes of part II of subchapter A of chapter 68 of the Code, which includes
(1) the "tax imposed"
(2) "the amount shown as the tax by the taxpayer on his return"
(3) "amounts not so shown previously assessed (or collected without assessment)", and
(4) "the amount of rebates made".
In their briefs the parties agree that the first component is $144, the third component is zero, and the fourth component is zero. Their dispute is about the second component: the amount shown as the tax by the taxpayer on the return.The IRS contends that the statutory phase "the 2013 U.S. Tax Ct. LEXIS 32">*40 amount shown as the tax" is ambiguous as to whether the amount includes the three refundable credits petitioners claimed on their 2008 return. The IRS contends that the Court should consult the definition of this phrase in
Petitioners contend that the Code unambiguously excludes any credits claimed on a return from the computation of the amount of tax shown on the return. According to petitioners, the provisions in the Code allowing tax credits clearly distinguish between credits and the taxes against which credits are applied. For example,
Petitioners also observe that in defining the amount of tax shown on the return for calculating a deficiency,
Petitioners make the following alternative argument: "Even if the refundable credits at issue were to be included in the 2013 U.S. Tax Ct. LEXIS 32">*42 calculation of the amount of tax shown by Petitioners on their return, there is no statutory or regulatory basis for reducing the amount of tax below zero. Thus, any underpayment would be limited to the amount of the credit against Petitioners' reported self-employment tax." This position was also presented by the Cardozo Tax Clinic.
The Cardozo Tax Clinic filed an amicus brief contending that the three types of credits petitioners claimed are part of the amount shown as tax on the return when calculating an underpayment. However, the Clinic contends that the tax shown on a return cannot be negative when calculating an 141 T.C. 376">*382 underpayment because Congress purposefully declined to incorporate a provision like
The issue to be resolved is the amount of tax shown on the return (within the meaning of
• $0 of income tax under
• $144 of self-employment tax under
• 2013 U.S. Tax Ct. LEXIS 32">*43 $1,447 of additional child tax credit,
• $4,824 of earned income credit, and
• $1,200 of recovery rebate credit, resulting in
• $7,327 of overpayment, claimed as a refund.
The positions taken are: (a) -$7,327, as the IRS argues, (b) $144, as petitioners argue, or (c) $0, as the Clinic argues (and as petitioners argue in the alternative). We hold that the amount is zero. The result of this conclusion is that, for penalty computation purposes, petitioners have an underpayment of $144.Operative Provisions(1) the sum of--
141 T.C. 376">*383 (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.
This "part" of the Code includesIn this case we are not called upon to address whether the statute is clear on its face as to whether "the amount shown as the tax by the taxpayer on his return" takes into account the earned income tax credit, the additional child tax credit, or the recovery rebate credit. In
In Feller the Court addressed the question of how overstated withholding credits under
(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 paragraphs (b)(1), (2), and (3) of this section, 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) and section 33 (relating to tax withheld at source on nonresident aliens and foreign corporations), as payments of estimated tax, or as any other payments made by the taxpayer with respect to a taxable year before filing the return for such taxable year, over
(ii) The amounts actually withheld, actually paid as estimated tax, or actually paid with respect 2013 U.S. Tax Ct. LEXIS 32">*46 to a taxable year before the return is filed for such taxable year.
141 T.C. 376">*384 SeeWhen testing the validity of a regulation, we generally look to the two-part test established under
In contrast to withholding credits, the regulations under
Because the Secretary has not promulgated a regulation addressing how the refundable credits at issue here should be taken into account, we need not address whether the statute leaves room for agency interpretation. It follows that we are also not resolving the question of whether the Secretary may promulgate a regulation that is inconsistent with 141 T.C. 376">*385 this Opinion.62013 U.S. Tax Ct. LEXIS 32">*48 And the mere fact that we devote these pages to interpreting the statute does not, by implication, mean that the statute is ambiguous. Whether a statute is ambiguous is determined not only from the language of the statute being considered, but also from the "language and design of the statute as a whole." See, e.g.,
Returning to the definition of an underpayment, we note that the Code provides the following:
(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.
A series of canons of statutory construction lead to the conclusion that refundable credits must be taken into account when determining the amount shown as the tax by the taxpayer but that those credits cannot reduce that amount below zero.Where the same words or phrase appear within a text, they are presumed to have the same meaning.
Although not explicitly linked today, the definition of a deficiency under
(1) Income, estate, gift, and certain excise taxes.--In the case of a tax to which
Although they are linked by history, the fact remains that in 1989 Congress uncoupled these terms. And although identical words are presumed to have the same meaning, the presumption "'is not rigid'".
Before we reach the question of whether the three tax credits at issue can reduce the amount shown as tax below zero, we must first decide whether these credits reduce the amount shown as tax to any extent. Although
(1) The tax imposed by subtitle A and the tax shown on the return shall both be determined without regard to payments on account of estimated tax, without regard to the credit under section 31, without regard to the credit under section 33, and without regard to any credits resulting from the collection of amounts assessed under section 6851 or 6852 (relating to termination assessments).82013 U.S. Tax Ct. LEXIS 32">*53
Because the Code specifies that certain credits should be disregarded when determining the tax shown on the return, we can infer that other credits should not be disregarded. Under the canon expressio unius est exclusio alterius, if a statute provides specific exceptions to a general rule, we may infer that Congress intended to exclude any further exceptions.
Although not specifically addressed in our prior opinions, this holding is consistent with many previous opinions of this Court, including Feller, where the claiming of a credit to which a taxpayer was not entitled resulted in the imposition of a penalty. Most credits are identified in the Code as a "credit against the tax imposed".92013 U.S. Tax Ct. LEXIS 32">*56 Petitioners attach special meaning to the phrase "credit against the tax" and infer from those words that a credit against the tax is a payment and141 T.C. 376">*389 not part of the tax itself. Whether a particular tax credit is a refundable 2013 U.S. Tax Ct. LEXIS 32">*55 credit or not, the Code uses this same phrase "credit against the tax". Compare
Having concluded that credits can reduce the amount 2013 U.S. Tax Ct. LEXIS 32">*57 shown as tax on the return, we must next address the Clinic's argument that the earned income credit, additional child tax credit, and recovery rebate credit cannot reduce the amount shown as the tax on the return below zero. We again turn to canons of statutory construction.
* * * *
(4) For purposes of subsection (a)--
141 T.C. 376">*390 (A) any excess of the sum of the credits allowable under sections 24(d), 32, 34, 35, 36, 53(e), and 6428 over the tax imposed by subtitle A (determined without regard to such credits), and
(B) any excess of the sum of such credits as shown by the taxpayer on his return over the amount shown as the tax by the taxpayer on such return (determined without regard to such credits),
shall be taken into account as negative 2013 U.S. Tax Ct. LEXIS 32">*58 amounts of tax.
More simply stated, any excess of the refundable credits claimed as compared to the amount to which the taxpayer was entitled is treated as a negative tax.We can infer from this provision that the specified refundable credits would not be considered a negative tax but for this provision. In this instance, the surplusage canon leads us to conclude that excess credits are not otherwise a negative tax. Under the surplusage canon we are to give effect to every provision Congress has enacted.
Based on the negative tax provision of
We note that our conclusion breaks the historical link between the definitions of a deficiency and an underpayment; however, it was Congress that made that break. As we previously noted, the definition of an underpayment was linked to the definition of a deficiency until 1989. In 1988 Congress amended
Moreover, Congress has made it clear in analogous circumstances when it intended refundable credits to be taken into account. We have already shown how Congress addressed a "negative tax" in
141 T.C. 376">*393 Beyond the previously discussed canons of statutory construction on which we rely, our Opinion is further supported by another canon: the rule of lenity.
The rule of lenity is an "ancient maxim" that "is perhaps not much less old than construction itself. It is founded on the tenderness of the law for the rights of individuals; and on the plain principle that the power of punishment is vested in the legislative, not in the 2013 U.S. Tax Ct. LEXIS 32">*64 judicial department. It is the legislature, not the Court, which is to define a crime, and ordain its punishment."
In
Here, the words of the relevant statutes do not plainly impose a penalty on refunds resulting from overstated earned income credits, additional child tax credits, or recovery rebate credits. Because the penalty is not plainly imposed on the refundable portion of the credits, the rule of lenity further confirms what we have already concluded: that
We have concluded that the earned income credit, additional child tax credit, and recovery rebate credit can be taken into account to reduce the amount shown as tax on the return, but not below zero. We turn to two additional points raised by respondent.
Auer DeferenceRespondent urges us to apply Auer deference to his interpretation on brief of the phrase "the amount shown as the tax by the taxpayer on his return". See
Although we do not in this instance defer to respondent's interpretation on brief, we note that our interpretation of the statute is not inconsistent with the regulation. To the extent the regulation implies that refundable credits should be taken into account in determining the amount shown as the tax, we have done so. But, consistent with the statutory scheme, we have done so only to the extent that it does not give rise to a negative tax. On this, the regulation is silent.
Gap in the Penalty RegimeRespondent also asserts that if his position is not adopted there would be a gap in the penalty regime. Respondent's point is not well taken for at least three reasons.
First, to the extent respondent's claim is that a claim of excess refundable credits could not 2013 U.S. Tax Ct. LEXIS 32">*67 be penalized under our holding, respondent is mistaken. To the extent the credits reduce the amount of tax shown on the return, the disallowance of those credits will result in an increased underpayment upon which a
141 T.C. 376">*395 Second, to the extent an improperly claimed credit resulted in a refund, it may be subject to a penalty under
And third, respondent is incorrect that there would be a gap in the penalty regime insofar as an erroneously claimed earned income tax credit is concerned. In 1997 Congress carved out a separate sanction for taxpayers who improperly claim the earned income tax credit. See
In the case 2013 U.S. Tax Ct. LEXIS 32">*69 of an underpayment due to negligence or a substantial understatement of income tax, among other things,
To reflect the foregoing and concessions,
Decision will be entered under
Reviewed by the Court.
THORNTON, VASQUEZ, GALE, WHERRY, KROUPA, HOLMES, PARIS, KERRIGAN, and LAUBER, JJ., agree with this opinion of the Court.
FOLEY, J., did not participate in the consideration of this opinion.
GUSTAFSON, J., dissenting: The Commissioner argues that petitioners are liable under
For 2008 petitioners filed a Form 1040, "U.S. Individual Income Tax Return", on which they reported income and tax but also claimed refundable credits (to which they were not entitled). As a result, petitioners incorrectly reported no balance due but rather claimed an overpayment and a refund to which they were not entitled.
In particular, Form 1040 for 2008 required petitioners to report "Tax" on line 44, "Alternative minimum tax" on line 45, and the total of those on line 46. The form called for various non-refundable credit amounts not at issue here on lines 47-55, "Self-employment tax" on line 57, and "total tax" on line 61. As their "total tax", petitioners reported $144. (I submit that this $144 amount is "the amount shown as the tax by the taxpayer on his return" for purposes of
Thereafter, in 2013 U.S. Tax Ct. LEXIS 32">*72 the section of Form 1040 entitled "Payments", petitioners claimed an "Earned income credit" (line 64a), an "Additional child tax credit" (line 66), and a "Recovery rebate credit" (line 70), to which they were not actually entitled. They reported "total payments" of $7,471 (consisting solely of those excessive claimed credits) and therefore reported an "amount you overpaid" of $7,327 on line 72, and they requested on line 73 that it all be "refunded to you".
The IRS determined against petitioners an accuracy-related penalty pursuant to
Under our Constitution, it is Congress that enacts laws. See
(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 the tax imposed was less than the excess of the amount specified in paragraph (1) over the rebates previously made.
141 T.C. 376">*399 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".By statute Congress has authorized 2013 U.S. Tax Ct. LEXIS 32">*75 the Secretary of the Treasury to prescribe "regulations for the enforcement of" the Internal Revenue Code, see
There is no other law governing the issue in this case--unless we invent it.
III. DiscussionWithout doubt, Congress could impose a penalty for claiming refundable credits to which one is not entitled. The question we face is whether in fact Congress did so in
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 2013 U.S. Tax Ct. LEXIS 32">*77 amount in
Second, the amount in
Third,
Fourth, the amount in
The critical term in
In fact, Form 1040 calls for a computation of "total tax" (without reduction by refundable credits) and only then calls for the refundable credits to be reported as "payments", consistent with the Code.4 Form 1040 was so arranged when refundable credits were first allowed in 1975;52013 U.S. Tax Ct. LEXIS 32">*81 and when 141 T.C. 376">*402 Congress enacted the current penalty regime in 1989 (and employed the "shown * * * on his return" definition), the Form 1040 return most recently in use--i.e., the Form 1040 for 1988--reflected this same arrangement.62013 U.S. Tax Ct. LEXIS 32">*82 The IRS has always constructed the Form 1040 return in such a way that "total" 2013 U.S. Tax Ct. LEXIS 32">*80 tax is figured first and then refundable credits are characterized as "payments" of that tax. The IRS has never prescribed an individual income tax return on which there was "shown as the tax" an amount that had already been reduced by refundable credits.
I do not suggest that IRS forms and instructions are generally precedential. Cf.
To interpret the "underpayment" definition in
First, if not only tax "shown" but also "tax imposed by this title" (emphasis added) should generally be understood to refer to tax net of refundable credits, then other Code sections that refer to "tax imposed by this title" but that do not explicitly exclude the netting of credits might become very problematic.
These provisions have always been (rightly) understood to apply where there is a tax liability, whether or not that liability has been satisfied by refundable credits. That is, it is a truism that "tax imposed" does not generally mean "amount of tax due after application of refundable credits". It is hard to imagine administering the provisions listed above if it were otherwise. The inference that an internal revenue statute that addresses "tax imposed"--or "tax shown"--without mentioning refundable credits must refer to the tax due after such credits is manifestly unwarranted.
Second, the majority states that it "see[s] no evidence of a contrary congressional intent" (i.e., intent contrary to its expressio unius construction), but it describes no inquiry into the congressional intent that did produce the critical language in
At that time, there were no refundable credits. Congress' 1944 expressio as to withholding credits made no implication whatsoever as to the alterius of refundable credits that would not exist until 1975. The silence of
The majority opinion is correct that the "rule of lenity" requires that penalty statutes be "construed strictly",
Applying the rule of lenity, we should construe "tax" strictly to mean tax, rather than construing it loosely to mean tax minus refundable credits. We should construe "shown as the tax * * * on his return" strictly to mean shown as the tax on his return, rather than construing it loosely to mean not really shown as the tax on his return.
IV. ConclusionThe parties and the majority agree that the tax "imposed" is $144, and there is no dispute that $144 was shown as the "total tax" on line 61 of petitioners' return. There is therefore no "underpayment" as defined in
HALPERN and GOEKE, JJ., agree with this dissent.
MORRISON, J., dissenting: On their joint federal tax return 2013 U.S. Tax Ct. LEXIS 32">*88 for 2008, Rand and Klugman claimed that they were entitled to three types of refundable credits: the earned income credit, the additional child tax credit, and the recovery rebate credit. To buttress their claims to these credits, Rand and Klugman falsely reported on their tax return:
(1) that they lived in the United States;
(2) that their children lived in the United States;
141 T.C. 376">*406 (3) that they had earned income of $18,148, including $17,200 in wages supposedly paid to Rand by the Yeshivas Brisk Institute in Israel.
Rand and Klugman reported that their total tax liability, before credits, was $144. This amount was attributable to self-employment taxes. The refundable credits they claimed total $7,471, and they sought a refund of $7,327 ($7,471-$144).The statements on the return were false; Rand and Klugman were not entitled to the refundable credits they claimed. The issue remaining in this case is to determine the amount of their penalty under
The Court holds that the "tax shown" for the purpose of calculating an underpayment cannot be less than zero. Therefore, the Court holds that the "tax shown" on Rand and Klugman's return is zero. In my view, the "tax shown" on the return can be less than zero. I would hold that the "tax shown" on Rand and Klugman's return is $144 (the amount they reported on their return for self-employment tax) minus $7,471 (the refundable credits they claimed), which is -$7,327.1
Whether the "tax shown" on a return can be negative, i.e. less than zero, in calculating an underpayment is not answered by the plain language of the Internal Revenue Code.
I disagree with the Court's holding for three primary reasons. First, it does not give sufficient weight to Congress's purpose in enacting
When a law is ambiguous, it is appropriate for 2013 U.S. Tax Ct. LEXIS 32">*91 a court to interpret the law in a manner consistent with Congress's purpose behind the law. See
The purpose of the
Adopting this interpretation would result in imposing a penalty on Rand and Klugman of $1,494.3 This is not an onerous penalty for filing the false return, considering the false return was designed to generate an undeserved tax benefit of $7,471. By contrast, the Court holds that the appropriate amount of the penalty is 20% of $144, or $29. That is only about 0.39% (less than one two-hundredth) of the tax benefit sought.
The second reason I contest the Court's holding is that it relies unduly on
First, the Court's holding implicitly (and incorrectly) assumes that there is a sure meaning of "tax shown" (as used in
Second, portions of the opinion of the Court suggest that the concepts of deficiency and underpayment are separate, yet the Court draws heavily from
A related problem is that the Court's holding is not supported by the legislative history it cites. See op. Ct. p. 26 (citing H.R. Rept. No. 101-247, at 1394 (1989), 1989 U.S.C.C.A.N. 1906, 2864). The committee report stated that the establishment 2013 U.S. Tax Ct. LEXIS 32">*98 of a separate definition of "underpayment" in 1989 (separate from the definition of "deficiency") was not intended to change the definition of "underpayment". H.R. Rept. No. 101-247, at 1394, 1989 U.S.C.C.A.N. at 2864. But taken literally this would mean that the definition of "underpayment" remained unchanged from its pre-1989 definition. 141 T.C. 376">*411 Because its pre-1989 definition included the negative-tax provision of
The fourth problem with the Court's reliance on
Finally, the majority contends that its holding, which occasions a puny $29 penalty for Rand and Klugman's false claim for $7,471 in tax credits, does not result in a gap in the penalty 141 T.C. 376">*413 regime because there are penalties for false or excessive claims for credits found in
In addition, the Court asserts that Congress's exemption of the earned income credit from
COLVIN, J., agrees with this dissent.
Footnotes
1. An amicus curiae brief was filed by Carlton M. Smith as attorney for the Cardozo Tax Clinic.↩
2. Unless otherwise noted, all references to sections are to the Internal Revenue Code of 1986, as in effect for the 2008 tax year. All Rule references are to the Tax Court Rules of Practice and Procedure.
3. The complete name of Form 4852 is Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.↩
4. Even after the parties' stipulations, one issue remains unresolved (in addition to the penalty issue addressed in this Opinion). By stipulation, the parties agree that petitioners did not have sufficient earned income to qualify for the additional child tax credit or the recovery rebate credit. The earned income thresholds for claiming the additional child tax credit and the recovery rebate credit are $8,500 and $3,000, respectively. See
sec. 24(d)(1)(B)(i) (additional child tax credit);sec. 6428(b)(2)(A) (recovery rebate credit). Respondent assumes that this stipulation eliminated the income reported on line 7, apparently predicated on the incorrect notion that all items reported on line 7 are earned income. Petitioners make no such assumption; they assume that the $17,200 remains on line 7.We need not resolve the parties' confusion regarding their own stipulation. It is possible to have line 7 income that is not earned income, such as scholarship income that is not reported on a Form W-2. See↩ IRS Publ. 596, at 22 (2008). The two possible interpretations of their stipulation are (1) petitioners had $17,200 of line 7 unearned income, or (2) they had no line 7 income. Under either scenario, petitioners' taxable income is zero, because their income would be fully offset by the standard deduction coupled with dependency exemptions.
5.
Section 6402(a) provides that the Secretary may credit the amount of an "overpayment" against the tax liability of the person making the overpayment and must refund any balance to the person.Section 6401(b)↩ provides that if the amount of specified credits (including the three credits petitioners claimed on their 2008 return) exceed the tax imposed by subtitle A (as reduced by other nonrefundable credits), the amount of such excess is considered an overpayment.6. If the Secretary should promulgate such a regulation, we may be called upon to revisit that question, but judicial restraint dictates that we not resolve that question now.
LTV Corp. v. Commissioner, 64 T.C. 589">64 T.C. 589 , 64 T.C. 589">595↩ (1975) ("[C]ourts will not gratuitously decide complex issues that cannot affect the disposition of the case before them.").7. The third passage is
section 1314 (amongst the mitigation provisions ofsections 1311 through 1314 ), and in that instance, this phrase appears only in connection with a cross-reference tosection 6211↩ .8. This section was also present in substantially the same form before the 1989 amendments that removed the express cross-reference from the definition of an underpayment to the definition of a deficiency.
9. See
sec. 21 (expenses for household and dependent care services necessary for gainful employment);sec. 22 (credit for the elderly and the permanently and totally disabled);sec. 23 (adoption expenses);sec. 24 (child tax credit);sec. 25 (interest on certain home mortgages);sec. 25A (hope and lifetime learning credits);sec. 25B (elective deferrals and IRA contributions by certain individuals);sec. 25C (nonbusiness energy property);sec. 25D (residential energy efficient property);sec. 27 (taxes of foreign countries and possessions of the United States; possession tax credit);sec. 30 (credit for qualified electric vehicles);sec. 30A (Puerto Rico economic activity credit);sec. 30B (alternative motor vehicle credit);sec. 30C (alternative fuel vehicle refueling property credit);sec. 38 (general business credit);sec. 53 (credit for prior year minimum tax liability); andsec. 54 (credit to holders of clean renewable energy bonds). In using that same phrase, the general business credit undersection 38 brings along with it more than 30 other credits that must also be considered a "credit against the tax". Seesec. 38(b)↩ .10. See, e.g.,
Carlebach v. Commissioner, 139 T.C. 1">139 T.C. 1 (2012) (imposing a penalty on disallowed child care credit undersection 21 and child tax credit undersection 24 );Langley v. Commissioner, T.C. Memo. 2013-22 (hope and lifetime learning credits undersection 25A );Ellis-Babino v. Commissioner, T.C. Memo. 2012-127 (general business credit undersection 38 , including the increasing research activities credit undersection 41 );A.J. Concrete Pumping, Inc. v. Commissioner, T.C. Memo. 2001-42 (general business credit undersection 38 , including the investment tax credit undersection 46↩ ).11. Of the credits at issue here, only the earned income credit was included in
section 6211(b)(4) in 1988. In 1998 Congress added the additional child tax credit to the Code, and in 2000 it incorporated the credit in the negative tax provision ofsection 6211(b)(4) . Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, sec. 1(a)(7), 114 Stat. at 2763 (amendingsec. 6211(b)(4) ); Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 101(a), 111 Stat. at 788 (addingsec. 24 ). In 2008 Congress added the rebate recovery credit to the Code and incorporated the credit in the negative tax provision ofsection 6211(b)(4) . Economic Stimulus Act of 2008, Pub. L. No. 110-185, sec. 101(b)(1), 122 Stat. at 615 (amendingsec. 6211(b)(4) ); id., sec. 101(a), 122 Stat. at 613 (amendingsec. 6428(a)↩ ).12. The period of disallowance is 10 years if the claim of credit is due to fraud.↩
1. In
Feller v. Commissioner, 135 T.C. 497">135 T.C. 497 , 135 T.C. 497">526-543 (2010) (Gustafson, J., dissenting), I made a similar critique of this Court's opinion imposing the fraud penalty ofsection 6663 ; but in one respect the majority's error in this case is more extreme: The outcome in Feller was supported by a regulation, i.e.,26 C.F.R. section 1.6664-2(c)(1) , Income Tax Regs. (which the majority held valid, over my dissent); but in this case there is no equivalent regulation to define "tax shown" in such a way as to support the imposition of the penalty. This absence of a regulation makes all the more appropriate the invocation of the rule of lenity (discussed below) to construe the penalty statute narrowly. Cf.Babbitt v. Sweet Home Ch. of Comtys. for a Great Or., 515 U.S. 687">515 U.S. 687 , 515 U.S. 687">704 n.18, 115 S. Ct. 2407">115 S. Ct. 2407, 132 L. Ed. 2d 597">132 L. Ed. 2d 597↩ (1995) ("We have applied the rule of lenity * * * where no regulation was present").2.
Article I, Section 7, Clause 1 of the Constitution 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 "[t]heCongress shall have power to lay and collect taxes on incomes".3. See note 1, above. An analogous regulation defines "tax shown" for purposes of avoiding the penalty for failure to pay estimated tax: One can pay "100 percent of the tax shown on the return of the individual for the preceding taxable year."
Sec. 6654(d)(1)(B)(ii) (emphasis added). The statute is silent about credits, but the regulations make it appear that "tax shown" means tax minus refundable credits (but not withholding credits or payments of estimated tax). See26 C.F.R. sec. 1.6654-2(a)(1)(i) ,(b)(1)(iii) ,(b)(2)(i) . But again, there is no such regulation pertinent to the accuracy-related penalty ofsection 6662↩ .4. The portion of a refundable credit that exceeds the tax liability is an "overpayment", see
secs. 37 ,6401(b)(1) ; an overpayment is by definition a "part of the amount of the payment",sec. 6401(a) (emphasis added); and the refundable credit is therefore treated in the Code as a payment. By contrast, nonrefundable credits are limited to and can never exceed the amount of the tax liability, seesec. 26(a)↩ , and thus never reduce the liability below zero.5. When the first refundable credit (the earned income tax credit) appeared on the Form 1040 for 1975, "Tax" was computed on line 16a and was reduced by certain credits before the addition of "Other taxes" (line 19) to yield a "Total" (line 20). From that were subtracted withholding, estimated payments, the EITC (line 21c), and other payments to yield (on line 23 or line 24) either a "BALANCE DUE IRS" (not a "tax") or an "amount OVERPAID". That is, the 1975 Form 1040 reflected that credit amounts like these are in the nature of payments, not tax. The Form 1040 for 2008 was similar in all material respects to the Form 1040 for 1975.
6. On the Form 1040 for 1988, the "Tax Computation" section (consisting of lines 32 through 40) included, after the computation of taxable income, a line 38 on which one was to "Enter tax", a line 39 for "Additional taxes", and a line 40 that totaled lines 38 and 39. The next section, entitled "Credits" (lines 41 through 47), consisted not of refundable 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. Thereafter, a section of "Other Taxes" (lines 48 through 53) included, for example, the self-employment tax and the alternative minimum tax; and it ended with line 53, which read: "Add lines 47 through 52. This is your total tax" (bold in original). Only after this "total tax" on line 53 did the 1988 return include, in the section of the return entitled "Payments", an entry (at line 56) for "Earned income credit", which was one of the items that yielded "total payments" on line 61. The net amount due after these "total payments" was not↩ referred to as tax, but either as an "amount OVERPAID" (line 62) or as an "AMOUNT YOU OWE" (line 65). This is what in fact appeared on a "return" at the time Congress defined a taxpayer's underpayment as "tax imposed" minus tax "shown * * * on his return". The Form 1040 for 2008 was similar in all material respects to the Form 1040 for 1988.
1. The difference between zero and -$7,327 affects the amount of the underpayment. If the "tax shown" is zero, the underpayment is $144. If the "tax shown" is -$7,327, the underpayment is $7,471.↩
2. Professor Lawrence Zelenak in his article "Tax or Welfare? The Administration of the Earned Income Tax Credit",
52 UCLA L. Rev. 1867, 1869 (2005) , observes:In common with other taxpayer-favorable provisions of the federal income tax, the EITC [the earned income tax credit] is administered on the basis of self-declared eligibility. As with persons claiming other income tax deductions, exclusions, and credits, the EITC claimant makes the entries on her tax return required to determine the amount of EITC to which she is entitled, and pays less tax or receives a bigger refund as a result. * * *
3. Twenty percent of $7,471 is $1,494. See
sec. 6662↩ .4. In 1997 Congress added the additional child tax credit to the Code, and in 2000 it incorporated the credit in the negative-tax provision of
sec. 6211(b)(4) . Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, sec. 1(a)(7), 114 Stat. at 2763 (amendingsec. 6211(b)(4) ); Taxpayer Relief Act of 1997, Pub. L. No. 105-34, sec. 101(a), 111 Stat. at 796 (addingsec. 24 ). In 2007 Congress added the rebate recovery credit to the Code and incorporated the credit in the negative-tax provision ofsec. 6211(b)(4) . Economic Stimulus Act of 2008, Pub. L. No. 110-185, sec. 101(b)(1), 122 Stat. at 615 (amendingsec. 6211(b)(4) ); id. sec. 101(a), 122 Stat. at 613 (amendingsec. 6428(a)↩ ).5. Before 1989 former
sec. 6653(a)(1) and(b)(1) imposed penalties equal to percentages of the portions of an underpayment due to negligence (5%) or fraud (75%), respectively. Formersec. 6661(a) (repealed 1989) also imposed a penalty equal to 25% of the portion of an underpayment due to a substantial understatement of income tax. An underpayment was not defined bysec. 6661(a) . An underpayment for purposes of the 5% negligence penalty and the 75% fraud penalty was generally defined the same as a deficiency for income tax returns. This rule was found in formersec. 6653(c) : "the term 'underpayment' means * * * a deficiency as defined in[section 6211 ]". SeeFeller v. Commissioner, 135 T.C. 497">135 T.C. 497 , 135 T.C. 497">506-507 (2010). In 1988 Congress amendedsec. 6211(b)(4) to add the negative-tax provision we summarized above. Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, sec. 1015(r)(2), 102 Stat. at 357 (amendingsec. 6211(b)(4) ). At the time, of the three types of credits Rand and Klugman claimed, only the earned income credit was in existence and referenced in the negative-tax provision ofsec. 6211(b)(4) . Thus,sec. 6211(b)(4) provided:For purposes of subsection (a)--
(A) any excess of the sum of the credits allowable under sections * * * 32 and 34 over the tax imposed by subtitle A (determined without regard to such credits), and
(B) any excess of the sum of such credits as shown by the taxpayer on his return over the amount shown as the tax by the taxpayer on such return (determined without regard to such credits),
shall be taken into account as negative amounts of tax.Because of the cross-reference of formersec. 6653(c) to the definition of "deficiency", the 1988 amendment modified the definition of "underpayment" for purposes ofsec. 6653(a)(1) and(b)(1) . One year later, in 1989, Congress revamped the system of civil tax penalties. Omnibus Budget Reconciliation Act of 1989 (OBRA), Pub. L. No. 101-239, sec. 7721(a), (c), 103 Stat. at 2395, 2399. It repealed formersec. 6653 ; it addedsec. 6662 (the accuracy-related penalty),sec. 6663 (the fraud penalty--equal to 75% of the portion of the underpayment attributable to fraud), andsec. 6664 (setting forth definitions of terms used insecs. 6662 and6663 ). OBRA sec. 7721(a), (c)(1). The word "underpayment", used insec. 6662 (andsec. 6663 ), is defined bysec. 6664(a) .Secs. 6662(a) ,6663(a) . The 1988 amendment modifying the definition of "deficiency" remained in the Code, but after 1989 it no longer expressly affected the definition of "underpayment". This is because in 1989 the definition of "underpayment" was detached from the definition of "deficiency". SeeFeller v. Commissioner, 135 T.C. 497">135 T.C. 507-508 ("The definition of an underpayment is no longer tied to the definition of a deficiency undersection 6211 , as it had been insection 6653(c)↩ ".). Despite the detachment of the definition of "underpayment" from the definition of "deficiency", a report of the House Ways and Means Committee asserted that the definition of "underpayment" under the 1989 amendments was "not intended to be substantively different" from previous law. H.R. Rept. No. 101-247, at 1394 (1989), 1989 U.S.C.C.A.N. 1906, 2864.6. The period of disallowance is 10 years if the claim of credit is due to fraud.↩
7.
Sec. 32(k) is conditioned upon "reckless or intentional disregard of rules and regulations."Sec. 6662 is not. Seesec. 6662(b)(2)↩ .8. The Court seems to take the IRS to task for failing to assert the
sec. 6676 penalty against Rand and Klugman. The opinion states: "Such a penalty may have applied here, if respondent [the IRS] had asserted it." See op. Ct. p. 31. However, the record does not disclose whether the IRS has asserted asec. 6676 penalty. This is not surprising. The present proceeding is a deficiency proceeding undersec. 6214 . In a deficiency proceeding the Tax Court does not have authority to redetermine a taxpayer's liability for asec. 6676 penalty, which the IRS can assess without a notice of deficiency. Seesec. 6671(a)↩ .9. It is the earned income credit that makes up the largest portion of the refundable tax credits claimed by Rand and Klugman on their 2008 return. They claimed an earned income credit of $4,824, an additional child tax credit of $1,447, and a recovery rebate credit of $1,200.↩