110 T.C. No. 26
UNITED STATES TAX COURT
ALBERT LEMISHOW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 18744-96. Filed June 2, 1998.
P is liable for the accuracy-related penalty on that portion of the underpayment attributable to the negligent omission of $102,519 of the total unreported income. In determining the amount to which the penalty is applied, R first calculated the total underpayment. R then calculated the underpayment excluding the "negligent" income. R then imposed the penalty on the difference. P calculated the underpayment of tax attributable to negligence by adding the $102,519 to the reported income and applying the penalty to that amount. Held, R's method of computing the penalty is sustained.
J. Dudley B. Kimball, for petitioner.
Mark L. Hulse and Laurence D. Ziegler, for respondent.
This supplements Lemishow v. Commissioner, 110 T.C. 110 (1998). - 2 -
SUPPLEMENTAL OPINION
TANNENWALD, Judge: This case is again before us because of
differing computations for entry of decision under Rule 1551
submitted to implement our earlier opinion, Lemishow v.
Commissioner, 110 T.C. 110 (1998). In that opinion, we held that
none of the $480,414 withdrawn from petitioner's Individual
Retirement Accounts and Keogh plans during 1993 constituted
qualified rollovers and thus the total amount of the withdrawals
was includable in income. We also held that the accuracy-related
penalty (the penalty) under section 6662 did not apply to the
underpayment of tax attributable to $377,895 of the unreported
income which petitioner reinvested in an unsuccessful rollover
attempt, but that the penalty did apply to that portion of the
underpayment attributable to the $102,519 which petitioner did
not reinvest.
The penalty is "an amount equal to 20 percent of the portion
of the underpayment * * * which is attributable to", in the
instant case, negligence. Sec. 6662(a) and (b). In determining
the amount of the penalty, respondent first calculated the total
underpayment. Respondent then calculated the underpayment based
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
on excluding the "negligent" income (i.e., the $102,519).2
Respondent then imposed the 20-percent penalty on the difference,
the difference representing the underpayment attributable to
negligence. Petitioner calculated the underpayment of tax
attributable to negligence as the excess of tax based on income
of $102,519 plus the reported income, over the tax shown on his
return. It is only because of the different tax rates at
different levels of taxable income that respondent's method
results in a higher penalty than the method petitioner
advocates.3
Section 1.6664-3, Income Tax Regs., provides the rules for
determining the order in which adjustments to a return are taken
into account for the purpose of computing the penalties imposed
under sections 6662 and 6663. The adjustments to the return are
made in the following order:
(1) Those with respect to which no penalties have been imposed.
(2) Those with respect to which a penalty has been imposed at a 20 percent rate (i.e., a penalty for negligence or disregard of rules or regulations, substantial understatement of income tax, or substantial valuation misstatement, under sections 6662(b)(1) through 6662(b)(3), respectively).
2 Since this case only involves two adjustments, one with respect to which no penalty applies and one to which a penalty does apply, the underpayment excluding the "negligent" income is the same as the underpayment that results from adding the "nonnegligent" income to that shown on the return. 3 In this case, respondent's computation results in an accuracy-related penalty of $8,119 and petitioner's in $5,298. - 4 -
(3) Those with respect to which a penalty has been imposed at a 40 percent rate (i.e., a penalty for gross valuation misstatement under section 6662(b)(3) and (h)).
(4) Those with respect to which a penalty has been imposed at a 75 percent rate (i.e., a penalty for fraud under section 6663). [Sec. 1.6664-3(b), Income Tax Regs.]
Respondent's computation of the penalty is in accordance with
these rules and the implementing examples. Petitioner offers an
alternative computation which he claims complies with the
statute.
In reviewing a regulation, we consider two questions as set
forth by the Supreme Court:
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 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. [Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-843 (1984); fn. refs. omitted.]
These principles were very recently reaffirmed by the Supreme
Court in Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. ,
, 118 S. Ct. 1413, 1418 (April 21, 1998), with the additional
admonition:
the task that confronts us is to decide, not whether the Treasury regulation represents the best interpretation of the statute, but whether it represents a reasonable one. See Cottage Savings Assn. v. Commissioner, 499 U.S. 554, 560-561 (1991). * * * - 5 -
Accordingly, the questions in terms of the instant case are: (1)
Whether the Code clearly provides how to compute the portion of
the underpayment which is attributable to negligence; and, if
not, (2) whether section 1.6664-3(b), Income Tax Regs., is a
permissible construction of sections 6662(a) and (b) and 6664(a).
In United States v. Craddock, ___ F.3d ___ (10th Cir.,
May 1, 1998), the Commissioner determined an addition to tax for
substantial understatement of tax under section 6661 for the
taxable year 1985.4 The taxpayer had disclosed one of the
unreported income items in the return. Section 6661(a) imposed a
25-percent addition to tax on the amount of any underpayment
attributable to a substantial understatement, but section
6661(b)(2)(B) provided that the amount of the understatement be
reduced by "that portion of the understatement which is
attributable to" items which the taxpayer disclosed. The
Commissioner computed the addition to tax in accordance with
section 1.6661-2, Income Tax Regs., comparing the total tax
required with that calculated as if the disclosed item had been
reported on the return, to determine the amount of the
understatement. The taxpayer argued, as does petitioner herein,
that the understatement should be computed by calculating the tax
4 Sec. 6661 was repealed in 1989, and the substantial understatement penalty was placed, along with the negligence penalty at issue herein, in a new sec. 6662. Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(a), (c)(2), 103 Stat. 2106, 2395, 2399. - 6 -
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110 T.C. No. 26
UNITED STATES TAX COURT
ALBERT LEMISHOW, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 18744-96. Filed June 2, 1998.
P is liable for the accuracy-related penalty on that portion of the underpayment attributable to the negligent omission of $102,519 of the total unreported income. In determining the amount to which the penalty is applied, R first calculated the total underpayment. R then calculated the underpayment excluding the "negligent" income. R then imposed the penalty on the difference. P calculated the underpayment of tax attributable to negligence by adding the $102,519 to the reported income and applying the penalty to that amount. Held, R's method of computing the penalty is sustained.
J. Dudley B. Kimball, for petitioner.
Mark L. Hulse and Laurence D. Ziegler, for respondent.
This supplements Lemishow v. Commissioner, 110 T.C. 110 (1998). - 2 -
SUPPLEMENTAL OPINION
TANNENWALD, Judge: This case is again before us because of
differing computations for entry of decision under Rule 1551
submitted to implement our earlier opinion, Lemishow v.
Commissioner, 110 T.C. 110 (1998). In that opinion, we held that
none of the $480,414 withdrawn from petitioner's Individual
Retirement Accounts and Keogh plans during 1993 constituted
qualified rollovers and thus the total amount of the withdrawals
was includable in income. We also held that the accuracy-related
penalty (the penalty) under section 6662 did not apply to the
underpayment of tax attributable to $377,895 of the unreported
income which petitioner reinvested in an unsuccessful rollover
attempt, but that the penalty did apply to that portion of the
underpayment attributable to the $102,519 which petitioner did
not reinvest.
The penalty is "an amount equal to 20 percent of the portion
of the underpayment * * * which is attributable to", in the
instant case, negligence. Sec. 6662(a) and (b). In determining
the amount of the penalty, respondent first calculated the total
underpayment. Respondent then calculated the underpayment based
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
on excluding the "negligent" income (i.e., the $102,519).2
Respondent then imposed the 20-percent penalty on the difference,
the difference representing the underpayment attributable to
negligence. Petitioner calculated the underpayment of tax
attributable to negligence as the excess of tax based on income
of $102,519 plus the reported income, over the tax shown on his
return. It is only because of the different tax rates at
different levels of taxable income that respondent's method
results in a higher penalty than the method petitioner
advocates.3
Section 1.6664-3, Income Tax Regs., provides the rules for
determining the order in which adjustments to a return are taken
into account for the purpose of computing the penalties imposed
under sections 6662 and 6663. The adjustments to the return are
made in the following order:
(1) Those with respect to which no penalties have been imposed.
(2) Those with respect to which a penalty has been imposed at a 20 percent rate (i.e., a penalty for negligence or disregard of rules or regulations, substantial understatement of income tax, or substantial valuation misstatement, under sections 6662(b)(1) through 6662(b)(3), respectively).
2 Since this case only involves two adjustments, one with respect to which no penalty applies and one to which a penalty does apply, the underpayment excluding the "negligent" income is the same as the underpayment that results from adding the "nonnegligent" income to that shown on the return. 3 In this case, respondent's computation results in an accuracy-related penalty of $8,119 and petitioner's in $5,298. - 4 -
(3) Those with respect to which a penalty has been imposed at a 40 percent rate (i.e., a penalty for gross valuation misstatement under section 6662(b)(3) and (h)).
(4) Those with respect to which a penalty has been imposed at a 75 percent rate (i.e., a penalty for fraud under section 6663). [Sec. 1.6664-3(b), Income Tax Regs.]
Respondent's computation of the penalty is in accordance with
these rules and the implementing examples. Petitioner offers an
alternative computation which he claims complies with the
statute.
In reviewing a regulation, we consider two questions as set
forth by the Supreme Court:
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 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. [Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-843 (1984); fn. refs. omitted.]
These principles were very recently reaffirmed by the Supreme
Court in Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. ,
, 118 S. Ct. 1413, 1418 (April 21, 1998), with the additional
admonition:
the task that confronts us is to decide, not whether the Treasury regulation represents the best interpretation of the statute, but whether it represents a reasonable one. See Cottage Savings Assn. v. Commissioner, 499 U.S. 554, 560-561 (1991). * * * - 5 -
Accordingly, the questions in terms of the instant case are: (1)
Whether the Code clearly provides how to compute the portion of
the underpayment which is attributable to negligence; and, if
not, (2) whether section 1.6664-3(b), Income Tax Regs., is a
permissible construction of sections 6662(a) and (b) and 6664(a).
In United States v. Craddock, ___ F.3d ___ (10th Cir.,
May 1, 1998), the Commissioner determined an addition to tax for
substantial understatement of tax under section 6661 for the
taxable year 1985.4 The taxpayer had disclosed one of the
unreported income items in the return. Section 6661(a) imposed a
25-percent addition to tax on the amount of any underpayment
attributable to a substantial understatement, but section
6661(b)(2)(B) provided that the amount of the understatement be
reduced by "that portion of the understatement which is
attributable to" items which the taxpayer disclosed. The
Commissioner computed the addition to tax in accordance with
section 1.6661-2, Income Tax Regs., comparing the total tax
required with that calculated as if the disclosed item had been
reported on the return, to determine the amount of the
understatement. The taxpayer argued, as does petitioner herein,
that the understatement should be computed by calculating the tax
4 Sec. 6661 was repealed in 1989, and the substantial understatement penalty was placed, along with the negligence penalty at issue herein, in a new sec. 6662. Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(a), (c)(2), 103 Stat. 2106, 2395, 2399. - 6 -
owed on an amount arrived at by excluding the disclosed item and
adding to the reported income those items to which the addition
to tax would apply. The Court of Appeals for the Tenth Circuit
applied the test outlined in Chevron, U.S.A., Inc. v. Natural
Resources Defense Council, Inc., supra, found section
6661(b)(2)(B) ambiguous as to how to compute the portion of the
understatement which is attributable to disclosed items, and
upheld the regulation as a reasonable construction of section
6661.
We are satisfied that the ordering principles in section
1.6664-3, Income Tax Regs., are a reasonable interpretation of
how to compute the portion of the underpayment which is
attributable to negligence.
Decision will be entered in
accordance with respondent's Rule
155 computation.