Gonzalez v. Comm'r of Internal Revenue (In re Estate of Trompeter)

• Citation: 111 T.C. No. 2,111 T.C. 57
• Decision Date: 22 July 1998
• Docket Number: No. 11170–95.,11170–95.
• Parties: Estate of Emanuel TROMPETER, Deceased, Robin Carol Trompeter Gonzalez and Janet Ilene Trompeter Polachek, Co–Executors, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.*
• Court: United States Tax Court

111 T.C. 57

111 T.C. No. 2

Estate of Emanuel TROMPETER, Deceased, Robin Carol Trompeter Gonzalez and Janet Ilene Trompeter Polachek, Co–Executors, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.*

No. 11170–95.

United States Tax Court.

July 22, 1998.

Robert A. Levinson and Avram Salkin, for petitioner.

Irene Scott Carroll, for respondent.

SUPPLEMENTAL OPINION

LARO, Judge:

The dispute herein involves the Rule 155 computation mandated by the Court's Memorandum Opinion filed as Estate of Trompeter v. Commissioner, T.C. Memo.1998–35. The issue before the Court is one of first impression; namely, whether an estate's underpayment for purposes of computing the fraud penalty is determined based solely on expenses which are included on the Federal estate tax return, or based on all deductible expenses including deficiency interest and professional fees which arise after the filing of the return.

We hold that the underpayment is determined by taking into account all expenses. Unless otherwise stated, section references are to the applicable provisions of the Internal Revenue Code. Rule references are to the Tax Court Rules of Practice and Procedure. Estate references are to the Estate of Emanuel Trompeter. Mr. Trompeter (the decedent) resided in Thousand Oaks, California, when he died on March 18, 1992. The estate's coexecutors, Robin Carol Trompeter Gonzalez and Janet Ilene Trompeter Polachek, resided in Florida and California, respectively, when the petition was filed.

In Estate of Trompeter v. Commissioner, supra, we held that the estate was subject to the fraud penalty under section 6663(a). The estate computes the amount of this penalty based on an underpayment that takes into account all deductible expenses, including expenses for trustee's fees, attorney's fees, and deficiency interest that were incurred after the filing of the estate tax return. Respondent challenges the estate's ability to compute its underpayment by deducting the latter expenses. Respondent asserts that the estate must compute its underpayment based solely on the expenses which were reported on its estate tax return.

We agree with petitioner. Section 6663(a) imposes a 75–percent penalty on the portion of “any underpayment of tax required to be shown on a return [that] is due to fraud”.¹ The term “underpayment” is defined by section 6664(a) to mean

the amount by which any tax imposed by this title exceeds the excess of—

(1) the sum of—

(A) the amount shown as the tax by the taxpayer on his return, plus

(B) amounts not so shown previously assessed (or collected without assessment), over

(2) the amount of rebates made.

In the case of the Federal estate tax, the “amount of tax imposed by this title” refers to the tax that “is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.” Sec.2001(a). This tax is determined based on the value of the taxable estate, sec.2001, which, in turn, is determined by reducing the value of the gross estate by the amount of any deduction set forth in sections 2053 through 2056. Sec.2051. Section 2053 allows a deduction for certain expenses, indebtedness, and taxes. Section 2054 allows a deduction for certain losses. Section 2055 allows a deduction for certain transfers for public, charitable, or religious uses. Section 2056 allows a deduction for certain bequests to a surviving spouse.

Nowhere in the Code or regulations thereunder does it say that an estate's underpayment is based solely on deductions that appear on its estate tax return. Respondent reaches this result by analogy to a line of cases which hold that a net operating loss (NOL) carryback will not reduce the amount of an income tax underpayment for purposes of computing a penalty or an addition to tax. In this Court's seminal opinion of C.V.L. Corp. v. Commissioner, 17 T.C. 812 (1951), we held that a delinquency penalty applied to a year for which it was later determined that no tax was due on account of an NOL carryback. In reaching this result, we relied on Manning v. Seeley Tube & Box Co., 338 U.S. 561 (1950), and the Senate Finance Committee report accompanying the Revenue Act of 1942, ch. 619, 56 Stat. 798. The Supreme Court held in Manning v. Seeley Tube & Box Co., supra, that an NOL carryback eliminated a deficiency for a prior year, but did not eliminate the interest that accrued thereon. The Senate Finance Committee report stated that

A taxpayer entitled to a carry-back of a net operating loss * * * will not be able to determine the deduction on account of such carry-back until the close of the future taxable year in which he sustains the net operating loss * * *. He must therefore file his return and pay his tax without regard to such deduction, and must file a claim for refund at the close of the succeeding taxable year when he is able to determine the amount of such carry-back. * * * [S. Rept. 1631, 77th Cong., 2d Sess., at 123 (1942), 1942–2 C.B. 504, 597.]

This Court subsequently extended the principle enunciated in C.V.L. Corp. v. Commissioner, supra, to an NOL that was carried back to a year in which the taxpayer was subject to an addition to tax for fraud. The Court held in Petterson v. Commissioner, 19 T.C. 486 (1952), that the original deficiency was the proper base for computing the fraud penalty, and that the NOL carryback did not reduce this deficiency for purposes of that computation.

This and every other Court that has considered whether an NOL carryback reduces an underpayment for purposes of computing a penalty or an addition to tax has concluded that the principle expressed in C.V.L. Corp. v. Commissioner, supra, is correct; namely, that the NOL carryback may not reduce the underpayment. See, e.g., Arc Elec. Constr. Co. v. Commissioner, 923 F.2d 1005, 1009 (2d Cir.1991), affg. on this issue and revg. and remanding T.C. Memo.1990–30; Willingham v. United States, 289 F.2d 283, 287–288 (5th Cir.1961); Simon v. Commissioner, 248 F.2d 869, 877 (8th Cir.1957), affg. on this issue and revg. and remanding U.S. Packing Co. v. Commissioner, T.C. Memo.1955–194; Nick v. Dunlap, 185 F.2d 674 (5th Cir.1950); Rictor v. Commissioner, 26 T.C. 913, 914–915 (1956); Auerbach Shoe Co. v. Commissioner, 21 T.C. 191, 196 (1953), affd. 216 F.2d 693 (1st Cir.1954); Blanton Coal Co. v. Commissioner, T.C. Memo.1984–397; Pusser v. Commissioner, a Memorandum Opinion of this Court dated Dec. 7, 1951, affd. per curiam 206 F.2d 68 (4th Cir.1953); see also United States v. Keltner, 675 F.2d 602, 605 (4th Cir.1982). Respondent's reliance on this line of cases for a similar result here, however, is misplaced. The ability to carry back an NOL depends on the happenings in a taxable year after the taxable year in which the underpayment is due to fraud, and the subsequent year may be as far away as 3 years after the year of the fraudulent underpayment. The principle of C.V.L. Corp. v. Commissioner, supra, reflects the fact that each taxable year is a separate year for income tax purposes, and that a taxpayer may not reduce his or her liability for fraudulent conduct in one year by virtue of unforeseen or fortuitous circumstances that happen to occur in a later year. See Paccon, Inc. v. Commissioner, 45 T.C. 392 (1966).

In the case of the Federal estate tax, however, the same rationale does not apply. The Federal estate tax is not calculated on an annual basis, but is a one-time charge or excise that is computed on the value of a decedent's gross estate less certain deductions which are specifically allowed by the Code. Some of these deductions, like the ones at hand, cannot be determined until after a return is filed. Unlike an NOL carryback, these deductions do not depend on unrelated, unforeseen, or fortuitous circumstances that may occur in later years. These deductions are directly related to a determination of an estate's tax liability. In contrast to the determination of Federal income tax liability, a determination of Federal estate tax liability is not made based solely on deductions that are required to be reported on the appropriate tax return as filed. Indeed, our rules explicitly recognize the fact that even some expenses incurred at or after a trial are deductible in determining an estate's Federal estate tax liability. See Rule 156; see also Estate of Bailly v. Commissioner, 81 T.C. 246, supplemented by 81 T.C. 949 (1983).

We also disagree with respondent's argument in this case because it could possibly lead to the imposition of the fraud penalty when the taxpayer/estate does not have an underpayment of tax and, indeed, may even be entitled to an overpayment. Such a result is inconsistent with jurisprudence. As this Court has consistently held, the fraud penalty does not apply without an underpayment because “[absent] an underpayment, there is nothing upon which the fraud addition to tax [or penalty, as it is now known] would attach.” See, e.g., Newman v. Commissioner, T.C. Memo.1992–652; Lerch v. Commissioner, T.C. Memo.1987–295, affd. 877 F.2d 624 (7th Cir.1989); Hamilton v. Commissioner, T.C. Memo.1987–278, affd. without published opinion 872 F.2d 1025 (6th Cir.1989); Shih–Hsieh v. Commissioner, T.C. Memo.1986–525, affd. without published opinion 838 F.2d 1203 (2d Cir1987); Estate of Cardulla v. Commissioner, T.C. Memo.1986–307; Apothaker v. Commissioner, T.C. Memo.1985–445; Boggs v. Commissioner, T.C. Memo.1985–429; Meredith v. Commissioner, T.C. Memo.1985–170; Stephens v. Commissioner, T.C. Memo.1984–449; Phillips v. Commissioner, T.C. Memo.1984–133; see also Compton v. Commissioner, T.C. Memo.1983–642; Hansen v. Commissioner, T.C. Memo.1981–98; Nunez v. Commissioner, T.C. Memo.1969–216; Brown v. Commissioner, T.C. Memo.1968–29, affd. per curiam 418 F.2d 574 (9th Cir.1969). Moreover, as the Court of Appeals for the Fifth Circuit has stated in a similar setting:

The taxpayer sought to introduce evidence to show the market value of the option at the...