135 T.C. 497 (T.C. 2010), 4325-07, Feller v. Commissioner of Internal Revenue

Docket Nº:4325-07
Citation:135 T.C. 497, 135 T.C. No. 25
Opinion Judge:HAINES, Judge:
Party Name:RICK D. FELLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Terry W. Vincent, for petitioner. Cathy J. Horner and Dennis G. Driscoll, for respondent.
Judge Panel:HAINES, Judge. HALPERN and WHERRY, JJ., agree with this dissent. COLVIN, COHEN, WELLS, GALE, THORNTON, GOEKE, KROUPA, HOLMES, PARIS, and MORRISON, JJ., agree with this majority opinion. CONCUR BY: THORNTON THORNTON, J., concurring: COLVIN, COHEN, GALE, MARVEL, GOEKE, KROUPA, HOLMES, and HAINES, J...
Case Date:November 08, 2010
Court:United States Tax Court
 
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Page 497

135 T.C. 497 (T.C. 2010)

135 T.C. No. 25

RICK D. FELLER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 4325-07

United States Tax Court

November 8, 2010

SYLLABUS

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 I.R.C. sec. 6663 because his overstated prepayment credits resulted in underpayments of income tax pursuant to I.R.C. sec. 6664 and sec. 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs. On Nov. 27, 2006, R assessed, by use of the mathematical error assessment procedures of I.R.C. sec. 6213(b)(1), adjustments related to P's overstatement of prepayment credits for 1992 through 1997.

P argues that (1) I.R.C. sec. 6501 bars the issuance of the notices of deficiency and (2) sec. 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., under which overstated prepayment credits result in underpayments of income tax, is invalid because it violates the intent of Congress in enacting I.R.C. sec. 6664 and that he is not subject to the fraud penalty.

We apply the test set forth in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), to determine the validity of the regulation. Under Chevron step 1, we find that I.R.C. sec. 6664 is ambiguous regarding the definition of " underpayment" . Under Chevron step 2, we find that the regulation is based on a permissible construction of I.R.C. sec. 6664.

Held: P filed false returns with the intent to evade tax within the meaning of I.R.C. sec. 6501(c); therefore the issuance of the deficiency notices was not time barred.

Held, further, sec. 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., is valid.

Held, further, P is subject to the fraud penalty pursuant to I.R.C. sec. 6663 for each year at issue.

Terry W. Vincent, for petitioner.

Cathy J. Horner and Dennis G. Driscoll, for respondent.

HAINES, Judge. HALPERN and WHERRY, JJ., agree with this dissent.

OPINION

HAINES, Judge:

Rick D. Feller petitioned the Court for redetermination of the following penalties:

Page 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 section 6501; and (2) whether petitioner's overstated prepayment credits for the years at issue resulted in underpayments of income tax attributable to fraud pursuant to sections 6663 and 6664. [1] In so deciding, we must determine the validity of section 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs. FINDINGS OF FACT 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 Business Petitioner 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 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 Page 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-2 For 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, and $41,750, respectively. Southeastern/Barnesville Health Care Center Forms W-2 For 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] 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 Page 500 fictitious Federal withholdings reported of $52,000, $39,000, $43,500, $44,500, and $42,500, respectively. Other Falsifications For 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 Claims For 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 Case After 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 section 7206(1). In his plea agreement, petitioner admitted that he filed deliberately falsified personal tax returns for each of the years at issue. He also admitted that for each of the years at issue he claimed a false income tax refund when he knew he actually owed income taxes and that he attached to his return a fictitious Form W-2 for each nursing home. 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. Page 501 However, section 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., requires excess withholding tax credits to be included in determining an underpayment under section 6663. Accordingly, the notices of deficiency determined fraud penalties under section 6663 based upon underpayments of income tax pursuant to section 6664 of $104,642, $75,584, $58,087, $78,214, $80,993, and $78,073 for 1992, 1993, 1994, 1995, 1996, and 1997, respectively. On November 27, 2006, respondent assessed adjustments related to petitioner's overstatement of withholding tax credits for each of the years at issue through the mathematical error assessment procedures of section 6213(b)(1) and section 301.6201-1(a)(3), Proced. & Admin. Regs. On February 22, 2007, petitioner sought redeterminations, asserting that (1) pursuant to section 6501, the statute of limitations applied to bar assessment for each of the years at issue, and (2) section 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., including petitioner's overstated withholding tax credits in the calculation of his underpayments is invalid. OPINION I. Period of Limitations on Assessment Petitioner argues that the issuance of the notices of deficiency was barred by section 6501(a). Section 6501(a) provides the general rule that the amount of any tax imposed must be assessed within 3 years after the return is filed. An exception to the 3-year rule is provided in section 6501(c)(1):

(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...

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