Rand v. Comm'r

• Citation: 141 T.C. 376,141 T.C. No. 12
• Decision Date: 18 November 2013
• Docket Number: No. 2633–11.,2633–11.
• Parties: Yitzchok D. RAND and Shulamis Klugman, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

?141 T.C. No. 12
141 T.C. 376

Yitzchok D. RAND and Shulamis Klugman, Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 2633–11.

United States Tax Court.

Nov. 18, 2013

So ordered.

Gustafson, J., dissented and filed opinion.

Morrison, J., dissented and filed opinion.

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 I.R.C. sec. 6664(a)(1)(A), the earned income credit, additional child tax credit, and recovery rebate credit are taken into account but do not reduce the amount shown as tax below zero.

Andrew R. Roberson, Roger J. Jones, and Patty C. Liu, for petitioners.¹

Michael T. Shelton and Lauren N. Hood, for respondent.

OPINION
BUCH, Judge:

[141 T.C. 377]

Respondent determined deficiencies, additions to tax, and penalties with respect to petitioners' joint Federal income tax as follows:

Year	Deficiency	Addition to tax sec. 6651(a)(1)	Penalty sec. 6662(a)
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 section 6662(a) ² for 2008. Determining that amount requires us to first determine the “underpayment of tax required to be shown” on petitioners' 2008 tax return. See sec. 6662(a) (imposing 20% penalty on specified portions of “an underpayment of tax required to be shown on a return”); sec. 6664(a) (defining “underpayment”). This, in turn, requires that we determine “the amount shown as the tax” on petitioners' 2008 return. See sec. 6664(a)(1)(A).

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.

Background

Petitioners Rand and Klugman, who were a married couple during 2008, timely filed a 2008 joint Federal income tax

[141 T.C. 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 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 section 1401. In total petitioners reported that their adjusted gross income was $18,148.

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 Refund

The total tax of $144 was reduced, below zero, by refundable tax credits. Petitioners 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. 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 Adjustments

The 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 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.⁴ 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 section 6662 applies; the parties agree that a penalty applies “if the Court determines that there is ‘an underpayment of tax required to be shown on the return’ within the meaning of I.R.C. § 6662(a)”.

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. 380]

recovery rebate credit (along with a corresponding increase in the penalty under section 6662). Petitioners agreed to this adjustment.

Thus, after concessions, the sole issue remaining to be decided is whether there is an “underpayment” upon which an accuracy-related penalty can be computed.

Positions of the Parties

The parties submitted the case without trial pursuant to Rule 122. Petitioners have conceded that they are liable for the accuracy-related penalty for 2008 if there is “an underpayment of tax required to be shown on a return” as that phrase is used in section 6662(a). It follows from the concession that petitioners have waived any defense based on reasonable cause. See sec. 6664(c).

For the purposes of part II of subchapter A of chapter 68 of the Code, which includes section 6662, the term “underpayment” is defined by section 6664(a). It consists of four components:

(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 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 section 1.6664–2(c), Income Tax Regs., and that this regulation should be interpreted to require that petitioners' claims for the three credits be included in the computation of the amount shown as tax on their return. The IRS contends that its interpretation of the regulation should be afforded deference under the principle that an agency's interpretation of its own ambiguous

[141 T.C. 381]

regulation must be afforded deference. See Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997).

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, section 24(a) provides a “credit against the tax imposed by this chapter”. To petitioners, this means that the additional child tax credit they claimed is not part of the tax shown on their return.

Petitioners also observe that in defining the amount of tax shown on the return for calculating a deficiency, section 6211(b)(4) provides that the difference between (1) the refundable credits ⁵ claimed on the return and (2) the amount shown as tax on the return (as determined without regard to refundable credits) is taken into account as a negative amount of tax. Because Congress did not enact a similar provision for the calculation of an underpayment, petitioners contend that Congress must have intended that refundable credits be excluded from the tax shown on the return in underpayment calculations.

Petitioners make the following alternative argument: “Even if the refundable credits at issue were to be included in the 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...