Todd v. Comm'r of Internal Revenue

• Decision Date: 26 October 1987
• Docket Number: Dkt. No. 8227-86
• Citation: 89 T.C. No. 63,89 T.C. 912
• Parties: RICHARD J. TODD AND DENESE W. TODD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

89 T.C. 912

89 T.C. No. 63

RICHARD J. TODD AND DENESE W. TODD, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Dkt. No. 8227-86

United States Tax Court

Filed October 26, 1987.

Deficiencies determined by respondent were sustained because petitioners' property was not placed in service during the years in issue. Valuation of the property was also overstated on the return by more than 250 percent of the correct valuation. HELD, the underpayments of petitioners' taxes were not ‘attributable to‘ the valuation overstatement, and additions to tax under sec. 6659, I.R.C., as amended, do not apply for t he years in issue. Martin N. Gelfand and William Weintraub, for the petitioners.

Martin D. Cohen and William H. Quealy, Jr., for the respondent .

OPINION

COHEN, JUDGE:

In Noonan v. Commissioner, T.C. Memo. 1986-449, we found that petitioners Richard J. Todd and Denese W. Todd (the Todds) purchased two FoodSource containers by agreements dated December 8, 1981, and a third container by an agreement dated October 14, 1982. The Todds' containers were, however, the subject of a dispute between the seller, FoodSource, Inc., and the manufacturer, Budd Company, and were not released to the Todds or placed in service prior to November 29, 1983. The issue for decision here is whether the Todds are liable for additions to tax under section 6659. ¹

The deficiencies in issue in Noonan with respect to the Todds were for 1979, 1980, 1981, and 1982. The deficiencies for 1981 and 1982 resulted from disallowance of investment tax credits, depreciation deductions, and miscellaneous deductions relating to the containers. The deficiencies for 1979 and 1980 resulted from carryback of the unused investment tax credits from 1981 and 1982.

The consolidated cases decided in Noonan involved various test case petitioners with circumstances differing from those of the Todds. All petitioners claimed investment tax credits and deductions based on a sales price of $260,000 per container. We determined that the containers purchased by certain of those test case petitioners, Henricks and Hillendahl, had been placed in service during the years in issue. We concluded that the correct basis of each petitioner in his or her container did not include long-term purchase debt and was limited to the actual cash payments made by the purchaser up to a fair market value of not more than $60,000. Thus to the extent that the basis claimed on a return exceeded the correct basis determined by us, there was a valuation overstatement for purposes of section 6659. We stated:

Certain of the petitioners, including the test case petitioners identified in our findings, will have their investment tax credits and depreciation deductions disallowed during the years in issue because the containers in which they invested were detained by Budd and not placed in service during the years in issue. Other petitioners may or may not have their deductions disallowed upon application of section 183 after further hearings. With respect to petitioners Henricks and Hillendahl, however, their respective claimed investment tax credits and depreciation deductions will be reduced in accordance with our finding that their adjusted basis for purposes of the investment tax credit must be reduced by the amounts of the notes and, to the extent represented by cash, limited to the maximum fair market value of the container interest. Once those adjustments to basis have been made in the individual cases, the additions to tax under section 6659(a), presumably in the amount of 30 percent under section 6659(b), will apply to the portion of the underpayment of each petitioner attributable to the difference between the adjusted basis claimed on the petitioner's return and the amount determined to be the correct adjusted basis. See section 6659(c)(1). »Noonan v. Commissioner, supra, 52 T.C.M. 534 at 553, 55 P-H Memo. T.C. par. 86-449 at 2081-2082.†

The Todds here contend that the underpayments of their taxes for the years in issue resulting from our ‘not placed in service‘ finding are not ‘attributable to‘ the valuation overstatements claimed on their returns. Disagreeing, respondent first suggests that, where property is not placed in service, taxpayers acquire no basis in the property and that, under Zirker v. Commissioner, 87 T.C. 970, 979 (1986), the addition to tax under section 6659 applies to the full amount of the underpayment. We are not persuaded by this suggestion. Taxpayers are not entitled to depreciation deductions or investment tax credits prior to the time that property is placed in service. Computation of basis, however, is independent of the date on which deductions or credits commence. See sections 1011-1016. A taxpayer may have a basis in property, such as property held for personal use, that has no tax significance unless and until the property is sold. In Zirker v. Commissioner, supra, we held that there was no sale and, for that reason, the taxpayers had no basis in the subject property. Here we have found that the Todds actually purchased three containers. They did, therefore, have a basis in those containers from the time they made their cash investment, regardless of when the containers were placed in service.

Respondent has chosen, however, to seek the addition to tax under section 6659 only with respect to the difference between the basis claimed on the return, $260,000 per container, and petitioners' cash investment, $52,000 per container. Respondent's position is set forth as follows:

Logic and fairness dictate that the Todds not fare better than Hillendahl and Henricks on the implausible grounds that the Todds' situation suffers from greater infirmities. * * *

In the context of this case respondent reads section 6659 as saying, in simple terms:

If an income tax deficiency results because deductions or credits relating to a business asset are not allowable, and if the amount of such deficiency would have been less but for the reporting of an unjustifiably high basis for the asset, how can it be gainsaid that, in the language of section 6659(a), a percentage of the understatement of tax is attributable to a valuation overstatement?

To conclude otherwise would lead to the anomalous result that parties who were conscientious enough to ensure that their overvalued assets were actually placed in service would be liable for the additions to tax while others, who were less conscientious in this regard, but who similarly overstated their basis in fully identical assets, would not. Similarly, those petitioners who failed to demonstrate profit motive or to overcome inferences of pure tax motivation could presumably escape sec. 6659 liability, notwithstanding gross overvaluation, simply because their containers had not been placed in service. »Fn. ref. omitted.†

Further, respondent argues that, as to the later years (1983 and 1984 in this case), when the property is placed in service, petitioners will have the benefit of our opinion in Noonan and may avoid the additions to tax under section 6659 by not claiming a valuation overstatement.

Respondent is asking us, in effect, to apply section 6659 whenever an underpayment is attributable to a transaction involving or accompanied by a valuation overstatement. We are not persuaded, however, that respondent's interpretation is an appropriate one under the statute.

The pertinent language of section 6659 is as follows:

SEC. 6659(a) Addition to the Tax. — If —

(1) an individual, or

(2) a closely held corporation or a personal service corporation,

has an underpayment of the tax imposed by chapter 1 for the taxable year which is attributable to a valuation overstatement, then there shall be added to the tax an amount equal to the applicable percentage of the underpayment so attributable.

* * *

(c) Valuation Overstatement Defined. —

(1) In general. — For purposes of this section, there is a valuation overstatement if the value of any property, or the adjusted basis of any property, claimed on any return is 150 percent or more of the amount determined to be the correct amount of such valuation or adjusted basis (as the case may be).

We have previously held that underpayments resulting from carrybacks to years prior to December 31, 1981, from returns filed after December 31, 1981, are subject to section 6659. Such underpayments are attributable to the valuation overstatements on the returns filed after December 31, 1981 (in this case the returns for 1981 and 1982). Nielsen v. Commissioner, 87 T.C. 779 (1986).

Section 6659 was originally enacted as part of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, 95 Stat. 341. The language describing its extent in the conference report accompanying the bill is brief. It states:

The bill provides a graduated addition to tax applicable to certain income tax ‘valuation overstatements.‘ The addition to tax applies only to the extent of any income tax underpayment which is attributable to such an overstatement * * * [H.Rept. 97-215 (Conf.) at 262 (1982), 1981-2 C.B. 481, 515.]9

The General Explanation by the Staff of the Joint Committee on Taxation, however, is more detailed. ² The provision is there explained as follows:

OVERVIEW

The Act provides a new penalty in the form of a graduated addition to tax applicable to certain income tax ‘valuation overstatements.‘ As an addition to tax, this penalty will be assessed, collected, and paid in the same manner as a tax. This addition to tax applies only to the extent of any income tax underpayment which is attributable to such an overstatement, and only if the taxpayer is an individual, a closely held corporation, or a personal service corporation. For example, assume that an individual understates income tax liability or the taxable year by $5,000, and that of the $5,000 underpayment, $2,000 is attributable to overstating the value of property. In this case, only the portion of the tax underpayment that is attributable to...