Belloff v. C.I.R., 1524

• Citation: 996 F.2d 607
• Decision Date: 23 June 1993
• Docket Number: D,No. 1524,1524
• Parties: -5334, 93-2 USTC P 50,396 Paul F. BELLOFF, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. ocket 92-4010.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 607

996 F.2d 607

72 A.F.T.R.2d 93-5334, 93-2 USTC P 50,396

Paul F. BELLOFF, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 1524, Docket 92-4010.

United States Court of Appeals Second Circuit.

Argued May 13, 1992.

Decided June 23, 1993.

Emil Sebetic, Manhasset, NY, for petitioner-appellant.

Janice B. Geier, Attorney, Tax Div., Department of Justice, Washington, DC (James A. Bruton, Acting Asst. Atty. Gen., Gary R. Allen, Jonathan S. Cohen, Attorneys, Tax Div., Dept. of Justice, Washington, DC, of counsel), for respondent-appellee.

Before: CARDAMONE, PIERCE, and MAHONEY, Circuit Judges.

MAHONEY, Circuit Judge:

Petitioner-appellant Paul F. Belloff appeals from a decision of the United States Tax Court, Charles E. Clapp II, Judge, entered October 18, 1991 that determined a deficiency in income tax due from Belloff for 1986 in the amount of $17,137, a penalty pursuant to 26 U.S.C. § 6653(a)(1)(A) ¹ in the amount of $856.85, and penalty interest pursuant to § 6653(a)(1)(B). These determinations ensued from an opinion of the Tax Court, Belloff v. Commissioner, 62 T.C.M. (CCH) 274, 1991 WL 138571 (1991), whose primary ruling was that the Tax Court lacked jurisdiction to consider Belloff's claim that his overpayment of income tax for 1986 should be applied in discharge of that year's deficiency and penalties. The Tax Court premised this determination upon the prior application of the 1986 overpayment by the Commissioner of Internal Revenue (the "Commissioner") in setoff against an assessment for 1982 of § 6700 penalties against Belloff for the promotion of abusive tax shelters.

We conclude that the Tax Court had jurisdiction under § 6512(b) to determine Belloff's claim that his 1986 overpayment should have been applied to the 1986 deficiency and penalties. We affirm the decision of the Tax Court, however, rejecting Belloff's claim on the merits.

Background

In June 1986, the Commissioner assessed penalties against Belloff (and others) for 1982, 1983, and 1984 pursuant to § 6700, relating to the promotion of abusive tax shelters. Belloff was assessed penalties of $141,750 for 1982, $473,917 for 1983, and $630,532 for 1984, a total of $1,246,199. In February 1987, after paying fifteen percent of a portion of the assessed penalties, see § 6703(c), Belloff instituted a refund action in the United States District Court for the Eastern District of New York contesting his liability under § 6700. See In re Tax Refund Litig., 725 F.Supp. 140 (E.D.N.Y.1989) ("Refund Litig. I "), appeal dismissed as moot, 915 F.2d 58 (2d Cir.1990) (per curiam).

In October 1987, Belloff timely filed (after an extension) his federal income tax return for 1986. The return showed an overpayment and a request for refund in the amount of $18,370.76, representing the difference between the federal income tax withheld from Belloff's income, $28,140, and the total tax due as reported on his return, $9,769.24. On November 30, 1987, the Commissioner notified Belloff that his 1986 overpayment, inter alia, had been credited against his assessed § 6700 liability for 1982.

On December 21, 1988, the Commissioner issued a notice of deficiency to Belloff determining an additional tax liability of $17,137 for 1986 attributable to Belloff's failure to include on his 1986 tax return his liability for the alternative minimum tax. The deficiency notice also determined that Belloff was liable for negligence penalties on the resulting underpayment of tax: a five percent penalty on the underpayment pursuant to § 6653(a)(1)(A) in the amount of $856.85, and fifty percent of the interest on the underpayment pursuant to § 6653(a)(1)(B) in the amount of $1,085.90.

On February 16, 1989, Belloff filed a petition for redetermination of the 1986 deficiency with the Tax Court. Belloff alleged that the Commissioner "[e]rroneously and unlawfully" applied the 1986 overpayment of $18,370.76 against the civil penalties assessed under § 6700 for 1982. While not disputing his liability for the alternative minimum tax of $17,137, Belloff claimed that the reported overpayment of $18,370.76 should have been used to offset the additional alternative minimum tax, and as a consequence he actually made a net overpayment of $1,233.76 for 1986. Belloff further claimed that because (1) his failure to declare liability for the alternative minimum tax was inadvertent rather than negligent, and (2) in any event, the underpayment of taxes asserted by the Commissioner (upon which the negligence penalties were calculated) resulted from the improper failure of the Commissioner to credit the 1986 overpayment against Belloff's alternative minimum tax liability, the negligence penalties were also improperly assessed. Belloff concluded by asking the Tax Court to determine that the Commissioner improperly applied the 1986 overpayment, and that Belloff had made a $1,223.76 overpayment for that year.

Meanwhile, in the district court action regarding the § 6700 penalties, Belloff challenged the authority of the Internal Revenue Service ("IRS") to undertake certain collection activities with respect to the § 6700 assessment, including the application to the 1982 assessment of his 1986 overpayment. See Refund Litig. I, 725 F.Supp. at 140-41. Belloff relied upon § 6703(c)(1), which provides that if a taxpayer timely pays fifteen percent of an asserted § 6700 liability and files a refund action in the appropriate district court, "no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution" of the district court action. Belloff argued that § 6703(c)(1) barred the IRS from setting off his 1986 overpayment against penalties for which he was only assertedly liable pending final resolution in the district court.

In a November 13, 1989 decision that relied primarily upon legislative history, the district court agreed with Belloff, ruling that the IRS could not apply any overpayment for other taxable years against the 1982 § 6700 assessment. See Refund Litig. I, 725 F.Supp. at 141-42. The court accordingly directed injunctive relief in behalf of Belloff, including the application of his 1986 overpayment to his 1988 estimated income tax rather than to the 1982 § 6700 penalties. 725 F.Supp. at 142.

On November 24, 1989, following the district court decision, the Commissioner filed a "partial" motion with the Tax Court to dismiss the petition in this case for lack of jurisdiction insofar as it challenged the application of the 1986 overpayment to the 1982 § 6700 penalties. The Commissioner urged that the district court where the § 6700 penalties were being litigated was the exclusive forum for resolving the application of the 1986 overpayment to the penalty assessments.

While that motion was pending before the Tax Court, on December 18, 1989, the United States appealed the district court's November 13, 1989 decision to this court. On January 3, 1990, the district court stayed its ruling pending resolution of the Commissioner's appeal on the condition that Belloff's 1986 overpayment be maintained in an interest-bearing escrow account. During the pendency of the appeal, however, on July 11, 1990, Belloff was found liable by a jury for the § 6700 penalties. The district court then vacated its outstanding order. See In re Tax Refund Litig., 915 F.2d 58, 59 (2d Cir.1990) (per curiam) ("Refund Litig. II "). On September 11, 1990, this court dismissed the appeal of the United States from the district court's November 13, 1989 order as moot. Id.

The Tax Court then granted the Commissioner's "partial" motion to dismiss Belloff's petition in an opinion filed July 30, 1991, concluding that "[i]f [Belloff] has a claim respecting the application of the 1986 overpayment, he must seek it in another forum." Belloff, 62 T.C.M. at 275. The court noted that the district court hearing the § 6700 refund case was the appropriate forum, and that the "Tax Court does not have subject matter jurisdiction to decide this issue." 62 T.C.M. at 275.

Based upon Belloff's conceded liability for the alternative minimum tax in the amount of $17,137 and apparent concession of liability for the § 6653(a)(1)(A) five percent negligence penalty, the court found Belloff liable for § 6653(a)(1)(B) penalty interest. 62 T.C.M. at 275. In doing so, the Tax Court rejected Belloff's claim that application of the $18,370.76 overpayment to the $17,317 tax liability and § 6653(a)(1)(A) penalty in the amount of $856.85 would leave no principal upon which to premise § 6653(a)(1)(B) penalty interest. 62 T.C.M. at 275.

An order was then entered by the Tax Court on October 17, 1991 granting the Commissioner's "partial" motion to dismiss for lack of jurisdiction, and a decision was entered on October 18, 1991 imposing liability upon Belloff for the $17,137 tax deficiency, the § 6653(a)(1)(A) penalty of $856.85, and § 6653(a)(1)(B) penalty interest. Belloff appealed to this court from that decision on January 7, 1992, in accordance with § 7483.

Belloff also appealed from the adverse district court determination in the § 6700 refund suit. That appeal was argued on April 9, 1992, and the appeal in this case was argued on May 13, 1992. We subsequently affirmed the district court's decision in the § 6700 refund action on Belloff's appeal; the district court determined Belloff's personal liability to be $9,667.00. See In re MDL-731-Tax Refund Litig. of Organizers & Promoters of Inv. Plans Involving Book Properties Leasing (Barrister Assocs. v. United States ), 989 F.2d 1290, 1296, 1305 (2d Cir.1993) ("Barrister Assocs."). ² We also affirmed as to a liability of Barrister Associates in the amount of $534,692.50. Id. As a general partner of Barrister Associates, Belloff is "jointly and severally liable to the full extent of [his] assets for any penalty imposed upon the partnership." In re Tax Refund Litig., 766 F.Supp. 1248, 1256 (E.D.N...