Arc Electrical Construction Co. v. Commissioner, Docket No. 20563-82.

• Decision Date: 17 January 1990
• Docket Number: Docket No. 20563-82.
• Citation: 58 TCM (CCH) 1235,1990 TC Memo 30
• Parties: Arc Electrical Construction Co. v. Commissioner.
• Court: U.S. Tax Court

58 T.C.M. (CCH) 1235 (1990)

T.C. Memo. 1990-30.

Arc Electrical Construction Co. v. Commissioner.

Docket No. 20563-82.

United States Tax Court.

Filed January 17, 1990.

Paul Friedman, 1450 Broadway, New York, N.Y., for the petitioner. Kevin M. Flynn, for the respondent.

Supplemental Memorandum Opinion

PARR, Judge:

This matter is before us on petitioner's motion to vacate.

On December 29, 1988, we filed our Memorandum Findings of Fact and Opinion in this case. Arc Electrical Construction Co. v. Commissioner Dec. 45,246(M), T.C. Memo. 1988-592. We held that (1) petitioner suffered a $6 million embezzlement loss in 1980, which could be carried back to 1977, and (2) the determined deficiencies in tax for 1977 and 1974 were attributable to fraud. With respect to our finding of fraud for 1974, we stated:

The deficiency for the 1974 taxable year is due to the disallowance of a job credit carryback from 1977. Respondent alleges that since petitioner fraudulently understated its income in 1977 due to overstating its cost of goods sold in that year, it also fraudulently filed a Form 1139 seeking a refund for the 1974 taxable year using a jobs credit partially unused in the 1977 taxable year. Respondent claims that since the act of understating income in 1977 was fraudulent the subsequent act of seeking a refund through the use of a jobs credit carryback from 1977 to 1974 was also fraudulent. Petitioner's only defense to respondent's assertion is that there was no fraud.

We agree with respondent. Petitioner knowingly understated its income in 1977. It was fraudulent for petitioner to subsequently try to carry back a partially unused job credit which was only unused because of the fraudulent understatement of income. * * * Arc Electrical Construction Co. v. Commissioner Dec. 45,246(M), T.C. Memo. 1988-592, 56 T.C.M. 975-3, 983-984, 57 P-H Memo T.C. par. 88,592 at 3070.

We withheld entry of decision under Rule 155¹ for the purpose of permitting the parties to submit computations pursuant to our determination of the issues.

On April 19, 1989, respondent's computation for entry of decision was filed with the Court. On May 9, 1989, petitioner filed notice of objection to respondent's computation, together with an alternative computation. Both respondent's and petitioner's computations provided for an overpayment of tax of $31,769 in 1974. However, respondent's computation provided for an addition to tax under section 6653(b) of $27,884 in 1974, while petitioner's alternative computation provided for no addition to tax.

On May 11, 1989, we ordered respondent to submit a detailed explanation of his computation for the 1974 taxable year, since it appeared that he was allowing petitioner to carry back a 1977 jobs credit to 1974, the disallowance of which was the basis for the 1974 deficiency and addition to tax under section 6653(b).

On May 31, 1989, respondent filed a motion to amend his computation for entry of decision together with a memorandum in support of such motion. Respondent's amended computation was exactly the same numerically as the first computation, although it provided additional explanation. The amended computation for the 1974 taxable year stated:

                  Tax liability, computed without allowance
                  for 1980 net operating loss carryback to 1977
                  which creates a new jobs credit carryback from 1977 to 1974 ....................................... $87,445.00
                  Tax assessed and paid
                       March 15, 1975 (statutory date) ..................................... $ 94,722.00
                       December 10, 1975 ...................................................   13,148.00
                                                                                             ___________
                             Total Payments ................................................ $107,870.00
                  Less: refund
                       March 15, 1975 (statutory date) .....................................  (20,425.00)
                  Less: tentative allowances
                       August 14, 1978 .....................................................   (5,676.00)
                       November 27, 1978 ...................................................  (50,000.00)
                                                                                             _____________
                  Total refunds and tentative allowances ...................................($ 76,101.00)
                  Net tax assessed and paid ........................................................................   31,769.00
                  Deficiency, without allowance for net
                  operating loss carryback from 1980 to 1977
                  and new jobs credit carryback from 1977 to 1974 ..................................................  $55,676.00
                                                                                                                      ==========
                

                  Tax liability, computed without
                  allowance for 1980 net operating loss carryback
                  to 1977, which creates a new jobs credit
                  carryback from 1977 to 1974 ......................................................................  $87,445.00
                  Reduction in liability due to new jobs credit
                  carryback from 1977 to 1974 ......................................................................   87,445.00
                                                                                                                      __________
                  Tax liability after carryback ....................................................................      -0-
                  Net tax assessed and paid ........................................................................   31,769.00
                                                                                                                      __________
                  Overpayment ......................................................................................  $31,769.00
                                                                                                                      ==========
                                                                     * * *
                  Addition to tax under
                  I.R.C. § 6653(b) (to be assessed) ................................................................  $27,884.00
                                                                                                                      ==========
                

On June 6, 1989, we granted respondent's motion to amend his computation. On June 7, 1989, we entered decision in this case finding an overpayment of tax of $31,769.00 and an addition to tax under section 6653(b) of $27,884.00 for 1974.

On June 15, 1989, petitioner filed a motion to vacate the decision entered June 7, 1989. Petitioner's motion to vacate states in pertinent part:

7. Respondent in a memorandum in support of his amended computation misstated a material fact. In the opening paragraph, respondent states that the Court found fraud, in its opinion, that Arc * * * fraudulently filed its 1974 federal income tax return with the intent to evade tax. The Court made no such finding and respondent was informed by petitioner to notify the Court of the error, but chose not to do so. * * *

13. If petitioner had never filed for a tentative allowance due to a new jobs credit carryback, it would be entitled to the carryback and a refund of all tax paid with the return.

14. Any penalties asserted against the petitioner are really based on the time of discovery of the embezzlement so that if the discovery of the embezzlement were made in 1977, there would not have been any penalty in 1977 and in 1974.

15. Petitioner believes that since the return of petitioner was not fraudulently originally filed and it is entitled to a total refund of the tax as shown on the return based upon a new jobs credit carryback from 1977, which it is entitled to as a matter of law, there is no deficiency on which to base any penalty. * * *

19. By asserting the fraud penalty for the calendar year 1974, the Court is placing the petitioner in the position of being jeopardized twice. Since the new jobs credit carryback is absorbed in 1974, it is not available as a carryover to the year 1978 and subsequent years where respondent is going to assert the fraud penalty. To the extent it would have been available in subsequent years, any asserted fraud penalty would be reduced to the extent of the available jobs credits. * * *

Petitioner's motion to vacate raises a number of different arguments which we will address separately.

First, petitioner appears to argue in paragraph 15 of its motion to vacate that the new jobs credit carryback from 1977 to 1974 should reduce the underpayment to which the 50-percent fraud addition is applied in 1974. We disagree.

The base for computing the 50-percent addition to tax for fraud is undiminished by any subsequent carryback. Petterson v. Commissioner Dec. 19,359, 19 T.C. 486 (1952). "The unforeseen circumstance that a carry-back later arises to offset the deficiency should not operate to relieve the taxpayer of the addition imposed for the fraud." Auerbach Shoe Co. v. Commissioner Dec. 19,972, 21 T.C. 191, 196 (1953), affd. 54-2 USTC ¶ 9673 216 F.2d 693 (1st Cir. 1954).

Petitioner's second argument stems from its first argument. The jobs credit carryback from 1977 to 1974 resulted in an overpayment of tax in 1974 of $31,769, but at the same time there was an underpayment of $55,676 to which the 50-percent fraud addition was applied. "The basic principle to be found in prior case law would permit reduction for carryforward loss deductions and credits, but prohibit carryback loss deductions and credits, when computing additions to tax." See Blanton Coal Co. v. Commissioner Dec. 41,382(M), T.C. Memo. 1984-397. Petitioner's grievance seems to be that to the extent the jobs credit carryback was allowed in 1974, it is unavailable as a carryover to be applied to 1978 and subsequent years where petitioner states respondent is going to determine the addition to tax for fraud.

The simple response to petitioner's argument is that a taxpayer does not have the option of carrying a new jobs credit forward if the credit is able to be carried back. See sec. 53(c).² Since the carryback to 1974 is a result mandated by law, peti...