Bang v. Comm'r Of Internal Revenue

• Decision Date: 04 January 2011
• Docket Number: Docket No. 9371-07S
• Parties: BEVERLY BERNICE BANG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

BEVERLY BERNICE BANG, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9371-07S

UNITED STATES TAX COURT

Filed January 4, 2011

PURSUANT TO INTERNAL REVENUE CODE

SECTION 7463(b), THIS OPINION MAY NOT

BE TREATED AS PRECEDENT FOR ANY

OTHER CASE.

Kent Vriezelaar, for petitioner.

Michael W. Bitner, for respondent.

MORRISON, Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed.¹ Under section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Pursuant to section 6330(d), petitioner Beverly Bang seeks review of the determination of the IRS Office of Appeals to sustain a proposed levy. Respondent, whom we refer to here as the IRS, has filed a motion for summary judgment.

The proposed levy seeks to collect interest and penalties that arose from Bang's failure to timely pay $2,636 of income tax for her 1983 tax year. The $2,636 payment, which was due on April 15, 1984, was made on May 12, 2006. The amount of the proposed levy is $32,343.46. The $32,343.46 comprises four components:

•underpayment interest under section 6601(a); i.e. $21,553.52 in interest on the $2,636 underpayment from the day the payment was due, April 15, 1984, until the date the $2,636 was assessed by the IRS, March 27, 2006 (the $21,553.52 does not include the additional interest that continued to accrue until the date Bang paid the $2,636 on

May 12, 2006);²

•tax-motivated transaction interest under former section 6621(d)); i.e. the $21,553.52 computed above used an interest rate of 120 percent of the normal rate because the IRS had determined that the $2,636 underpayment was attributable to a tax-motivated transaction;³ •the 50-percent-of-interest negligence penalty under former section 6653(a)(2); i.e. $10,776.76, which was 50 percent of $21,553.52, reflecting the determination that the $2,636 underpayment was due to negligence;⁴ and

•a failure-to-pay-tax penalty; i.e. $13.18 assessed on June 12, 2006.⁵

The levy did not include the $2,636 in additional income tax for the 1983 year and did not include a $131.80 section 6653(a)(1) 5-percent negligence penalty for underpaying her 1983 tax.⁶ Bang had already paid these amounts. At the Appeals Office, Bang wasnot entitled to challenge her liability for, or the collection of, these two amounts of $2,636 and $131.80. These two amounts are therefore not before the Tax Court.

Background

1. The Contra Costa Partnership

Bang was a partner in a partnership called Contra Costa Jojoba Research Partners. This partnership, which we shall refer to as the Contra Costa partnership, filed a partnership tax return for its 1983 tax year on which it deducted $437,500 in research and experimental expenditures under section 174. On her own 1983 tax return, Bang reported a deduction of $12,500 for her share of the $437,500 deduction that the partnership had claimed. The 1983 tax return was due on April 15, 1984. See sec. 6072.

The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) regarding the Contra Costa partnership on April 12, 1989. The FPAA determined that the $437,500 deduction for research and experimental expenditure was erroneous and that the appropriate deduction was zero. In explaining the reasons for the adjustment the FPAA stated:

We have disallowed the amount above because it has been determined that there is insufficient evidence to demonstrate that the expenses listed above qualify as research and development expenditures. Further, it has been determined that a portion of the research and experimental expenditures listed in the return may be for items not associated with research and experimental costs.

The FPAA did not specifically mention penalties, except for the following assertion:

THE FOLLOWING PENALTIES ARE APPLICABLE TO THE PARTNER/SHAREHOLDER Section 6661⁷

On July 13, 1989, the Contra Costa partners challenged the FPAA determination in a partnership-level proceeding before the Tax Court, Contra Costa Jojoba Research Partners v. Commissioner, docket No. 17323-89.⁸ On January 28, 1994, the parties to docket No. 17323-89 stipulated to be bound by the legal theories and findings of fact that would determine the eventual outcome of partnership adjustments in Utah Jojoba I Research v. Commissioner, Tax Court docket No. 7619-90.⁹ The stipulation said:

With respect to all adjustments in respondent's Notice of Final Partnership Administrative Adjustment relating to Contra Costa Research Partners, a jojoba partnership, the parties stipulate to the following terms:

1. THE ABOVE ADJUSTMENTS¹⁰ ARE THE ONLY ISSUES IN THE CASE.

A. UPON RESOLUTION OF THESE ISSUES, A PROPOSED DECISION WILL BE PREPARED BY RESPONDENT'S COUNSEL.

2. The above adjustments, as specified in the preamble, shall be redetermined by application of the same legal theories as that which resolved the same partnership item adjustments with respect to the following partnership:

Name of Case: Utah Jojoba I Research Tax Court Docket No.: 7619-90 (hereinafter the CONTROLLING CASE)

3. All issues involving the above adjustments shall be resolved as if the partnership in this case was the same as the partnership in the CONTROLLING CASE;

A. If the Court makes findings of underlying facts with respect to tax motivated transactions, a valuation overstatement, or other elements applicable to a determination of additions to tax and/or section 6621(c)¹¹ interest, which are attributable to the above-designated partnership item adjustments, the findings of fact in the CONTROLLING CASE shall apply to the partners in Contra Costa Jojoba Research Partners as if the partnership in this case was the same as the partnership in the CONTROLLING CASE; * * *

* * * * * * *

9. This stipulation applies to all partners in Contra Costa Jojoba Research Partners who were parties to the action within the meaning of I.R.C. § 6226(c) and (d) on the date the stipulation is executed by the respondent and whose partnership items have not subsequently converted to nonpartnership items pursuant to I.R.C. § 6231(b) prior to the entry of the decision in this case; * * *.

In 1998, the Tax Court issued an opinion in Utah Jojoba I Research v. Commissioner, T.C. Memo. 1998-6. The Court held that the Utah Jojoba I Research partnership was "not entitled to a section 174(a) research and experimental expense deduction for 1982 because it did not directly or indirectly engage in research or experimentation." Id. The Court in Utah Jojoba I did notmake any finding or holding that expressly referred to penalties or interest.¹²

On April 11, 2005, the Tax Court issued an order and decision in Contra Costa Jojoba Research Partners v. Commissioner, docket No. 17323-89 (Contra Costa). The order and decision sustained the partnership item adjustments that the IRS had determined in the Contra Costa FPAA.¹³

2. The Notice of Deficiency: March 13, 2006

The IRS issued a deficiency notice to Bang on March 13, 2006. Attached to the deficiency notice was a Form 4549-A, Income Tax Discrepancy Adjustments. We consider Form 4549-A to be part of the deficiency notice issued to Bang. Also attached to the deficiency notice was a Form 4089-B, Notice of Deficiency--Waiver. We refer to the Form 4089-B as the waiver form.

The first page of the deficiency notice itself (not the Form 4549-A or the Form 4089-B) contained the heading "Deficiency (Increase in tax)". Under that heading, the following textappeared:

IRC 6653(a)(1)(A)[should be 6653(a)(1)]: $131.80

IRC 6653(a)(1)(B)[should be 6653(a)(2)]: 50% of interest on $2,636.00.

The notice stated that

We have determined that you owe additional tax or other amount(s), or both, for the tax years(s) identified above. This letter is your NOTICE OF DEFICIENCY, as required by law. The enclosed statement shows how we figured the deficiency.

The notice continued:

If you want to contest this determination in court before making any payment, you have 90 days from the date of this letter * * * to file a petition with the United States Tax court for a redetermination of the deficiency * * *.

The notice added:

If you decide not to file a petition with the Tax Court, please sign the enclosed waiver form and return it to us at the IRS address on the top of the first page of this letter. This will permit us to assess the deficiency quickly and can help limit the accumulation of interest.

If you decide not to sign and return the waiver, and you do not file a petition with the Tax Court within the time limit, the law requires us to assess and bill you for the deficiency after 90 days from the date of this letter * * *.

The section 6653(a)(1) and (2) penalties were discussed on a "Continuation Sheet" to the notice. The "Continuation Sheet" said:

It is determined that all or part of the underpayment of tax for the taxable year(s) is due to negligence or intentional disregard of rules and regulations. This penalty is five (5) percent of the full underpayment of tax (except that portion of the underpayment which is due to fraud) plus fifty (50) percent of the interest due on the part of the underpayment that is due to negligence. The penalty is figured on the earlier of the date of assessment or the date the tax was paid. If the return was not timely filed, the penalty is asserted on the full amount of the corrected tax instead of the underpayment of tax.

We now turn to Form 4549-A. The Form 4549-A contained the following chart showing the calculation of the $2,636 and penalties:

1. Adjustments to Income

a. Ordinary Loss 12, 500.00

2. Total Adjustments 12, 500.00

3. Taxable Income Per Return or as Previously Adjusted 9, 959.00

4. Corrected Taxable Income 22, 459.00

Tax Method TAX TABLE

Filing Status Single

5. Tax 4, 062.00

6. Additional Taxes/Alternative Minimum [blank]

7. Corrected Tax Liability 4, 062.00

8. Less Credits

a. Investment Credit 187.00

9. Balance (Line 7 less total of Lines 8a

...