Fine v. Comm'r of Internal Revenue

• Decision Date: 16 August 1978
• Docket Number: Docket No. 2493-76.
• Citation: 70 T.C. 684
• Parties: BETSY FINE, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

70 T.C. 684

BETSY FINE, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 2493-76.

United States Tax Court

Filed August 16, 1978.

In 1971, petitioner's husband, Maynard, was assessed with a 100-percent penalty for failure to collect and pay over certain employment taxes, and the assessment was not paid. Petitioner and Maynard filed joint income tax returns for 1969 and 1972. On Apr. 16, 1973, petitioner and Maynard filed an application for tentative refund from carryback of net operating loss, claiming an overpayment for 1969 as a result of an alleged net operating loss in 1972. The application was tentatively allowed and the resulting overpayment for 1969 was credited against Maynard's unpaid penalty assessment. Subsequently, on audit of the joint income tax return for 1972, respondent determined that petitioner and Maynard did not incur a net operating loss in that year. Respondent further determined a deficiency in petitioner's 1969 income tax in the amount of the credit applied against Maynard's employment tax penalty assessment. Held, in order to recover the credit resulting from the tentative allowance of the carryback adjustment applied against Maynard's employment tax penalty assessment, respondent was authorized to follow the deficiency procedures prescribed by sec. 6212, I.R.C. 1954. Arnold S. Schafer, for the petitioner.

Deborah S. Hack, for the respondent.

OPINION

FEATHERSTON, Judge:

Respondent determined a deficiency in the amount of $3,874.84 in petitioner's Federal income tax for 1969. The issue here involves the procedure to be followed by the Internal Revenue Service in recovering a credit tentatively allowed as a carryback adjustment in respect of petitioner's joint return for 1969, applied on an unpaid employment tax penalty liability of her husband, and later shown by an audit to have been erroneous. Specifically, the issue is whether the recovery must be effected by reversing the credit and reinstating the unpaid assessment or whether the deficiency procedures prescribed by section 6212¹ may be followed.

All the facts have been stipulated.

Petitioner Betsy Fine (hereinafter petitioner) was a legal resident of Culver City, Calif., when she filed her petition and amended petition. She and her husband, Maynard Fine (Maynard), filed joint Federal income tax returns for 1969 and 1972.

As the responsible officer of Wheatfield Motor Inn, Maynard failed to collect and pay over withholding taxes for the period June 1970 to March 1971, and on September 29, 1971, he was assessed a 100-percent penalty in the sum of $28,824.14. Maynard consented to the assessment but later contested it in a bankruptcy proceeding in the United States District Court for the Eastern District of Michigan, Southern Division. On January 28, 1976, an order dismissed the cause with prejudice. The assessment was Maynard's individual liability.

On their joint Federal income tax return for 1972, petitioner and Maynard reported a net operating loss. On April 16, 1973, they filed Form 1045, Application for Tentative Refund from Carryback of Net Operating Loss or Unused Investment Credit, claiming their alleged 1972 loss as a net operating loss carryback to 1969. Respondent granted the tentative carryback allowance in the amount of $3,874.84, the amount previously paid as tax on petitioner's and Maynard's joint income tax return for 1969. The full amount of the 1969 tax was paid from Maynard's income. Petitioner did not have any income in 1969.

On June 4, 1973, respondent, instead of issuing a cash refund, credited the $3,874.84 to the unpaid balance of the September 29, 1971, employment tax penalty assessment against Maynard. Subsequently, in the audit of the taxable year 1972 and the tentative carryback of the 1972 net operating loss, respondent determined that petitioner and Maynard did not incur a net operating loss in 1972. In order to recover the credit allowed against Maynard's employment tax penalty assessment, respondent determined that there is a deficiency of $3,874.84 in petitioner's joint income tax liability for 1969.

Petitioner does not challenge respondent's determination that she and Maynard did not incur a net operating loss in 1972. Nor does she challenge the Internal Revenue Service's right to credit any overpayment for 1969 against Maynard's individual liability for the employment tax penalty assessment.² She recognizes that she had no property interest in the overpayment for 1969 generated by the tentative application of the 1972 carryback.³ Petitioner maintains, however, that she did not receive any economic benefit from the overpayment tentatively allowed and applied on Maynard's individual liability. She argues, therefore, that respondent's appropriate remedy, upon completing the audit of the 1972 joint return, was to reverse the credit of the 1969 overpayment to Maynard's employment tax penalty liability and to restore that amount as a credit to discharge the joint liability of herself and Maynard for 1969, created by the tentatively allowed carryback, citing Commissioner v. Newport Industries, Inc., 121 F.2d 655 (7th Cir. 1941), revg. 40 B.T.A. 978 (1939).

We hold for respondent.

The Code provisions on the tentative allowance of net operating loss carryback adjustments and the manner in which any erroneous allowances are to be adjusted are specific and detailed. Section 6411(a) provides that a taxpayer who has incurred a net operating loss may file an application for a tentative carryback adjustment “of the tax for the prior taxable year affected by a net operating loss carryback provided in section 172(b).” Section 6411(b) contemplates that the Internal Revenue Service will make a “limited examination of the application” and determine “the amount of the decrease in the tax attributable to such carryback upon the basis of the application and the examination.” The section then provides:

Such decrease shall be applied against any unpaid amount of the tax decreased * * * and any remainder shall be credited against any unsatisfied amount of any tax for the taxable year immediately preceding the taxable year of the net operating loss * * *. Any remainder shall, within such 90-day period, be either credited against any tax or installment thereof then due from the taxpayer, or refunded to the taxpayer. (Emphasis added.)

Thus, respondent was following the specific directions in section 6411(b) in crediting against Maynard's unpaid employment tax penalty liability the “decrease” in the 1969 tax attributable to the tentative allowance of the 1972 net operating loss.

The Code is equally explicit in stating how the Internal Revenue Service should proceed if, on audit, it finds that the tentative allowance of the net operating loss carryback adjustment was erroneous. Three remedies are provided: (1) A suit for erroneous refund where a refund actually has been made, secs. 7405 and 6532(b); (2) assessment as a mathematical error of a deficiency for the year to which the net operating loss carryback was applied, sec. 6213(b) (3); or (3) assessment pursuant to a notice of deficiency issued under section 6212 of any deficiency for the year to which the net operating loss carryback was applied.⁴

None of these remedies is exclusive. In Polachek v. Commissioner, 22 T.C. 858, 863-865 (1954), this Court rejected the contention that the mathematical error procedure to recover amounts applied, credited, or refunded in exclusive. In Neri v. Commissioner, 54 T.C. 767, 770 (1970), the Court rejected a contention that the suit-for-erroneous-refund procedure is exclusive even where the refunds were made with respect to improper years and sustained a deficiency determined pursuant to section 6212.⁵ See also Krieger v. Commissioner, 64 T.C. 214, 216 (1975). Respondent was, therefore, free to pursue the third remedy, as he did in the instant case, determining a deficiency for 1969, the year to which the claimed net operating loss applied.

Clearly there is a deficiency for 1969. That is, the amount of the tax imposed by the Code for 1969 exceeds the amount shown as tax on petitioner's joint return for that year reduced by any “rebate” made. Sec. 6211(a). The fact that the 1969 overpayment or decrease in tax resulting from the carryback was credited rather than refunded is not controlling. The term “rebate” includes the credit of the decrease in the 1969 tax which was applied against Maynard's employment tax penalty liability. Sec. 6211(b)(2).⁶

Respondent is not authorized or directed by anything in the Code, as petitioner contends, to “reverse the offset of the husband's liability and reinstate the amount as it existed prior to the overpayment.” Indeed, a procedure of crediting and reversing credits tentatively allowed could create chaos in the administration of the tax laws. In some instances, the reversal of the tentative credit and the revival of the deficiency against which the credit was made would occur after the 6-year limitations period on collection of assessments has expired. Sec. 6502. Moreover, the mathematical error and the deficiency procedures, the second and third remedies discussed above, must be undertaken within the period in which deficiencies “for the taxable year of the net operating loss” may be assessed. There is no similar statutory limitations period for the corrective procedures advocated by petitioner.

In Commissioner v. Newport...