Hesselink v. Comm'r of Internal Revenue

• Decision Date: 30 July 1991
• Docket Number: Docket No. 31528-88.
• Citation: 97 T.C. No. 7,97 T.C. 94
• Parties: THOMAS LEE HESSELINK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

97 T.C. 94

97 T.C. No. 7

THOMAS LEE HESSELINK, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 31528-88.

United States Tax Court

Filed July 30, 1991.

After being investigated by respondent and after being indicted and pleading guilty to criminal charges for failing to file Federal income tax returns for 1980 through 1983, petitioner, in compliance with the sentence imposed by the Federal district court, filed delinquent tax returns. HELD, Under sec. 1.6661-2(d)(2), Income Tax Regs., in computing petitioner's liability for additions to tax under sec. 6661, I.R.C. 1954, amounts of tax shown on petitioner's delinquent tax returns are to be ignored. Thomas Lee Hesselink, pro se.

Donna C. Hansberry, for the respondent.

OPINION

SWIFT, JUDGE: ^*

Respondent determined additions to petitioner's Federal income taxes with respect to 1980 through 1983, as follows:

+-----------------------------------------------------------------------------------+
                ¦Additions to tax  ¦                 ¦                ¦                 ¦           ¦
                +------------------+-----------------+----------------+-----------------+-----------¦
                ¦Year              ¦Sec. 6653(a) 1  ¦Sec 6653(a)(1)  ¦Sec. 6653(a)(2)  ¦Sec. 6661  ¦
                +------------------+-----------------+----------------+-----------------+-----------¦
                ¦1980              ¦$804             ¦---             ¦---              ¦---        ¦
                +------------------+-----------------+----------------+-----------------+-----------¦
                ¦1981              ¦---              ¦$528            ¦**               ¦---        ¦
                +------------------+-----------------+----------------+-----------------+-----------¦
                ¦1982              ¦---              ¦783             ¦**               ¦$3,904     ¦
                +------------------+-----------------+----------------+-----------------+-----------¦
                ¦1983              ¦---              ¦582             ¦**               ¦2,909      ¦
                +-----------------------------------------------------------------------------------+
                

After concessions, the only issue for decision is petitioner's liability for the additions to tax under section 6661 with respect to 1982 and 1983.

The relevant facts were fully stipulated and are so found. Petitioner, a medical physician, resided in Hanover Park, Illinois, at the time he filed his petition in this case.

With respect to each of the years 1980, 1981, 1982, and 1983, petitioner did not file timely Federal income tax returns, petitioner did not have any Federal income taxes withheld from his income, and petitioner did not make any estimated tax payments. After a criminal investigation by respondent, on April 2, 1985, petitioner was indicted by a Federal grand jury for willfully failing to file Federal income tax returns for 1980 through 1983, in violation of section 7203. After trial, on July 26, 1985, petitioner pled guilty to each of the charges.

Pursuant to petitioner's guilty plea and conviction, on September 27, 1985, petitioner was sentenced by the United States District Court for the Northern District of Illinois to 1 year in prison, and petitioner was ordered to file Federal income tax returns for 1980 through 1983, and to perform 1,000 hours of community service.

In compliance with the order of the Federal district court that petitioner file tax returns, in September of 1985 petitioner filed Federal income tax returns for 1980 through 1983, showing taxes due and owing of $16,079, $10,579, $15,617, and $11,636, respectively.

Petitioner appealed his conviction for violation of section 7203, and on April 3, 1986, the United States Court of Appeals for the Seventh Circuit affirmed petitioner's conviction in an unpublished order.

On March 3, 1987, petitioner paid the taxes reported due on his late-filed 1982 and 1983 Federal income tax returns. On September 6, 1988, respondent, among other additions to tax, determined that petitioner was liable for additions to tax under section 6661 with respect to 1982 and 1983. ²

The amount of section 6661 additions to tax, assessed after October 21, 1986, is equal to 25 percent of the amount of any underpayments attributable to substantial understatements. Section 8002 of the Omnibus Budget Reconciliation Act of 1986, Pub. L. 99- 509, 100 Stat. 1874, 1951; see Pallottini v. Commissioner, 90 T.C. 498, 501-502 (1988).

In respondent's September 6, 1988, notices of deficiency to petitioner for 1982 and 1983, respondent did not, and respondent does not now, dispute the amount of Federal income tax liability shown on petitioner's 1982 and 1983 tax returns as they were filed late by petitioner in September of 1985.

Petitioner, generally, interprets the addition to tax for a substantial understatement under section 6661 ³ as applying only where taxpayers show substantial understatements on tax returns actually filed and regardless of when the taxpayers filed the tax returns. Petitioner therefore concludes that since his Federal income tax liabilities were correctly shown on his 1982 and 1983 tax returns filed in September of 1985, he is not subject to the section 6661 additions to tax.

b. COMMISSIONER V. ACKER

It is apt to make reference to Acker given the question here at issue. In Acker, the Court was concerned with the question whether, under the Internal Revenue Code of 1939, the failure of a taxpayer to file a declaration of estimated income tax not only subjected him to the addition to the tax prescribed for failure to file the declaration but also to the further addition to the tax prescribed for the filing of a “substantial underestimate” of his tax. The Court held invalid a regulation that, for the purpose of determining if a substantial underestimate existed, deemed a failure to file a declaration of estimated tax to be the equivalent of a filed declaration estimating zero tax. Commissioner v. Acker, 361 U.S. at 93-94. Justice Frankfurter (dissenting) did not doubt that, to find failure to file a declaration of estimated income to be a “substantial underestimate,” would be to attribute to Congress a most unlikely meaning for that phrase “simpliciter.” Nevertheless, he found persuasive evidence in the legislative history of the provision that Congress did not mean the language in controversy, “however plain it may be to the ordinary user of English,” to have the ordinary meaning. Both the Senate Report and the House Report, he concluded, added a gloss to the phrase “substantial underestimate,” which legitimated the position taken in the regulations. Id. at 94- 95.

c. LEGISLATIVE HISTORY

No similar gloss can be found in the legislative history of section 6661. In Acker, Justice Frankfurter pointed out that “the most authoritative form of contemporaneous explanation by Congress of a gloss that it would add to the plain language of legislation is a Congressional report defining the scope and meaning of that legislation.” “The most authoritative report,” he stated, “is a Conference Report acted upon by both Houses and therefore unequivocally representing the will of both Houses as the joint legislative body.” Id. at 94. Section 323(a) of Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324, 613 (enacting section 6661) originated as a Senate amendment to a House revenue bill (H.R. 4961). See S. Rept. 97-494, at 272-273 (1982). The conference agreement generally follows that amendment, with changes not here relevant. See H. Rept. 97-760 (Conf.) (1982), 1982-2 C.B. 649-651. The report of the Committee on Finance states the reasons for the amendment as follows:

Reasons for Change

The committee believes that an increasing part of the compliance gap is attributable to the “audit lottery.” The audit lottery is played by taxpayers who take questionable (although non-negligent) positions not amounting to fraud or negligence on their returns in the hopes that they will not be audited. If a taxpayer is audited and the questionable position is challenged, then he or she pays the additional tax owing plus interest. Importantly, however, taxpayers are not exposed to any downside risk in taking highly questionable positions on their tax returns since even resolution of the issue against the taxpayer will require only payment of the tax that should have been paid in the first instance with interest to reflect the cost of the “borrowing.” Taxpayers rely on opinions of tax advisors to avoid the possibility of fraud or negligence penalties in taking these highly questionable positions, even though the advisor's opinion may clearly indicate that if the issue is challenged by the Internal Revenue Service, the taxpayer will probably lose the contest. Thus, in the event that the questionable position is not detected, the taxpayer will have achieved an absolute reduction in tax without cost or risk. The committee believes, therefore, that taxpayers should be subject to a penalty designed to deter the use of undisclosed questionable reporting positions. On the other hand, the committee recognizes that taxpayers and the Government may reasonably differ over the sometimes complex Federal tax laws, and that a penalty is not appropriate for in [sic] many cases in which there is a large underpayment. Finally, the committee believes that taxpayers investing in substantial tax shelters should be held to a higher standard of reporting or risk a significant penalty. [S. Rept. 97-494 at 272-273.]

In relevant part, operation of the amendment is explained as follows:

Explanation of Provision

In general, under the committee bill, when there is a substantial understatement in income tax for any taxable year attributable to an aggressive filing position not disclosed by the taxpayer in the return, * * * an addition to tax equal to * * * [25] percent of such understatement will be imposed.

For this purpose, an understatement is the excess of the amount of income tax imposed on the taxpayer for the taxable year, over the amount of tax shown on the return. * * * [S. Rept. 97-494 at...