Medeiros v. Comm'r of Internal Revenue

Citation77 T.C. 1255
Decision Date14 December 1981
Docket NumberDocket No. 4145-79.
PartiesALVIN E. MEDEIROS, JR., and CLARA T. MEDEIROS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Held, the 100-percent penalty tax imposed by sec. 6672(a), I.R.C. 1954, assessed against petitioner and paid by him, is not deductible under either sec. 162(a) or sec. 165(c)(1). Sec. 162(f). Held, further, the Tax Court does not have jurisdiction to determine petitioner's liability for the penalty tax imposed by sec. 6672(a). Larry L. Myers, for the petitioner.

Lawrence G. Becker, for the respondent.

DRENNEN , Judge:

Respondent determined deficiencies in petitioners' income taxes and additions to tax for the following years and in the following amounts:

+-------------------+
                ¦¦¦Addition to tax  ¦
                +++-----------------¦
                ¦¦¦        ¦        ¦
                +-------------------+
                
Year Deficiency Sec. 6651(a) Sec. 6653(a)  
                1972   $21,498.36   $5,374.59      $1,580.92
                1973   13,599.90    3,399.98       1,398.55
                1974   13,698.33    3,424.58       1,320.51
                

Petitioners having conceded all other adjustments made in the notice of deficiency, including the additions to tax, the only issue for decision is whether petitioner is entitled to a deduction for the year 1972 in the amount of $11,290.65 for the 100-percent penalty tax imposed by section 6672, I.R.C. 1954 (hereinafter referred to as penalty). The amount of $11,290.65 assessed against and paid by petitioners in 1972, and claimed by them as a deduction on their return, consisted of $9,673.69 of penalty and $1,616.96 of interest thereon. Respondent has allowed petitioners a deduction for the interest in the notice of deficiency.

FINDINGS OF FACT

The stipulated facts are incorporated herein by reference.

Petitioners are husband and wife and, at the time their petition was filed herein, resided in Honolulu, Hawaii. They filed joint Federal income tax returns for the years 1972, 1973, and 1974 with the Director, Internal Revenue Service, Fresno, Calif.

In April 1968 and continuing to the date of trial, Alvin Medeiros (hereinafter petitioner) was president of Honolulu Transport & Warehouse Corp., a Hawaiian corporation, engaged in warehousing and trucking since 1957.

Red Line Transfer Co. (hereinafter Red Line) was a Hawaiian corporation engaged in the trucking business for many years. In April 1968, Don Medeiros (unrelated to petitioners) was president and general manager of Red Line and ran the day-to-day operations of the business.

In early 1968, petitioner entered into a conditional oral purchase agreement with Don Medeiros and others to acquire their stock in/or assets of Red Line. The sale was conditioned on (1) Don Medeiros' obtaining approval of the State of Hawaii Public Utilities Commission (PUC) for the transfer of ownership and operation of Red Line to petitioner or his alternative; (2) petitioner's paying $10,000 to Red Line immediately for payment of outstanding bills of Red Line; and (3) petitioner's purchasing the stock of Red Line from its shareholders for $1 per share.

In April 1968, petitioner transferred $10,000 into a new checking account at Liberty Bank in Honolulu established in the name of Red Line, out of which was to be paid certain outstanding gasoline and repair bills, and lease rental to Victoria Ward, for Red Line. Petitioner signed checks on the Liberty Bank account from time to time at the request of Don Medeiros to pay bills or make partial payments on bills of Red Line. Petitioner did not know the financial condition of Red Line, and Don Medieros did not discuss it with petitioner. Petitioner did not pay any of Red Line's bills directly to the creditors.

Don Medeiros collected the moneys received from Red Line's customers and deposited a portion of those moneys in the Liberty Bank account and the remainder in a separate existing account of Red Line's in the Hawaii National Bank. Petitioner did not have access to this account and did not know how much was in the account. Don Medeiros paid Red Line's payroll with checks on this account. No payroll checks were drawn on the Liberty Bank account although occasionally checks were drawn on the Liberty Bank account and deposited in the Hawaii National Bank account.

Petitioner was never an officer or director of Red Line and had nothing to do with the operations, the bookkeeping, or the financial affairs of Red Line. He had no knowledge that Red Line was not paying to the Government employee and withholding taxes until Red Line discontinued business. Shortly before Red Line discontinued business, however, petitioner was directed by Don Medeiros to make out a check to the Internal Revenue Service for $500 for withholding taxes for prior periods.

In September 1968, Don Medeiros told petitioner that the PUC would not approve the transfer of Red Line's business and license to petitioner. Shortly thereafter, because Red Line failed to pay arrearages in union dues, its union employees walked off their jobs. The corporation then ceased all further operations. Don Medeiros then alone withdrew the remaining funds out of the Liberty Bank account. Petitioner did not buy any of the stock of Red Line.

From April 1968 through September 30, 1968, and at times prior thereto, Red Line failed to withhold and pay over to the Government a substantial portion of the employment tax and income tax withholdings required by law.

On April 25, 1969, the Internal Revenue Service made an assessment against petitioner Alvin Medeiros of the penalty imposed by section 6672 of the Internal Revenue Code of 1954 (often referred to as the 100% penalty tax) due to his relation with Red Line.1 The assessment was in the amount of $9,673.69 for the period June 30, 1968, to September 30, 1968. Petitioner “rejected” the assessment. On March 10, 1972, a notice that their personal residence had been seized by the IRS for nonpayment of the April 25, 1969, assessment was mailed to petitioners. On March 25, 1972, revenue agents posted numerous notices of seizure on petitioners' residence, indicating that the house was to be sold in 3 days if the assessment was not paid in full within that time.

On March 28, 1972, petitioner made a payment to the IRS of $11,290.65. This payment represented the payment of the assessed penalty, $9,673.69, plus interest accruing from the date of assessment to the date of payment, totaling $1,616.96.

Petitioners made no effort to resist the collection of the assessment nor did they file a claim for refund of the amount paid.

Petitioners deducted the $11,290.65 on Schedule C of their 1972 income tax return as “taxes on business and business property-Fed. tax lien.” In the notice of deficiency, respondent allowed an additional deduction for “interest on Federal Tax Lien” in the amount of $1,616.96 and disallowed the deduction of $11,290.65 for Federal tax lien.2

OPINION

Petitioners argue that they were never formally adjudged liable for the penalty provided by section 6672(a)3 of the Code and are not liable therefor, and that they are entitled to a deduction for the amount paid as a loss under section 165(a) as a loss incurred in petitioner's trade or business, section 165(c)(1). Respondent argues that this Court has no jurisdiction to determine petitioner's liability for the penalty assessed and that the amount paid is not deductible under any section of the Code and is specifically nondeductible by virtue of section 162(f) which provides that “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.” Since we agree with both of respondent's arguments, we must reluctantly hold for respondent.4

The Tax Court is a court of limited jurisdiction, having only such jurisdiction as is provided in section 7442 of the Code. This includes Federal income, estate, and gift taxes which are subject to the deficiency notice requirements of sections 6212(a) and 6213(a). The deficiency notice requirements set forth in those two sections are limited to the taxes imposed by subtitle A (income taxes) and subtitle B (estate and gift taxes), and chapters 41 through 45 (certain excise taxes). Wilt v. Commissioner, 60 T.C. 977 (1973). Rule 13, Rules of Practice and Procedure, United States Tax Court, provides—-

Except in actions for declaratory judgment or for disclosure * * * the jurisdiction of the Court depends (1) in a case commenced in the Court by a taxpayer, upon the issuance by the Commissioner of a notice of deficiency in income, gift or estate tax or in the taxes under Chapter 41, 42, 43, or 44 of the Code (relating to excise taxes on certain organizations and persons dealing with them) or in the tax under Chapter 45 (relating to the windfall profits tax) or in any other taxes which are the subject of the issuance of a notice of deficiency by the Commissioner; and (2) in a case commenced in the Court by a transferee or fiduciary, upon the issuance by the Commissioner of a notice of liability to the transferee or fiduciary. See Code Sections 6212, 6213, and 6901.

Section 6212 of the Code provides:

If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitle A or B or chapter 41, 42, 43, 44, or 45, he is authorized to send notice of deficiency to the taxpayer * * *

Section 6213 provides that within 90 (or 150) days after the notice of deficiency authorized in section 6212 is mailed, the taxpayer may file a petition in the Tax Court for a redetermination of the deficiency. No assessment of a deficiency in respect of the taxes mentioned in section 6212 may be made until such notice has been mailed to the taxpayer, nor until the expiration of such 90-(or 150-) day period, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court becomes final.

The issuance of a notice of deficiency or notice of liability by the Commissioner is a condition precedent to Tax Court jurisdiction, except in certain...

To continue reading

Request your trial
57 cases
  • Kluger v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • September 11, 1984
    ...of limited authority and may exercise jurisdiction only to the extent expressly provided by Congress. Section 7442; Medeiros v. Commissioner, 77 T.C. 1255, 1259 (1981); Wilt v. Commissioner, 60 T.C. 977, 978 (1973). We nevertheless have jurisdiction to determine whether we have jurisdiction......
  • Nacchio v. United States
    • United States
    • U.S. Court of Appeals — Federal Circuit
    • June 10, 2016
    ...(holding that “it is easy to sustain a public policy rationale for denying a loss deduction” sought under § 165 ); Medeiros v. Comm'r , 77 T.C. 1255, 1261 n.7 (1981) (“we cannot ascribe to Congress the intent, in enacting section 162(f), to disallow the deduction of this penalty under secti......
  • Stephens v. C.I.R.
    • United States
    • U.S. Court of Appeals — Second Circuit
    • June 11, 1990
    ...is some question whether the public policy doctrine retains any vitality since the enactment of sec. 162(f)." Medeiros v. Commissioner, 77 T.C. 1255, 1262 n. 8 (1981). The court observed that "[i]f sec. 162(f) was intended to supplant the public policy doctrine, in all likelihood it would d......
  • Pesch v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • January 25, 1982
    ...tax) which is [78 T.C. 120] not subject to the deficiency procedures prescribed by sections 6211 through 6215. Medeiros v. Commissioner, 77 T.C. 1255 (1981); Wilt v. Commissioner, 60 T.C. 977 (1973). Young is also inapposite because it involves a refund of a payment made to satisfy an outst......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT