SCOTUS Reports

Tag: Feller v. Commissioner

  • Snow v. Commissioner, 141 T.C. No. 6 (2013): Calculation of Underpayment for Accuracy-Related Penalty

    Snow v. Commissioner, 141 T. C. No. 6 (U. S. Tax Ct. 2013)

    In Snow v. Commissioner, the U. S. Tax Court upheld the IRS’s computation of an underpayment for the purpose of imposing a 20% accuracy-related penalty under I. R. C. § 6662(a). The court clarified how to calculate an underpayment when a taxpayer overstates tax withholdings, affirming that such overstatements increase the underpayment. This ruling follows the precedent set in Feller v. Commissioner and emphasizes the importance of accurately reporting tax withholdings on returns, impacting how tax liabilities and penalties are assessed.

    Parties

    Glenn Lee Snow, the petitioner, represented himself pro se. The respondent was the Commissioner of Internal Revenue, represented by Martha J. Weber.

    Facts

    Glenn Lee Snow filed his 2007 federal income tax return, claiming a refund of $16,684. 65 based on reported federal income tax withholdings of the same amount. However, Snow incorrectly included $5,562. 13 of Social Security and Medicare tax withholdings as federal income tax withholdings on his return. The IRS determined that only $11,117. 65 had been withheld as federal income tax, resulting in Snow receiving an erroneous refund of $5,567. Snow’s actual tax liability for the year was $12,968, leading the IRS to calculate an underpayment of $18,535, which included the tax liability plus the erroneous refund, and assessed a 20% accuracy-related penalty of $3,707 under I. R. C. § 6662(a).

    Procedural History

    Snow filed his 2007 tax return and received a refund of $16,684. 65. The IRS issued a notice of deficiency, asserting that Snow owed additional taxes due to the overstatement of withholdings and was liable for an accuracy-related penalty. Snow petitioned the U. S. Tax Court to challenge the computation of his underpayment for the penalty. The court had previously found Snow liable for the tax and penalties in a Memorandum Opinion (T. C. Memo. 2013-114). In this case, the Tax Court was tasked with reviewing the IRS’s computation of the underpayment for the accuracy-related penalty under Rule 155. Snow did not dispute his tax liability or the section 6673(a) penalty but objected to the computation of the section 6662(a) penalty.

    Issue(s)

    Whether the IRS correctly calculated the underpayment for purposes of imposing the accuracy-related penalty under I. R. C. § 6662(a) when the taxpayer overstated federal income tax withholdings on his return?

    Rule(s) of Law

    Under I. R. C. § 6662(a), a 20% accuracy-related penalty is imposed on any portion of an underpayment attributable to negligence or substantial understatement of income tax. The term “underpayment” is defined in I. R. C. § 6664(a) and further clarified by Treasury Regulation § 1. 6664-2. Specifically, Treasury Regulation § 1. 6664-2(c)(1) reduces the amount shown as tax on the return by the excess of the amount shown as withheld over the amounts actually withheld. The court in Feller v. Commissioner, 135 T. C. 497 (2010), upheld the validity of this regulation.

    Holding

    The U. S. Tax Court held that the IRS correctly calculated Snow’s underpayment for purposes of the accuracy-related penalty under I. R. C. § 6662(a). The underpayment was determined to be $18,535, which included Snow’s tax liability of $12,968 plus the $5,567 overstatement of withholdings. Consequently, the accuracy-related penalty of $3,707 (20% of $18,535) was upheld.

    Reasoning

    The court’s reasoning focused on the application of Treasury Regulation § 1. 6664-2, which provides a formula for calculating an underpayment. The court emphasized that the amount shown as tax on Snow’s return was reduced by the excess of the amount he claimed as withheld over the amounts actually withheld, resulting in a negative figure of $5,567. This negative amount was then added to the tax imposed to determine the underpayment. The court’s decision followed the precedent set in Feller v. Commissioner, which upheld the validity of the regulation. The court reasoned that Snow’s overstatement of withholdings increased the underpayment, and thus the accuracy-related penalty was correctly computed. The court also clarified the meaning of “rebates” and “amounts collected without assessment” under the regulation, finding that Snow had no such amounts that would reduce the underpayment. The court’s interpretation ensured that the penalty was based on the actual amount of revenue the government was deprived of due to Snow’s return.

    Disposition

    The court affirmed the IRS’s computation of the underpayment for the accuracy-related penalty and entered a decision for the respondent.

    Significance/Impact

    Snow v. Commissioner reinforces the importance of accurately reporting tax withholdings on returns, as overstatements can significantly impact the calculation of underpayments and subsequent penalties. The decision follows and expands upon the precedent set in Feller v. Commissioner, providing further guidance on the application of Treasury Regulation § 1. 6664-2. This ruling affects tax practitioners and taxpayers by clarifying how the IRS computes underpayments for penalty purposes, particularly when errors in withholding amounts are involved. The case underscores the need for meticulous attention to detail in tax reporting to avoid increased liabilities and penalties.

  • Feller v. Commissioner, 135 T.C. 497 (2010): Validity of Regulations Under IRC Section 6664 for Fraud Penalties

    Feller v. Commissioner, 135 T. C. 497 (2010) (U. S. Tax Court, 2010)

    The U. S. Tax Court upheld the IRS’s imposition of civil fraud penalties on Rick D. Feller for overstated withholding tax credits, affirming the validity of Treasury regulations defining ‘underpayment’ to include such overstatements. Feller, a CPA, had fraudulently claimed refunds by inflating his withholding credits over six years, a practice he admitted to in a criminal plea. The court’s ruling clarifies that overstated withholding credits can be considered in calculating fraud penalties, impacting how tax fraud is assessed and penalized.

    Parties

    Rick D. Feller, the petitioner, challenged the IRS’s determination of civil fraud penalties. The Commissioner of Internal Revenue, the respondent, defended the imposition of the penalties. Feller’s case progressed from a criminal conviction to a civil tax dispute, with Feller as the appellant in the U. S. Tax Court.

    Facts

    Rick D. Feller, a certified public accountant, was a partner in an accounting firm and president of SFT Health Care Corp. , which owned two nursing homes. From 1992 to 1997, Feller filed false tax returns claiming fictitious wages and withholding tax credits, resulting in overstated refunds totaling $320,078. After an IRS audit and criminal investigation, Feller pleaded guilty to willfully submitting a false tax return for 1997. The IRS issued notices of deficiency for 1992-1997, asserting fraud penalties under IRC section 6663 due to Feller’s overstated withholding credits.

    Procedural History

    The IRS issued notices of deficiency on November 22, 2006, determining fraud penalties for 1992-1997 based on Feller’s overstated withholding credits. On November 27, 2006, the IRS assessed adjustments related to these overstatements using mathematical error assessment procedures. Feller sought redetermination in the U. S. Tax Court, arguing the statute of limitations barred the deficiency notices and that the regulations defining ‘underpayment’ were invalid. The Tax Court, applying the Chevron deference standard, upheld the regulations and affirmed the fraud penalties.

    Issue(s)

    Whether the issuance of the notices of deficiency for 1992-1997 was barred by the statute of limitations under IRC section 6501? Whether Feller’s overstated withholding credits for 1992-1997 resulted in underpayments of income tax attributable to fraud pursuant to IRC sections 6663 and 6664? Whether Treasury Regulation section 1. 6664-2(c)(1) and section 1. 6664-2(g), Example (3), Income Tax Regs. , validly include overstated withholding credits in the calculation of underpayments for fraud penalties?

    Rule(s) of Law

    IRC section 6663 imposes a 75% penalty on any portion of an underpayment attributable to fraud. IRC section 6664 defines an ‘underpayment’ as the amount by which the tax imposed exceeds the sum of the tax shown on the return and amounts previously assessed or collected, minus rebates made. Treasury Regulation section 1. 6664-2(c)(1) specifies that the tax shown on the return is reduced by excess withholding credits claimed over actual withholdings for the purpose of calculating an underpayment.

    Holding

    The Tax Court held that Feller filed false returns with intent to evade tax within the meaning of IRC section 6501(c), thus the issuance of the deficiency notices was not time-barred. Furthermore, the court upheld the validity of Treasury Regulation section 1. 6664-2(c)(1) and section 1. 6664-2(g), Example (3), confirming that overstated withholding credits are included in calculating underpayments for fraud penalties. Consequently, Feller was subject to the fraud penalty for each year at issue.

    Reasoning

    The court applied the two-step Chevron analysis to determine the validity of the regulation. Under Chevron step 1, the court found that IRC section 6664 is ambiguous regarding the definition of ‘underpayment’ as it does not explicitly address withholding credits. Under Chevron step 2, the court concluded that the regulation’s inclusion of overstated withholding credits in the calculation of underpayment is a permissible construction of the statute. The court reasoned that the regulation aligns with the legislative intent to distinguish between ‘deficiency’ and ‘underpayment,’ and that Congress’s subsequent amendments to section 6664 did not alter the regulation’s interpretation. The court also emphasized Feller’s clear intent to evade tax, supporting the imposition of the fraud penalties.

    Disposition

    The Tax Court affirmed the IRS’s imposition of fraud penalties on Feller for the years 1992-1997, upholding the validity of the relevant Treasury regulations.

    Significance/Impact

    The decision in Feller v. Commissioner clarifies the scope of IRC section 6664 and the regulations under it, affirming that overstated withholding credits can be included in calculating fraud penalties. This ruling impacts how the IRS assesses fraud penalties, reinforcing the agency’s ability to penalize taxpayers who manipulate withholding credits to evade taxes. The case also sets a precedent for applying Chevron deference in tax law, affirming the IRS’s regulatory authority in defining ambiguous statutory terms.