TAX COURT OPINION

Case: Rick D. Feller
Docket Number: 4325-07
Judge: Haines
Opinion Type: reported
Filed: 11/08/2010
Pages: 78

135 T.C. No. 25 UNITED STATES TAX COURT RICK D. FELLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 4325-07. Filed November 8, 2010. P overstated his prepayment credits on his Federal. I.R.C. sec. 6663 because his overstated On Nov. 22, 2006, R issued two notices of income tax returns in order to claim refunds for 1992 through 1997. deficiency determining that P was subject penalty of prepayment credits resulted in underpayments of pursuant (g), Example (3), assessed, by use of procedures of P's overstatement of prepayment credits for 1992 through 1997. to I.R.C. sec. 6664 and sec. 1.6664-2(c) (1) and the mathematical error assessment to the fraud Income Tax Regs. On Nov. 27, 2006, R I.R.C. sec. 6213 (b) (1), adjustments related to income tax P argues that (1) I.R.C. sec. 6501 bars the issuance of the notices of deficiency and (2) sec. 1.6664-2(c) (1) ·and (g), Example (i), prepayment credits result in underpayments of invalid because it violates the intent of Congress in enacting I.R.C. sec. 6664 and that he is not subject fraud penalty. Income Tax Regs., under which overstated income tax, to the is SERVED NGV -8 20ig - 2 - We apply the test set forth in Chevron U.S.A. Inc. v. Natural Res. Def. Council, determine the validity of step 1, we find that I.R.C. sec. 6664 is ambiguous regarding the definition of step 2, we find that permissible construction of the regulation is bas'ed on a I.R.C. sec. 6664. Inc., 467 U.S. 837 (1984), to the regulation. Under Chevron "underpayment". Under Chevron Held: P filed false returns with the intent to evade tax within the meaning of issuance of the deficiency notices was not time barred. I.R.C. sec. 6501(c); therefore the Held, Income Tax Regs., (3), is valid. further, secl. 1.6664-2(c) (1) and (g), Example Held, further, P is subject to the fraud penalty pursuant to I.R.C. sec. 6663 for each year at issue. Terry W. Vincent, for petitioner. Cathy J. Horner and Dennis G. Driscoll, for respondent. HAINES, Judge: Rick D. Feller petitioned the Court for redetermination of the following penalties: Year 1992 1993 1994 1995 1996 1997 Penalty Sec. 6663 $78,481 56,689 43,566 58,660 59,963 58,552 ' · , Hereafter, the years 1992, 1993, 1994, 1995, 1996 and 1997 will be referred to as the years at issue. After concessions, the issues for decision are: (1) Whether the issuance of the notice of deficiency for each of the years at issue is barred by the - 3 - expiration of the -limitations period for assessment under section 6501; and (2) whether petitioner's overstated prepayment credits for the years at issue resulted in underpayments of income tax attributable to fraud pursuant to sections 6663 and 6664.1 In so deciding, we must determine the validity of section 1.6664- 2(c) (1) and (g), Example (3), Income Tax Regs. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the attached-exhibits, is incorporated herein by this reference. At the time petitioner filed his petition, he resided in Ohio. Petitioner's Business Petitioner earned a bachelor of science degree in accounting I from the University of Akron in 1976 and received a certified public accountant certificate from the State of Ohio in 1980. In 1984 petitioner became a partner in the small accounting firm of Skonk, Feller, Tuber & Brown.2 In 1992 petitioner and two additional partners of the firm became 100-percent owners of stock in SFT Health Care.Corp. IUnless otherwise indicated, all section references are to the Internal Revenue Code (Code), as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. Amounts are rounded to the nearest dollar. 2The firm went through several name changes. It was originally called Tuber & Shonberg, Tuber, and finally Skonk, Feller, Tuber & Brown. Inc., then Skonk, Feller & t - 4 - (SFT). SFT owned two nursing homes, Red Carpet Health Care Center and Southeastern Health Care Center. Petitioner served as president of the nursing homes throughout the years at issue. In his capacity as president, petitioner visited the nursing homes once or twice a week and oversaw their operations. He also was responsible for the financial reporting and preparation of tax returns associated with the nursing homes and SFT. Red Carpet Health Care Center Forms W-2 For the years at issue petitioner attached to his Federal income tax returns Forms W-2, Wage and Tax Statement, reporting actual wages from Red Carpet Health Care Center of $17,781, $17,602, $19,202, $33,571, $19,016, and $23,580 with Federal withholdings of $366, $300, $464, $1,025, $350, and zero, respectively. Petitioner also attached to his Federal income tax returns for the years at issue fictitious Forms W-2 purportedly issued by Red Carpet Health Care Center and reporting fictitious wages of $120,000, $100,000, $75,000, ·$75,000, $75,000, and $72,500 and fictitious Fedefal withholdings of $65,000, $52,000, $39,000, $40,500, $40,750, ánd $41,750, respectively. Southeastern/Barnesville Health Care Center Forms W-2 For 1992 petitioner attached to his Federal income tax return a Form W-2 issued by Southeastern Health Care Center reporting actual wages of $23,739 and Federal withholding of $1,334. Petitioner also attached to his Federal income tax - 5 - return a second, fictitious Form W-2 purportedly issued by Southeastern Health Care Center reporting fictitious wages of $120,000 and fictitious withholding of $70,000. For 1993, 1994, 1995, 1996, and 1997 petitioner attached to his Federal income tax returns Forms W-2 issued by Barnesville Health Care CenterS reporting actual wages of $25,536, $28,161, $47,960, $80,119, and $80,119 with Federal withholdings reported of $1,253, $650, $990, $2,210, and $2,210, respectively. Petitioner also attached to his Federal income tax return fictitious Forms W-2 purportedly issued by Barnesville Health Care Center reporting fictitious wages of $100,000, $75,000, $80,000, $80,000, and $75,000 with fictitious Federal withholdings reported -of $52,000, $39,000, $43,500, $44,500, and $42,500, respectively. Other Falsifications For each of the years at issue petitioner included with his Federal income tax return a Schedule E, Supplemental Income and Loss, on which he reported a false amount of partnership losses generated by his accounting firm. Petitioner also included a Schedule A, Itemized Deductions, in which he reported an inflated itemized deduction for State and local income taxes paid that was based on the fictitious Forms W-2 he prepared. 3Southeastern Health Care Center changed its name to Barnesville Health Care Center in 1993. Refund Claims - 6 - For 1992, 1993, 1994, 1995, 1996, and 1997 petitioner claimed refunds of $86,181, $57,349, $34,686, $48,776, $48,703, and $44,383, respectively. Criminal Case After a civil audit and a criminal investigation, criminal proceedings were initiated against petitioner in the U.S. District Court for the NorthŠrn District of Ohio. On January 23, 2003, petitioner pleaded guiglty to willfully making and submitting a false tax return for 1997 in violation of section 7206(1). In his plea agreement, petitioner admitted that he filed deliberately falsified personal tax returns for each of the years at issue. He also admitted that for each of the years at issue he claimed a false income tax refund when he knew he actually owed income taxes and that he attached to his return a fictitious Form W-2 for each nursing home. On November 22, 2006, respondent mailed petitioner two notices of deficiency, one for 1992-95 and the other for 1996-97. The Form 4549-B, Income Tax2Examination Changes, attached to each notice, among other things educed income by the amount of fictitious wages, increased income for fictitious losses claimed from the partnership, and reduced itemized deductions by the amount of State taxes claimëd on the fictitious Forms W-2. For each year the corrected tax liability was less than the tax shown - 7 - on the return petitioner filed if claimed prepayment tax credits were ignored. However, section 1.6664-2(c) (1) and (g), Example (.3), ,Income Tax Regs., requires excess withholding tax credits to be included in determining an underpayment under section 6663. Accordingly, the notices of deficiency determined fraud penalties under section 6663 based upon underpayments of income tax pursuant to section 6664 of $104,642, $75,584, $58,087, $78,214, $80,993, and $78,073 for 1992, 1993, 1994, 1995, 1996, and 1997, respectively. On November 27, 2006, respondent assessed adjustments related to petitioner's overstatement of withholding tax credits for each of the years at issue through the mathematical error assessment procedures of section 6213(b) (1) and section 301.6201-1(a) (3), Proced. & Admin. Regs. On February 22, 2007, petitioner sought redeterminations, asserting that (1) pursuant to section 6501, the statute of limitations applied to bar assessment for each of the years at issue, and (2) section 1.6664-2(c) (1) and (g), Example (.3), Income Tax Regs., -including petitioner's overstated withholding tax credits in the calculation of his underpayments is invalid. I. Period of Limitations on Assessment OPINION Petitioner argues that the issuance of the notices of deficiency was barred by section 6501(a). Section 6501(a) - 8 - provides the general rule that the amount of any tax imposed must be assessed within 3 years after the return is filed. An exception to the 3-year rule is provided in section 6501(c) (1): (1) False Return.- In the rcase of a false or fraudulent return with the intent to evade tax, assessed, or a proceeding in.court for collection of such tax may be begun without assessment, at any time. the tax may be Respondent argues that the period of limitations in section 6501(a) does not apply because petitioner filed false returns with the intent to evade taxes for the years at issue. See sec. 6501(c) (1). The burden of proof is upon respondent to prove that petitioner has filed a false return with the intent to evade tax for each year at issue. See sec. 7454(a); Rule 142(b). Because direct evidence of an intent to evade tax is rarely available, intent may be proved by circumstantial evidence and reasonable inferences from the facts. Petzoldt v. Commissioner, 92 T.C. 661, 699 (1989). Petitioner pleaded guilty to willfully making and submitting a false tax return for 1997 in violation of section 7206(1) and admitted, in his plea agreement, that to obtain refunds he falsified personal.tax returns for each of the years at issue by attaching to his returns fictitious Forms W-2 which overstated income tax withheld. Throu hout the 6 years at issue, petitioner was licensed as a certified public accountant practicing in an accounting firm that prepared income tax returns - 9 - for clients. He held himself out to the public as sophisticated and knowledgeable in the preparation of tax returns. He prepared his own returns and those needed for businesses in which he had invested. Critically, petitioner falsified his own returns and Forms W-2 for the businesses in the same manner for 6 consecutive years and stopped only when confronted by the authorities. On each of his returns, among other things, he overstated and falsified (1) partnership losses, (2) itemized deductions for State taxes withheld, and (3) Federal withholding credits. Through his conduct he obtained $320,078 in Federal refunds to which he was not entitled over the 6-year period. Petitioner testified that he intended to pay back the refunds he received as soon as he overcame troubles in his personal life, but there is no evidence that petitioner at any; time made an effort to repay even after his conduct was discovered. Petitioner's explanation for his behavior is implausible. We find that respondent has shown by clear and convincing evidence that petitioner filed his returns for the years at issue with the intent to evade tax. See Brister v. United.States, 35 Fed. Cl. 214 (1996) (involving an accountant and bookkeeper who overstated withholding credits to obtain refunds). Therefore, the 3-year period of limitations under section 6501(a) does not - 10 - apply for any of the years at issue, and respondent was not barred from issuing the notices of deficiency for those years. II. Sections 6663 and 6664 Section 1.6664-2(c), Regs. Income Tax Respondent has established that petitioner intended to evade tax and thus engaged in fraudulent conduct. However, before there can be an imposition of a fraud penalty, respondent must also prove that the fraud resulted in underpayments of tax required to be shown on the returns. Section 6663(a) sets out the fraud penalty: SEC. 6663 (a). Imposition of Penalty.--If any part of any underpayment of due to fraud, equal is attributable to fraud. to 75 percent of othe portion of the underpayment which tax required to be shown on a return is there shall be added to the tax an amount The term "underpayment" is defined in section 6664(a) as follows: SEC. 6664(a). Underpayment.--For purposes of this part, the term "underpayment" means the amount by which any tax imposed by this title exceeds the excess of-- (1) the sum of-- (A) the amount shown as the tax by the taxpayer on his return, plus (B) amounts not so shown previously assessed (or collected without assessment), over (2) the amount of rebates made. For purposes of paragraph (2), much of an abatement, credit, was made on the grounde that tax imposed was less than the excess of rebates previously made. the amount sbecified in paragraph (1) over the the term "rebate" means so refund, or other repayment, as Neither paragraph (1) (B) not (2) applies in this case. - 11 - Section 1.6664-2(c) (1), Income Tax Regs., interprets the definition of "underpayment" in section 6664 by stating that -the tax shown on the return -is reduced by the excess of: (i) The amounts shown by the taxpayer on his return as credits for tax withheld under section 31 (relating to tax withheld on wages) * over * * (ii) The amounts actually withheld, * * * with respect for suoh taxable year. to a taxable year before the return is filed The regulation extends the meaning of "underpayment" to include a taxpayer's overstated credits for withholding. Sec. 1.6664-2(g), Example (3), Income Tax Regs. Accordingly, if a taxpayer overstates prepayment credits, such as the credit for wages withheld, the overstatement decreases the amount of tàx shown on the return and increases the underpayment of tax. Sadler v. Commissioner, 113 T.C. 99, 103 (1999). Petitioner contends that section 1.6664-2(c) (1) and '(g), Example (3), Income Tax Regs., is invalid because the statute which it interprets, section 6664, does not refer to credits for tax withheld, and it was not Congress' intent to include withholding credits in the calculation of an underpayment. Petitioner notes that repealed section 6653, Êhich previously had imposed the fraud penalty, defined an underpayment with reference to a deficiency as defined in section 6211. Section 6211(b) (1) excludes credits for taxes withheld'from the calculation of a deficiency, and consequently such credits did not affect the - 12 - calculation of an underpayment under repealed section 6653(c). Therefore, petitioner bases his argument in legislative history that the definition of an underpayment in section 6664(a) as in effect for the years at issue was "not intended to be substantively different from * * * [previous] law." H. Rept. 101-247, at 1394 (1989). Respondent argues that Congress enacted a new penalty regime and significantly reworded the definition of "underpayment" for income tax purposes, thereby justifying the Secretary's clarification of the treatment of overstated prepayment credits. As a threshold matter, both parties agree that the regulation was issued under section 7805(a and is applicable to the computation of the underpayments in the instant case. Accordingly, our next step is to determine, whether the regulation warrants judicial deference. III. Judicial Deference Much ink has been spilled on the question of the level of judicial deference to be afforded to regulations. See, e.g., Berg, "Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments", 61 Tax Law. á81 (2008). The Court of Appeals for the Sixth Circuit, to which(any appeal of this case would lie absent a written stipulation to the contrary, has held that regulations issued under the general authority of the Secretary - 13 - to promulgate necessary rules, with notice and comment procedures, are entitled to judicial deference as outlined by the U.S. Supreme Court in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). See sec. 7482(b) (2); Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971); Estate of Timken v. United States, 601 F.3d 431, 434- 435 (6th Cir. 2010); Estate of Gerson v. Commissioner, 507 F.3d 435 (6th Cir. 2007)", affg. 127 T.C. 139 (2006). In Chevron, the Supreme Court addressed the circumstances in which the judiciary is to afford an agency discretion to interpret the statutes the agency administers. In what is commonly referred to as the two-step "Chevron analysis", the Supreme Court stated: When a court reviews an agency's construction of it is confronted with is the question whether If the intent of Congress is clear, the matter; for the court, as well as the the statute which it administers, two questions. First, always, Congress has directly spoken to the precise question at issue. that is the end of agency, must give effect to the unambiguously expressed intent of Congress. Congress has not directly addressed the precise question at own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, court permissible construction of is whether the agency's answer is based on a the court does not simply impose its the question for the the statute. If, however, the court determines iàsue, Id. at 842-843 (fn. refs. omitted). Chevron step 1 requires us to determine whether the statute.clearly expresses the intent of Congress. If the statute is silent or ambiguous with respect to - 14 - the specific issue before the Court, Chevron step 2 requires us to determine whether the regulation is based upon a permissible construction of the statute. "[T]he cardinal rule [is] that a statute is to be read as a whole * * * since the meaning of statutory language, plain or not, depends on context." King v. St. Vincent's Hosp., 502 U.S. 215, 221 (1991). Sections 6663 and 6664 impose a fraud penalty when taxpayers, with intent to evade, underpay the income tax shown on their returns. We will examine the language and history of those sections to determine what the term "underpayment" means in the context of a fraud statute. The examination requires us to analyze the definitions of a "deficiency" and of an "underpayment" and their interrelationship, if any, in interpreting sections 6663 and 6664. We must consider whether an underpayment can exist without a deficiency. The definition of a deficiency in section 6211(a) as it relates to income tax has rëmained essentially unchanged since the 1954 codification of the internal revenue laws.4 The basic *SEC. 6211. DEFINITION ÎOF A DEFICIENCY. In General.--For purposes of this title * (a) "deficiency" meaná the amount by which the tax imposed * * the term by Subtitle A or B * * * exceeds the excess of-- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by (continued...) I I - 15 - formula is to determine the correct tax and reduce it by the tax reported by the taxpayer. The 'resulting amount is the deficiency. In calculating the deficiency, estimated tax payments and withholding credits are ignored. Sec. 6211(b) (1). The definition of an underpayment -for purposes of the civil fraud penalty remained unchanged from the 1954 codification of the Internal Revenue Code until 1989. In 1989 Congress repealed sections of the Code;" including section 6653, that imposed accuracy-related penalties, and neplaced them with sections 6662 through 6665. Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(a), 103 Stat. 2395. Congress' primary focus 4(...continued) the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus (B) the amount previously assessed (or collected without assessment) as a deficiency, over-- (2) the amount of rebates, as defined ¯in subsection (b) (2), made. (b) Rules for Application of Subsection (a).--For purposes of this section-- (1) The tax imposed by subtitle A and the tax shown on the return shall both be determined without regard to payment on account of estimated tax, without regard to the credit under section 31 * * * sSecs. 6653, 6659, 6659A, 6660, and 6661. Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(c), 103 Stat. 2399. Sec. 6662 was stricken and replaced by -a new sec. 6662. Id. sec. 7721(a), 103 Stat. 2395. - 16 - in enacting a new penalty regime was to alleviate taxpayer confusion and the difficulties of administration of several different penalties relatingjto the accuracy of a tax return. H. Rept. 101-247, supra at 13883 The House report also stated that the definition of "underpayment" in section 6664(a) was not "intended to be substantively different from * * * [previous] law." Id. at 1394. Repealed section 6653 (b) (1) provided that if any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return was due to fraud, certain penalties applied.' Section 6653(c) tied the definition of an underpayment to the definition of a deficiency. SEC. 6653(c). Definition of Underpayment.--For purposes of this section, the term "underpayment" means-- (1) Income, estate, gift, and certain excise taxes.--In the caåe of a tax to which section 6211 (relating to incode, estate, gift, and certain excise is applicable, a deficiency as defined in that taxes) section (except that, the tax shown on a return referÿed to in section 6211(a) (1) (A) shall be taken into account only if such return was filed on or before the last day prescribed for the filing of such return, determined with regard to any extension of time for such filing) * for this purpose, * * The basic formula (correct tax - reported tax = underpayment) applied and, because of the application of section 6211(b) (1), 'The amount of penalty was increased in stages over the years from 50 percent of underpayment and 50 percent of 6601. the underpayment the the interest payable under sec. to 75 percent of - 17 - estimated payments and withholding credits did not enter into the calculation. Sections 6663 and 6664 replaced repealed section 6653. For convenience, we again set out the pertinent portions of sections 6663 and 6664. Section 6663(a) deals with imposition of the fraud penalty: SEC. 6663(a). Imposition of Penalty.--If any part of any underpayment of due to fraud, equal is attributable .to fraud. to 75 percent of the portion of the underpayment which tax required to be shown on a return is there shall be added to the tax an amount The term "underpayment" is defined in section 6664(a) as follows: SEC. 6664(a). Underpayment.--For purposes of. this part, the term "underpayment" means the amount by which any tax imposed by this title exceeds the excess of-- (1) the sum of-- (A) the amount shown as the tax by the taxpayer on his return, * * * The basic formula (correct tax - reported tax = underpayment) is retained and, to that extent, the definition of an underpayment is not substantively different from previous law. In a case involving a deficiency and fraud in which no excess withholding credits are claimed, the calculation of an underpayment is unchanged. In that context, the terms "deficiency" and "underpayment" can be used interchangeably. However, in a fraud case where there is no deficiency but excess withholding credits have been claimed, as is the case here, or in a fraud case where there is a deficiency and such - 18 - credits have been claimed the effect -of the statutory changes; in relation to the amount of any underpayment, is unclear from , sections 6663 and 6664 (a) or their face. The definition of an underpayment is no longer tied to the definition of a deficiency under section 6211, as it hid been in section 6653 (c) , and the restrictions in section 6211(b) (1) , excluding estimated tax and withholding-credits from the calculation of a deficiency, no longer apply to an underpay ent by explicit cross-reference. Consequently, the statutes do not speak expressly to the precise issue whether withholding c edits can be taken into account when calculating an underpayment for purposes of sections 6663 and 6664 (a) . Therefore, we find under Chevron step 1 that for the determination of an underpayment, Congress seems to have retained the basic formula (correct tax - reported tax = underpayment) in section 6664 but has deleted the express cross-reference to the definition of a deficiency in section 6211. Section 6664 is silent and ambiguous with respect to the issue before us; i.e., Congress has not directly addressed the meaning of the term "underpayment" when a taxpayer has overstated withholding credits. The Secretary has promulgated section 1.6664-2 (c) (1) and (g), Example (1), Income Tax Regs., to address the issue. Under Chevron step 2 we must determine whether the regulation is based - -19 - upon a permissible construction of the statute. We "need not conclude that the agency construction was the only one it: permissibly could have adopted toruphold the construction, or even the reading * * * [we] would have reached if the question had arisen in a judicial proceeding." Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 843 n.11.. Rather, "considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer." Id. at 844. The Court should not disturb the agency's action unless it appears from the statute.or its legislative history that it is one that Congress would not have sanctioned. Id. at 845. On March 4, 1991, the Federal Register published a notice of proposed rulemaking regarding the accuracy-related penalty under section 6662; the fraud penalty under section 6663, and the definitions and rules for purposes of both penalties under - section 6664. See Notice of Proposed Rulemaking, 56 Fed. Reg. 8943 (Mar. 4, 1991). The preamble to the proposed regulations explained that: (1) Overstated prepayment credits increase the amount of an underpayment but have no effect on the calculation of a deficiency; (2) whether a position with respect to an item has substantial authority or is disclosed on a return is relevant to the determination of the amount of a deficiency, but not to the determination of the amount of an underpayment; and (3) the a - 20 - amount of an underpayment ià reduced by amounts not shown on the return-that have been previdusly assessed (or collected without assessment),.but the amount of a deficiency is not. Id. at-8947. Commentators on the propose regulation objected to factoring in overstated prepayment credits in the calculation of the underpayment. The basis of their objection was that the overstated:prepayment credi s are not taken into -account ins computing the amount of a.déficiency under section 6211. 3 = A - public hearing was held on June 3, 1991. The proposed regulatio s were adopted and published as final regulations.on December 31, å991. T.D. 8381, 1992-1 C.B. 374. The preamble to the accuracf-related penalty final regulations rejected the position of the commentators and-stated: "There are differences in the section 6664 definition of 'underpayment' and the section 6211-definition of 'deficienay', that warrant taking overstated prepayment credits into account for purposes of the accuracy-related penalty." Id., 1992-1 C.B. at 379. For convenience, we will again set out the pertinentiportion of the regulations. Sectio 1.6664-2(c) (1), Income Tax Regs., interprets the definition of "underpayment" in section 6664 by stating that the tax shown on the return.is reduced by the excess of: (i) The amounts sÑown by the taxpayer 'on his return as credits for dax withheld under section 31 (relating to tax withhéld on wages) * over * * - 21 - (ii) The amounts actually withheld, * * * with respect for such taxable year. to a taxable year before the return is filed Petitioner contends athat the regulation is inconsistent with congressional intent." He stresses the House report which stated that the definition of "underpayment" in section 6664(a) was not "intended to be'substantively different from * * * [previous] law." H. Rept. 101-247, supra at 1394. On the basis of that statement, petitioner argues that the definition of an underpayment, as contemplated by section 6664, should not be different from what it was under section 6653(c) and thus withholding credits should be excluded from the computation of an underpayment. We disagree with petitioner's position. Neither section 6664(a) nor the -regulation differs substantively from prior law. The basic formula (correct tax - reported tax = underpayment) is retained,' and in cases involving a deficiency in which no excess withholding credits are claimed, the calculation of an underpayment, for purposes of section 6664 and its regulations, 7Petitioner cites several cases in support of the is equivalent law. proposition that the term "underpayment" term "deficiency" under current Commissioner, 125 T.C. 211, 224 (2005); Downing v. Commissioner, T.C. Memo. 2005-73, supplementing T.C. Memo. 2003-347; Estate of Johnson v. Commissioner, T.C. Memo. 2001-182, affd. 129 Fed. Appx. 597 (11th Cir. 2005). dealt with a situation in which the taxpayer's underpayment under sec. 6664 also constituted the deficiency under sec. 6211. None dealt with the overstatement of prepayment credits. See Estate of Capehart v. to the Each of these cases - 22 - is no different from what i would have been under former section 6653(c) (1). If Congress had intend d the old and the:new penalty-regimes to be identical in every respect,- we may infer that it twould have equated the term."underpayme'nt" with "deficiency" and carried 1 forward section 6653(c) (1) erbatim into section 6664(a). Congress did not do so. Co gress has amended section 6664 on, three occasions but has not faltered the definition of-the term, "underpayment" in response do the regulation. See Pension Protection Act of 2006, Pub.t| L. 109-280, sec. 1219, 120 Stat.s 1083,; 'Gulf Opportunity Zone ct of 2005,e Pub. L. 109-135, sec. 403, 119 Stat. 2615; Americ n Jobs Creation Act of 2004, Pub. L. 108-357, sec. 812, 118 Stat 1577. The Secretary has folldwed Congress' intent to carve out a specialized set of rules fo the penalties applicable to the accuracy of a return. The application of the regulation is by its terms specifically limi ed to underpayments for purposes of section 6662 (relating to tNe accuracy-related penalty) and - section 6663 (relating to the fraud penalty) for purposes of income taxes imposed under ubtitle A. Sec. 1.6664-2(a), Income "One salient change was the'omission from the'new statute of the parenthetical clause foùnd in sec. 6653(c), under which the tax shown on a late return did not count. that- the Secretary has fillåd-by regulations taking account of the tax.shown on a "qualifidd amended return." 2(c) (2) and (3), This created a gap Income Tax Regs. Sec. 1;6664- - 23 - Tax Regs. By fleshing out the mechanics' of what factors into the section 6664 underpayment calculation when a deficiency is not present, it promotes fairness in the'administration of the penalties. It also facilitates the stàndardization of the reasonable cause/good faith exception criteria for the application of all accuracy-related penalties. Our examination of whether the regulation is based on a permissible construction of section 6664 reveals that the Secretary réasonably construed the taEute"throágh the regulation. Accordingly, we hold the regulation to be valid. See Estate of Gerson v. Commissioner, 507 F.3d at 441. If the Commissioner proves that any portion of an underpayment is due to fraud, the entire underpayment will be treated as attributable to fraud for purposes of the penalty under section 6663 (b), except any portion of the underpayment that the taxpayer establishes by a preponderance of the evidence is not attributable to fraud. Knauss v. Commissioner, T.C. Memo. 2005-6. Respondent has proved that petitioner committed fraud in filing his returns for the years at issue. Petitioner has not shown that any portion of the underpayment in any year at issue is not attributable to fraud. Therefore, the underpayments for the years at issue are subject in their entirety to fraud penalties. Sec. 6663(b). - 24 - In reaching our holdings herein, we have considered all arguments made, and, to the extent not imentioned above, we conclude they are moot, -irr levant, or without merit. To reflect the foregoir g, Decision will be entered f or respondent . Reviewed by the Court . COLVIN, COHEN, WELLS, GALE THORNTON, GOEKE, KROUPA, HOLMES, PARIS, and MORNISON, JJ., acree with this majority opinion. L is - 25 - THORNTON, J., concurring: I agree with the majority opinion and write separately to respond to some of the dissenters' concerns. Judge Gustafson contends that section 1.6664-2(c) (1), Income Tax Regs., contradicts the plain meaning of section 6664(a) (1) (A) by defining "the amount shown as the tax by the taxpayer on his return" so as to remove excess withhol_ding credits. I respectfully disagree. As explained in more detail below, the Code authorizes the IRS to process an assessment to recover or disallow excess withholding credits as an adjustment to the tax shown on the return on which the credit was claimed. Consistent with those provisions, the regulation permissibly treats the amount shown on the return as reflecting such an adjustment. The IRS summarily assessed petitioner's erroneous refunds pursuant to section 6201(a) (3), which authorizes assessment of excess ("overstated") withholding credits in generally the same manner as mathematical or clerical errors (for simplicity, math errors): income taxes the the If on any return or claim for refund of under subtitle A there is an overstatement of credit for income tax withheld at the source, or of amount paid as estimated income tax, the tax shown on overstated which is allowed against the return or which is allowed as a credit or refund may be assessed by the Secretary in the same manner as in the case of a mathematical or clerical error appearing upon the return, except of section 6213(b) (2) mathematical or clerical error assessments) shall not (relating to abatement of the amount so that the provisions - 26 - apply with regard to any assessment under this paragraph. The contemporaneous 1954 legislative history sheds some light on this provision: e recovered by assessment For exa nple, assume a da'se in which the the claimed prepayment Under this new paragraph refunds caused by erroneous prepayment credits may in the same manner as in dhe case of a mathematical error on the return. tax shown on the return is $100, credit is $125, and refund of $25 is made, and that it is later determined that the prepayment credits should have been only $70 . Ur der existing law, $30 (the tax - of $100 as shown on the return less the $70 credit) can be immediately assessed as tax shown on the return which was not paid, but recovered by suit in'cdurt. Under the entire $55 can be assessed and collected. Rept. 1337, 83d Cong., 2d Sess. A404 (1954) .] the remaining $25 must be the new provision,- - [H. As this history indicates, the legislative impetus for section 6201(a) (3) was the erceived need to give the IRS a means, previously lacking, f recouping erroneous refunds at~tributable to overstated ithholding credits without having to Šile suÎt.' The legialative solution, 'as effected in section 6201(a) (3), was to permit tle IRS to assess, "in the same manner as in the case of a mathematical or clerical error appeariný upon the return, " not only the e roneous refund ($25 in the above example) , but also the amou t of òverstated withholding credits that the IRS had previously "allowed" against the tax shown on - 27 - the return but that had not generated a refund ($30 in the » example). Section 6201(a) (3) authoriies ovanstated withholding credits to be "assessed". And because under secti'on 6201(a) the IRS' assessment authority pertains only to "taxes", 'it follows that assessment of overstated withholding credits under'section 6201(a) (3) is properly considered as assessment of additional taxes.3 Furthermore, because. section 6213 (b) is the only Code provision that expressly addresses the process for making 9M: first blush it may seem paradoxical to speak, as dòes .But from the example in the the that they were overstated. Ultimately, in fact "allowéd" but instead were made One would not ordinarily think of an "overstated" to the summary assessment provisions of sec. 6201(a) (3). sec. 6201(a) (3), of an "overstated" withholding credit as being "allowed". amount as being allowed or allowable. the above-quoted legislative history it seems clear that withholding credits were "allowed" only provisionally until IRS "later determined" the overstated withholding credits, by virtue of being overstated, were not subject Similarly, although the statute refers to overstatements as being "allowed against the tax shown on ,the return", and hence (as , Judge Gustafson notes) as being di'stinct from the tax shown on the return, "overstated" amounts are made subject 6201(a) (3). the statute's operation upon these amounts. detail assessed in the same manne'r as math errors "appearing upon on the return", is to treat the overstated withholding credits as part of*the amount shown (erroneously) on the return. The more meaningful consideration is the effect of this phrase merely describes which "allowed" in permitting these overstated amounts to be the effect of sec. 6201(a) (3) to the operation of sec. As described in more infra, TIndeed, in the example in the legislative history, in order to recoup the $25 erroneous refund in the manner provided in sec. 6201(a) (3), the IRS must assess not only the original $100 shown on the return but also the $25 associated with the erroneous refund, as an additional amount of tax. - 28 - assessments arising out of math errors, it is reasonable to conclude that section 6201(a) (3), in directing that overstated withholding credits may be assessed "in the same manner as in the case of a mathematical or clerical error appearing upon the return," means in the same a nner as -described in section 6213 (b) . Otherwise , this directive would not . be .meaning ful . Consequently, we look to section 6213 (b) for guidance. Pursuant to section 6213 (b) (1) y summary assessment is - - - permitted (i.e., the restrictions applicable to deficiencies are made inapplicable) if a math error on a return gives rise to 'an amount of tax "in excess of that shown on the return" . From this phrase it is clear that the tax "shown on the return" is the amount the taxpayer has sho n oå thè r$turn before any adjustment is made to correct the math error; i.e., the amount "shown.on the return" is the amount that reflects the math error. Because there is no suggestion in tl e Code that the amount of tax "shown on the return" should mean iffîrent things in different sections, the same analysis holds true in determining the impact of a math error on the tax "shown * * * [on the] return" under section 6211(a)'(1) (definin "deficiency" by reference to the amoünt of tax shown on thé eturn) and section 6664 (a) (1) (defining "underpayment" by reference to the amount of tax shown on the' return) . - 29 - Furthermore, because section 6201(a) (3) directs that overstated withholding credits be assessed in the same manner as math errors, it is reasonable to conclude that the.same analysis holds true for overstated withholding credits. In other words, for overstated withholding credits under section 6201(a) (3), as for other types of math errors under section 6213 (b) (1), summary assessment is permitted if overstated withholding credits give rise to an amount of tax "in excess of that shown on the return". Sec. 6213 (b) (1). As with math errors, this means that the amount of tax "shown on the return" is the amount shown by the taxpayer that reflects the overstated withholding credits. Again, absent some contrary statutory signal, it is reasonable to conclude that this result carries over to section 6664(a) (1), where tax "shown * * * [on the] return" is a relevant consideration.3 In short, under this statutory framework the "amount shown as the tax by the taxpayer on his return" under section 6664(a) (1) (A) is the amount that reflects reduction for excess withholding credits. This is precisely the result achieved by the regulation.4 3A prominent example of a contrary statutory signal appears in sec. 6211(b) (1), which expressly excludes withholding credits from the amount a deficiency. Although the old "underpayment" definition-of former sec. 6653(c) (1) reference, "this linkage between the sec. 6211 "deficiency" definition and the current sec. 6664(a) definition was broken in 1989, as discussed in more detail "shown on the return".for purposes of determining incorporated these provisions by cross- infra. 4The effect is to increase the amount of the amount of overstated withholding credits. the underpayment by It might be noted (continued...) - 30 - The legislative histor of-section 6664(a) indicates that its new (in 1989) definitio of "underpayment" was not intended to differs "substantively" from prior.law. H. Rept. 101-247, at 1394 (1989). But in the sa e sentence this-legislative history states that the new definition was intended to "simplify and . coordinate" diverse "underpfyment" definitions under former law. Id. And in fact the new "udderpayment" definition in section 6664(a) differs in various ays.from the old "underpayment" definitions which it replaced.5 of special importance.for present purposes, it differ from the former section 6653(c) (1) definition by dropping the cross-reference to the section 6211 "deficiency" def-inition wit its directive-that the "tax imposed" and the :"tax -shown on the:réturn" should be "determined without regard to" withholding cred ts, among other things. (...continued) . - 1 that to be evenhanded the r gulation conversely permits unclaimed but otherwise allowable witgholding credits to reduce the amount of any underpayment. See sdc. 1.6664-3(c), Income Tax Regs. sThe new-"underpayment" definition in sec. 6664(a) replaced "underpayment" definitions that appeared aw; least two different income, estate, gift, and certain excise taxes; and former sec. 6653(c) (2), pertaining, to additions to tax for- at (1) Former sec. 6653(c) (1), in-these sections of.prior pertaining to additions to ax for negligence and fraud for purposes of (2) negligence and, fraud relating:to,taxes other than as described in sec. 6653(c) (1). Of these dwo former "underpayment" definitions, only the first incorporated by cross-reference the sec. 6211 "deficiency" definition with its directive that withholding taxes should be disregarded in de ermining the "tax imposed" and the "tax 'shown.on the return". l - 31 - Judge Gustafson suggests that this striking difference between these two "underpayment" definitions is of no consequence. Citing the 1944 legislative history of section 6211, he contends that the phrase "determined without regard to" was meant merely to clarify that "refunds" of claimed overpayments of withheld tax should not increase any deficiency. He suggests that this "clarification" was omitted from the section 6664(a) "underpayment" definition merely because section 6664 defined "rebates" in such a manner as to eliminate the former confusion about "refunds", making the phrase "determined without regard to",redundant and unnecessary.' See Gustafson op. pp. 66-67. But this analysis fails to take into account the problem of erroneous refunds arising from overstated withholding credits. As we have seen, Congress separately addressed that problem in 1954 with the enactment of section 6201(a) (3), authorizing the IRS to process an assessment to recover or disallow excess withholding credits as an adjustment to the income tax return on which the credit was claimed.. The former section 6653(c) (1) 'Under this analysis it might be thought that the phrase "determined without regard to" was also unnecessary and redundant in sec. 6211, since it contains the same definition of "rebate" as does sec. 6664(a). language). language unnecessary or redundant are generally disfavored. See 2A Singer & Singer, Sutherland Statutory Construction, sec. 46:6 (7th ed. 2007). But of course interpretations that render statutory See secs. 6211(b) (2), 6664(a) (flush - 32 - "underpayment" definition excluded such amounts from an underpayment only by virtue of. the definition's express linkager to the "determined without regard to" phrase of section 6211(b) . The breaking of that linkage in -1-989 in the new sections6664 (a) "underpayment" definition had the consequence of permitting 4 overstated withholding cred ts to be factored into an underpayment, as provided b the regulation.7 - In the final analysis, "the amount shown as the tax by the taxpayer on his return" is term of art, as is the section 6664 (a) definition of "unde payment" of which it is a component. That the meanings of these terms of art may not be immediately plain on their face is attributable in part to the intricate interplay of Code provision . But the regulation is based upon a construction of <these terms and of the larger statutory framework that is, in my view, not merely permissible but correct. For - 'For similar reasons, I) also respectfully disagree with I also respectfully disagree Judge Wherry's dissent, whi h depends in large measure on the assumption that "the amount shown as the tax by the taxpayer on his return" under sec. 6664 (a) (1) (A) cannot reflect any reduction for excess withholding credits. with certain technical aspe ts of Judge Wherry's analysis, particularly his suggestion that overstated witihholding credité are properly considered,amounts "collected without assessment" under sec . 1. 6664 -2 (d) , 31 credits which are. "allowable" . withholding credïts are not "allowable", and in all, likelihood (as is true in the case befcre us) predicated have never been ' collected" ; Properly construed, regulation does not give ri e to the "double-counting error" that concerns Judge Wherry. the amounts on which they are the See Wherry op. p. 49. Income Tax. Regs . , which pertains to sec . By definition, overstated - 33 - these rèasons and the reasons stated sin the imajority opinion, the regulation is valid. COLVIN, COHEN, GALE, MARVEL, GOEKE, KROUPA, HOLMES, and HAINES, JJ;, agree with this concurring opinion. - 34 - WHERRY, _J. , dissenting: I disagree with the majority to the extent it holds section 1. 6664 -2 (c ) (1) , Income Tax Regs . , to obe a permissible construction of section 6664 (a) (1) (A) , for, many of the reasons Judge Gustafson Êartícùlates in his finely crafted ~ dissent . Not only is section 1. $664 -2 (c ) (1) , Income Tax Regs . , at variance with the statute it purports to interpret; it also renders the totality of the Commissioner' s regulatory scheme, as set f orth in section 1. 6664 -2, Income Tax Regs . , contradictory and unreasonable. I would, therefore, hold invalid section 1. 6664 -2 (c ) (1) , Income Tax 1(egs . , and certain regulatory examples inextricably linked with it. Ignoring these provisions, I find that the remainder of sectiÊn 1.6664-2, Income Tax Regs., is sufficiently consistent, bogh with the statute and among its constituent parts, to sustain a section 6663 civil fraud penalty i Sec. 1.6664-2(c), Incoöle Tax Regs., was adopted on Jan. 9, The latte , in turn, had replaced the prior Income Tax Regs . , adopted on to T.D. 9309, 2007-1 C.B. 497, which also removed 2007, pursuant sec. 1.6664-2T, Temporary Ir come Tax Regs., 70 Fed. Reg. 10037 (March 2, 2005). f inal regulation, sec . 1. 6664 -2 (c) , Dec. 31, 1991, pursuant to 3.D. 8381, 1992-1 C.B. 374. temporary regulation, qualified amended returns cdntained in the prior final regulation, had retained pa . unchanged. Tax Regs., adopted on Jan. to the version adopted on Dec. 31, 1991, ard in effect during the tax years at issue. Also, applicable to the computaticn of case." (c) (1) of that regulation The current version of sec. 1.6664-2(c) (1), "both parties agree that the regulation * issued to modify the rules relating to See majority op. p. 12. i, 2007, is identical The Income * * is the underpayments in the instant 2See infra note 9. 35 - here . I would, however, aimpose that epenalty not on the entire amount by which petitioner overstated-his -withho]/ding credits, but only on the -portion of the ovérstated withnolding credists that he fraudulently claimed and received as a refund. Openiñq the - Door to Withholdinq - Credit s The majority asserts, without explanation, that "Neither paragrapli (1) (B) "[of section 666d. rèlating to amountiä collected without assessment]Gnož (2) [of seátiön 6664 'relat ing do rebates] applies in this "case:" See majority cú. p." 1Ó. The majority, thus, ,icceptin respóndent' s claini~that - in -each ò'Î petitioner' s tax years .at issùe the aniodnt of a section 6664 (a) (2) rebåte Êiaá, respectively; zéro In faisling torsúßject this claim"to scrutiny, t he-majo ity lias *denied-itse'lf the'toþportùnity to appreaiáte the"áreativity-and 'comp]existy underlying section 1.6664123(d) Inicome Tá Rees. 'Ì'his'séction of thi tegulaéîons is not rientionedain either petitidridr' s orNespondent ' s briefs Ùut, nonetheless, constitútés the baÃis~ for arriving at respondent's result - under sectic n 1 a66442 (c ) (1) I làome Tak Regs . , "which petitioner challenges and 'respondeíît def ends . Siding with respondent, the majority accurately observes that "the ståtütes do not espeak expiessly to the precise issue whether eitnho!Lding credits can be talken into account when caldulating an'ùnderpayment for urposes of sections 6663 and 6664 (a) . " See "majority op. ý . -18 . I suggest thát "responderit - 36 - finds the - statutory hook fo his regulatory innovation not in section 6664 (a) (1) (A) , whose plain meaning, as Judge Gustafson points out,- could hardly be clearer, but instead in section 6664 (a) (1) (B),. A. Section 6664 (a) (1) (B) , Not Section 6664 (a) (1) (A) , Turns the Key ,Section 6664 (a),(1) (A) plicates the operative language of section 6211(a) (1) (A) , the p rallel provision in the definition of deficiency ("the amount shown as the tax by the taxpayer on his return"-) . In contrast, section 6664 (a) (1) (B) uses words slightly4different from-thos of its deficiency counterpart, section 6211(a) (1) (B) ., Whereas section 6664 (a) (1) (B) specifies "amounts not so shown previ sly assessed (or collected without assessment) ", section 6211(a) (1) (B) refers to "amounts previously assessed (or collected with t assessment)-- as a deficiency". (Emphasis - supplied . ) When compared with section 6211 (a) (1) (B) , section. 6664 (a) (1) (B) contains the additional qualifying phrase "not so shown" before "previously assessed" but omits the qualifying phrase "as a deficiency" after the parenthetical " (or collected without assessment ) " . Rely.ing on that omission, the Commissioner has concludedrin sec tion 1. 6664 -2 (d) ,- Income Tax Regs . , that the additional - a qualifier "not so shown" -in section 6664 (a) (1) (B) does not apply to the parenthetical " (or collected without assessment)," . In -= 37 - other words, the Commissioner reads section 6664(a) (1) (:B) as referring to two different kinds of amounts: (1) Those not shown on the return that were previously assessed; and (2) those that were collected without assessment. This taxonomy, in turn, allows the Commissioner to define the latter amounts as the credits allowable (relating to tax withheld at source on the amount by which the total of under section 31 (relating to tax withheld on wages) and section 33 nonresident aliens and foreign corporations), estimated tax payments, and other payments in satisfaction of tax liability made before the return is filed, exceed the tax shown on the return (provided such excess has not been refunded or allowed as a credit to the taxpayer). Sec. 1.6664-2(d), Income Tax Regs. Section 6664(a) (1) (B), and its differences with section 6211(a) (1) (B), creates an opening, through which the Commissioner has dragged withholding credits'into the equation for calculating an underpayment.3 B. Withholding Credit Is Amount Collected Without Assessment Except When I Say It Is Not Unfortunately for the Commissioner, neither the preamble to the proposed or final regulations nor the regulations themselves 3As evidence, consider the preamble to the proposed regulations, which had justified the inclusion of withholding credits in amounts collected without assessment under sec. 6664(a) (1) (B), even though such credits are excluded under sec. 6211(a) (1) (B), by arguing that the amount of an underpayment is reduced by amounts collected without assessment whereas the amount of a deficiency is not. Notice of Proposed Rulemaking, 56 Fed. Reg. 8947 (Mar. 4, 1991). - 38 - clarify why including withh lding credits in amounts -collected without assessment, under s ction 6664 (a) (1) (B) ,ealso requires that we reduce amounts show as tax under section 6664 (a) (1) (A) by any overstated withholding credits. Even worse, under the plain meaning of the Commissioner' s own regulations, in a case where there is no deficienc as defined in section 6211(a) , a refund of overstated withholding credits would constitute a rebate under section 6664 (a) (2) . Consequently, the regulations would count this refunded a ount twice in calculating an underpayment, once by reducing the amount shonn 'as the tax pursuant to section 1.6664-2(a) and (c) (1), Income Tax Regs., and then again as a rebate pursdant to section 1.6664-2(a) and (e), Income Tax Regs . Respondent tries to dis vow,this anomalous effect of his own handiwork. Respondent's po ttrial brief and section 1.6664-2(g), Example s (1) and (.3_) , Income Tax Regs . , imply that when withholding credits are ref nded,- they cease to be aniounts collected without assessmenth and this cessation -somehow has retroactive effect so that the refund does not constitute a rebate within the meaning of section 6664 (a) (2) . Reaching this conclusion, however, requir s reversing the laws of space and time, the rules of logic and grammar, and the force of our own precedent. - 39 - Respondent presumably relies on the parenthetical "(provided such excess has not been refunded or allowed as a credit tò the taxpayer)" in section 1.6664-2(d), Income Tax Regs., to conclude that when withholding credits are refunded, they no longer constitute amounts collected without assessment. Therefore, according to respondent, the refund cannot be a rebate under section 6664(a) (2). This flies in the face of the obvious implication of the regulatory text itself that until such time as a withholding credit is refunded, it remains an amount collected without assessment. In fact, section 1.6664-2(g), Example (2), Income Tax Regs., suggests as much. It should follow that as long as the tax shown on the return is no less than the tax imposed, so that there is no deficiency under section 6211(a), any refund of the withholding credit could only have been "made on the ground that the tax imposed was less than * * * Amounts not so shown previously assessed (or collected without assessment)". Sec. 1.6664-2(e), Income Tax Regs. C. In A Galaxy Far, Far Away Respondent appears to construct a multiverse version of reality in which the moment a withholding credit is refunded, it enters a parallel universe, as it were, where the refunded amount was never an amount collected without assessment to begin with. Tax law, alas, must inhabit our universe where the arrow of time can move in only one direction and cause must precede its effect. - 40 - If a withholding credit is n amount collected without assessment, then it must re ain so until it is refunded. And if the refund, when made, is m de on the ground that the tax imposed is less than the amount of ithholding credits, then that refund must constitute a rebate under section 6664(a) (2).» Respondent's difficult lies in the fact that the statutory design envisions any amount collected without assessment as potentially affecting the c lculation of an underpayment in two - ways: (1) Negatively, unde section 6664(a) (1) (B);~and (2) positively, under section 6664(a) (2).* Because respondent has included withholding credité in amounts collected without *Sec. 6664(a) establish s the following relationshiþ between underpayment and an amount ollected without assessment: Underpayment equals th amount of tax imposed minus (the amount shown as the tax by the taxpayer on his return plus all amounts not so shown previodsly assessed, or collected without assessment, minus the amounŠ of rebates made). Sec. 1.6664-2(a), Incode Tax Regs., accurately represents this relationship in the folilowing algebraic expression: Underpayment = W - (X 4 Y - Z), where W - the amount of income tax imposed; X y the amohnt shown as the tax by the taxpayer on his redurn; Y = amounts not so shown previously assessed (o collected without assessment); and Z = the amount of ebates made. Rearranging the terms yield the following equivalent expression: Underpayment = It is easy to see that gua increase of $1 in the amount (W + Z) 0- ,(X +, Y) . Howeveä, to the extent that this $1 is reduces collected without assessmen(increases- Y and, underpayment by $1. refunded "on the ground thad the tax imposed was less than the excess of * 6664(a) (2), underpayment by the same amount. * the resulting i crease i:ba Z will increase [(X + Y)] o er the rebates previously made", sec. thereby, * - 41 - assessment under section 6664(a) (1) (]B), his attempt to deny their existence in computing a rebate under section 6664(a) (2) is logically irreconcilable. Grammar and our own precedent also undermine respondent's cause. The Commissioner's own words in the regulations refer to the amount by which withholding credits "and other payments in satisfaction of tax liability made before the return is -filed, exceed the tax shown on the return (provided such excess has not been refunded or allowed as a credit to the taxpayer)." Sec. 1.6664-2(d), Income Tax Regs. (emphasis supplied). The use of the present perfect tense in the parenthetical dictates that the parenthetical apply at the time that the underpayment is calculated. We have long maintained that for purposes of the civil fraud penalty, the base on which the penalty is imposed be determined as of the time when the return is filed and not any later time such as when the notice of deficiency is issued. See, e.g., Stewart v. Commissioner, 66 T.C. 54 (1976). Underpinning such decisions was the rationale that a taxpayer should not, after fraudulently understating his tax liability, retain the power to avoid the fraud penalty by the simple expedient of remainder of his correct return -was under audit. tax upon discovering his later paying the * * * Id. at 58-59. It would surely be perverse to allow respondent's discretion in handling a refund claim to affect the amount of petitioner's underpayment well after petitioner has filed his return. - 42 - Clearly, then, so long s a taxpayer has .no 'deficiency under section 6211(a) , the plain aning of the regulations' language would cause a refund of a withholding credit to be a rebate under section 6664 (a) (2) .5 Furthe , any refund that this taxpayer obtains by overstating withh lding credits would also constitute a section 6664 (a) (2) rebate since this refund must necessarily have been "made on the grour d that the tax imposed was less than" (emphasis supplied) the amou ts collected without assessment. Sec. 6664 (a) . In fact, the e could exist no other grounds for making this refund. II. Taking the Blue Pencil to the Commissioner' s Drafting Finally, to the case' of Rick D. Feller, where the notices of deficiency,evidence "the absence of a section 6211-(a) defióiency in .each of the tax years at issue. For the reasons discussed SA sec. 6211(a) deficie icy could arguably cause a rebate To see * * the amount shown as the tax by the to be smaller by the same amount . as¯ defined Supra note 4] over the rebates It may be argued that this $1 could [a refund] as was made on under sec . 6664 (a) (2) this, consider a situation here "the amount by which the tax imposed * * taxpayer upon his return" is $1. This would create a deficiency of $1 under sec . 6211 (a) . not be included in "so much Êof the ground that the tax impc sed was less than the excess of * previously made . " 6664(a) (2) in a smaller rebate under sec. 6211(a) deficiency may resuÈt the sec . 6664 (a)i formula for underpayment would 6664 (a) (2) , automatically pick up the dåficiency to leave the amount of underpayment, algebraic formula for computŠing the underpayment. See also infra note ,10, discussing the con0erse case, where the tax shown on the return exceeds the tax iinposed, and infra note 11, deriving the numerical results for such å converse case. Sec . 666((a) . Under this argument , any sec . rebate would be reduced by $1. See supra note 4 for the Even though a sec. if any, uncharÍged. * exceeds * * * * * * [ (X + Y) , - 43 - above, section 1.6664-2(d) and (e), Income Tax Regs., would cause petitioner's section 6664(a) underpayment to include so much of his overstated withholding credits that he claimed and received as a refund. However, if the challenged regulation, section 1.6664-2(c) (1), Income Tax Regs., is valid, we would consider the overstatement of withholding credits yet again. Specifically, we would adjust ,the tax shown on -the return by subtracting from it the entire amount of the overstated withholding credits.' We would then use this adjusted figure, rather than the actual tax shown on the return, to calculate petitioner's underpayment. The refunded portion of the overstated withholding credits would, ("The amount shown as the tax by the taxpayer on his return 'It is unclear from the regulations whether the challenged to the Compare sec. 1.,6664-2(a) (1) (i), tax shown on the return also purports to cover the adjustment under sec. 1.6664-2(c) (1),.Income Tax Regs., amount of calculation of a sec. 6664(a) (2) Income Tax Regs. Regs. (as defined in paragraph (c) of this section)"), with sec. 1.6664-2(e) (1) (i), by the taxpayer on his return" without a cross-reference to "paragraph (c) of this section"). However, any sec. 6664(a) (2) rebate calculated under sec. 1.6664-2(e), Income Tax Regs., would remain unchanged, whether or not sec. 1.6664-2(c) (1), rebate under sec. 1.6664-2(e), ("The amount shown as the tax Income Tax Regs., applies. the final amount of Income Tax Regs. Income Tax Applying sec. 1.6664-2(c) (1), Income Tax Regs., to this the amount of On the one hand, calculation would have two equal and opposite effects that would cancel each other out. tax shown on the return under sec. 1.6664-2(e) (1) (i), would be reduced by the amount of the other hand, however, amounts collected without assessment under sec. 1.6664-2(e) (1) (ii), Income Tax Regs., would be increased by the same amount. Regs. that calculation of a sec. 6664(a) (2) respective amounts under sec. 1.6664-2(e) (1) (i) and (ii), Income Tax Regs., "exceed the tax shown on the return"). Since the (restricting amounts collected without assessment the net effect would be zero. rebate entails adding the the challenged adjustment. See sec. 1.6664-2(d), Income Tax Regs., Income Tax to those On - 44 - thus, be counted one more t me.7 This bizarre result is untenable, and either secti n 1.6664-2(c) (1), Income Tax Regs., or both section 1.6664-2(c) (1) and (d), Income Tax Regs., must give way." 'See infra note 11 showing such double-counting of overstated withholding cred ts for petitioner's 1992 tax year. ®Quite apart from the d uble-counting of the refunded the challenged , says that "amount * Income Tax Regê., (Emphasis supplied.) Sec. 1.6664-2(c) (1), Income Income Tax Regs . , [withholding credits] is the amount b which * tax liability made before the m regulations . Unde& sec . 'collected without * the adjustment to the tax shown on the portion of overstated withhclding credits, adjustment under sec . 1. 666 -2 (c ) (1) , introduces another inconsist ency, and a potentially fatal one, with the eremaining provisions of 1.6664-2(d), assessment' and other payments in satisfaction of the return is filed, exceed the tax 'shown on the return (provided such excess has not been refunded or allowed as a credit to the taxpayer)." Tax Regs . return applies "For purposes of- paragraph (a) of this section" . And though the term -"amount collected without assessment" fully defined only in sec. 1L6664-2(d), Income Tax Regs., "paragraph (a) of this sect(on" certainly mentions and uses it as an input reading of this applicabilit y provision would require the challenged adjustment the underpayment f ormula of sec . 1. 6664 -2 (a) , including, amount collected ithout assessment . depending upon the. fa'cts. of a particular situation, none, all of adjustment The results could be startling in a case, such as petitioner's, where respondent has relied don the challenged adjustment reduce the amount shown as t ax to a negative number. -Invalidat.ing sec . 1.-6664 -2 (a ) (1) , confer the added benefit of precluding this self-defeating construction and salvaging the remainder of sec. 1.6664-2, Tax Regs . the benefits that reápondent seeks from the challenged (a) would have to be, given up in par. . (d) . to be made to all the terms that go into Income Tax Regs . As a consequence, some or Income Tax- Regs . , would, , thus , in the underpayment formula set forth there. A literal to . ~ in par. is - , Income invalid ting sec. 1.6664-2(d), By -comparison, , would eviscerate the entire regulatory venture . Regs . believe that Regs . any other provision of -sec. 01.6664-2, on its own since, as explained above, sec. 1.6664-2(d), in.the absence of sec. 1.6664-2(d), , sec . 1. 6664 -2 (c ) (1) , Income Tax Regs . Income Tax I do not Income Tax , or for that matter, Income Tax Regs:, can stand Income (continued. . . ) I agree with Judge Gustafson, that "section 6664 (a) (1) (A) is not -ambiguous, and under the Supreme Court' s Chevron analysis, the inquiry stops there." Gustafson op. 7. 76. "Moreover, as I have shown, section 1.6664=2(c) (1), Income Tax'Regs., as currently written, causes the Commissioner' s regulatory scheme to generate results that are incorrect, illogical and incoherent. I would, therefore, invalidate sectional 6664-2 (c) (1) , Income Tax Regs." - However, I also believe that the omission of the phrase "as a deficiency" in section 6664 (a) (1) (B) , when~compared with section 6211(a) , leaves the former sufficiently ambiguous to invite regulatory interpretation. Under "step 2" of a Chevron analysis, I would then consider whether the interpretation that the Commissioner has provided in.section 1.6664-2(d), Income Tax Regs,, 'is "based on a permissible construction of the statute." Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843 (1984) . The Commissioner' s interpretation is by no means "the only one * * * .[he) permissibly could have adopted" . Id. n.11. But I can find nothing in the statute that would indicate that Congress ( . . continued) Tax Regs., credit s into account is the provision that enables taking withholding in computing an underpayment . "I would also invalidate sec-." 1.6664-2 (g) , Examples (.;1._) and Income Tax Regs . (3.) , impermi-ssible constructions of contained in sec. 1.6664-2(d), , holding them to be unreasonable and the Commissioner' s own text Income Tax Regs. - 46 - would not have sanctioned idcluding withholding credits in amounts previously collected without assessment. See tid. at 845. Further, as the majority dijcusses at length, there is-sufficient legislative history to supp rt the proposition that Congress wanted to distinguish an underpayment under section 6664 (a) from a deficiency under section 6211(a) . I would, therefore, defer to respondent ' s interpre tation of sec tion 6664 (a) (1) (B) , which ,he provides in section 1.6664-2(d), Income Tax Regs. Applying the unambiguous plain language of that regulation section to petitioner's cas( and tracing its consequences sequentially through section 1.26664-2(e) and (a), Income Tax Regs., I would find underpa ments in the amounts of the overstated withholding credits claimed and received as refunds. ° I would, therefore, sustain a section 6663 civil fraud penalty not on the entire amount by which petitioner overstated,his withholding- credits for eacl tax year at issue but only on such the amoudt shown on the return exceeded the °Resþondent did Not de ermine a sec. 6211(a) deficiency for for one or more issue . However, these years petitioner had in fact overstated his tax any of petitioner' s tax yea s at of liability, so that tax imposed. Ceteris parib s, rebate to be larger by the amount of the sec . 6664 (a) underpayme$t would remain unchanged in the amount of result for petitioner's 1992 tax year, where the amount shown as tax did, (discussing the case of a säc. 6211(a) deficiency) . this would cause, a sec. 6664 (a) (2) the overstatement . However, the total refund. See infra note 11, establishing this in fact, exceed thd tax imposed. , Cf. supra note 5 e - - - 47 - portion of the overstated withholding credits as he had claimed and received as a refund." "This is the exact amount that one obtains as a sec. Income Tax Regs.' 6664(a) underpayment by applying the formula set forth in sec. 1.666422(a) (2), Income Tax Regs., and discussed supra note 4, without giving effect to the challenged adjustment under sec. 1.6664E2(c) (1), I formally demonstrate this below for petitioner's 1992 tax year. the challenged adjustment on petitioner's 1992 underpayment amount, highlighting the double-counting of of petitioner's 1992 underpayment amount, computed with and without the challenged adjustment, actually determined. the overstated withholding credits. Finally, to the underpayment that respondent I then show the impact of the refunded portion I compare Recall from supra note 4 that the required inputs for the underpayment formula are: W = the amount of X = the amount shown as the tax by the taxpayer on his income tax imposed; return; Y = amounts not so shown previously assessed (or collected without assessment); and Z = the amount òf rebates made. For his 1992 tax year petitioner claimed and received a refund of $86,181, $5,328 of which consisted of claimed excess Social Security tax withheld. legitimacy or otherwise of such claimed withholdings, and respondent has not treated them as overstated withholdings in applying the challenged adjustment under sec. 1.6664-2(c) (1), Income Tax Regs. I will assume a refund amount of $86/181 less $5,328, or $80,853. ignore the claimed excess Social Security withholdings and For purposes of this exercise, The record is silent on the therefore, Respondent determined petitioner's 1992 tax liability to be $30,022, whereas petitioner had written a figure of ·$57,244 on line 53 of his 1992 Form 1040, U.S. against withholdings of $138,097, of which $3,097 were actual and the remaining $135,000 were fictitious. formula, W is $30,022 and X is $57,244. Also, Y is zero and Z is $108,075. the words "This is your total tax". Petitioner claimed in the underpayment Income Tax Return, Individual Thus, Note that Y consists of amounts actually collected without Sec. 1.6664-2(d), assessment, but only to the extent the return". withholdings of $3,097 were less than the $57,244 of the return, Y is set sec. 6664(a) (2) Income Tax Regs., as follows. rebate, calculated pursuant tax shown on to be zero. Further, Z is the amount of'the Income Tax Regs. Since actual they "exceed the tax shown on The rebate would consist of the to sec. 1.6664-2(e), (continued...) - 48 - "(...continued) Income Tax Regs. The latter is the higher ~of the tax imposed over the amount specified in sec. excess of 1.6664-2(e) (1), amount shown as the tax, or $57, 244, and the total claimed withholdings, or $138 , O97 . This yields : $108,075, which is larger tlÏan the refund of $80,853 by exactly the amount by which petitiorfer overstated his tax liability or $27, 222 . also a rebate, and one trivially so in the sense ,that it is an - abatement or credit of a sellf -reported and immediately assessable tax,liability, and such abat ement or credit must necessarily have been "made on the ground th t the tax imposed was less than the * * Tax Regs . This $27, 222 (in Šddition to. the $8 0 , 853 refund)¿ is [tax -shown on the return] " . $138, 0 97: - $30 , 022 . Sec . 1. 6664 -2 (e ) - Income the * , Begin with the formula for underpayment Underpayment (X + Y) . (W + Z) = - from supra note 4, Since Y is zero, the formul Underpayment The numbers for W, Z, and X, W = can be simplified, Z - X. from above, are $30, 022, $57, 244, and $108, 075, the formula, resp ctively. Plugging these numbers in Underpayment = = = Z - X W $30, 022 +,-$108, 075 - $57, 244 . $1 8, 097 - $57, 244 = $80, 853 . The $80, 853 underpaymer t equals the amount of the refund and t the outset . the challenged adjustment under sec. 1.6664-2(c) (1), this proves the claim made impact of Income Tax Regs . shown on the return of $5'7, 44 by the fictitious withholdings of $135, O O O and, -$77,756. $30 , 022, numbers in the formula , - Z, and Y would be unchanged; ,$108 , 075, and zero respectively . Plugging these The adjust ment would reduce the amount of thus , - arrive at à negative snumber f or X of Now, consider the »The -numbers for i.er, tax UncÌerpayment = = Z - X . W $30 , 022 + $108, 075 - $138, 097 + $77, 756 = $215, 853 . (-$77, 756) The $215,853 underpaym nt is larger than the $135,000 fictitious withholdings by xactly .the refund amount of $80,853, demonstrating that the refu ded portion of withholdings has been count d twice . the fictitious . e . Respondent actually de ermined a 1992 underpayment amount for petitioner of only $104 642. Presumably.under,authority -of sec . 1. 6664-2 (g) , Example ( notwithstanding the plain långuage of sec : 1. 6664 -2 (d) , and (e ) / Income Tax Regs., refund as a sec . 6664 (a) (2) did not consider as a rebate the $27,222-by, which petitioner -had . responden( declined to recognize the $80;853 rebate . Curiously, Income Tax' Regs . respondent also (continued. . , and ) , ) III. Conclusion -.49 - I believe that the Commissioner could have drafted an expanded version of the current section 1.6664-2(d), Income Tax Regs., in a manner that delivered results mathematically identical to those that section 1.666422(c) (1), Income Tax Regs., seeks to attain. He could have done so without the double- counting error that plagues the current set of regulations. Our mandate, however, is to test the validity of the regulations as the Commissioner has drafted them and seeks to apply them, not to improve or improvise upon them in order to achieve a "just" result. I would hold section 1.6664-2(c) (1), Income Tax Regs., "(...continued) to assess it. Consequently, sec. 1.6664-2(g), Example Income Tax Regs., would not apply, and this amount would overstated his 1992 tax liability. Petitioner had shown this amount as tax, but respondent determined it not to be so and chose not (1), appear to be a rebate, not even in the deficiency context. it as a rebate caused petitioner's 1992 underpayment to be lower by $27,222. just for sec. 6664(a) (2) purposes, but See sec. 6211(b) (2). Ignoring Respondent's munificence to petitioner did not end there. Instead of using the actual $57,244 figure that petitioner had handwritten as his tax on his return, respondent used an "as adjusted" amount of $60,380 as the tax shown. We, and other courts, have consistently held that a postfiling adjustment or payment cannot mitigate a fraud that was perpetrated when the return was filed. Badaracco v. Commissioner, 464 U.S. 386 (1984). postfiling adjustment of $3,136 into account caused petitioner's 1992 underpayment amount In the underpayment to be lower by the same amount. formula, See text supra between notes 4 and 5; see also respondent set Z to be zero and Taking a derived X as follows. Starting with $60,380 as the tax shown, respondent reduced that amount by the fictitious withholdings of $135,000 and, -$74,620. Plugging these numbers in the formula, thus, arrived at a negative number for X of Underpayment = = = W + Z - X $30,022 + $0 - $30,022 + $74,620 = $104,642. (-$74,620) - 50 - to be an impermissible construction of section 6664 (a) (1),(A) . I respectfully dissent . HALPERN and GUSTAFSON, TJ. , agree with this dissent . - .I - -51 - GUSTAFSON, J., dissenting: I would hold invalid the regulation on which the fraud penalty at issue depends. Section 6664(a) (1) (A) states an unambiguous term, i.e., "the amount shown as the tax by the taxpayer on his return"; but the IRS's corresponding regulation--26 C.F.R. section 1.6664-2(c) (1), Income Tax Regs.--gives a definition that contradicts almost every substantive word in that statutory term. The regulation modifies the term to mean an amount that-- • • • is not "shown" but rather has to be derived; is not an amount of "tax" but rather is tax reduced by excess credits; is not shown "by the taxpayer" but rather is asserted by the IRS as the result of its examination, in contradiction of what was shown "by the taxpayer"; and • is not shown "on the return" but rather must be derived from information that is not "on the return". The regulation thereby undertakes to impose the penalty to an extent that the statute does not. I. Introduction Petitioner Rick D. Feller filed income tax returns for 1992 through 1997 on which he reported income tax liabilities greater than he actually owed, because he incorrectly reported as wages certain amounts that he did not in fact receive. For example, - 52 - for 1992 he reported a tota] tax liability of $60, 380,1 whereas the IRS determined that in fact he owed only $30, 022. , «That is, Mr. Feller's returns overstated his total tax liability. However, Mr. Feller also incorrectly reported, as Federal tax withholding from wages, certain'amounts that were-not in fact withheld from his ages (be ause the wages were fictit ious) . For example, for 1992 he report d total tax withholding from wages as $138,097, whereas only $3,097 was actually withheld and $135;600 was a fraudulent overstatement of his withholding. As a result, Mr. Feller reported on his deturns net amounts due that were much less than he actually owed. That is, his returns understated his net amount due to the IRS a d in fact claimed instead for 1992 (for example) a refund of $86,181. When Mr. Feller was diåcovered, he pleaded guilty to submitting a false tax retu n for one of the years in issue. For his crime he was sentenced t o 15 months in prison. The IRS also determined against Mr. Feller a civil fraud. penalty pursuant to section 6663 (a) , which penalty applies " [i] f any part of any underpayment of tax required to be shown on a return is due to fraud". ( mphasis added.) The~ tierm The actual amount of " otal tax" shown "on line ~53 of Mr. Feller's 1992 return is $57,.244.58; but on line 19 of IRS's notice of deficiency the "Total previously adjusted" adjustments that would accoùnt for the difference; but does not show them. For si plicity's sake and ease of comparison, I use the IRS' s amount . is $60 380 . Presumably there are previous tax shown on 'return or as the the record - 53 - "underpayment" is defined in section 6664(a) of the Internal Revenue Code and in section 1.6664-2(a) of the Income Tax Regulations (26 C.F.R.). This case turns on the meaning of "underpayment" in section 6664(a), which in turn depends on the meaning of the term "amount shown as the tax by the taxpayer on his return" that appears in that statute. II. The statute and regulation at issue A. The statute: section 6664(a) Section 6664(a) defines the "underpayment" to which the fraud penalty of section 6663(a) applies. In simplified terms, the "underpayment" is the excess of one's actual liability over his reported liability--i.e., tax "imposed" minus tax "shown" equals "underpayment". Section 6664(a) provides as follows: SEC. 6664(a). Underpayment.--For purposes of this the term "underpayment" means the amount by which part, any tax imposed by this title exceeds the excess of-- (1) the sum of-- (A) the amount shown as the tax by the taxpayer on his return, plus (B) amounts not so shown previously assessed (or collected without assessment), over (2) the amount of rebates made. For purposes of paragraph (2), so much of an abatement, credit, repayment, as was made on the ground that refund, or other the tax the term "rebate" means - 54 - imposed was less than the excess of specified in paragraph (1) over the rebates previously made." the amount This defiAition of "underpa ment" follows closely the definition of a tax "deficiency" in se tion E211(a), employing terms useå in that section ("tax imposed" "exceeds the excess", "amount ~ shown", "previously assessed"); and the definition of "rebate" follows closely the definition of the÷same term in section 6211(b) (2). - However, unlike the definition of "underpayment" in section 6664 (a) , the def init ion of "def iciency" in section 6211(a) is qualified by section 6211(b) (1), which a provides that "For purposes of this section [i.e., not "For purposes of this title":] * ** [t]he tax imposed by subtitle A. and the tax shown on the redurn shall both be determined * * * 2The definition of "reb te" in section 6664(a) incorporates in which subparagraph is a question the erroneous refunds made to Mr. Feller to term in section 211(a) (1) (B). Whether this might lacks the phrase "as a deficiency" when compared to the "the amount specified in pa agraph (1)", (A) equivalent render a portion of be rebates (and thus to inc ease the underpayment) the parties have not addresåed in any detail., Respondent makes no contention that Mr. Fell r had any "amount of rebates made", sec. 6664(a) (2), or any "amgunts not so shown previously assessed (or collected without assessment)," sec. 6664(a) (1) (B), but rather states in his calculŠtions that therefore disregard rebates in this discussion and use the shorthand definition of tax "shown" equals "underpayment"). However, Judge Wherry shows that respondent has a mista en understanding of section 6664(a) "rebates" that wrongly equates them with section 6211(b) (2) "rebates" despite the phraså "as a deficiency" that section 6211(b) (2) but error is corrected, portion of in from section 6664(a). When this the excess credi that was actually refunded. "underpayment" (i.e., tax "imposed" minus those amounts are zero. I is aßsent the penalty appears to be owing on the is present - 55 - without regard to the credit under section 31'[i.e., "Tax Withheld on Wages"]". Withholding credits are thus explicitly excluded from the Code's "deficiency" equation; but the Code's "underpayment" equation in section 6664(a) that is at issue here does not mention withholding credits. B. The regulation: 26 C.F.R. section 1.6664-2 I The regulation implementing the fraud penalty largely repeats the definition of "underpayment" given in the statute. Moreover, the regulation defines "tax imposed" in a manner consistent with the use of that term in the deficiency context. That is, even though section 6664(a) is, as we have noted, silent about withholding credits, the regulation borrows from the deficiency context (section 6211(a)) and explicitly defines the minuend of the equation--"tax imposed"--without regard to withholding credits:3 3That is, the regulation does not give a special definition "tax imposed"; and neither respondent nor the to the minuend, majority suggests that the statute i's ambiguous in referring to "tax imposed". Much mischief or absurdity might result if "tax imposed by this title" were ambiguous and might refer to tax net of withholding credits. In that event, other Code sections that are like section 6664(a)--i.e., sections that refer to "tax imposed by this title" but do not explicitly exclude the netting of credits--might become problematic. (requiring that "Every person liable for any tax imposed by this title * from time to time prescribe"), section 6011(a) return be filed by "any person made liable for any tax imposed by this title"), section 6501(a) imposed by this title"), and section 6511(a) (setting a deadline for the filing of a claim for refund of "any tax imposed by this These provisions have always been (rightly) understood title"). (continued...) (providing for assessment of "tax These include section 6001 (requiring that a * * shall keep such records * * * as the Secretary may 56 - (b) - Amount of income tax imposed. For purposes of paragraph (a) of this section, tax imposed" taxpayer under subtitle A for the taxable year, determined without regard tor- the "amount of is the amoþnt of ,tax imposed son the income (1) The credits får tax withheld under sections 31 (relating to tax withheld on wages) and 33 (relating to tax withheld at source on nonresident aliens and foreign corporations) * *. * 26 C.F.R. sec. 1.6664-2(b), Income Tax Regs. (emphasis added) . However, in defining the sul rahend of the equation--the "amcunt shown as the tax"--the regu ation makes one significant emendation: (c) Amount shown as the .tax by the taxpayer on his For purposes of paragraph (a) of the "amodnt shown as the tax by the return-- (1) Defined. this section, taxpayer on his return"3 is the tax liability shown by the taxpayer on his retåurn, determined without .regard to the items listed in §§ 1. 6664 -2 (b) (1) , (2) , and (3) , except that it is reduded by the excess of- (i) The amounts shown by the taxpayer on his return as credits for dax withheld under section 31 (relating to tax withh ld on wages) * over * * (ii) The amounts 4ctually withheld * * * for such taxable year. '26 C.F.R. sec. 1.6664-2(c), Income Tax Regs.- (emphasis added) . Under this regulation, the amount shown" is thus first determined "Without regard o the items listed in 3 ( . . . continued) to apply where there is a tAx liability, whether or not that liability has been satisfied by withholding credits - 57 - § 1.6664-2(b) (1)"--i.e., without regard to withholding credits-- but is then reduced by excess withholding credits. Without this' provision, if Mr. Feller's -"amount shown as the tax" ($60, 380 for 1992) is subtracted from his "tax imposed" ($30,358), then the difference is less than zero, he has no underpayment at all, and he is not subject to the fraud penalty. The effect of this regulatory provision, however, is to reduce the "amount shown as the tax" (Mr. Feller's $60,380) by the excess withholding credits ($135, 000 for 19.92) in order to reveal the extent to which the taxpayer under-reported his net liability. For Mr. Feller this modification yields an "amount shown" that is negative ($60,360 - $135,000 = -$74,640) and that therefore, when subtracted from "tax imposed", does not decrease his "underpayment" but rather increases it. This regulation thus aims to measure the true culpability of a return like Mr. Feller's, rather than overlooking the excess credits in the computation of'the penalty. III. Regulations as law Under our Constitution, it is Congress that enacts laws. See U.S. Const., art. I, sec. 7. The first enumerated power given to Congress (and not to the Executive) is the "Power To lay and collect Taxes, Duties, Imposts and Excises". Id. sec. 8, cl. - 58 - 1.' As ·the Supreme Court ob erved in Whitman v. Am. Trucking Associations, 531 U.S. 457, 472 (2001) : § 1, of Article I, legislative Powers herein grantied . the United States . " This text permits no delegation of, those powers * the Constitution vests " [a]11 in a Congress of * *. . . Only the legislature can le islate. Only Congress can enact tax laws . However, -since at least as early as 1828 (i.e., 40 years after the Constitution was atified) , the Secretary of the Treasury has-been explicitl authorized by statute to promulgate "regulations" .5 Such regulations acquire the force of law only 4Article I, section 7, lause 1 includes an additional ' "All bills for , the house that (in James Madison' s words ) the originating of money bills", which authority is the known and determined sense of a majority of See-The Federalist No. 58 (James Madison) democratic provision particdlar to tax law: raising revenue shall origir ate in the House of Representat ives " - - i . e . "speak [s] people" . houses have "equal authorit except conferred on "the House [of Representatives] , composed of greater number of members, determined sense of a major ty of section 9, clause 4 of "direct" taxes; and when thå Constitution was amended to curtail that prohibition, Article I, section 8) and collect taxes on incomed" . * and speaking the known and the people") . Article I, the Sixteenth Amendment provided (echoing the Constitution originally prohibited ' The Congress shall have =power to lay * on all legislative subjects, (the two that the the * * * sSee Act of May 19, 1828, ch. 55, sec. 10, 4. Stat. 274 ("it to establish such rulês and regulations, not inconsistent the United )States, as the President of the the United States, the Treasury, under ther from time to the Seåretary of the President df shall be the duty of direction of time, with the laws of United States shall think pioper, impartial appraisal of" impdrted goods, duties) . to secure a just, faithful, and for purposes of customs - 59 - derivatively, through statutes enacted by Congress--either because a statute explicitly authorizes an agency to promulgate "legislative regulations" or because the,agency that is charged by law with administering a statute issues "interpretive regulations"6 that interpret the statute, and the courts defer to that interpretation. See Chevron, U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-845 (1984). The pa¯rties and the majority of this Court acknowledge that the regulation at issue--26 C.F.R. section 1.6664-2(c) (1)--is in the second category desóribed in Chevron--i.e., so-called "interpretive regulations". Such interpretive regulations embody the Treasury "department's construction of a statutory scheme it is entrusted to administer", Chevron, 467 U.S. at 844, and are generally authorized in section 7805(a) ("the Secretary shall 'Judicial deference to interpretive regulations is See Kristin E. Hickman, "The Need for "The 1960s and id. at 1574, Through the mid-20th century, courts and law would be an unconstitutional delegation of relatively recent. (such as commentators concluded that a general rulemaking grant section 7805(a)) authorizing interpretive regulations that have the force of legislative authority. Mead: Rejecting Tax Exceptionalism in Judicial Deference", 90 Minn. L. Rev. 1537, 1567 (2006). However, 1970s saw a virtual explosion of agency rulemaking", and there followed the modern deference regimes (culminating in Chevron), perceived as an impediment. But see Whitman v. Am. Trucking Associations, concurring) text of on cessions of would be willing to address the question whether our delegation jurisprudence has strayed too far from our Founders' understanding of separation of powers"). the parties to these cases has examined the the Constitution or asked us to reconsider our precedents to which the nondelegation doctrine is no longer Inc., 531 U.S. 457, 487 (2001) (Thomas, J., legislative power. On a future day, however, I ("none of i - 60 - prescribe all needful rules and-regulations for the enforcement of this title") In reviewing interpreti e rëgulations, "a court" may not substitute its own" construction of :a statuto y provision for á reasonable interpretation ma e by the =administrator of an agency." Id._ at 844. As t majority explains, following Chevron we conduct a two-step reŸiew of the regulation: First; we ask "whether Congress, has directly spoken to the precise question at issue"; and second, if the statute is "silent or ambiguous", we ask whether t he regulation reflects a reasonable construction of the statute. Majority op. pp 13-14 (citing, Chevron,' 467 U.S. at 842-843) . IV. Diècussion There is no question tl at the deliberate reporting of fictitious withholding credits is fraudulent. There is no question that Congress could well impose a civil penalty on such fraud (in addition to the c iminal penalties that it has imposed and that Mr. Feller has bor e) . The question is whether in fact Congress did so when it imp sed thesfraud penalty on ,"underpayments", defined as "tax imposed" minus "amount shown" or whether instead the Trea ury Department went beyond the statute when it promulgated the regulation. - 61 - A. The plain meaning of the statute is not ambiguous. The term at issue is "the amount [1] shown [2] as the tax [3] by the taxpayer [4] on his return". Sec. 6664(a) (1) (A). Under section 6664(a) this amount is subtracted from "tax imposed" (i.e., the actuál tax liability) to yield the "underpayment". The plain meaning of this term could hardly be clearer: In the first place, the amount in section 6664(a) (1) (A) is an amount "shown". It is therefore an amount that is visible. The plain language steers us away from an amount that would need to be determined by investigation or correction and points us simply to what is "shown". Section 1.6664-2(c) (1) of the regulations, however, employs the "tax liability shown * * * except that it is reduced by" excess credits, which are determined by reference to "amounts actually withheld" as compared to "amounts shown by the taxpayer on his return as credits". (Emphasis added.) In Mr. Feller's case, the resulting negative number (-$74,640) is not shown anyWhere on his 1992 return, nor does the return show the constituent numbers necessary to yield that negative number. Rather, Mr. Feller hid the amount "actually withheld"--i.e., $3,097--and certainly did not cause it to be "shown" on his return. The regulation thus looks to what is deliberately not shown and thereby ignores the plain language of the statute that describes an amount "shown". -- 62 - Second,a the amount in section 6664 (a) (1) (A) is "tax" . Of course, the Code also has p(ovisions about other kinds of amounts--e.g., of income, de uctions, costs, basis, exclusions, credits, payments, penalties, and so on--but section 6664 (a) (1) (A) refers to an amount of "tax", a term not at all interchangeable with those other kinds of amounts . Section 1.6664-2 (c) (1) of t e regulations, on the other hand, though it properly begins with the "tax" shown, reduces it by excess withholding credits t o yield not the taxpayer's tax shown but a number--in Mr. Feller's case, a fictitious negative number (-$74,640 for 1992) --that i neither his actual tax liability nor his reported tax liability. This negative number is instead a number that, when used in tl e underpayment calculation, shows the size of his net liability to the IRS. However, the plain meaning of the statutory language restricts us to "tax" that is shown on the return, and the statuto y language gives no warrant for injecting excess credits in o the equation. Third, the amount in sdction 6664 (a) (1) (A) is shown "by the taxpayer". Of course, the dode authorizes the IRS to make its own determinations of amount s relevant to tax liabilities; but plainly section 6664 (a) (1) ( ) describes an amount shown "by the taxpayer". Section 1.6664-2(c) (1) of the regulations, on the other hand, corrects the amäunt shown "by the taxpayer" on his return and replaces it with a number determiged by the RS. The formula in the regulation t us wanders from the plain language of section 6664(a) (1) (A), which looks to-an amount shown "by the - 63 - taxpayer". Fourth, the amount in section 6664(a) (1) (A) is an amount shown "on his return". If Mr. Feller's 1992 return had included a $135,000 entry explicitly for "excess credits" (or an amount of tax reduced by $135,000 of excess credits), then there could hardly have been fraud on the return, since that candid reporting would have confessed the very fabrication that was perpetrated on the return. But of course the excess withholding credit amount of $135,000 was an amount that did not appear as such anywhere on, and could not be derived from, his- return. By bringing that undisclosed amount into the computation, the regulation contradicts the plain meaning of the statutory description of an amount "on the return". It is true that some terms in the Code are "terms of art" whose true meaning "may not be immediately plain on their face". Concurring op. p. 32. But this is a term so explicit, so at odds with the regulatory definition, and.so consistent with the tax return itself that it cannot be explained away in this fashion. The Form 1040 tax return does not raise any question about the plain meaning of the term but faithfully corresponds to it--and not to the artful revision of the regulation. The return includes a line for "total tax", and withholding credits are - 64 - reported on the return only after that "total tax" entry.' One looks in vain on the Form 1040 for any "show [ing] " of excess withholding credits. More mportant, one looks in vain on the Form 1040 for any entry dendminated "tax" that takes into account any withholding credits, wh th r "actual" or "shown". , Instead, the ,only "amount shown as the tax by the taxpayer on his retu n" is a "total tax" amount befdre any payments or credits. On Mr. Feller's tax return for 1992, that "total tax" (before withholding credits) that wäs "shown as the tax by the taxpayer on [line 53 of] his return" was no less than $60,380. . (See supra note 1..) Since the "tax im osed" was less than this amount, there was no "underpayment" reflected on the return. 70n the Form 1040 for 1988--the year before sections 6663 the tax The next section, entit led "Credits" (lines 41 through 47), t'axes", Énd a line 40 that totals lines 38 and (Not inc luded in this section is the "credit" instead credit s (such as the child care credit and lines 32 through 40) incfudes, after the computation of tha( are taken into account in figuring and 6664 were enacted--the "Tax Computation" section (consisting of taxable income, a line 38 oË which one is to "Enter tax", a line 39 for "Additional 39. consists not of credits in the nature of payments againát liability but the foreign tax credit ) the tax liability. for withheld tax, which "is in the nature of a payment.) Thereafter, a section of "Other Taxes" includes, alternative minimum tax; and it ends with line 53, which reads: "Add lines 47 through 52. Ýhis is your total original) . Only after this "total return include E withheld", net aniount due after payments and credits is not referred to as tax, but (line 62) or an "AMOUNT YOU OWE" issue were the same, with o ly slight dif ferences in some line number s . income t ax the return entitled "Payments". is either an "amouÄt OVERPAID" (line 65) . (bold in tax" on line 53 does the tax" for eiample,' the Êelf-employment tax and the The Fo ms 1040 for Mr. Feller's years at (lines 48 through 53) in the section of The 54) for "Federal - 65 - B. The statutory silence about "credits" is no warrant for the innovation in the regulation. The majority observes, however, that-- the statutes do not speak expressly to the precise issue whether withholding credits can be taken into account when calculating an underpayment for purposes of sections 6663 and 6664(a). * * * Section 6664 is silent and ambiguous with to the issue before us; respect directly addressed the meaning of "underpayment" when a taxpayer has overstated withholding credits. i.e., Congress has not the term Majority op. p. 18. It is true (to put it more precisely) that section 6664(a) (1) (A) does not state whether "the amount shown as the tax by the taxpayer on his return" does or does not take into account withholding credits. However, the very term at issue is "tax" shown, and the unremarkable lack of any mention of "credits" is simply consistent with the statute's meaning what it says: To state the obvious, "the amount shown as the tax" refers to tax. Withholding credits under section 31 are another matter. Section 6664(a) (1) (A) can be said to be "silent" about withholding credits--but only in the same way that it is silent about the fuel credit under section 34, silent about payments designated to the Presidential Election Campaign Fund under section 6096, silent about interest under section 6601, and silent about a host of other provisions in the Code that Congress could have incorporated into the ,"underpayment" definition but did not. It is true that when a statute is "silent", that - 66 - silence may leave a gap that can legitimately be filled by regulation, see Chevron, 467 U.S. at 843; but for this purpose a statute can fairly be called "silent" only when it cannot be said that "the intent of Congress is clear", see id. at 842. Statutory specificity about ne subject cannot sensibly be construed as gap-creating "silence" about other subjects. In section 6664 (a) (1) (A) Congress was silent about withholding credits because it was prov ding a rule about tax. • When Congress states a plain and unambiguo s term involving "the amount shown as the tax by the taxpayer on his return" , the IRS cannot take that enactment as an occasidn to craft rules about different 1. subject matter not addressed in the statute--i.e., excess withholding credits not shown by the taxpayer and not appearing on the return--as if Congress had left a gap to be filled in. C. Different language in the deficiency statute does not justify the innovition in the regulation. The majority's apparent basis for discerning ambiguity in "the amount shown as the ta " is this: That term appears both in the definition of "underpayment" in section 6664 (a) and in the. similar but not identical définition of a "deficiency" in section 6211(a) . See majority op. p. 18. For purposes of defining a "deficiency", section 6211( ) (1) provides: "The tax imposed by subtitle A and the tax showr on the return" shall both be "The term "amount shown as tax by. the taxpayer on his return" in section 6664 (a) (1) (A) is not identical to the phrase (continued; . . ) - 67 - determined without regard to", inter alia, withholding credits. (Emphasis added.) Section 6664(a) defining "underpayment", on the other hand, has no equivalent "without regard to" provision. This contrast evidently prompts the suggestion that,. for purposes of defining a "deficiency", the tax "shown on the return" should be determined without regard to withholding credits; but for purposes of defining an "underpayment", the tax "shown on the return" should be determined with regard to withholding credits. However, an examination of the origin of section 6211(b) (1) shows that this suggestion is not warranted. The basic definition of a "deficiency" in section 271 of the 1939 Code, like today's definition in section 6211(a), was "tax imposed" minus "amount shown as the tax"; but in the 1939 Code the "amount shown" "was "decreased by the amounts previously abated, credited; refunded, or otherwise repaid in respect of such tax" (emphasis added); and the deficiency was therefore increased by those amounts. The 1939 Code had no provision that "tax imposed" or "amount shown" should be "determined without regard to" withholding credits, since those credits had yet to be invented. "(...continued) "tax shown on the return" in section 6211(b) (1). However, latter term in section 6211(b) (1) "amount shown as tax by the taxpayer upon his return" in section 6211(a) (1) (A), so we assume it is equivalent term in section 6664(a) (1) (A). is evidently shorthand for the to the same 81 - 68 - The 1939 provision tha a "deficiency" would ,be increased by amounts "refunded" began to be awkward in 1943, when the Current Tax Payment Act of 1943, ch.) 120, 57 Stat. 126, provided for the now-familiar mechanism of p yroll withholding. For the first time, employers withheld ta from wages, id. sec. 2, and the employee claimed that withholding as a credit (i.e., a payment)· on his return, id. sec. 3, 57 Stat. 139. If that resulted in an overpayment of tax, then the overpayment was refunded to the employee. Id. sec. 4, 57 S at. 140. The next year Congress- noted that this regime rais d questions about the definition of a "deficiency' (i.e., "tax im osed" over "amount shown" minus "See S. Rept. 885, 78th Cong., 2d Sess. 38 (1944), 1944 C.B. 858, 887: Under the systemgof with respect ta collection which now obtains to individuals, it is apparent that in - certain cases the estidated tax payments and the tax, Under the procedure instituted, , - If, in such cases, it is the éxcess of such payments withheld at source may exceed the tax shown by the taxpayer on his return by the Commissioner fo handling such cases it is contemplated that (estimated tax and tax withheld at source) over the tax shown on the return shall be refunded to the taxpayer as expeditiously as po sible. subsequently- determined that the tax imposed under chapter 1 is greater than the tax shown on the return, the existing definitioñ of deficiency would produce an improper result if the amount so refunded is taken into account For example, a tax of $600 and clai withheld at source, $300 would be immediately refunded. If the Commissioner su sequently determines that the correct tax should be $800, liability in controver y is $200 and, hence, deficiency should be $200. However, if the taZpayer filed a return disclosing in ascertaining the amount of ing a credit of $900 for tax the amount of the tax the the definition the deficiency. . contained in existing law would indicate«a deficiency 4. (continued ..) - 69 - "refunds"), which now needed to be revised to make clear that a mere refund of a claimed overpayment of withheld tax (what is now called a "non-rebate refund") did not skew the computation by reducing tax "shown". Congress therefore deleted from section 271 the phrase "decreased by the amounts previously abated, credited, refunded, or otherwise repaid" and in its place incorporated and defined the term "rebate". After this 1944 amendment, section 271 provided (in language very similar to current section 6211): SEC. 271. DEFINITION OF DEFICIENCY. (a) In General.--* * * "deficiency" means the amount by which the tax imposed by this. chapter exceeds the excess of-- (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, amounts previously assessed (or collected without assessment) as a deficiency, over-- * plus (B) the * * (2) the amount of rebates, as defined in subsection (b) (2), made. is, that 9(...continued) of $500, ($600 [taxishown] minus $300 [refund]). amendment corrects this defect by providing that the amount of any such refund shall not be taken into account. the excess of $800 [actual The proposed tax] over This 1944 legislative history makes it clear that the "determined without regard to" language of section 6211) because non-rebate "refunds" once muddled the deficiency definition. to "underpayment", That definitional problem never arose with respect for tax shown was never reduced by "refunds". is'present in the "deficiency" definition only former section 271 (now - '70 - (b) Rules "for App ication of Subsection (a) . --For the purposes of this sectio (1) The tax imposed by t-his chapter and the tax shown on the råturn shall both be determined without regard to ayments on account of . estimated tax, [and] without rega d to the credit under section 35 * * *; (2) The term "rebate" means so much òf an refund, or other repayment, as was abatement, credit, made on the ground that the tax imposed by this chapter was less than the xcess of subsection (a) (1) byer the amount of rebates previously made * the amount specified in [Emph sis added.] * *. Individual Income Tax Act of 1944, ch.« 210, sec. 14(a), 58 Stat. 245. Under subsection (b) (2) of the amended statute (as under today' s Code) , the "rebate" hat decreases "amount shown" (and thereby increases the "deficiency") includes a refund only if the refund is "made on the ground that the tax imposed" is less than what the taxpayer reported, and does not include re-funds made on the mere ground that payment s and credits exceed the tax that the taxpayer reported as due. nd, lest there be any doubt, subsection (b) (1) makes cle r that prepayments and withholding credits do not affect the "tax imposed"1° or the "tax shown". 1°It seems a truism to aay that "tax imposed" does not It is therefore hard to discern the potential error include credits; -a "credit" is not "imposed"; and the problem that Congress addressed in 944 concerned tax "shown", not "imposed". that Congress sought imposed" . However, the basic definition of a dåficiency (i.e., and in the definition of tax "shown" minus "rebates" "rebates"; and :the latter inclusion may have made the clarification seem more nec ssary. to cor0ect by this clarification as to "tax the phrÅse "tax imposed" does appear in both "tax imposed" over the term tax The provision survives today . ) (continued. . - 71 - When the current penalty regime was enacted in 1989," Congress preempted any equivalent confùsion about the effect of- non-rebate- refunds on the computation of an "underpayment". It did so'by enacting in section 6664(a) a definition of "underpayment"~ that, like the 1944 "deficiency" definition, omitted any mention of "refunds" and instead subtracted "rebates" from the t'ax shown on the return-. Admittedly, this new "underpayment" definition did not include any instruction that "tax imposed" or "tax shown" is determined without regard to . withholding credits and other prepayments. However, the 1944 origin of that language in the deficiency context, set out above, shows that the'absence of that instruction in section 6,664(a) is not significant. The provision about, and the definition of, "rebates" made such an instruction unnecessary. The "underpayment" definition, new in 1989, never included any mention of non-rebate "refunds" that might have skewed the definition. That 1943-era confusion as to deficiencies was solved in 1944 by the "rebate" provision; and any potential similar confusion as to underpayments was preemptively solved in 1°(.:.continued) in section 6211(b) (1). "The negligence and fraud penalties on "underpayment[s]" were first enacted in 1954 in former section 6653(a) and (b). The definition of incorporated by reference the definition of "deficiency" as corrected in 1944, so that the problem of confusing the definition of former section 6653. "underpayment" never arose under (non-rebate) "underpayment" in section 6653(c) (1) explicitly "refunds" - 72 - 1989 when the "underpayment" definition included, in the first instance, the equivalent. "rebate" provision. There was therefore never an occasion for includ ng in section 6664 (a) a provision that withholding credits sho ld not affect the -computation of tax shown. Such a provision would have been redundant. (And the absence in section 6664 (a) c any reminder that "tax imposed" is determined without regard to withholding credits did not prevent the agency .from so providinc , in section 1.6664-2(b) of its - regulation, for purposes of computing an underpayment . ) D. ~ ' Section 6201(a) (3) does not -iustify the- innovation--in tÏ1e regulation. Section 6201(a) (3). ref rs to excess withholding credits that, are allowed against "tax shc wn on the return" . Thee concurring opinion observes the following: Section 6201(a) (3) provides that such overstated withholding amounts are to be "assessed by the Secretary in the same manne as in the case. of a mathematical, or clerical error", and the pr vision cross-references section 6213 (b) . Concurrinc op . pp 27 -28 . Section ,6213 (b) (1) provides for an assessment f an amount of tax "in excess of . that shown on the return", so that the amount "shown on the return" I must be an amount that refldcts the math error. Concurring op. p. 28. With excess withholciing credits, "[als with math errors, * * * t he .amount of tax 'shown on the return' is the amount shown by the taxpayer that reflect s the overstated withholding, s credits.." . That is, tax "sh wn" under section 6201(a) (3)) must - 73 - mean tax reduced by excess credits- (as^ the regulation provides under section 6664(a)). -Concurring op. p. 29. It is su el proper to attempt to bring these other sections to bear on the meaning of tax ishoun" in section 6664(a), but I submit that there are skips and fiaws "in this an'alysis of sections 6201(a) (3) and 6213(b). The House Report that the concurring opinion cites'clearly states that then-current law (before section 6201(a) (3)) already allowed the IRS to retrieve, without deficiency procedures, any excess credit that had been mistakenly allowed against the tax liability. Retrieval of those credids that had been mistakènly allowed against tax liability did not require any new assessment authority to be enacted in section 6201(a) (3). What was new in that section was a procedure fo retrieval of refunded credits. -Section 6201(a) (3) does not . cross-reference 'section 6213(b) (1)--the paraÿraph critical to the argument in the concurring opinion--but refers only to section 6213(b) (2) (to make cleaf that it does not apply). Section 6201(a) (3) does not state or'even imply that excess credits are a constituent of tax "shown".' -On the contrary, the statute conceives of the tax liability- and excess credits as distinct, since it refers to excess credit "allowed against the tax shown on the return". (Emphasis added.) "To the same -effect, the-House Report that the concurring opinion cites reflects a clear understanding that "tax shown" tax (not 1.6664-2(c) (1), tax reduced by excess credits, -as in section is Income Tax*Regs.)". In- presenting its'example, (continued...) - .74 - Furthermore, it. is far from clear what the statute means when it states that an overstated credit allowed against tax shown on the return may be "assessed" . Payments that are credited (or not credited) a ainst the -tax liability do not increase or decrease the amdunt of the tax liability. If an ostensible payment or credit that was originally allowed against that, liability proves in fact to be no good, that hardly increases the amount of tax; instead it decreases the amount oft payments that should be entered. The Internal Revenue Manual (IRM) reflects this distinction. It states that an excess withholding credit, once discovered, .is in fact not assessed by the IRS as additional tax. Instead, excess credits are recovered either by "an assessment (a TC 290) for the amount of the overstated withholding credit or in limited circumstances with a reversal (TC 807) of the ovérstated amount." IRM pt. " ( . . . continued) is $100--not the $70 twice states that the "tax shown" H. R pt. 1337, 83d Cong., 2d Sess. A404 the repdrt refers to the excess credits as the report that would be yielded by suNtracting the excess credit of $30 from -the tax of $100. (1954) . Similarly, "$30 (the tax of $100 shown in the return less the [proper] $70 credit)"; and the report sa s that this $30 amount "can be immediately assessed as tax shown on the return which was not paid" . as affecting the amount of af fecting the amount of contrast, an "underpayment" reference to tax "shown", nöt by reference to "tax shown that has not been paid" . The House Report states that the excesa 'creditss can be "assessed as tax shoån on thes return which was not paid" . That report suggests) an assessmènt paid") .a This describes not means of collection, and it therefore does not address our issue; the excess credits are (correctly) described not the "tax shown" but rather as . the tax shown that has not been paid. the means by -which ther IRS is to get the $30 is (the in section 6664 (a) the. amount but the is calculated by ("as tax shown * * * which was not the character, of That is, is, , By - 75 - 21.4.5.4.3(4) (Jan. 24, 2008). ("TC 290" is the code for "Additional Tax Assessment", and "TC 807" is the code for "Withholding Credits Reversed".)" What is that "limited circumstance" that gets TC 807 treatment?--It is none other than excess credits that have been wrongly applied to the reported liability. The IRM makes it clear that these excess credits wrongly applied are "recovered with a reversal of the credit (i.e., TC 807 * * *)" (emphasis added), not by an assessment of additional tax. IRM pt. 21.4.5.4.3(6) (Jan. 24, 2008). The IRM gives an example: Mary Smith filed her 2008 income tax return reporting a tax liability of $700 and withholding credits of $500. She overstated her withholding by $100 and the error was not corrected when IRS processed the return. Since Ms. Smith did not claim the overstated amount as a refund (she reported a balance due) and the overstated amount did not result in a refund, a TC 807 may be used to correct -the overstatement. [Id.] The House Report indicates that the provisions added in 1954 were codifying existing law, so that today's law as to correction of non-refunded excess credits, illustrated in the IRM, is the same as pre-1954 law. The meaning of tax "shown" in section 6664(a) is not illuminated by section 6201(a) (3). Section' 6201(a) (3) does not state or imply that"excess withholding credits that were wrongly allowed against the tax liability are later assessed as part of "See Non-Master File Pocket Guide, IRS Document 10978 (Rev. 10-2006). tax "shown"., They.are reversed (despite the statute's loose reference to their being "assessed"), and the suggestion thats they are assessed as tax "sh wn" requires subtle and creative cross-referencing not warran ed in the statute. E . - Even if section 6664 (a) (1) (A) were ambiguous , regulation is incdnsistent with congressional the intent . For the reasons stated above, section 6664 (a) (1) (A) is not ambiguous, and under the Su reme Court's Chevron analysis, the, inquiry stops there. Howev r, if we were to assume arquendo that the statute is ambiguous and were to proceed to Chevron' s "step 2", we would then need to determine "whether the agency's answer is based on a permis ible construction of the statute" . Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 843. Undertaking that step 2 analysis, I find"that the definition of "amount shown as the tax" in section 1.6664-2'(c) (1) of the regulations (i.e., t x shown reduced by excess credits) is not a permissible construction of ethe statute. Because the penalty pr vision in former secti'on 6653 (a) incorporated the deficiency definition into the definit ion of "underpayment", the pre-198 penalties did not reach excess withholding credits (which, as we have noted, are expressly excluded from the -"deficien y" calculation by section 6211 (b) (1) ) . As th majority .acknowledges, majority op. p. 21, the 1989 legislative history includes a statement in a House Report "that the defi ition of 'underpayment' in section - 77 - 6664-(a) was not 'intended to be substantively different from * * * [previous] law.' H. Rept. 101-247, supra at 1394." A. regulation that would impose the penalty on a new circumstance (excess withholding credits) that had not formerly been reached by the penalty is "substantivel:y different" from thë prior law-. The IRS's interpretation is therefore at odds with express congressional intent. If in 1989 Congress had intended to impose a penalty that reached not only under-reporting of "the amount shown as the tax" but also over-reporting of withholding credits, then it would not have used the language that appears in section 6664(a) (1) (A). A different penalty provision in section 6694, enacted in 1976, sheds a helpful light in this regard. Section 6694 imposes an assessable penalty on a tax return preparer for an "Understatement of Taxpayer's Liability". The definition of that "understatement" is telling: SEC. 6694(e).' Understatement of Liability the net amount payable with respect Defined.--For purposes of this section, "understatement of of imposed by this title or any overstatement of amount creditable or refundable with respect to any such tax. liability" means any understatement to any tax * * * the term the net This lianguage from section 6694(e) reflects the concept--i.e., net tax liability after credits--that the regulation would attempt to read into section 6664(a). However, that language has been in section 6694(e) since 1976--i.e., 13 years before section 6664 was added in 1989--and was therefore at the ready when - 78. - Congress enacted the new pen lty regime; but .Congress did not - employ such language in sect .on 6664. Section 6694 shows that when Congress wants to penalize an understatement of a net amount due (or an overstatement, of reditable amounts) , it knows chow to do so. It did so in section 6694 but not by its provision in section ,6664 (a) (1) (A) as to ax "shown" . V. Conclusion Only the legislature can legislate; only Congress can impose a penalty. I would hold that the penalty that the IRS has determined here--a fraud peralt~y on overstated withholding credits--has simply not been enacted to the extent that the regulation provides. The regulation's imaginative definition of "amount shown as the tax by the taxpayer on his return" is not a reasonable interpretation oÉ t-he statute but is the agency' s impermissible attempt to sugplement the statute . HALPERN and WHERRY, JJA, agree with this dissent.