TAX COURT OPINION

Case: Beverly Bernice Bang
Docket Number: 9371-07S
Judge: Morrison
Opinion Type: summary
Filed: 01/04/2011
Pages: 44

T.C. Summary Opinion 2011-1 UNITED STATES TAX COURT BEVERLY BERNICE BANG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 9371207S. Filed January 4; 2011. Kent Vriezelaar, for petitioner. IvÍichael W. Bitner, for respondent. MORRISON, Judge: This case was' heärd pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Under section 7463 (b) ,. the decision to be entered is not reviewable by Ény. other court, Unless otherwise indicated, all section references are 'to the Internal Revenue Code (Code) ,' as amended, and alal Rule references÷are to the Tax Court Rules of Pfactice and Procedure. Bang resided in Iowa at the time her petition was filed. SERVED JAN: 4 20 ft - 2 - and th s opinion shall not be treated as precedent for any other case. Pursuant to section 6330 (d)", petitioner Beverly Bang seeks review of the determination of the IRS Officè of Appeals to sustaifi a proposed levy. Respondeñt, whom we refer to here as the IRS, has filed a motion for summary judgment. The proposed levy seeks to, collect interest and penalties that äiose from Bang' s failure to timely pay $2, 636 of income tax for he 1983 tax year. The $2,636 payment, which was due on April 15, 1984, was made onsMay 12, 2006. The amount of the propos d levy is $32,343.46. The $32,343.46 comyrises four component s : interest under section 6601(a); i e- • dderpayment $21,553.52 in interest on the $2,636 underpayment dày the payment was due, April 15, £984, until $ $21, 553 . 52 does noti cöntinued to accrue. until May 12, 2006) ;2 , 636 was assessed by the IRS, March 27, 2006. (the include the additional the date Bang paid the $2, 636 on from the ' the date the interest that i.e. •tax-motivated transaction interest under former section 6621(d)); interest rate of 120 percent of I S had determined thatethe $2, 636 underpayment was attributable to a tax-motivated transaction;5 the $21 553.52 computed aliove used an the normal rate because the 2Sec ; 6601 (a) if a taxpaye? underpays tax, the taxpayer must pay interest on the uñÿaid tax from the date the tax is due until 'the'date the tax is paid.4 The interest rate is setlfor each calendar quarter. reqùires - that, Normer sec. 6621(d) provided that if any underpayment of * tax wa attributable to a "tax-motivated transaction" thes intere t rate on that payinent, woùld abe - 20 percent more than the ordina y interest rates on underpayments. Act of 1984, Pub. L. 98-369, esec. 144(a) See 3Deficit Reduction 98 Stat. 6822 - 3 - Athe 50-percent-of-interest negligence penalty under former secdion 6653(ai (2); $21,553.52, reflecting the determination that the $2,636 únderpàyment was due to negligèncè;4 and i.e. $Í0,776,76, which was 50 percent of •a failure-to-pay-tax penalty; 12, 2006. i.e. $13.18 assèseed dh June The levy did not include the $2,636 in additional i come tax for the 1983 year and did not inc ude a $131.80 section 6653 (a) (1) 5- percent negligence penalty sfor underpaying her 1983 tax.6 Bang had already paid these amounts. At the Appeals Office, Bang was 4Former sec. 6653(a) (2) (as amended by the Economic Recovery Ta'x Act of 1981, sec. 722(b) (1), Pub. L. =97-34, 95 Stat. 342) provided that if any underpayment of tax was attributable to negligenci, of underpayment'due to neglidence. percent addition to tax was made when the underlying tax was either'assessed' or paid. the interest payable under sec. 6601 on the portion of theêe would be an addition to tax equal The calculation-of the 50- Id. to 50 percent the - In 1986, formerasec. 6653(a) (2) was renumbered as former sec. 6653(a) (1) (B). 99-514; sect 1503(a) due date for which (determined without regard to extension) after Dec. 31, 1986, Tax Reform Act of 1986 (TRA 1986), Pub. L. 100 Stat.» 2742 (effective for returns the id. sec. 1503(e), 100 Stat. 2743). is sThere -are two f ailure - to - pay penalt ies - in the code . e Se c . 6651(a) (3) provides that a taxpayer who underreports the tax owed on the return and does not pay this underreported -amount within 21 days from the date the IRS demands payment of pay an addition to tax equal per month, not exceeding 25 percent 6651(a) (2)' provides that a taxpayer whoedoes notspay the tax reported on a returà must pay an addition to tax equalsto 0.5 percent per month of percentrin the aggregate. the amount must to 0.5 -percent of-the unpaid,amount the amount not paid, not exceeding 25 in, the aggregate. Sec. "In 1986, former sec. 6653(a) (1) was renumbered as former sec. 6653(a) (1) (A). returns the due date for which (determined-without regard to extension) is after Dec. 31, 1986, TRA 1986, sec. 1503(a) id. sec. 1503(e)). (effective for not ent itled to challenge he liabil ty for, or the collection of, thése two amounts of $2 636 anK $13].80. These t o amounts are therefore .not before the Tax Court. Background 1. The Contra Costa Partnershi Bang was a partner ih partne ähip called Contra Cóáta Jojolia Rese rcli Partners. ThiUparther hip, which we shall ref er o a t Co tra Costa p rtne hip, file'd a rt nership tai return for its 1983 tax year on which it dedueted $437, 500 in researdh and experimental expenditures under section 174 . On her own 1983 tax return, Bang reported a deduction of $12, 500 for her share of the $437,,500 sdeduction that the artnership had claimed. The 1983 tax return was due on April 15 198 . eSee sec. 6072. TÉe IRS issued a Notice lof Final Partnership Administrative Adjustment (FPAA) regarding the Contra Costa partnership on: April 12, 1989 The FPAA determined that the $437, 500 dedùctiòn for researåh and experimenta] expenditure was erroneous ands that the appropiiate deduction was zero. In explaining the reasons for the adjustment the FPAA stated: y - We have disallowed the amount above because it has been determined - that. there is insufficient evidence to demonstrate that the e4enses listed above qualify as research and deireiopment expenditures." Further, it has been dšternlined thaE a portion of the research and experimental expenditurestlisted in the return ma costs. be for items not associated with research and experimental * The FPAA did not specifically mention penalties except for ,the following assertion: 5 - THE FOLLOWING PENALTTES ARE APPLICABLE TO THE PARTNER/SHAREHOLDER Section 6661 On July 13, 1989, the Contra Costa partners challenged the FPAA determination in a partnership-level proceeding before the Tax Court, Contra Costa Joioba Research Partners v. Commissioner, docket No. 17323-89. On January 28, 1994,, the parties to docket No. 17323-89 stipulated to be bound by the legal theories and findings of 'fact that would determine the eventual outcome of partnership adjustments in Utah Joioba I Research v. Commissioner, Tax Court docket No. 7619-90 ." The stipulation said: With respect to all'adjustments in resþondent's Notiòe of Final Partnership Administrative Adjustment relating to Contra Costa Research Partners, a jojoba partnership, the following terms: the parties stipulate to 1. THE ABOVE ADJIJSTMENTS"4 ARE THE ONLY ISSUES IN THE CASE. A. UPON RESOLUTION OF THESE ISSUES, A PROPOSED DECISION WILL BE PREPARED BY RESPONDENT'S COUNSEL. During the tax year at issue, sec. 6661(a) provided: SEC. 6661(a) . Addition to Tax.--If there is a substantial understatement of income tax for any taxable year, added to the tax an amount equal to 10 percent of the amount of any underpayment attribùtable to such understatement. there shall be It was the tax matters partner who filed the petition in the partnership-level proceedings, but partners to be parties to the proceeding. the law considers all See sec. 6226(c) (l). "Bang did not sign the stipulation to be bound, but the tax matters partner signed it, and he was authorized to sign on behalf of all of (3) . the Contra Costa partners. See sec. 6224(c) (1), 4°The phrase = "Above Adjustments" a reférs to the adjustinents in the IRS's FPAA issued to the Contra Costa partnership. 6 - 2. The above,adjustmênts as speòified in the preamble, shall be redetermined by application of .thea same legal theories as that which resolved the .same partnership item adjust ments with respect to the following partnership: Name .of Case: Tax Court Docket No.: (hereinafter the CONTROLLING CASE)- -;Utah JojobagI llesearch 7619-90 3. Ail issues involving the above adjustment s shall be resolved - as if therpartnership in this case was thessame as the partnèrship in the CONTROLLING CASE; A. If tihè Couet makes findings* of ündèrlying facts with respect to tax inotivated "transactions, a valuation overstatemerit, ora other elements, applicable to a determination of additions to tax and/or section 6621(c) aboveidesigr ateå nartñeÉshiò item aÈji stments findings of to, the-partnersein Contra Costa; Jojoba Research Partners as if the partnership in this case was the same as the paitnership in the- CON'I'ROLLING'CASE; interest, which are attributable to the the in the CON'ÉROLLING CASE shall apply fadt 9. This, stipulation, applies to all partners in Contra ,Costa Jojoba Reseai-ch Partners who were,pa ties to the action within the meaning of 1.R.C. the stipulatiòn is "executed-by the respondent and whose partnership items have not subsequently converted, to e nonpartnership items pu suant to I.11.C.: § 6231(b) prior to thes entry of § 6226(c) and (d) -on the date the decision in ÷this - case ; s * * e * . 1 In 1998, the Tax Court issued an opinion in Utah Joioba I Resear h v.' Commissioner T.C. Memo. 1998-6. The» Court,held that the Utàh Jójoba I Research partnershiy was "not èntitled to a -10 section 174e(a) research and e pe imental expense deduction for 1982 bêcause it did not directly or indirectly engage in research or exp rimentation."- Ide The Court in Utäh Jo o did not ormer sec. 6621(d), Deficit Reduction Act of £984, Pub. 82, as in effects for the 1983 to TRA 1986 asec 1511(c) (1) , 100 Stat . L. 98e369, sec. 144 (a) , 98 Stat year, tax-mo ivat-ed transactions. sec . 6621 (c) pursuant i.mposed an increased interest rate on underpayments due to The provision was later: renumbered make any finding or holding that expressly referred to penalties or interest. On April 11, 2005, the Tax Court issued an order and decision in Contra Costa Jo oba Research Partners v. Commissioner, docket No. 17323-89 (Contra Costa). The order and decision sustained the partnership item adjustments that the IRS had determined in the Contra Costa FPAA. 2. The Notice of Deficiency: March 13 2006 The IRS issued a deficiency notice to Bang on March 13, 2006.. Attached to the deficiency notice was a Form 4549-A, Income TaxsDiscrepancy Adjustments. We consider Form 4549-A to be part of the deficiency notice' issued to Bang. Also attached to the: deficiency notice was a Form 4089-Bo Notice of Deficiency --Waiver. We refer to'the Form 4089-B-as the waiver form. The first page of the deficiency notice itself (not the Form 4549-A or the Form 4089-B) contained the heading "Defiqiency (Increase in tax)". Under that heading, the following text "However, as we note later, the Utah Joioda I oÿinion established that the partners' underpayment of attributable to a tax-motivated transaction. tax was "Before 'the orde*r and decision in the,Contra Costa case was the Contra Costa partners asked the Court entered; them of their liability for accrued interest and penalties, part, because of pending. the accrued interest and penalties were a type of "affected item" and thus were not properly before the Court level proceeding. The Court rejected these arguments. the length of time the Contra Costa case was to relieve in It reasoned that in a partnership- appeared: $ 8 - IRC 6653 (a) (1) (A) [should be 6653 (a) (1) ] IRC 6653 (a) (1) (B) [should be 6633 (a) (2) ] : $131.80 : 50% of interest on $2, 636. 00 . The not ice stated that WÊ haves determined that "you owe additional "tax or other amount(s), o both, .for the tax.years(s) ydùr NOTICE .0F DEFICIENCY, as required by -law. statement shows how we figured the deficiency. identified above. This letter eis The enclosed The notice continued: If you want to contest this determination in court before making a1Îy payment, you have 90 days froá tfie date of this letter * * * to file a petition with -the United States Tax court for r determination of the. deficiency * * * . The not ice added: If you decide not to file a petition with the Tax Court please sign the enclosed waiver. form and returneit to -us at the IRS address on the top of pårmit ussto assess the deficiency quickly and canghelp limit the a cúmulation of the first page of this letter. This>will intèrest . If you decide riöt file a petition with the Tax Court within the time limit, r quires us to assess and bill you for the deficiency after 90 ddys from the date of this letter * * * toa sign and return the NiúérT and- you dornot . the law The section 6653 (a) (1) and (2) penalties were discussed on a "Conti uation Sheet" to the not ice . The "Cóntinuation Sh5et" said: tax for the is due to negligence or intentional ,disregard the underpayment of It is determined that all or part of tlie taiable year (s) of rules and regulations. Tliis penalty is afive (5) percent of flÌll' underpayment of wllich is due to fraud)9pluid fifty (50) percent of oE the part of the underpayment that is dues to- negligence. pånalty is figured on the earlier of dåte the tax was paid. p¾nalty is asserted on the full amount of iAstead of If the return was not timely filed, the correctéd tax the underpa ment of tåx- (except that portion of the= underpayment the date of assessment or the thé interestadue The the t ax - 9 - We now turn to Form 4549-A The Form 4549-A contained the following chart showing the dalculätion of the $2 636 and penalties: 1. Adjustments to Income a. Ordinary Loss 2. Total Adjustments 3. Taxable Income Per Return or as Previously Adjusted 4. Corrected Taxable Income Tax Method Filing Status 5. Tax 6 . Additiona] Taxes /Alternative Minimum 7. Corrected Tax Liability 8. Less Credits a. Investment Credit 9. Balance (Line 7 less total of Lines 8a thru 8d) 10 . Plus Other Taxes 12,500.00 12,500.00 9,959.00 22,459.00 TAX TABLE Single 4,062.00 [blank] 4,062.00 187.00 3,8?5.00 a. Alternative Minimum Tax 0.00 1]. Total.Corrected Tax Liability (Lin 9 plus Lines 10a thru 10d) 3,875.00 12. Tot'als Tax Shown on Return or as Previously Adjusted 1,239.60 13 . AdjustmentÊ to a, b, c 14. Deficiency- Increase in,Tax or. (Overassessment - Decrease in Tax) (Line 11 less Line 12 adjusted by Lines 13a thru 13d). 2,636.00 15. Adjustments to Prepayment Credits-Increase (Decrease) 16. Balance Due or (Line 14 ad usted by Line 15) (Overpayment) (Excluding interest and penalties) 17 . Penalties/Code . Sections a. Negligence - IRC 6653(a) 18 . Total Penalties 2,636.00 131.80 1313 8 0 Underreporter attributable to negligence: addition of. 50 percent of will accrue until it is paid or assessed. the interest due on the underpayment a 0.00 (1981-1987) A tax ¡ Underreporter åttributa$1e to fraud: 50 percent of- interest due on the underpayment will accrue until it- is paid - or assessed. (1981-1987) I tax addition of 0 . 00 Underreporter.attributable to Tax Motivated Transactions (TMT)." Interest -will accrue and be assessed at 120% of underp'ayment rate insaccordance with IRC 6621(c) 2;636 00 - After this, tihere appeared a section entitled "Summary of ~ Taxes, Penalties, and Interest". This is the text of that section: "See supra note 11. - 10 - a.C Balance due or b. Penalties (Line 18) c.' Interest d. TMT interest - computed tò 3/29/2006 (ori TMT underpayment) 0.00 e. Amount due or refund - 2,767.80 (Overpayment) Taxes -- (Line 16, Page 1) 2,636.00 131.80 (sum of Lines a, b, c and d) - computed.to 3/29/2006: - computed to 2/27'/2006 (IRC § 6601) 0.00 , Beneath the Summary of Taxes, Penalties, and Interest was a box entitled "Other Information" . This box òontained the following - I discussion of the increased interest rate due to tax-motivated transac tions : The adjustment on this report is based on the changes Cont'ra Costa Jojoba Research Partners EIN#94-2855838 per the Tax Court Decision. ade t,o All or part of the underpayment of tax you were required to show on your return is a substantial understatement attributable to Tax M<$tivated Transactions,' as defined by Section 6621(c) (3) * of Internal Revenue Code. interest rate payable on your income taxes on this understatement of the adJusted rate established under'Code Section 6621(b). is 120 percent * A~ccordingly, the annual the The Tax Deficiency and the Tax Motivated Transaction (TMT) * Interest have been processed against your account, basèd on the Partnership examination results, and will be reflectêd-on the Statement of Account. The Notice of Deficiency reflects only the*penalty, portion of this examination report * * *. If you require any further information, please contact your Taf Matters Partner. On the next 'page, a section ~entitled "Explana,tion of Items" discussed the negligence penalties underssection 665,3(a): the underpayment of Since all or part of tax you, were required to show on your return is due to negligence or intentional disregard of rules and regulations, you are being charged a penalty under »Section 6653(a) of the Internal Revenue Code. This penalty is 5 percent of the full underpayment of interest due on the part of the underpayment that is due to tax plus 50 percent of the -negligence. We figured the penalty as of the date of ,assessment or the date the tax was paid, whichever came first See supra note 14 - 11e - 3. IRS Assessed the Increase in Bang's Tax Resulting From the Disallowance of Interest: March 27, 2006 the Contra Costa Deduction and Underpayment On March 27, 2006, after the mailing of the deficiency notice, the IRS assessed the $2, 636 (the tax on the increased income attributable to Bang' s share of the research and experimental expenditures disallowed at the partnership level), and the accumulated interest of $21,553.52 pursuant to section 6601 (underpayment interest) and former section 6621(d) (20- percent increase in interest rate for tax-motivated transactions) on the $2, 636 . " The $21, 553 . 52 represented the interest t!hat accumulated from the date the tax was due, Apri 15, 1984, until the date of assessment, March 27, 2006. Interest continued to accrue after assessment until the date the tax was paid. See sec. 6601(a) . The interest charge included the 20-percent additional interest sfor tax-motivated transactions, as sexplained above . "As discussed below, assessment of the $2, 636 did not to deficiency procedures. Interest, on the $2,636 violate the restriction on assessments contained in sec. 6213 (a) because the $2, 636 was a type of computational adjustment derived entirely from a concluded partnership óróceeding and was not subject could also begassessed at the same time becaùse sec. ,6601(e) provides that See Field v. United States, 381 F.3d 109, 113 (2d Cir. 2004) ; Smith vaCommissioner , T . C. :Memo . 200 9 -33 . Only the 5-percent and 50-percent-of-interest penalties determined were subject the deficiency-procedures ofosecs. 6212 and 6213(a). to deficiency procedures. interest is not subject that to - 12 - 4. Bang Waived Restrictions on Assessment Made Payments (May 12,- 2006) (May 8, 2006) and . Bang did not file a petition with this Court in response to the deficiency notice. Instead, on May 8, 2006, she executed the waiver form that had been attached to the deficiency notice. The waiver form listed the following under "Deficiency--Increase in Tax and-Penalties": Ta'x Year Ended: December 31, 1983 D ficiency: Increase in tax Penaltiles [blank [blank] - IRC 6653 (a) (1) (A) 131.80 IRC 6653 (a) (1) (B) See *a below a 50% of interest on 2,636.00 Abo've Bang's signature, the waiver form reads: ' * See"the attached explanation fo'r the above deficiencies. I tconsent to the immediate assessment and collection of the , deficiencies (increases in tax and penalties) shown above, plus any interest provided by law. _ , Bang sent a payment of $2, 767.80 to the IRS (the sum of $2,636 and $131.80) . The payment was received by t-he IRS on May 12, 2006, and applied to the account that the IRS used to keep track of her 1983 tax year. The Internal Revenue Code references should have been to sec . 6653 (a) (1) and sec . 6653 (a) (2) , not sec . 6653 (a) (1) (A)' and sec . 6653 (a) (1) (B) . "Bang would later claim in a -letter attached to her Tax Court petition that she consulted with her -accountant before makings this payment and that " [my accountant] and I were totally . ) (continued. . 13 - 5. Assessment$of othe~ Two NegligencenPenaltieK and Failure-ToPay Penalty: June 12 2006 On June 12, 2006, after Bang' s execution of the waiver form, the IRS assessed the 5-percent negligence penalty of $131.80 (5 percent of $2,636), the 50-percent-of-interest negligence penalty of $10,776.76 (50 percent of the $21,553.52 for tax-motivated transaction and underpayment interest) , and a failure-to-pay-tax penalty of $13.18 (the latter of which was not mentioned in the notice) " The $10,776.76 amount was 50 percent of the $21,553.52 interest charge on the $2,636 underpayment. Calculating the 50- percent-of -interest penalty in this way assumed that the entire $2, 636 underpayment was attributable to negligence. See former sec . 6653 (a) (2) (penalty is 50 percent of interest on portion of underpayment attributable to negligence) . The record does not indicate whether the failure-to-pay-tax penalty was the penalty imposed by section 6651(a) (2) (failure to timely pay tax shown on return) , or the penalty imposed under 6651(a) (3) (failure to timely pdy tax that should haŸe been shown (...continued) unaware that by paying this, penalties and interest." I somehow agreed to any additional "The deficiency, underpayment interest, and tax-motivated transaction interest were assessed on Mar. 27, 2006, after the mailing of form, as noted above. June 12, 2006, assessment . the notice but before the rexecution of These items were thus excluded from the the waiver - 14 - on retúrn) . We do not -have any -informat ion- about howathe $13.18 was cálculated, although we observe that $13.18 is 0 5 percent of $2, 636 . 6. . Bàng's Failure To File Tax Court Petition: June 12 2006 June 12, 2006, was also the last day for Bang to file a petition with the Court. She did not file a petition 7. Final Notice of Intent To Levy August 23 2006 The IRS then issued to Bang a Final Nottice of Intent to Levy and Notice of Your Right to a Hearing on August 23, 2006, notifying Bang that the IRS intended to levy to collect $32,343.46. Although the final notice of intent to levy does not identi y the components of the $32,343.46, we can tell from other parts öf the record that the $32,343.46 is composed of the following amounts: Underpayment interest and tax- motivated t armaction interest $21,553.52 50-percent-of-interest negligence 10 776.76 penalty I pailure-to-pay-tax penalty Total 13.18 32 343.46 The $32,343.46 assessed therefore does not include tÍ1e $i,636 and the 5 percent negligencë penalty of $131.80 hich Bang had already paid, as noted above. 8 Collecti'on Due' Process Hearing e 15 - NBarig's accountant filed aMForm 12153, Request for a Collectión Due Process Hearing;Non her behalf, together with a a letter stating that Rit seëfns very uni-easonableitihat [Bang] should be 'assessed [sic] negligence; penaltiès and interest on deficiencies dating back to 1983Eand 1985. She promptlyapaid' the tax deficiency in 2006 when notices were brought to hernattention penalties and interest be removed. e are requesting all He also argued that Bang made her investment "in good faith expecting a reasonable return. " The telephone conference occurred on January 25, 2007. According to the Appeals officer's notes of the conference, Bang's accountant confirmed the TP's [taxpayer's] primary issue is the liability. Heafirmly believes the TP [taxpayer] should not have been assessed , the negligence penalty. In hiä declaration accompanying the IRS' s motion för summary judgment, the Appeals officer states thdt duÝing the"telepl oný conference, the accountant "stated that the purpose behind the filing of a Request for a Collection Due Process Hearing was to challenge the merits underlying. * * *. Bang' s 1983 income tax liability; [sic] including the negligence addition to tax "20 The notes and theadeclaration say thateBang's accountant offered no co]lection alternatives. The Appeals officer infonned the °The À peals öffice dòès not clatify whethe he was4 referring to both the 5-percent and 50-pežcent-of-intierest negligence penalties or' just one of the two. - 16 - accountant that he could not raise obj,ectionsgto the negligence penalty at a collection due process hearing because, Bang had received -the d.eficiency.notice and,signed the waiver form.- The notes said: I explained that under IRS 6330 (c) (2) (B) liability in a Collection,Due Process (CDP) Hearing if.they have had a prior opportunity. a ISND and signed a F.4089-B agreement. In, this case the taxpayer both received the ,taxpayer cannot raise j , , s , . The notes stated that Bang's accountant said that he was not aware of such a rule, nor was he aware that his client had signed a waiver form. On March 27, 2007, the IRS Appeals Office issued a Notice of Determination Concerning Collection Action (s) Under Sec'tion 6320 and/or,6330 that sustained the proposed levy. The determination recognized that Bang's request for a heari«ng'contested her liability for "assessed negligence, penalties, and interest." But the determination stated: Taxpayer was not able to dispute liability within the hearing. And: Taxpayer did raise liability as an issue. Taxpayer was not allowed to raise liability because she had -a prior opportunity-to dispute the liability. The taxpayer' s representative, - Randall Kramer, - stated the primary issue is the liability. He firmly believes the taxpayer should not,have been assessed the negligence penalty. Bruce Stork explained that under IRC 6330 (c) (2) (B) the taxpayer~ cannot raise liability in a collection Due Process (CDP) Hearing if they have had a prior opportunity. In this case the taxpayer both received a Statutory Notice of Deficiency and signed a F.4089-B agreement. etcplained and recommended as the appropriate svenue to get the taxpayer' s, The Audit Reconsideration~Process was issue resolved. -Settlement Officer , Taxpayer presented no other issues. - 17 - Bang timely chall'enged the levy by petition to this Court on April 27, 2007. In a letter attached to her petition, she stated that she 'felt it was "unreasonable" that she be "assessed a' penalty and 20 years [sic] wdrth of accrued ináeresta for an investment she made with "her trusted investment advisor of many years" with no ,tax avoidance purpose. Ÿhe extensifa p cedural history f the Contra Costa partner ' case and this case s sunimarized in the chart below. Procedural History of Cases Against Contra Costa Partners and Bang Date Action Effect- •IRS reduces $437, 500 in deductions lain ed by partnership to $0 the partnership items in the •Agreement requires that resolution of Contra Costa partnership case would follow the determinations made by t e Tax Court Joioba I Research v. Commissioner, docket No. 7619-90 in the partnership case Utah •Tax Court disallows othe deductions claimed by Utah Jojoba I partnership Apr. 12, 1989 July 13, 1989 Jan. 5, 1998 IRS is$ue FPAA for Contra Costa part-nerîËip Contra Costa partners and IRS agree to be bound by Utah Joioba I Research v. Commissióner docket No. 7619-90 Tax Court issues opinion in Utah Joioba Research v. Commissioner a T C. Memo. 1998-6 Apr . 11, 2005 March 16 2006 Tax Court decides Contra Costa case TRS issues deficiency notice to Bang March 27, 2006 AssessNient against Bang e - 18 - t uphŠlds all adjuŠtments in •Tax Co the FPAA issued to Contra sCosta partnership •Calculations assume that Bang owes $2, 636 more tax than she reported in connection with the disallowed ai-tnNrähip 16ss •Bang owes $]31.80, or 5-percent of $2, 636, penalty •Bang owds 50 þercent Uf $2, 636 as the .50 -percent negligence for the 5-perce'nt 'negligence intief-est oh , enalty," calculated" usinj the interest accumulated from the ,date the tax was duè Eo t e eärifer of is assessed or the date the 'tax is paid theidate the tax includes: Assessment •$2, 636 increase in Bang' s tax a liability because of.disallowance of her snáÊe ŠÊthe disallowed Contra Cois t a deduÊtŠons •$21, 553 . 52 in underpayment on $2, 636 (calculated at percent rate because of motivated transaction) interes t the 120 - the, tax- May Š 2006 May 12, 2006 Bang consents Consent to immediate assessment includes: •$13i 80 (5 percent negli*gence penalty) o assessment 5O percèl t of intere t -on $2, 636 Bang ' s payment to the IRS is received include s : Payment •$2, 636 •$131.80 (5-ýercent negligence t enalty) June 12, 2006 IRS assesses penalties includes: Assessment •$131.80 (5-percent negligence penalty) •$10,776.76 (50-percent negligence penalty) •$13.18 failure-to-pay-tax penalty ·^- June 12, 2006 August 23, 2006 Last day for Bang to challenge deficiency notice by filing a Tax Court petition ÏRS issues final notice of intent to levy - 19 - Amounts Bang could "challehg by a petition: •$131.80 (5-percent nègligence penalty) •$10,776.76 (50-percent negligence penalty) iling intent to levy Final notice of includês: •$10,776.76 (50-percent negligence penalty) •$21, 553 . 52 in underpayment on $2 636 (ãalculated at percent rate because of motivated transaction) interes t the 120- the tax- March 27, 2007 IRS issues notice of determination •Sustains levy Discussion 1. Arguments of the Parties The IRS asserts in its motion for summary judgment that Bang' s receipt of the deficiency notice precludes her from challenging the 50 -percent -of - interes t negligende penalty . The IRS also argues that Bang' s complaint -over the unreasonableness of the accrual of interest was not made with sufficient specificity at the hearing to be ,considered a claim for interest abatement under section 6404 (e) . According to the IRS, Bang failed to specify grounds on which an interest abatement claim could be granted, such as a specific terror or delay caused by a ministerial act of the IRS. The IRS also argues that even if the Court could consider whether Bang is entitled to abatement of - 20 - interest under section 6404(e), the Court should sustain the Appeals officer's decision not to abate interest. With respect to the amount of its assessment of tax- motivated transaction interest, the IRS claims that the stipulation to be bound and the findings of fact in Utah Joioba I are suf f ic ient "to establish that pet it ioner ' s involvement in Contra Costa Jojoba Research Partners was a 'tax motivated transaction'", [and] that "petitioner's underpayment was attributable to the tax -motivated transactions of the Contra Costa Jojoba Research Partners partnership" and that the underpayment is substantial. The IRS did not make any arguments in its submission to this Court regarding the failure-to-pay-tax-penalty assessed. Bang' s response to the IRS' s motion for summary judgment was as follows: Petitioner objects to and resists Respondent's Motion for Summary Judgment on the following grounds: The calculation and assessment of Restricted Interest and 1. the Negligence Penalty are both incorrectly determ'inedi and exceed the maximum amount allowable by law. The signature of Petitioner on the Notice of 2. Deficiency/Waiver dated May 8, 2006 was improperly obtained bècause the listing of income tax discrepancy adjustments did n'ot include the Restricted Interest or the Negligence Penalty amounts -causing the- taxpayer to believe that the amount she was, agreeing to was only $2,767.80, rather than the additional amount of $32,000.00 plus dollars. Therefore it should be thrown out and the taxpayer allowed to contest the entiresbalance assessed. - - THEREFORE, Petitioner respectfully requests that Respondent'sa Motion for Summary Judgment be denied and for such other and further relief as the Court deems just. - 21 - We interpret Bang?s response aska challenge to her liability for the underpayment interest, the increased rate -of interest -for a tax-motivated- transaction, the 50-percent-of -interest negligence penalty, and the failure-to-pay-tax penalty, but not her liabilityifor the $2,636 and ther5-percent negligence penalty. - 2. Standard of Review and Issues To Be Decidedi A 'motion for summary judgment" will bes granted if - the - pleadings,e answers to interrogatories, e depositions, admissions, and other acceptable materials, together with any affidavits, show that theresis no genuine issue as to any material fact and that a decision may be rendered as a matter of law-. Rule el21(b) ; Elec. Arts,- Inc.. v. Commissioner, 118 T.C. 226, 238 (2002) . A partial summary adjudication may be made which does not dispose of all the tissues in the case. Rule 121(b) ; Tracinda Corp. v. Commissioner, 111 T.C., 315 323-324 (1998) . . The moving party, here the IRS, ahas the, burden of provings that nor genuine issue of material fact exists and that ,it is entitled to- judgment as .a mattër of law. Rauenhorst v. Commissioner, 119 T rC. 157 162 (2002) . At a collection due process hearing, a taxpayer may raiser challenges to the existence or amount of the ,"underlying tax liabi],ity" only f the taxpayer "did not receivé any statutory notice of dšfíciency ÉÉr such tax liaßility or did not otherwise ha#esan opportunit;y to dispute éuch tax liability." Sec. - 22 - 6330 (c) 2) (É) .E If a taxpayer is, not-permitted- under-section 6330 todáïse a challenge to the underlying. tax liability, the only issues ethat a taxpayer can raise before the.Appeals .officer are appgopfiate spousal defenses, challenges to the . appropiÎateness of collection actions, and any collection alternatives . Sec . -6330 (c)a(2) (A) . Seation 6330 (d) (1) provides a person with the right to obtäin' Tar Court réeiew of the administrative determination by filing a petition with, the Court within 30 days .of the determination a If the validity of the sunderlying tax liability is prop"erly at ssue, the-Court will review- the determination de novo. Giamelli v. Commissioner, 129 T.C. 107, 111.'(2007); Davis ir: CommissiÍ>než, 11'5 T.C. 35, 39 (2000) ; Sego .v. Commissioner, a 114',T.d. 6045 610 (2000) ;. Goza v. Commissioner, 114: T.C. 176, 181-182 (2000) . All otiher elements of the determination are beeiewed for abuse ofadiscretion. Sego v. Commissioner, supra,at 610; Goza v: Comnissicher, a supra at 181-1-82.- Whether an abuse of discretiion has 'occurred ;depends upon whether the exercise of discretion is without sound basis in fact or law. Freiie v. Commissiòher,« 125:T. C. 14, 23 · (2005) . General-ly we consider only See Goza v. Commissioner, 114 T.C. 176, 182-183 (2000) (a taxpay r who received deficiency notice was precluded from contesting his tax liability for the underlying taxes at Ap eal Office coliection due process administrative hearing,, or at the Tax Court on appeal of the Appeals Office determination) . The ph ase "underlying tax liability" inclùdes all' forms of interest and all penalties described in the Code. the 23 - those arguments, issues, and other matters (including a challenge to the underlying tax aliability)ethat the taiþayer raised at the collection~hearing or otherwise brought to the attentiôn of Appeals. Giamelli v. "Commissioner, sußra at 4112-113; Magaña v. Commissioner, 118 T.Cî 488, 493 (2002) ; see also sed 301.6330- 1(f) (2), Q&A-F3, Proced. &-Admin. Regs. - Bang did not offer a specific collectión alternative to be considered Bytthe' Appeals sof f iscer, nor did "she raise any other appropriate défenses to icollection. See sec: 6330 (c) (2) (A) , (3) (B) . Hér sole contention aissthat'she is not liable for various interest and perialties, specifically underpayment interest, the 20-percent indrease in interest rate fdr underpayments attributable to tax-motivated transactions, the 50- pèžcènt-of-interest penalty for underpaymeñts^resulting from negligence, and the failure-to-pay penalty. a a 3 Underpayment Interest Section 6601(a) provides that if-a taxpayer fails'to pay the tàx imposed by the/Code, eihterest shall, accrue from the- date that ther tax payment is due- until the date it sis*paid. eThe rate of interest is "the underpayment rate established under section 6621" . 22 .llus trat he a lâulation of undeFþayment 2This statutory language is in effect for interest? accruing the is substantively the same for after December 31, 1986e -For interest accruing befores then, statute istworded differently but these purposes . - 24 - interešt, suppose that a taxpayer _fails to pay $1, 000 in tax that was due onaApril 15e Assume that the underpayment rates is 6 percent f or the -second - quarter of the c same hypothet ical, year On May 15 thé taxpayer would owe interest of :$1;000 x (1+(0.06/365))30-$1,000. This amount reflects 30 days of interest, compounded daily. Sec. 6622(a) . This amount is separa e from the $1, 000 tax liability On her 1983 income tax return, Bang claimed as$12 500 deduct on. The Tax Court in the partnership=level'Contra Costa partnegship proceeding determined that Bang was - not entitléd to the deduction. Without the deduction, Bang' s, tax liability for 1983 was $2,636 more than she reported and paideonsher 1983 return". Thus, ,under section 6601(a) , Bang owed underpaymerit interest on the $2, 636s from April 15, 1984, until ,May 12y 2006 the -day she paid the $2,636. Oh March 27, 2006, the IRS assessed· the $2-, 636 increase in taxi resulting from the disallowance of Bang's shareoof the partnership' s deduction. . That same day, e itsassessed' $21, 553 . 52 in ,interest ort the $2, 636 underpayment, calculatedato the day of The i.nterest, based on the formula in the text, is interest. Rev. Proc. 95-17, 1995-1 C.B. 556, -556 The IRS issued tables to be used in computing $4.943279. underpayment The tables show that the interest accruing over 30 days, at a rate oï 6 percent, princiþalsamount." , Id. in the tables, 0.004943279,; (1+(0.06/365)) °-12 Multiplying this by- $1,000-, swe arrivesat $4.943279. is arithmetically equivalent-to is equal to 0.004943279 mult iplied by the table 17, 1995mle C.B. at 571. • The factor 25 - assessment. The interest was calculated at 120epercent of the normal rate because the IRS had determined that the entire underpayment was attributable to a tax-motivated transaction. The IRS notified Bang that it intended to levy to collect the underpayment interest (among other amounts) . Bang challenged the levy at the administrative level. Bang contested her interest liability in her request for a hearing. Her contention was that the interest was compounded over an excessive amount of time. The Appeals officer did not consider Bang's contention. A. to Interest Abatement Under Except for Entitlement Section 6404 (e) (1) Related to Bang's Liability for Underpayment We Will Not Consider Any Issues Interest. The IRS argues in its motion for summary judgment that Bang should be considered to have raised her liability for interest at the hearing only as a request for interest abatement under section 6404 (e) (1) (a provision that permits the IRS to abate interest accruals caused by IRS errors and delays), not as a challenge to any other aspect of her interest liability. Thus, the IRS urges us not to reach any other aspect of Bang' s liability for underpayment interest. We agree with the IRS that our review should be limited. We note that in her response to the IRS's motion for summary judgment, Bang failed to point to any other error in the IRS' s determination that she was liable for underpayment interest. - 26 - B Whether Bang Preserved Her Judicial Review Interest Abatement . Claim för The IRS also contends that Bang failed to make a claim for interest abatement with sufficient specificity at the adminiatrative level and that consequently the Court in reŸiewing the determination of the Appeals officer cannot consider her claim for interest abatement. The IRS cites Giamelli v. Commissioner, supra at 113, in support of this proposition. We disagree. Bang's accountant argued in his letter attached to the request for a hearing that , the underpayment interest should be abated because it had accrued over an unreasonably long time and because she paid the underlying amount of $2, 636 when it was finall brought to her attention. These statements sufficiently preserved Bang' s argument regarding interest abatement for judiciål review. In Brecht v. Commissioner, T.C. Memo. 2008-213, a taxpayer made no argument to the Appeals officer explaining why interest should be abated, and the Court held that it could not review the taxpayer' s entitlement to interest abatement . By contrast with Brecht, Bang presented her arguments about interest abatement in her request for a hearing. The Appeals officer's failure to determine whether Bang was entitled to interest abatement does not preclude us from making the determination ourselves. See Urbano v. Commissioner, 122 T.C. 384, 391 (2004) (citing Katz v. Commissioner, 115 T.C. 329, 340-341 (2000) ) - 2T - (holding"that wä iÉn ževiefanippåals officer''s denial of interest abaterdent4if tihe issue was raised atethe dolledt:Eor dúe process hearing) . The alternative of remanding the cas fo: t e Appeals offËc tá deternii e intårestanbat enleilt is no appropriate because Bang has been given sufficient opportunity both at her hearing and in thi proceeding to explain why she is entitled to interest abatement. See Lunsford v. Commissioner, 117 T.C. 183, 189 (2001) (declining to remand collection review case to Appeals officer when the Court can evaluate the merits of the taxpayer' s arguments without a remand) . C. Bang Is Not Entitled to Interest Abatement Bäng' s Wá n argúmerit predefit ed þÿ lier nacount ant at the lieaein is that the interest asséssed has accrued over àn 4 unreasoriabijdlóng*time because of pending litigation about which she had no knowledge. However the length of time which partnership-level litigation takes to resolve is not a delay in a "ministerial act" on which an abatement claim may be based. Lee v. Commissioner, 113 T C 45 150 (1999) ("The mere passage of time in the ] itigati n phase o t ax dispute does not, establish error oor delay by thencommissioner in performingua ministerial act."); Corson v Óominissid er C Memo. 2009-95; Kimball v. - 28 - Commissioner, ,T.C. Memo. 2008-78. Bang is therefore not- entitled to intérest abatement. The IRS did notaerr in failing to abate interedt 4. 20 Percent Additional Transactions Interest for Tax-Motivated Under former section 6621(d) (renumbered as section 6621(c) 2 pursuant to the Tax Reform Act of 1986, see supra note 11), the annualtrate of 'i~nterest on the portion of an underpayment that is attributable to a tax-motivated transaction is 120 percent of the "underpaynient ratie" established undär sect ion 6621(b) . Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 682." The In 1996,, Congress amended sec . 6404 (e) eto provid that is available for an "unreasonable" delay .in interest abatement perfortåing a "ministerial cg managerial' act . Rights 2, Pub. L. 104-168, sec. 301(a), 110 Stat. 1452, 1457 (1996) July 30, 1996. This amendment sapplies only to tax years beginning after - Taxpayer Bill of Id. sec. 301(c) . "Former sec. 6621(d) provides: SEC: 6621(d) . Interest on Substantial Underpayments Attributable to Tax Motivat d Transactions . - (1) In general.--In the case of interest payable under section 6601 with respect ¡to any substantial underpayment attributable to tax motivated transactions, interest established under this section shall be 120 percent of tífeiacij'usted iate e'stabl'idhed undär subsection (b) . the annual rate of (2) Substantial underpayment attributiable to tax niotivated transactions.--For purposes of this subsection, "dubstantial underpayment attributable to tax motivat-ed tiansãotions" means any undefpayment of" eixes "impos'ed by lubtitle A for any taxable year which is attributable to 1 or more tax motivated transactions if the amount of year so attributable exceeds $1,000. the underpayment for such the term (3) Tax motivated transactions.-- (A) In general.--For purposes of this subsection, (continued . the . t) --29 - increase in the interest rate required byaformer .section 16621(d) affects the interest- rate only fqr the period from December 31, 1984--the effective date of section 6.621(d) --until the date the tax is finally paid. For periods before December 31; 1984-, the interest rate .is unaffec,ted by former section 6621(d) To illustrate the calculation of the interest rate for tax- motivated transactions, suppose that a taxpayer fails to pay , , $1, 000 in tax on April 15, when the taix return and the -tax are due. Assume further that, the failure- to timely pay. the, entire $1, 000 is due to -a tax-motivated transaction. Assume that the underpayment rate is 6 percent for the second quarter of ,the year in which the return .is due. Section 6621(d) would require that the 6-percent interest rate be increased by 20 percent to, 7.2 p,ercent. On May 15, the taxpayer would owe interest of $1,000 x ( . . . continued) term "tax Êotivated trân'saction" means- the meaning of section 6659 (c) ) , (i)cany valuation overstatement (within (ii) in loss disailowed by reason of section 465 (a) and any credit disallowed under 46 (c) (8) (iii) any straddle (as defined in section 1092 (c) wiùhout regard to subsections (d) and (e) of section 1092), and (iv) any use of an accounting method specified in,regulations prescribed by the Secretary as a use which may result in a substantial distortion of income for any period. Clause (v) was added by. TRA 1986 sec . 1535 (a) , 100 Stat . 2750 , and applies to interest accruing after Dec. 31, 1984. - 30 - (14(03072/365))3°-$1/000 an amount that reflects 30 days -of intiefeat2àÛcumulätiön compoundêd dài-ly. NSec."6622(a) . Thi's amount9is Žeparate' from the $1, 000 taic liability. BÂng did not "háve an oppožtunity before - the collect!ion hearing to contest äl-1 öf the elenients of thé täd-motivated intere^s'tsyena]iti?' The deficiency±notice was nòû %ûch an opportunity . - Everi tholiéh - the -de f ic iency nötice áõñnäine'd t h aåsertrion athat Bang was liable for increased interest dn th'e pdztidñ ófaher endeï-paydient attributable to ä" tax-motivated transaÈtion and-even thoùýh Bang could have filed ão Tax Court petitii riain desýdnse to =the déficiency notice, the Codrt ròùld not ha ë had jurisdiction in a pá'rtner-level deficiency case 6ò determine Bang's liability for the increased ihtdrest. The reason is that increased interest is not a deficiency. Odend'hal v. Commissioner, 95 T.C. 617, 621 (1990); White v. Commissioner 95 T.Ci ,209, 214 (1990) . Thus, the Appeals offideE who made the determinatiorn sustaining the levy against Bang had jurisdiction to determine whether Bang should be subject to the increased interest rate- for a tax-motivated transaction. Although Bang' s Appeäla offi'cer did not consider Bang's argument why she should not be subject to the increased interest rate for tax-motivated transactiöns, this does not preclude us from considering whether Bang is liable ourselves. 31 - Bang is liable sfor the increased interest for tax-motivated transactions. First, the transactions of the ppartnership were tax motivated e Artax-motivated «transaction includes .a a transaction for which there is a"an accounting method specified in regulations prescribed by the Secretary as a ruse which may result in a substantial distortion of -income for any period." -Former sec. 6621(d) (3) (A) (.iv) . i Substantial distortions of incomes include a deductionawhich results in a "material distortion of income" . Sec . 301 v6621-aT Q&A-3 (9) (iii) , rTemporary Proced & Admin. Regs., 494Fed. Reg. 50392 (Dec. 2 1984). -The Contras Costa partners agreed to beabound by the determinations of issues made in Utah Joioba I Research v. Commissioner, docket No. 7619- 90, including "findings of underlying facts with respect to tax motivat,ed transacti<pns, a valuation overstat-ement, or other elements applicable to a determination of addi-tions to t ax and/or section 6621(c) interest." The Tax «Court held in Utah Joiobal Research v. Commissioner T.C. Memo. 1998,6s, that the x"R&D e agreement before us :was mere window dressing, designed and y ent ered into solely to r decrease the cost of participation in the jojoba farming venture ,for the limited partners through the mechanism .of a large up-front deduction for expenditures that in actuality were capital contributions." To claim a large upfront deduction for nondeductible capital expendituressis -a material distortion of income. - The n erpayment result-ing-from -such a - 32 - deduction is attributable to a tax-motivated transaction. Bailey v. Comåišèione , 90 T.C. 558, 629 (1988), affd. in párt and vacatied in -part 912 F.2d 44 (2d Cir. 1990) ; Glassley v. Codmissióner, T.C. tviemo. 1996-206. Because -the Cont a Costa pártnei-s, inaluding Bang, 'were bound by the disþösition of isáues and findirige of fact in -Utah Joioba I, the Contra Costá. partnenship' s -tránsactions were tax motivated. "Seciónd, we Nust 'detežmine the amount of Bang' s imderpayment of tax that was attributable to the partnership' s lax-motiirated transaétiorî and whether that underpayment was substañtial. See fórmer sèc. 662i(d), Deficit Reduction Act of 1984, PubaL. 98 369 sed. 144(a), 98 Stat. 682. The record-indicates that the entire $12 500 adjustment of Bang' s research and exyerimental expenditures deduction is attributable to the partnership' s tax motivat ed t ransact ion. The underpayment stemming f rom this adjuätänentl($2, 636) is substantial because it" exceeds $1 Ó00 . See id As all elements of former section 6621'(d) interest- haee been establaishedi we sustain the Appeals officet's determination with rêspect to tax-motivated transacition interdst . 5. FiftWPercent-of-Interest Negligence Pe'nality The IPES argues that Bang was not entitled to dispute 'her li'ability for 3the 50-percent-of-intierest penalty wit1í the Appeals offÉder.- It contends that Bang had already received aJaefièiency noticeNforathe l'iability. We agree. Þ -' 33 - Under former section e6653 (a) (2) e if a portion of- an underpayment is attributable to negligence (or intentional disregard ofy the rules orsregwlations) y there si-s added" to the tax 50 percent oft the interest, payable unders secti-one660L on the portion ofathe underpayment attributable to such negligence." a For this purposes ther interest payable underusection; 6601 sincludes dhe 12:0 -percent xincreasedi sintere.st rate f or- tax- motivatedstransa-ction interest ifethe portion of the underpayment that. is attri-butable cto negligence eis alsor attributable toca tax- motivatede transaction The interest pericd for which the 50k y percent of,interest neg igence penalty .appliesabegins on the day the paymentoofftax,was due sand stops accruing once the taxpayer pays the tax ror the IRS assesses the tax 3d "Former sec. 6653 (a) (2) provides: (2) Additional amount for portion attributable to negligence etc.-sThere shall- be-added to the tan(in addition to the amount determined under paragraph (1) ) an amount equal to 50 percent ,of ·thê interest payable under section 6601 (A) with respect to the portion of the underpayment Mescribed in pañagraph (1) whichais attributable t o the» negligence or intentional disregard referred to in paragraph ( L.) , and * (B^)Gfor the speriod beginning onethe fast date prescribed by law-for payment of such underpayment (determined <without regard to any extension) and .endings on the i a te of ehe assessment of the tax (or, if earlier, date of the payment of the tax) . The Technical Corrections Act of 1982, Pub. L. 97-448, sec. 107 (a) (3) , 96 Stat . 2391, the adate ofs ithe payment of :thes tax) " at - the . end doft fórmer "sec . 6653(a) (2) above. the date of sec. 6653(a) (2)As enactment. The insertionewasaretro:activelreffect ive to inserted the phrase " iofr, i eaflier, Id. -sec. 109. - 34 - To illustrate show this penalty is calculated, assume that a taxpayér fails to pay $1, 000 of tax due on April 15. Suppose further that, of this $1, 000, underpayment, $200 is both (1) the resultsof the-taxp'ayer's negligence, and (2), attributable toaa tax-motivated transaction. Suppose that over the nexte3 years the undetpayment interest rate is a constant± 6 percent and that the tax is assessed 3 years later on April 15. drnterest will be computediat an interest rate of 6 percent, increased by 20 percent for tax-motivated transactions, resulting in a total interesti charge of 7.2 percent that is compounded daily under section 6662. The 3-year interest charge would be $483.22; (that is, $200; xi 3(1+ (O . 072/365) ) D'S * ") -$200 . The taxpayer would .then' owe a negligence penalty of $24 .11 (that is, 50 percent of the entire : interest charge of $48 . 22) . Bang claimed on her 1983 income tax return tihat 3 e had a $12, 500 eloss stemming from a loss claimed by the Contra Costa partnership. She and the other Contra Costa partners then agreed to be bound by, the decision in the Utah Jojoba partnership case. The Court in the Contra Costa case disallowed the losses claimed by the Contra Costa partnership. The amount of the 50-percent- of-intérèst negligence -penalty is a deficiency atttibutable tò an affected item that requires a partner-level determiriation.27 47See former sec . 6230 (a) (2) (A) (i) (as amended by . TRA 1986) , sec .a 1835 (d) (2) (A) , 100 Stat . 28 96 (applying subch B to any (cont inued . . ) - 35 - 27 ( . . . cont nued) deficiency attributable to affected items which require partnerleveWdSte minatiè¡nŸ; 1 Com issioner; 09 T.C. . :741, 744-,745 (1987) . ("In cont;rast artners v the oth type of nèr . ffected item requïtes factual determinatións to be inade at the a if he he exiÀteÃce o tåŽectidh 665$(a) degliéence purihuaÉt the partner' s share of underpayment' oftfafat the tax some part of which is due to income, Toss dedìíctiba, arid ciedit is l'or example, a partner will be liable for the f partner level e additnon tfo t has -an underpayment of negiigenöÎ. partner level cannot be made úntil distributable items" of determined in the partgership; level pròceeding. Opce the þartnersh'ip level proceeding ènds of whether any part~ of negiigenee must be MárisNered at"the partrÈež level. instances, a nbtice o 6653 (a) level pròÊeè'dirigÝ. Court; for redetermination of partnership leveUprocêeding will be res j~udicat a as to the partnerships adjustments, and in the. subsequent will decialer only whether asome partrof the underpayment, was due to negligence:") . The yartner n y i her filE a betÉtiori that deficiengy.7 Jhe prior nless coriceded by the partner, ciefiniehdy fcir thNAéÍdition t to the partner after the completion of, the partnership the underpayment was due to the partner litigation, we howe'ver, In subh if any respondent-, will issue t/aËundér $Êct on the factual question in this Sec. 6230 (a) (2) (A) (i) was amended in 1997 to provide that penalties related to partnership adjustments be determined -at partnership level and therefore not be included-insa notice of deficiency. Taxpayer Relief Act of 1997., Publ. «L. 105r34, sec. Nèie Millenniun Trading , (6) , 1238 (b) 111 Stat TO26 ) the 1027 2 5, L . ommi sion 31 T 2 9 (2008.) ; Domulewicz v. the IRS becomes final, Callaway v. Commissioner 22 (2007), affd. sin part and -remanded Commissroner, 129 T.C. 11 sub nom. Desmet v. Commissioner, 581* F.3d 297 (6th Cir. 2009) . Under postr1997 law, once the partnership level proceedings are concluded and a decision in favor of the IRS canaassessethe penalty without deficiency Cir. 2000), affg.« T.C. L.L.CT Y. CommissioneÝ, suÞr att 280 citin se . 623Ó(A) (1) and N. C. F . Ér e v. Commissioner, supra at 2); sec. 6231(a) (6) L(a) (3) , Proced. & Admin.. Regs After the 1997 amendment; -angindividual partner' s only recourse to present any partner-level reasonable cause and good f aitha de f ense her onshea may thavesis :to f ile Car claim f or:K refund under sec. 62302(c)i(3) after; paying thesapiilicable penalty . . Commissioner, supra at 744) ; Domulewicz 231 F 3d406, 110 ns.5 (2d issuing a notice of lehrliuin Trádinga i9ŠŠt99; NefMi ( continued . y Parfners emo. T ) - 36 - Thus, the IRS was required to issue Bang a deficiency notice to assert that Bang was liable for the 6653 (a) (2) negligence pena]t See former sec. 6662(a) (2); Tax Equity and Fiscal Responsibility Act of 1982, Pul$. L. 97-248, sec. 323(a), 96 Stat. 613 (r riumbering former section 6660 of the Internal Revenue CO e of 1954, stating in part that references to "tax" in the Code include additions to tax- and penalties, and additions to tax and penalt es must be collected in the same manner as' taxes, unless a statü exception applies) . (This is so even though the amoünt Ef und r ayn r t interest, including the increased 120-percent rate f r a x-motivated transaction, is not subject to deficiency procedures.) The IRS issued such a defic ency notice. This Court has' jurisdiction in deficiency cases 'to redet rinine the amounts of penalties pursuant to section 6214 (a) ." Thus, - 27(...continued) in full.' New Millennium Trading, L.L.C. v. Commissione at 280;~ 'sec'. 301.6221-1(d), Proced. & Admin. Regs. The rule applies to any redetermination of the Contra Costa partnership' s 1983 return. the amounts reported in p re 1997 "Sec. 6214 (a) provides: SEC. 6214 (a) . Jurisdiction as to Increase of -Deficienc ¢ Additional'Amounts, Or Additions to the Tax. --Except, as provided the Tax court shall have jurisdiction .to by section 7463, redetermine the correct amount of which has been mailed to the taxpayer, and to determine 'whether any additional amount, or any addition to tax should be assessed, if claim therefor is asserted by the Secretary at or before tlie hearing or a rehearing . the deficiency * * *, notice of Thus, deficiency, if the addition to tax is asserted in the notice of this Court has jurisdiction to redetermine it ibecause . ) (continued. . £37 - hadeBang challenged the 350lpercent-of interest-negliigence penalty by filing'a petition sin response td her deficiency notice,athis rCourt Ewould haie had the powèr 'to decide bi'f she should have been relie#edeofuit. See Ghose vi «CommissionerísT.C. Memo. 2008-802 (aftež the Tax Coüft eñtéred the deciaion against the Contra - Costa partners Cat the paitnership leve-1, the tIRS issued a notice of deficiencySto one of Bang' s partners for the 1983 yeaf alleging a penaltytof $272 30 under former sectiori 6653 (a) (1) ,9 and "50 percent of ~tlie interest" due on the deficiency for the 1983 taxable -year under former sèctión4653 (a) (2-) !« the apartner filed a- petition and after a trial thiseCourt held that the partner was liable for the additlions to tax under- sectior 6653(a) (1) and (2)). (. . . continued) it was 'asserted before a potential 1 earing. The 'Co'urt''s jurisdiction in a partner-level proceeding to redetermine affected items such as penalties does not extend to the partnership-itern component of penalties. Partnership Ét-àms are determined solely at 6221. the partnership level. Former sec. 29 Helbig v. Commissioner, T.C. Memo. 2008-243, affd. withoutapublished opinion 106 AF,TR 2d 20]:0-6820, 2010-2 USTC par. 50;;692 3(9th Cir. 2010)-, HelbigEa þattner in the 'Contra Cdstäo ß partnérshipf claimed deductions froni ethe par:tnership on his, 1983, 1984, and 1985 tax returns . Afterathe-Tax Court entered a a decision against 1984; ande1985ttax years, Helbig in whi'ch -the IRSa asserted that Helbig owéd penaltiies under sec. 6653(a) (1) ànd (2). Helbig petitioned «the Tax Court, which found that he was ñegligent . the Contra Cost&paßtinershipkešarding, the 1983, tihè IRS issued defaiciency notides to (continued'. . . ) - 38 - Mathematically, the penalty is 50 percent of .the interest4 payable under section 6601(a) on the amount of the underpayment due tornegligencer The amount of interest payable:underrsection 6601(a) , for purposes of calculating the apenalty against Banga ranguntil the taxswas assessed on March 27, 2006. The ,deficiency notice did not notify Bang of the absolute amount of- the 50 percent-of-interest penalty because the notice was issued on March s13, ;2006 2 weeks before the interest period closed. «Se Kamholzav. Commissioner, 94 T.C. 11, 12 (1990) ("In fact, the amount e [of the section 6653 (a) (2) penalty] could anot have been determined when the notice was mailed, since the amount of interest.on which it was based had not been finally determined.") . But the penalty was certainly invoked in the deficiency notice. The first page of the notice of deficiency (and the waiver form) stated that "50% of interest on $2f636.00" would be due . The "Continuation Sheet" stated that the IRS dettermined a "fifty (50) percent of the interest due onihe pa t . . c ont inued ) 98 In Swanson v. Commissioner, T.C. Memo. 2009-31, Swanson, a partner in California Jojoba Ventures, claimed deductions from the þartnership on his 1983 tax return. the partners -agreed to be bound by Utah Joioba I Research v. C Commissioner, docket No. decided, sustained the FPAA issued to California Jojoba Mentures. issued notices of rdeficiency asserting that Swanson zwas liablev for the sec. 6653 (a) (1) and (2) penalties. Swanson filed a Tax Court petition, and the Court negligent and should not be subject in the California Jojoba Ventiures scase '7/619-90. After Utah Joioba I was In the partnership case found that Swanson was not to the penalty. the Tax Court The IRS I 39 - ofathe underpayment that idadue to negligence"E.e It falso explained howtthe perialtyawas calculated: a "Therpenalty is f guredadnether earlier of theadate ofi assessment or the date the tax was paid." Sectiion 6330 (c) (2) (B)aprovïdešythat a taxpayer may contest" the .underlyiný;:táx tiåbil tyeift theataxpayert "did not receiverahy statutory ,notice of deficiency for suchatax ]?iabilityi or did not otherwise have'anaopportunity .toadispute such tax li'ability2T Thesquest ibh -is whether the deficiericy notic~e was "for"- Bang's ali'ability for the 50-percent±of-iriterest negligehce penalty. The parties> shaveanotjòinted:us to anygegal authority»discussing awliat 'iteme'and Efor ä statutory notice of deficiency to' bei j'for" a partiou]sar staxeliability for athe apurpose of sectiori x y sh 6330 (c) (2) (B)TMBesidesusectiidha6330 (c) (2)a(B) ,ithere rare othere provas iöädtthat Ard[uirenari evaluationsof the relatsiönship "between a statutoryenoticé of--deficzency-and a yÿarticulars tax iliability. Section 7522 (a) arequirés a ,def iciency notice to - "describe the ibasis fòfgandwidentifyr thè amounts (if any)/offtheatax due iriterest addi-tional Ambuntà, sadditionsato the tax, and,assessable penalties included in such nòtice . An inadequate- description a understhe piecedingesentencécshall not invalidatessuch notice." InaBurnside vdComàissioneryT.iCCMémo 1994-:308,5the TaxaCourt held that a deficiency notice explaining that the IRS had - 40 - determined a penalty under .section 6653 (a) (1) (B) ,?° in an amount equal to "50 percent of the interest due on the portion of the underpayment attributable to negligence.", was in compliance with section 7522 (a) . 3 Rule 142.(a) provides that the burden of proof falls, on the taxpayer-wirth respect to issues raised in the -defici'ency notice arid falls on the IRS witha respect to, issues raised -inetheganswer. In Farr v Commissioner, T.-C. Memo. 1993/29, affd.. withoute a published opinion 41, F.3d 1513 (9th Cir. 1994), the IRS issued a noticenof deficiency-determining an addition to stax -equal to "50 per ent of the interest due on the portion of the underpayment a attribtitable to negligence pursuant to sec. 6653 (a);(1)-(B):." ¿The Tax Court held that the taxpayer had the burden of sprovingushe wasinot iable for the section 6653 (a) (1) (B) penalty. , « The deficiency .notices in Burnside and Farr invoked section 6653 (a)p(1) ($), using words like those used in the deficiency notice tissued to Bang. In each case, this Court held that the liability for the section 6653 (a) (1) (B) pénalty was ,sufficient described in the deficiency notices for.the purpose of the rules e at is sue ainathose cases . The statements in the notice of deficiency explaining the 50 -percent -of -interest negligence penalt-y made the de f iciency 3°Sec. 6653 (a) (2) was renumbered (with minimal substantive change) as sec . 6653 (a) (1) (B) pursuant to TRA 1986 sec . 1503 (a) . 41 - notice :"for" the penalty Ban*gh'received" the deficiency notice. Therefore, 2Bang was not entitled sto raise a challenge to the amount of-the þenalty at the- collection review hearing. We sustaie the AppeaTs officer's dete mination with respect to the. 50-percentuof -interésE penalty 6 . Failure - To- Pay- Tax Penalty The proposed levy that was sustained by: sthe Appeals of f icer included, among other things,-the amount of $13.18. All we know about this $13.18 is that the same amount was listed on the IRS record of its transactions with Bang for her 1983 income tax year as a failure-to-pay-tax penalty and that it was assessed on June 12, 2006. Two types of failure-to-pay-tax penalties appear in the IËt'ernal Revenùe Code, section 6651(a) (2)- and section 6651 (a) (3) . 'Sec~tion 6651(a) (2) imposes 'a penalty for failure to timely pay tax shown on the return on or before the date prescribed forspayment. As Bang: did pay the tax shown on her "Sec. 6651(a)e(2) provides: SEC. 6651(a) Addition toethe Tax n case of failure- we (2) to pay the amount shown as tax on any return * *, * on or before the date prescribed för payment .of such tax (determined with regard tosany extension,ofetime forapayment)s, unlessait is shown that .such failure is adue to reasonable causesand-not due to willful neglect, on such return 40.5 percent of failure is for not more than 1 month, with an additional 0 .5 percent for each additional month or fraction. thereof during which such faillire continues, not exceeding 25 percent in the aggregate * there shalMbeyadded to the amount shown as tax the amount of such tax if thë * * . a (continued. . . ) - 42 - 1983 treturn, the penalty is inapplicable to her. Section 6651(a)a(3) imposes a penalty for the failure to timely paystax 4 that should have been shown on the return if the taxpayer does not pay the tax within 21 days of notice and demand for payment of the Etax." Recall that Bang filed her 1983 tax return "(...continued) Sec. 6651(b) (2) provides: SEC. 6651(b) . Penalty Imposed on Net Amount Due.---For purposes of-y * * * * * * * (2) subsection (a) (2) , the amount of tax shown on the return shall, "for purposes of computing the addition for any month, be reduced by the amount of any part of before the beginning of such month and by the amount of any credit, against the tax which may be claimed on the return * the tax which is paid on or * * ' an To illustrate how the penalty is calculated, assume that ~a tax shown on her return and due The taxpayer does not pay the tax until Apr. 15 óf The taxpayer would owe a failure to timely taxpayer fails to pay $1, 000 of on Apr." 15; the .following year. p y pånalty of $60 (that is, $1,000 x 0.005 x 12) . "Éec. 6651(a) (3) provides: SNC. 66N(a) . Addition to the Tax.--In case of failure- * * * * * * * (3) to pay the amount in respect of any tax required to be * * which is not so shown * * within 21 - shown on a return * calendar days from the date of notice and demand therefor * * *, unless it is shown that such failure is due to reasonable cause and; not due to willful neglect, of the * amourit of such tax if -the failure is for not more than 1 month, tax stated in the such notice and demand 0 .5 percent of there shall be added to the amount * with an additional 0 .5 percent for each additionalomonth ior fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate. a - (continued. . . ) 43- - claiming a .$12, 500 deduatione Bantj paid het tax liability as if she was entitl-ed todthe--$12, 500-deduction.e In 2005, the a Court in the partnershipeleveleproceeding determined .that Bang and the other partners were not entitled to the deductions they had : e claimed'. TheuIRSaissued andeficiencys notice to Bang oneMarch913, 2006 a : Therdeficiency notice did not inclúdesa determination a regarding the faillure-to-pay-taxopenalty. i The IRS assessed the $2, 636 increaseeine tax sandithetunderpayment interestsof $21,553.52 on Mar:ch(27, 2006. Bang paid the $2,636 increase in tax (as well as thea5 percent negligence penalty) , and the payment 'was received by the IRS 4 days later son .May 12, 2006; but the record does not state when a notice and demand for payment wastissued to colle.ct thet $2,636. The IRS assessed a, $13.18 failureato-pay-tax penalty on June el2 2006 (an amount which is ( . . cont inued) Sec. 6651(b) (3)" prodide : SEC 6651(b) . Penalty¢Imþosed Ne Amount Úûe. -Fór Purposes (3) subsection (a) (3) , the afnount of tax stated in the notice and demand shall, for any month, be reduced by ther amountiof anyapart of which is paid befote, the beginning of such inonth. for the purpose of comyúting the addition the tax s To illustrate how the penalty is calculated, assume tshat a taxpayer fails to pay $1, 000 of tax not shown on her return (but required to be shown on the taxpayer' s return) within 21 days of the: dàEe of taxpayer does not pay the tax until 1 year following the 21st day after the date "ofahotice and demand -for payment. would owe a failure to timely pay penalty of $60 (that x 0.005 x 12) . otices -and demand for payment of The taxpayer is, $1, 000 the tax. The - 44 - 0 f 5 . ýercenthof" $2, 636 ) . The IRS then not i f ied Bang one August- 23 2Ò06, that it would levy to collect an amount that included the $13s.,18. The Appeals officer refused to consider any of Bang's arguments! at the administrative hearing, asserting that all of the arguments were about liability and that the arguments zwere improper "because Bang chad a prior opportunity to dispute her liabiility. ? The IRS did not explain in its motion for summary a judgment why Bang had a prior opportunity to dispute the failure- to-file penalty, or alternatively, why the determination of the Appeals officer should be sustained with respect to the levy of the failure-to-file penalty. Nor did the IRS provide any facts throughaaf fidavits or other attachments to its motion that relate to this penalty, such as whether and when the IRS issued at noti e and dema.nd for payment of the $2,636. Under these circumstances we will deny the motion for summary judgment to the extent that it aske us to sustain the determination of the Appeals officer regarding the existence or amount of Bang' s liability for the $13 18 ,failure-to-pay-tax penalty. Conclusion Respondent' s motion for summary judgment will be granted in part and, denied in part . An appropriate ordere will be issued.