Court Opinion

ID: 4473083
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:35:05.610248+00
Date Added: 2024-06-11T14:53:48.144424
License: Public Domain

Ruwe, J., dissenting: The majority holds that in determining the “underpayment” on which the section 6663(a) fraud penalty is imposed, petitioner is allowed to deduct expenses that were incurred long after the fraudulent estate tax return was filed. Although there is no dispute that reasonable postreturn expenses are allowable for purposes of determining the ultimate estate tax, section 6663(a) specifically provides that the fraud penalty be imposed on “any part of any underpayment of tax required to be shown on a return”. (Emphasis added.) The majority interprets the highlighted portion of the statutory phrase as merely a classification of the type of tax to which section 6663(a) applies. I believe that a more reasonable interpretation is that section 6663(a) imposes the penalty on the amount of the fraudulent underpayment of tax that was required to be shown on a return at the time the fraudulent return was filed. An estate tax return must be filed, and the tax must be paid, within 9 months after the decedent’s death.1 Secs. 6075(a), 6151. A deduction from the gross estate is allowed for administration expenses. Sec. 2053(a). For expenses that are not paid prior to filing the estate tax return, an estimated amount may be deducted if it is known that such expenses will be paid and if they are ascertainable with reasonable certainty. Thus, section 20.2053-l(b)(3), Estate Tax Regs., provides: An item may be entered on the return for deduction though its exact amount is not then known, provided it is ascertainable with reasonable certainty, and will be paid. No deduction may be taken upon the basis of a vague or uncertain estimate. If the amount of a liability was not ascertainable at the time of final audit of the return by the district director and, as a consequence, it was not allowed as a deduction in the audit, and subsequently the amount of the liability is ascertained, relief may be sought by a petition to the Tax Court or a claim for refund as provided by sections 6213(a) and 6511, respectively. [Emphasis added.] While postreturn expenses can reduce the taxable estate, if they are not ascertainable at the time the return is filed, such expenses cannot be deducted on the estate tax return. See Estate of Bailly v. Commissioner, 81 T.C. 246, supplemented by 81 T.C. 949 (1983). The amount of tax required to be shown on a return can only be computed based on the facts and circumstances in existence when the return is filed. Expenses for petitioner’s subsequent contest of the deficiency and fraud penalty had not been incurred and could not have been ascertained at the time the return was filed. Likewise, interest on the fraudulent underpayment had not yet been incurred, nor was it ascertainable. Petitioner’s postreturn expenses could not have been deducted on its estate tax return, and hence, these expenses do not reduce the tax liability that was required to be shown on the return. The ability to adjust a tax liability after the return is due does not relieve. a taxpayer of the obligation to report the tax in full when it is due, nor does it defer a taxpayer’s duty to pay the tax promptly. Manning v. Seeley Tube & Box Co., 338 U.S. 561 (1950).2  Any distinction between the calculation of an estate tax liability and the calculation of an income tax liability has no bearing on the taxpayer’s statutory obligation to file an accurate and timely return. The reasoning in the line of cases holding that a net operating loss (NOL) carryback will not reduce the amount of an income tax underpayment for purposes of computing a penalty or an addition to tax was not based on the unique nature of the income tax. The rationale in C.V.L. Corp. v. Commissioner, 17 T.C. 812 (1951), is not based on the fact that each taxable year is a separate year for income tax purposes as the majority claims. Majority op. p. 60. In that case we upheld a delinquency penalty even though the deficiency had been eliminated by an NOL carryback because the obligation to file a timely return was mandatory and subsequent events could not excuse that obligation. Id. at 816. In Auerbach Shoe Co. v. Commissioner, 21 T.C. 191, 196 (1953), affd. 216 F.2d 693 (1st Cir. 1954), we held that The taxpayer is required to report the correct amount of his income in filing a return. Where this is not done due to the taxpayer’s fraudulent conduct, liability for the 50 per cent addition to the tax for fraud is incurred and the unforeseen circumstance that a carry-back later arises to offset the deficiency should not operate to relieve the taxpayer of the addition imposed for the fraud. * * * The liability for the additions to the tax for fraud existed from the time of the filing of the false and fraudulent return with intent to evade tax. The addition is to be measured by the deficiency, undiminished by any subsequent credit or carry-back. [Emphasis added.] The key fact relied upon in both C.V.L. Corp. v. Commissioner, supra, and Auerbach Shoe Co. v. Commissioner, supra, was that the event which reduced the original “underpayment” occurred after the return at issue was filed. The fact that each taxable year is a separate year for income tax purposes was not discussed, nor was it relied upon, in any of the other cases cited by the majority.3 Consequently, the principle upon which these NOL carryback cases are based is applicable to the present case. Petitioner had a duty to file an estate tax return as of a certain date and to pay the amount of the tax due on that date. Like a taxpayer entitled to carry back an NOL, petitioner here did not incur, and therefore was not able to determine, the subsequently incurred expenses until after the estate tax return was required to be filed. Like the NOL carrybacks, these expenses could not have been deducted in computing the tax required to be shown on the estate tax return. Like NOL carrybacks, these later incurred expenses can be deducted only pursuant to proceedings subsequent to the filing of the return. See sec. 20.2053-l(b)(3), Estate Tax Regs.4  The fraud that is being penalized by section 6663(a) is complete when a fraudulent return is filed. In Badaracco v. Commissioner, 464 U.S. 386, 394 (1984), the Supreme Court explained that fraud was committed, and the offense completed, when the original return was prepared and filed. * * * In short, once a fraudulent return has been filed, the case remains one “of a false or fraudulent return,” regardless of the taxpayer’s later revised conduct, for purposes of criminal prosecution and civil fraud liability under §6653(b). * * * Since fraud is based on the facts and circumstances at the time the fraudulent return was filed, it makes sense that the facts and circumstances .considered in determining the amount of the resulting penalty should be the same. Courts addressing the fraud penalty examine the facts and circumstances in a time-specific manner, not only in determining whether fraud existed, but also in determining the amount of the associated penalty. See Arc Elec. Constr. Co. v. Commissioner, 923 F.2d 1005, 1009 (2d Cir. 1991) (“A taxpayer who commits a fraud in reporting taxes in one year may not, on account of a fortuitous carryback that later develops which eliminates tax liability for that same year, claim that the carryback wipes out the fraud as well. Once fraud is demonstrated, it is, as it were, frozen in time, unaffected by subsequent events.”), affg. on this issue and revg. and remanding T.C. Memo. 1990-30. This same logic is reflected by the statutory language of section 6663(a) that imposes the penalty on the fraudulent “underpayment of tax required to be shown on a return.” This logic is also reflected in the legislative history of the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101 — 239, sec. 7721(a), 103 Stat. 2106, 2395, which introduced section 6663 and retained the provisions imposing interest on the fraud penalties from the date the return was required to be filed. The bill retains the general rule of present law that interest on these penalties commences with the date the return was required to be filed. The committee believes this rule is appropriate because the behavior being penalized is reflected on the tax return, so that imposition of interest from this date will reduce the incentives of taxpayers and their advisors to “play the audit lottery.” [H. Rept. 101 — 247, at 1394 (1989).] The majority states that Congress used the phrase “tax required to be shown on a return” as a classification and did not intend that the penalty be based on the specific tax required to be shown on the fraudulent return on the filing date. See majority op. p. 62. I disagree. The statutory classification of situations covered by the section 6663(a) penalty is contained in section 6664. Section 6664(b) provides that the accuracy-related and the fraud penalties of sections 6662 and 6663 “shall apply only in cases where a return of tax is filed”. Section 6664(b) specifically classifies the situations to which section 6663(a) applies. If the phrase “tax required to be shown on a return” in section 6663 refers only to the type of tax, as the majority suggests, the phrase would be surplus-age. In construing the tax code, words used should not be considered surplusage. D. Ginsberg & Sons v. Popkin, 285 U.S. 204, 208 (1932) (it is a cardinal rule of statutory construction that “effect shall be given to every clause and part of a statute.”); Arc Elec. Constr. Co. v. Commissioner, supra at 1008. The majority’s interpretation will also produce an unintended inconsistency between the way in which the fraud penalties in sections 6663 and 6651 are computed. Prior to the enactment of section 6663 in 1989, section 6653(b) imposed a penalty for fraud, regardless of whether or not a return was filed. When Congress enacted section 6663 imposing a fraud penalty for fraudulent returns, it added section 6651(f) imposing a separate penalty for any fraudulent failure to file a return. The penalty for fraudulent failure to file is imposed by using the following statutory language: SEC. 6651(a). Addition to the Tax. — In case of failure— (1) to file any return required under authority of subchapter A of chapter 61 * * * there shall be added to the amount required to be shown as tax on such return * * * [15] percent of the amount of such tax if the failure is for not more than 1 month, with an additional * * * [15] percent for each additional month or fraction thereof during which such failure continues, not exceeding * * * [75] percent in the aggregate; [Sec. 6651(a), (f); emphasis added.5] The above-quoted language makes it clear that the section 6651 fraud penalty applies to the tax that was required to be shown on a specific return on the specific date that such return was required to be filed. This statutory language literally precludes any allowance for expenses incurred after the return due date in computing the fraud penalty. In 1989, when Congress enacted separate fraud penalties for fraudulent returns and fraudulent failures to file, there was nothing to indicate that Congress intended to allow events occurring after the return due date to produce different results depending on whether or not a return was filed. In defining the meaning of “underpayment” for purposes of this case, the majority holds that “the ‘amount of tax imposed by this title’ refers to the tax that ‘is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.’ Sec. 2001(a).” See majority op. p. 58. But this can only be true if one looks at the tax required to be shown on the tax return on its due date. Section 6664(a) defines “underpayment” generally to mean “the amount by which any tax imposed by this title” exceeds the amount shown as the tax by the taxpayer on his return. The isolated phrase “tax imposed by this title” is much more inclusive than the majority holds. For example, in the very next section of the Code, section 6665(a)(2) provides: any reference in this title to “tax” imposed by this title shall be deemed also to refer to the additions to the tax, additional amounts, and penalties provided by this chapter. [Emphasis added.] Likewise, section 6601(e)(1) provides: (1) Interest treated as tax. — ■ * * * Any reference in this title (except subchapter B of chapter 63, relating to deficiency procedures) to any tax imposed by this title shall be deemed also to refer to interest imposed by this section on such tax. [Emphasis added.] Pursuant to these sections, any computation of the “tax imposed by this title” made without reference to the point in time that the return was required to be filed, would have to include both interest and penalties. The majority clearly does not contemplate that interest and penalties be included in “tax imposed by this title” for purposes of computing the “underpayment” to which the fraud penalty applies. However, the only way to avoid such a result is to interpret section 6663 as imposing the fraud penalty on the underpayment of tax that was required to be shown on the taxpayer’s return at the time it was filed.6 Prior to the 1989 enactment of sections 6663 and 6664, the fraud penalty provided for by section 6653(b) was based on an “underpayment” that was generally defined in section 6653(c) as a “deficiency” within the meaning of section 6211. Neither the fraud penalty nor interest is within the definition of a “deficiency” pursuant to sections 6211 and 6601(e). See White v. Commissioner, 95 T.C. 209 (1990); Estate of DiRezza v. Commissioner, 78 T.C. 19 (1982). Finally, the purpose of the fraud penalty is to reimburse the Government for the heavy expense of investigation and the loss resulting from the taxpayer’s fraud. Helvering v. Mitchell, 303 U.S. 391, 401 (1938); Ianniello v. Commissioner, 98 T.C. 165, 180 (1992). The majority would allow a fraudulent taxpayer to reduce the penalty by costs incurred to fight the Government’s attempt to detect and recover fraudulently omitted tax and by interest charged for the period during which the fraudulently omitted tax was not paid.7 This thwarts the very purpose of the penalty. Respondent’s concern that the “‘government’s reimbursement [through the fraud penalty] could be consumed by the * * * [estate’s] counsels’ fees and fees being paid to the trustees, who happen to be the beneficiaries of the estate’”, majority op. p. 64, should concern us as well. This case appears to have been hotly contested. The Court’s initial opinion depicts a massive fraud that respondent proved by clear and convincing evidence. See Estate of Trompeter v. Commissioner, T.C. Memo. 1998-35. Under the majority’s holding, for every dollar that the estate incurs in unsuccessfully fighting the deficiency and fraud penalty, it could potentially save more than 96 cents in tax and penalties! A simple hypothetical may help explain this: Assume a 55-percent tax rate and a timely filed fraudulent return showing a taxable estate of $1,000.8 The estate reports and pays tax of $550 with the return. Later, the value of the taxable estate (before postreturn expenses) is determined by the Commissioner to be $2,000. The total amount of tax that should have been shown on the return was $1,100. This results in a $550 increase in tax over the tax reported on the return. The Commissioner also determines that the underpayment is due to fraud. Therefore, the estate would be liable for the additional $550 tax plus the fraud penalty in the amount of $412.50 (.75 x $550) for a total of $962.50 ($550 + $412.50). Now assume that in the resulting litigation, the Commissioner’s determination is upheld on all points, but in contesting the case, the estate incurs expenses of $1,000. These expenses reduce the value of the taxable estate to $1,000, which in turn results in a total tax liability of $550 ($1,000 x .55), the same amount reported on the fraudulent return. Pursuant to the majority opinion, the estate would pay no additional tax and no fraud penalty. Even though the estate lost all of the issues in litigation and spent $1,000, its real out-of-pocket costs would not exceed $37.50. The results that will occur under the majority’s holding can be avoided by a reasonable interpretation of section 6663(a). Section 6663(a) should be interpreted as providing that the fraud penalty be imposed on the difference between the amount of tax that was required to be shown on the return and the amount that was actually shown on the return. This interpretation is supported by the words of section 6663, the language in related sections of the Code, case law, and common sense. There is simply no reason why we should interpret the statutory language in a way that would produce a result contrary to the purpose of the statute. See Badaracco v. Commissioner, 469 U.S. at 398. Cohen, C.J., agrees with this dissent.   An extension up to 6 months may be obtained for filing. Sec. 6081(a); sec. 20.6081-l(a), Es~ tate Tax Regs.; see Estate of La Meres v. Commissioner, 98 T.C. 294, 320-321 (1992). The time for payment of the estate tax may be extended for a period of 1 year past the due date. Sec. 6161(a)(1). For reasonable cause, the time for payment may be extended for up to 10 years. Sec. 6161(a)(2).    In Manning v. Seeley Tube & Box Co., 338 U.S. 561, 565 (1950), the Court stated: The problem with which we are concerned in this case is whether the interest on a validly assessed deficiency is abated when the deficiency itself is abated by the carryback of a net operating loss. * * * The subsequent cancellation of the duty to pay this assessed deficiency does not cancel in like manner the duty to pay the interest on that deficiency. From the date the original return was to be filed until the date the deficiency was actually assessed, the taxpayer had a positive obligation to the United States: a duty to pay its tax. * * * [Emphasis added.]    The concept of separate taxable years is clearly not determinative. We have stated that if the event creating the deduction occurred in a separate prior year, the deduction would be allowed to reduce the liability for the year at issue for purposes of computing additions to tax. Blanton Coal Co. v. Commissioner, T.C. Memo. 1984-397 (“The basic principle to be found in prior case law would permit reduction for carryforward loss deductions and credits, but prohibit carryback loss deductions and credits, when computing additions to tax.”).    This is the same situation recognized by the Senate Finance Committee report that is quoted in the majority op. p. 59 A taxpayer entitled to a carry-back of a net operating loss * * * will not be able to determine the deduction on account of such carry-back until the close of the future taxable year in which he sustains the net operating loss * * *. He must therefore file his return and pay his tax without regard to such deduction, and must file a claim for refund at the close of the succeeding taxable year when he is able to determine the amount of such carry-back. * * * [S. Rept. 1631, 77th Cong., 2d Sess. 123 (1942), 1942-2 C.B. 504, 597; emphasis added.]    The bracketed percentages are substituted into sec. 6651(a) pursuant to sec. 6651(f) in cases where the failure to file is fraudulent.    The tax required to be shown on a timely filed return would not include any interest or penalty.    Petitioner is claiming postreturn administrative expenses of $926,274 and interest expenses in the amount of $4,167,275.    This is just an example. The 55-percent rate is applied to taxable estates exceeding $3 million. Petitioner was clearly in the 55-percent bracket.