Court Opinion

ID: 4331867
Source: CourtListenerOpinion
Date Created: 2018-11-14 00:22:44.791652+00
Date Added: 2024-06-11T14:47:41.818899
License: Public Domain

111 T.C. No. 2

                     UNITED STATES TAX COURT

             ESTATE OF EMANUEL TROMPETER, DECEASED,
    ROBIN CAROL TROMPETER GONZALEZ AND JANET ILENE TROMPETER
     POLACHEK, CO-EXECUTORS, Petitioner v. COMMISSIONER OF
               INTERNAL REVENUE, Respondent*

     Docket No. 11170-95.                Filed July 22, 1998.

          E, an estate, is subject to the fraud penalty of
     sec. 6663(a), I.R.C. R computes this penalty based on
     E's underpayment as determined by taking into account
     only the deductions which were included on E's Federal
     estate tax return. E computes its underpayment by also
     taking into account deductions for expenses, such as
     professional fees and deficiency interest, which arose
     after the filing of E's return.
          Held: E's underpayment is determined by taking
     into account all deductible expenses, including those
     paid or incurred after the filing of the return.

     Robert A. Levinson and Avram Salkin, for petitioner.

     *
       This opinion supplements our Memorandum Opinion in
Estate of Trompeter v. Commissioner, T.C. Memo. 1998-35.
                                - 2 -

     Irene Scott Carroll, for respondent.

                        SUPPLEMENTAL OPINION

     LARO, Judge:    The dispute herein involves the Rule 155

computation mandated by the Court's Memorandum Opinion filed as

Estate of Trompeter v. Commissioner, T.C. Memo. 1998-35.     The

issue before the Court is one of first impression; namely,

whether an estate's underpayment for purposes of computing the

fraud penalty is determined based solely on expenses which are

included on the Federal estate tax return, or based on all

deductible expenses including deficiency interest and

professional fees which arise after the filing of the return.

     We hold that the underpayment is determined by taking into

account all expenses.   Unless otherwise stated, section

references are to the applicable provisions of the Internal

Revenue Code.   Rule references are to the Tax Court Rules of

Practice and Procedure.   Estate references are to the Estate of

Emanuel Trompeter.   Mr. Trompeter (the decedent) resided in

Thousand Oaks, California, when he died on March 18, 1992.      The

estate's coexecutors, Robin Carol Trompeter Gonzalez and Janet

Ilene Trompeter Polachek, resided in Florida and California,

respectively, when the petition was filed.

     In Estate of Trompeter v. Commissioner, supra, we held that

the estate was subject to the fraud penalty under section

6663(a).   The estate computes the amount of this penalty based on
                                  - 3 -

an underpayment that takes into account all deductible expenses,

including expenses for trustee's fees, attorney's fees, and

deficiency interest that were incurred after the filing of the

estate tax return.    Respondent challenges the estate's ability to

compute its underpayment by deducting the latter expenses.

Respondent asserts that the estate must compute its underpayment

based solely on the expenses which were reported on its estate

tax return.

     We agree with petitioner.      Section 6663(a) imposes a

75-percent penalty on the portion of "any underpayment of tax

required to be shown on a return [that] is due to fraud".1      The

term "underpayment" is defined by section 6664(a) to mean

            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.

     1
         Sec. 6663(a) provides:

     SEC. 6663(a). Imposition of Penalty.--If any     part of
     any underpayment of tax required to be shown     on a
     return is due to fraud, there shall be added     to the tax
     an amount equal to 75-percent on the portion     of the
     underpayment which is attributable to fraud.
                                - 4 -

In the case of the Federal estate tax, 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).   This tax is

determined based on the value of the taxable estate, sec. 2001,

which, in turn, is determined by reducing the value of the gross

estate by the amount of any deduction set forth in sections 2053

through 2056.   Sec. 2051.   Section 2053 allows a deduction for

certain expenses, indebtedness, and taxes.      Section 2054 allows a

deduction for certain losses.    Section 2055 allows a deduction

for certain transfers for public, charitable, or religious uses.

Section 2056 allows a deduction for certain bequests to a

surviving spouse.

     Nowhere in the Code or regulations thereunder does it say

that an estate's underpayment is based solely on deductions that

appear on its estate tax return.    Respondent reaches this result

by analogy to a line of cases which hold 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.   In this Court's seminal opinion of C.V.L. Corp. v.

Commissioner, 17 T.C. 812 (1951), we held that a delinquency

penalty applied to a year for which it was later determined that

no tax was due on account of an NOL carryback.      In reaching this

result, we relied on Manning v. Seeley Tube & Box Co., 338 U.S.

561 (1950), and the Senate Finance Committee report accompanying
                               - 5 -

the Revenue Act of 1942, ch. 619, 56 Stat. 798.    The Supreme

Court held in Manning v. Seeley Tube & Box Co., supra, that an

NOL carryback eliminated a deficiency for a prior year, but did

not eliminate the interest that accrued thereon.    The Senate

Finance Committee report stated that

          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., at 123 (1942),
     1942-2 C.B. 504, 597.]

     This Court subsequently extended the principle enunciated in

C.V.L. Corp. v. Commissioner, supra, to an NOL that was carried

back to a year in which the taxpayer was subject to an addition

to tax for fraud.   The Court held in Petterson v. Commissioner,

19 T.C. 486 (1952), that the original deficiency was the proper

base for computing the fraud penalty, and that the NOL carryback

did not reduce this deficiency for purposes of that computation.

     This and every other Court that has considered whether an

NOL carryback reduces an underpayment for purposes of computing

a penalty or an addition to tax has concluded that the principle

expressed in C.V.L. Corp. v. Commissioner, supra, is correct;

namely, that the NOL carryback may not reduce the underpayment.

See, e.g., Arc Elec. Constr. Co. v. Commissioner, 923 F.2d 1005,

1009 (2d Cir. 1991), affg. on this issue and revg. and remanding
                               - 6 -

T.C. Memo. 1990-30; Willingham v. United States, 289 F.2d 283,

287-288 (5th Cir. 1961); Simon v. Commissioner, 248 F.2d 869, 877

(8th Cir. 1957), affg. on this issue and revg. and remanding

U.S. Packing Co. v. Commissioner, T.C. Memo. 1955-194; Nick v.

Dunlap, 185 F.2d 674 (5th Cir. 1950); Rictor v. Commissioner,

26 T.C. 913, 914-915 (1956); Auerbach Shoe Co. v. Commissioner,

21 T.C. 191, 196 (1953), affd. 216 F.2d 693 (1st Cir. 1954);

Blanton Coal Co. v. Commissioner, T.C. Memo. 1984-397; Pusser

v. Commissioner, a Memorandum Opinion of this Court dated

Dec. 7, 1951, affd. per curiam 206 F.2d 68 (4th Cir. 1953);

see also United States v. Keltner, 675 F.2d 602, 605 (4th Cir.

1982).   Respondent's reliance on this line of cases for a similar

result here, however, is misplaced.    The ability to carry back an

NOL depends on the happenings in a taxable year after the taxable

year in which the underpayment is due to fraud, and the

subsequent year may be as far away as 3 years after the year of

the fraudulent underpayment.   The principle of C.V.L. Corp. v.

Commissioner, supra, reflects the fact that each taxable year is

a separate year for income tax purposes, and that a taxpayer may

not reduce his or her liability for fraudulent conduct in one

year by virtue of unforeseen or fortuitous circumstances that

happen to occur in a later year.    See Paccon, Inc. v.

Commissioner, 45 T.C. 392 (1966).

     In the case of the Federal estate tax, however, the same

rationale does not apply.   The Federal estate tax is not
                                - 7 -

calculated on an annual basis, but is a one-time charge or excise

that is computed on the value of a decedent's gross estate less

certain deductions which are specifically allowed by the Code.

Some of these deductions, like the ones at hand, cannot be

determined until after a return is filed.    Unlike an NOL

carryback, these deductions do not depend on unrelated,

unforeseen, or fortuitous circumstances that may occur in later

years.   These deductions are directly related to a determination

of an estate's tax liability.   In contrast to the determination

of Federal income tax liability, a determination of Federal

estate tax liability is not made based solely on deductions that

are required to be reported on the appropriate tax return as

filed.   Indeed, our rules explicitly recognize the fact that even

some expenses incurred at or after a trial are deductible in

determining an estate's Federal estate tax liability.    See Rule

156; see also Estate of Bailly v. Commissioner, 81 T.C. 246,

supplemented by 81 T.C. 949 (1983).

     We also disagree with respondent's argument in this case

because it could possibly lead to the imposition of the fraud

penalty when the taxpayer/estate does not have an underpayment of

tax and, indeed, may even be entitled to an overpayment.     Such a

result is inconsistent with jurisprudence.    As this Court has

consistently held, the fraud penalty does not apply without an

underpayment because "[absent] an underpayment, there is nothing

upon which the fraud addition to tax [or penalty, as it is now
                                - 8 -

known] would attach."   See, e.g., Newman v. Commissioner,

T.C. Memo. 1992-652; Lerch v. Commissioner, T.C. Memo. 1987-295,

affd. 877 F.2d 624 (7th Cir. 1989); Hamilton v. Commissioner,

T.C. Memo. 1987-278, affd. without published opinion 872 F.2d

1025 (6th Cir. 1989); Shih-Hsieh v. Commissioner, T.C. Memo.

1986-525, affd. without published opinion 838 F.2d 1203 (2d Cir

1987); Estate of Cardulla v. Commissioner, T.C. Memo. 1986-307;

Apothaker v. Commissioner, T.C. Memo. 1985-445; Boggs v.

Commissioner, T.C. Memo. 1985-429; Meredith v. Commissioner, T.C.

Memo. 1985-170; Stephens v. Commissioner, T.C. Memo. 1984-449;

Phillips v. Commissioner, T.C. Memo. 1984-133; see also Compton

v. Commissioner, T.C. Memo. 1983-642; Hansen v. Commissioner,

T.C. Memo. 1981-98; Nunez v. Commissioner, T.C. Memo. 1969-216;

Brown v. Commissioner, T.C. Memo. 1968-29, affd. per curiam

418 F.2d 574 (9th Cir. 1969).   Moreover, as the Court of Appeals

for the Fifth Circuit has stated in a similar setting:

     The taxpayer sought to introduce evidence to show the
     market value of the option at the time it was given.
     This evidence was excluded in the court below. In
     addition, the taxpayer attempted to show additional
     costs incurred for the timber and not claimed on the
     1949 return. Likewise, the court below excluded this
     evidence. Also, with respect to the unreported sales,
     the taxpayer proffered evidence as to alleged
     additional costs incident to the sales not reported on
     the 1949 return. Again, the court below excluded the
     evidence as being irrelevant. This was error. Indeed,
     the appellee, United States, confesses error as to the
     exclusion of this evidence and concedes that the case
     should be remanded for a new trial. This undoubtedly
     is the correct view, for these alleged additional costs
     and the reasonable market value of the option, if
     proven, are relevant to the existence of a tax
     deficiency. Internal Revenue Code of 1939, §293(b).
                               - 9 -

     Since fraud on the part of the taxpayer as to the
     alleged deficiencies is the issue in this case, it is
     correct to state that if there is no deficiency, there
     can be no fraud in connection with the alleged
     deficiency. This evidence should have been received.
     [Jenkins v. United States, 313 F.2d 624, 627 (5th Cir.
     1963).]

     We have also considered whether an estate may deduct the

items reported on its estate tax return, in order to determine

its underpayment for purposes of applying section 6663(a), as

well as any unreported item that is properly deductible as of the

date that the estate tax return is filed.   Such a result would be

reached by interpreting the phrase "tax required to be shown on a

return", as it appears in section 6663(a), to mean that an estate

must determine the related underpayment for that section by

taking into account only those items that could have been

properly deducted from the gross estate on the date that the

return was filed.   We reject this interpretation.   Congress did

not intend for that phrase to be understood in a temporal sense,

but intended that the phrase serve as a rule of classification.

In other words, the phrase "tax required to be shown on a return"

merely refers to the type of tax that is subject to section

6663(a); namely, a tax payable with a return as opposed to, for

example, a tax payable by stamp.   In addition to our literal

reading of section 6663(a), in the view of the text of section

6663 as a whole, we find Congress' intent for the relevant phrase

by examining the evolution of section 6663(a).   Section 6663(a)

was added to the Code by section 7721(a) of the Omnibus Budget
                                 - 10 -

Reconciliation Act of 1989 (the 1989 Act), Pub. L. 101-239,

103 Stat. 2106, 2395-2398.      Prior to the passage of the 1989 Act,

the fraud penalty (or addition to tax, as it was then known) was

contained in former section 6653(b) and (e).      This former section

provided:

     SEC. 6653(b).   Fraud.--

                 (1) In general.--If any part of any
            underpayment * * * of tax required to be
            shown on a return is due to fraud, there
            shall be added to the tax an amount equal to
            75 percent of the portion of the underpayment
            which is attributable to fraud.

                 *    *    *      *    *    *    *

     (e) Failure To Pay Stamp Tax.--Any person * * * who
     willfully fails to pay any tax imposed by this title
     which is payable by stamp, coupons, tickets, books, or
     other devices or methods prescribed by this title or by
     regulations under authority of this title, or willfully
     attempts in any manner to evade or defeat any such tax
     or the payment thereof, shall, in addition to other
     penalties provided by law, be liable to a penalty of 50
     percent of the total amount of the underpayment of the
     tax.

Section 7721(a) of the 1989 Act amended former section 6653 to

read almost verbatim with former section 6653(e); i.e., section

6653 now applies only to a failure to pay tax by way of stamps,

coupons, tickets, books, or other devices or methods prescribed

by the Code or regulations thereunder.     Section 7721(a) of the

1989 Act also created section 6663(a) to impose the fraud penalty

on "tax required to be shown on a return".      Congress did not

intend for the 1989 Act, as it applied to the fraud and

accuracy-related penalties, to create a new body of law that
                              - 11 -

applied thereto.   The reason for the change, as stated by the

House Committee on the Budget, was:

          The committee believes that the number of
     different penalties that relate to accuracy of a tax
     return, as well as the potential for overlapping among
     many of these penalties, causes confusion among
     taxpayers and leads to difficulties in administering
     these penalties by the IRS. Consequently, the
     committee has revised these penalties and consolidated
     them. The committee believes that its changes will
     significantly improve the fairness, comprehensibility,
     and administrability of these penalties. [H. Rept.
     101-247, at 2221 (1989).]

     Our interpretation of the relevant phrase is also supported

by Congress' recognition of the fact that some taxes are payable

by return and that other taxes are payable by stamp.   Section

6511(a), for example, provides different limitations for credit

or refund, depending on whether it is "in respect of which tax

the taxpayer is required to file a return * * * [or] which is

required to be paid by means of a stamp".   Likewise, section

6601(a) imposes interest on "any amount of tax imposed by this

title (whether required to be shown on a return, or to be paid by

stamp or by some other method) [that] is not paid on or before

the last day prescribed for payment".   Similarly, section 6501(a)

generally provides that "the amount of any tax imposed by this

title shall be assessed within 3 years after the return was filed

* * * or, if the tax is payable by stamp, at any time after such

tax became due and before the expiration of 3 years after the

date on which any part of such tax was paid".
                             - 12 -

     Respondent relies on the principles of cases such as

Badaracco v. Commissioner, 464 U.S. 386, 401 (1984), and

Helvering v. Mitchell, 303 U.S. 391, 401 (1938), to the effect

that fraud is established upon the filing of a fraudulent return

and that the fraud penalty reimburses the Government for

detecting, investigating, and prosecuting fraud.   Although we

have no qualms about respondent's recitation of this well-settled

law, whether the estate is liable for fraud is not at issue here.

We decided that issue in Estate of Trompeter v. Commissioner,

T.C. Memo. 1998-35, where we found that the estate had committed

fraud when it filed its estate tax return.    We disagree with any

implication, however, that this body of law supports an

interpretation of the phrase "tax required to be shown on a

return" contrary to that which we espouse.    The relevant phrase

does not apply just to cases of fraud.   The same phrase appears

in section 6662(a), which, among other things, imposes a

20-percent accuracy-related penalty on underpayments attributable

to negligence and substantial understatement.

     We hold that an estate's underpayment is determined by

taking into account all amounts which it is allowed to deduct in

computing its Federal estate tax liability.   Respondent is

concerned that our holding will lead to bad tax policy in 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
                               - 13 -

estate".    We are not as concerned.    Although it is true that fees

for professionals such as attorneys and trustees may be

considerable expenses in the administration of an estate, only

those fees that are legitimate and reasonable are deductible.

We also note that respondent's policy argument is better aimed at

Congress.

     We have considered all arguments by respondent for a holding

contrary to that which we reach herein, and, to the extent not

discussed above, have found those arguments to be irrelevant or

without merit.   To reflect the foregoing

                                            An appropriate order will

                                       be issued.

Reviewed by the Court.

     CHABOT, SWIFT, JACOBS, PARR, WELLS, COLVIN, FOLEY, VASQUEZ,
GALE, THORNTON, and MARVEL, JJ., agree with this majority
opinion.
                               - 14 -

     CHABOT, J., concurring:   I join in the majority opinion, and

write separately merely to note a few additional considerations

in support of the majority opinion’s analysis and conclusions.

                    I.   Treasury Regulations

     Respondent argues that only those expenses which are

reported on the estate tax return may be deducted from the gross

estate in computing the amount of the underpayment.

Correspondingly, respondent further argues that expenses which

arise after the filing of the tax return may not be used to

reduce the underpayment of the estate tax.

     However, section 2053(a), in determining the value of the

taxable estate, permits the deduction of claims against the

estate which are allowable by applicable State laws.   There are

some types of claims whose effect on the decedent’s estate must

necessarily be determined by subsequent events, such as those

claims which require further action before they become a fixed

obligation of the estate.   See cases discussed in Estate of Smith

v. Commissioner, 108 T.C. 412, 418-419 (1997), supplemented by

110 T.C. 12 (1998); Estate of Kyle v. Commissioner, 94 T.C. 829,

848-851 (1990); Estate of Sachs v. Commissioner, 88 T.C. 769,

779-783 (1987), affd. in part and revd. in part 856 F.2d 1158,

1162-1163 (8th Cir. 1988); Estate of Van Horne v. Commissioner,

78 T.C. 728, 735-738 (1982), affd. 720 F.2d 1114 (9th Cir. 1983).
                                   - 15 -

Section 20.2053-1(b)(3), Estate Tax Regs.,1 forbids the deduction

on the estate tax return of an item unless the amount of the

liability “is ascertainable with reasonable certainty, and will

be paid.”    The provision closes with the reassurance that, if the

matter is not resolved by the time of the final audit, then

relief would be available in the Tax Court or in a refund suit.

     Respondent’s contentions in the instant case fly in the face

of this reassurance.       Having forbidden by regulation the taking

of a deduction, even by way of estimate, on a timely filed estate

tax return, respondent in the instant case proposes to limit the

relief otherwise flowing from the deduction merely because the

     1
            SEC. 20.2053-1(b)(3), Estate Tax Regs., provides as
follows:

     SEC. 20.2053-1. Deductions for expenses, indebtedness, and
       taxes; in general. * * *

                *      *       *     *      *    *     *

            (b) Provisions applicable to both categories.

                *      *       *     *      *    *     *

                 (3) Estimated amounts. 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.
                                - 16 -

taxpayer obeyed the regulation, waited until the event occurred,

and sought the promised relief at an appropriate time in the

instant Tax Court proceeding.

     In United States v. Olympic Radio & Television, 349 U.S.

232, 236 (1955), the Supreme Court directed that “We can only

take the Code as we find it and give it as great an internal

symmetry and consistency as its words permit.”   Thus, if the

phrase “tax required to be shown on a return” were to be

interpreted in a temporal sense in section 6663(a), then it ought

to have the same meaning wherever it appears.    This means that it

would have the same meaning where it appears in section 6662(a),

and would have the same impact on those of the section 6662

additions that apply to the estate tax.

     Respondent’s contentions in the instant case might well lead

prudent executors to load up estate tax returns with speculative

deductions in order to satisfy this newly proclaimed requirement,

that only items claimed on the estate tax return may be taken

into account in determining the base for additions to tax under

sections 6662 and 6663.

     Thus, respondent’s contentions in the instant case appear to

conflict with Treasury regulations and may well complicate the

practical administration of the estate tax laws.

                    II.   Legislative History

     The majority opinion explains that the phrase “tax required

to be shown on a return” has a clear classification meaning in
                                   - 17 -

the places in the Code where the phrase appears, but a temporal

meaning which would support respondent’s position would not fit

in many such places.       An examination of the legislative history

of the enactment of the Internal Revenue Code of 1954, where this

phrase appears to have been introduced into the fraud provision,

lends further support to the majority opinion’s analysis and

conclusions.

     Under the Internal Revenue Code of 1939, the civil fraud

addition to tax for income tax was imposed by section 293(b),

with a special rule in section 51(g)(6)(B) in certain joint tax

return situations; for gift tax by section 1019(b); and generally

for other taxes where tax returns or lists were filed by section

3612(d)(2).    As to the applicability of section 3612(d)(2) to

estate taxes, see sec. 871(i).       The civil fraud addition to tax

for various stamp taxes was imposed by section 1821(a)(3).

     When the Internal Revenue Code of 1954 was enacted, the

foregoing 1939 Code provisions were replaced by the following:

     SEC. 6653.     FAILURE TO PAY TAX.

                *      *       *     *      *    *    *

          (b) Fraud.--If any part of any underpayment (as
     defined in subsection (c)) of tax required to be shown
     on a return is due to fraud, there shall be added to
     the tax an amount equal to 50 percent of the
     underpayment. In the case of income taxes and gift
     taxes, this amount shall be in lieu of any amount
     determined under subsection (a).

                *      *       *     *      *    *    *

          (e) Failure To Pay Stamp Tax.--Any person (as
     defined in section 6671(b)) who willfully fails to pay
                              - 18 -

     any tax imposed by this title which is payable by
     stamp, coupons, tickets, books, or other devices or
     methods prescribed by this title or by regulations
     under authority of this title, or willfully attempts in
     any manner to evade or defeat any such tax or the
     payment thereof, shall, in addition to other penalties
     provided by law, be liable to a penalty of 50 percent
     of the total amount of the underpayment of the tax.

     The text of these provisions as enacted is identical to the

text of these provisions as reported by the Senate Finance

Committee.

     The Senate Finance Committee’s technical explanation of

these fraud provisions, S. Rept. 83-1622, at 591-592 (1954), is

as follows:

     Section 6653.   Failure to pay tax

          For all taxes for which returns are required, this
     section prescribes additions to the tax, corresponding
     to those of existing law relating to the income tax,
     for underpayments of tax resulting from fraud (50
     percent of the underpayment). Existing law imposes a
     50 percent addition in the case of fraud applicable to
     all taxes, but, in the case of taxes other than income,
     estate, and gift, that addition is based on the total
     amount of tax imposed. This section further provides
     that if the 50 percent penalty resulting from the fraud
     is assessed, the addition to tax under section 6651 for
     failure to file a return will not be assessed with
     respect to the same underpayment. Another change
     provided in this section is the substitution, for the
     penalty provided in existing law of an amount equal to
     the amount of any stamp tax evaded or not paid, of an
     addition to the tax of 50 percent of the total amount
     of the underpayment of such tax.

To the same effect is the House Ways and Means Committee’s

report.   H. Rept. 83-1337, at A419 (1954).

     Thus, it is clear that in 1954 the Congress intended to

consolidate and revise many of the 1939 Code fraud provisions.
                                - 19 -

The phrase “tax required to be shown on a return” is described in

the committee report as “all taxes for which returns are

required”.   S. Rept. 83-1622 at 591.    That phrase is used to set

off the section 6653(b), I.R.C. 1954 rules from the rules

applying to “any tax imposed by this title which is payable by

stamp, coupons, tickets, books, or other devices”, which are

collectively referred to in the committee report as “any stamp

tax” S. Rept. 83-1622, at 591, and which appear in the statute at

section 6653(e), I.R.C. 1954.

     The classification interpretation is clear from the

legislative events of 1954 and the committee reports.    One

searches in vain for any legislative events of 1954 or

explanations in the course of the enactment of the 1954 Code that

suggests that the phrase in dispute should be given a temporal

interpretation, whether as to fraud or in general.

     SWIFT, PARR, WHALEN, LARO, VASQUEZ, GALE, and MARVEL, JJ.,
agree with this concurring opinion.
                                - 20 -

     SWIFT, J., concurring:     Judge Ruwe’s dissent acknowledges

that under section 2053(a) an estate, or a preparer of an estate

tax return, may estimate and claim on the estate tax return,

expenses not yet incurred if such expenses are reasonably

anticipated and an amount therefor can be reasonably estimated.

See sec. 20.2053-1(b)(3), Estate Tax Regs.

     In Estate of Trompeter v. Commissioner, T.C. Memo. 1998-35,

we found that the executor in this case “knowingly” filed a

fraudulent estate tax return.    Because the fraud was “known” at

the time the estate tax return was filed, it would appear that it

would not have been unreasonable (albeit perhaps a poor strategy)

for the tax return preparer to have anticipated respondent’s

audit and the litigation that followed and, under section 2053,

to have estimated on the estate tax return a reasonable amount

for legal fees likely to be incurred in connection with the

litigation and to have claimed such expenses as deductions.

     I note that under current law and ethical guidelines, tax

return preparers may no longer consider the audit lottery when

evaluating the “reasonableness” of tax return positions.    See

Treas. Dept. Circular No. 230 (Regulations Governing the Practice

* * * Before the Internal Revenue Service); AICPA Statements on

Responsibilities in Tax Practice No. 1, par. 03a and

Interpretation No. 1-1, par. 05; ABA Ethics Opinion 85-352.

     Circular No. 230 at section 10.34(a)(4)(i) provides as

follows:
                             - 21 -

          The possibility that a position will not be
          challenged by the Service (e.g., because the
          taxpayer’s return may not be audited or
          because the issue may not be raised on audit)
          may not be taken into account.

     In other words, in considering the “hazards of litigation”

or the reasonableness of a particular tax return position, tax

return preparers are now to assume that tax returns will be

audited by respondent and that questionable items reported and

claimed on the returns will be disallowed by respondent.

     Accordingly, with regard to questionable items knowingly

reported on estate tax returns, taxpayers and tax return

preparers generally are to anticipate that an audit will occur

and that questionable items will be disallowed by respondent, and

they are to anticipate that the estate will incur additional

legal expenses associated with that disallowance.   Thus, under

section 20.2053-1(b)(3), Estate Tax Regs., it appears that legal

expenses likely to be associated with a disallowance by

respondent of questionable items reflected on estate tax returns

could be claimed on the returns when filed, based on reasonable

estimates therefor.

     I have two further points.

     If a taxpayer and a tax return preparer jointly and

knowingly participate in the preparation and filing of a grossly

fraudulent tax return to such an extent that the fraud -- when

first raised by respondent on audit -- should have been
                              - 22 -

immediately conceded by the taxpayer and by the taxpayer’s legal

representative, then the taxpayer should not have contested

either the resulting tax deficiency or the imposition of the

fraud penalty.   A contest involving such a patently fraudulent

return would be frivolous.

     Under the above approach, postaudit administrative hearings

and Tax Court litigation contesting an estate tax deficiency and

imposition of a fraud penalty ought to be regarded as unnecessary

and frivolous, and legal expenses relating thereto should be

disallowed under section 2053 and section 20.2053-3(a), Estate

Tax Regs., as unreasonable and as incurred not for the benefit of

the estate, but for the benefit of the beneficiaries (i.e., as

merely an attempt by the beneficiaries to postpone payment of the

proper estate tax and penalties due).   See, for example, Hibernia

Bank, Admr. (Estate of Clark) v. United States, 581 F.2d 741, 746

(9th Cir. 1978); Estate of Dutcher v. Commissioner, 34 T.C. 918,

923 (1960); Estate of Bartberger v. Commissioner, T.C. Memo.

1988-21; and Estate of Pudim v. Commissioner, T.C. Memo. 1982-

606, affd. without published opinion 942 F.2d 1433 (2d Cir.

1983), each of which illustrates the disallowance, for estate tax

purposes, of legal and other fees and costs due to the fact that

the costs were not incurred in the good faith administration of

the estate but for the benefit of the beneficiaries.
                              - 23 -

     I would think that the above authority would provide the

mechanism to handle the dissent’s hypothetical situation that

reflects bad faith and frivolous litigation.

     Lastly, if, on policy grounds,1 expenses of the type in

dispute herein should be denied as a matter of law, it would

appear appropriate for Congress to do so by legislation, rather

than by opinion of this Court and by respondent’s strained

interpretation of the statutory provisions, under which the

expenses in dispute would be deductible under section 2053 for

civil tax deficiency purposes but, as a matter of law, would not

be deductible for purposes of the computation of the fraud

addition to tax.   If Congress intends significant disparate

treatment in the allowance of identical expenses for two closely

related purposes, I would expect such disparate treatment to be

clearly set forth in the statutory scheme.

     1
      A strong policy argument certainly can be made that because
the items in question in this case were fraudulent they never
should have been claimed on the estate tax return in the first
place and the subsequent and related litigation expenses then
never would have been incurred.
                                - 24 -

     HALPERN, J., concurring:    The majority’s interpretation of

section 6663(a) leads to the conclusion that an executor who, in

anticipation of incurring future administration expenses, deducts

those expenses on the estate tax return, knowing full well that

such expenses are not deductible until incurred, will avoid any

section 6663(a) penalty with respect to his action even if the

Court finds that he acted with fraudulent intent, so long as the

expenses eventually are incurred.    Cf. Summerill Tubing Co. v.

Commissioner, 36 B.T.A. 347 (1937) (fraud in corporate return on

account of fictitious purchases, which masked embezzlement;

statutory period of limitations extended on account of fraud; no

deficiency on which to base addition to tax for fraud because of

offsetting theft-loss deduction).    As a matter of policy, I

question such result.   Nonetheless, I think that it is compelled

because of the structure and historical development of the

section 6663(a) fraud penalty.

     As a matter of arithmetic, section 6663(a) contains an

equation, in which the amount of the fraud penalty equals the

product of a multiplier (“75 percent”) and a multiplicand (“the

portion of the underpayment which is attributable to fraud”).

Section 6663(a) is ambiguous, however, as illustrated by the

debate between the majority and Judge Ruwe.    The issue is whether

we are to determine one aspect of the multiplicand (the

underpayment) as of the time the return is filed or as ultimately

determined.   Since the term “underpayment” is defined in section
                              - 25 -

6664(a) without any temporal qualification, the focus is on the

phrase “of tax required to be shown on a return”, which modifies

the term “underpayment” in section 6663(a).1   I am persuaded that

the majority has reached the right result on the basis of both

the history of section 6663 and a textual analysis.

     The relevant history concerns the evolution of the 1939 Code

into the 1954 Code.   An adequate summary of that history is

provided in Judge Chabot's concurring op. pp. 16-19.    The

important point is that, in 1954, Congress’ purpose was to

consolidate and revise many of the 1939 Code fraud provisions.

Under the 1939 Code, as described in the report of the Committee

on Finance, see Judge Chabot's concurring op. p. 18, there were

two models for imposition of a fraud addition.   For all taxes,

there was a 50-percent addition in the case of fraud.    The base

     1
          In pertinent part, the term “underpayment”, as defined
in sec. 6664(a), is the difference between “the tax imposed by
this title” and “the amount shown as the tax by the taxpayer on
his return”. Notwithstanding that the majority says that the
issue before the Court is whether the underpayment “is determined
based solely on expenses which are included on the Federal estate
tax return, or based on all deductible expenses including
deficiency interest and professional fees which arise after the
filing of the return”, majority op. p. 2, the issue is plainly
whether sec. 6663(a) specifies a time (the time for filing the
return) for determining the minuend (i.e., the “the tax imposed
by this title”) in the sec. 6664(a) equation. With respect to
the question of statutory interpretation facing us, the
subtrahend (i.e., “the amount shown as the tax by the taxpayer on
his return”) is invariable. Thus, a taxpayer can reduce the
sec. 6663(a) fraud penalty by proving deductions available at the
time the return was filed but omitted therefrom. Cf. Summerill
Tubing Co. v. Commissioner, 36 B.T.A. 347 (1937) (discussed in
the text). The majority’s mischaracterization is of no
consequence in calculating the relevant difference.
                               - 26 -

(the multiplicand), however, differed as between the income,

estate, and gift taxes, on the one hand, and all other taxes on

the other hand.    The multiplicand for the former group was the

amount of the deficiency in tax.    See, e.g., 1939 Code sec.

293(b).    For all other taxes, the multiplicand was the amount of

tax due.    See sec. 3612(d)(2), I.R.C. 1939.   For the 1954 Code,

as stated in the report of the Senate Finance Committee, Congress

chose the income tax model for all taxes for which returns are

due.    The 1939 provision, section 293(b), provided as follows:

       Fraud.--If any part of any deficiency is due to fraud
       with intent to evade tax, then 50 per centum of the
       total amount of the deficiency (in addition to such
       deficiency) shall be so assessed, collected, and paid,
       in lieu of the 50 per centum addition to the tax
       provided in section 3612(d)(2).

The term “deficiency” was defined in section 271 of the 1939 Code

much as it is defined both in the 1954 Code and today, and much

as the term “underpayment” is defined in section 6664(a).    I do

not read any temporal qualification into the multiplicand in the

1939 Code income tax fraud equation, and, for that reason, I do

not think that Congress intended one to exist today.    Such a

qualification would have been a significant change, and I think

that the lack of any mention of such a change in the legislative

history is persuasive that one was not intended.

       With respect to the text of section 6663, the object of the

adjectival prepositional phrase “of tax required to be shown on a

return” is the immediately preceding noun “underpayment”.    The

phrase does not modify the second use of the noun “underpayment”
                              - 27 -

in subsection (a), which second use is in the actual penalty

equation, nor does it modify any use of the noun “underpayment”

in subsections (b) and (c).   If Congress had intended the phrase

to be a temporal qualification on the term “underpayment” for

purposes of the penalty equation, then it is unlikely that

Congress would have merely implied such qualification in the

equation.

     Also, Congress used the indefinite article “a”, supporting

the majority’s interpretation that the phrase “required to be

shown on a return” is a general qualification, rather than the

definite article “the”, which would support Judge Ruwe’s

interpretation that the phrase is a temporal requirement

regarding the return.

     SWIFT, WHALEN, BEGHE, and GALE, JJ., agree with this
concurring opinion.
                              - 28 -

     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

     1
      An extension up to 6 months may be obtained for filing.
Sec. 6081(a); sec. 20.6081-1(a), Estate 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).
                              - 29 -

paid and if they are ascertainable with reasonable certainty.

Thus, section 20.2053-1(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
                               - 30 -

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. 6.   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

     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.]
                               - 31 -

mandatory and subsequent events could not excuse that obligation.

Id. at 861.    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.

     3
      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.").
                              - 32 -

     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. 20.2053-1(b)(3), Estate Tax Regs.1

     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,"

     1
      This is the same situation recognized by the Senate Finance
Committee report that is quoted in the majority opinion p. 5.

          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., at 123 (1942), 1942-2
     C.B. 504, 597; emphasis added.]
                             - 33 -

     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 if 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, 2395-2398, which introduced section 6663 and

retained the provisions imposing interest on the fraud penalties

from the date the return was required to be filed.
                              - 34 -

          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 2234 (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. 9.   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 only refers to the type of tax, as the majority

suggests, the phrase would be surplusage. 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
                              - 35 -

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

     5
      The bracketed percentages are substituted into sec. 6651(a)
pursuant to sec. 6651(f) in cases where the failure to file is
fraudulent.
                               - 36 -

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. 4.   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.]
                              - 37 -

     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

     6
      The tax required to be shown on a timely filed return would
not include any interest or penalty.
                              - 38 -

attempt to detect and recover fraudulently omitted tax and by

interest charged for the period during which the fraudulently

omitted tax was not paid.1   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. 12, 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 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 $1,000.2   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

     1
      Petitioner is claiming postreturn administrative expenses
of $926,274 and interest expenses in the amount of $4,167,275.
     2
      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.
                              - 39 -

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, respondent'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
                              - 40 -

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.