Tom I. Lincir and Diane C. Lincir v. Commissioner ( 2000 )

115 T.C. No. 22
UNITED STATES TAX COURT
TOM I. LINCIR AND DIANE C. LINCIR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent1*
Docket No. 22934-89. Filed September 27, 2000.
Ps are liable for deficiencies in and additions to
their Federal income tax liabilities for the taxable
years 1978 through 1982, including interest at the
increased rate prescribed under sec. 6621(c), I.R.C.,
and the "interest sensitive" addition to tax under sec.
6653(a)(2), I.R.C., for 1981 and 1982. The parties
agree that Ps are entitled to refunds for overpayments
for the taxable years 1984 and 1985 that would
partially offset the deficiencies for the earlier
years. Ps contend that the Court's decision for the
taxable years 1978 through 1982 should state that "The
penalties due under section 6621(c) and section
6653(a)(2) are to be determined after the application
of the interest-netting rules of section 6621(d)."
Held: The Court lacks jurisdiction in this
deficiency proceeding to determine the impact, if any,
of the so-called interest-netting rule under sec.
6621(d), I.R.C., on the computation of the sec.
*This supplements Lincir v. Commissioner, T.C. Memo. 1999-98.
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6621(c), I.R.C., interest. Held, further, Because R
has not computed the amount of statutory interest
payable under sec. 6601, I.R.C., the question of the
impact of sec. 6621(d), I.R.C., if any, on the
computation of the addition to tax under sec.
6653(a)(2), I.R.C., is not ripe for consideration.
Michael D. Savage, for petitioners.
Gary D. Kallevang, for respondent.
SUPPLEMENTAL OPINION
DAWSON, Judge: This matter is before the Court for
resolution of the parties' dispute over the terms of the decision
to be entered in this case pursuant to Rule 155.1 Although the
parties generally agree as to the decision to be entered in this
case, petitioners contend that it should include the following
statement:
The penalties due under section 6621(c) and section
6653(a)(2) are to be determined after the application
of the interest-netting rules of section 6621(d).
Respondent opposes the inclusion of the preceding statement in
the decision. As explained in detail below, the decision will
not include the disputed statement.
Background
During the taxable years 1978 through 1982, Tom I. Lincir
and Diane C. Lincir (petitioners) reported tax losses related to
1
Unless otherwise indicated, section references are to
sections of the Internal Revenue Code, as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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their participation in tax shelter programs known as the
"Arbitrage Carry" gold trading program promoted by Futures
Trading, Inc. (the FTI program) and the Treasury bill option and
stock forward transactions promoted by Merit Securities, Inc.
(the Merit Securities program). In 1984 and 1985, petitioners
reported taxable gains from offsetting straddle transactions
carried out in connection with the Merit Securities program.
Respondent determined deficiencies in and additions to
petitioners' Federal income tax liabilities for the taxable years
1978 through 1982 based upon the disallowance of losses that
petitioners claimed with respect to the FTI and Merit Securities
programs. Respondent also determined that petitioners are liable
for interest computed at the increased rate prescribed in section
6621(c) (section 6621(c) interest) for each of the years in
issue. Respondent also determined that petitioners are liable
for additions to tax under section 6653(a)(2) for 1981 and 1982.
Petitioners filed a timely petition contesting respondent's
determinations. They subsequently agreed that adjustments
related to their participation in the Merit Securities program
would be redetermined in the same manner as certain test cases.
In the test cases, reported as Leema Enterprises, Inc. v.
Commissioner, T.C. Memo. 1999-18, the Court disallowed all losses
related to the Merit Securities program on the alternative
grounds that the program lacked economic substance and Merit
Securities program participants failed to meet the statutory
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requirements for deducting the losses in dispute because their
primary objective was to obtain tax benefits. Petitioners
entered into a second stipulation in which they agreed that all
transactions related to the FTI program would be ignored for
Federal income tax purposes.
Although petitioners made one partial payment of
approximately $270,000 in 1990 against their liability for the
taxable years 1978 through 1982, the parties agree that
petitioners have underpayments for those taxable years on which
interest continues to accrue. The parties also agree that
petitioners are entitled to refunds for outstanding overpayments
for the taxable years 1984 and 1985 attributable to the gains
that petitioners reported in those years on transactions
associated with the Merit Securities program.2
After the disposition of the substantive tax shelter
adjustments described above, the Court conducted a trial to
redetermine petitioners' liability for additions to tax and
section 6621(c) interest. In Lincir v. Commissioner, T.C. Memo.
1999-98, the Court sustained respondent's determinations that
petitioners are liable for various additions to tax (including
section 6653(a)(2) for 1981 and 1982) and section 6621(c)
interest for the years in issue. We subsequently ordered the
2
On or about Apr. 7, 1987, to avoid a whipsaw in the event
the Court were to sustain respondent's disallowance of losses
claimed in the taxable years before the Court, petitioners filed
protective claims for refunds of the taxes paid in 1984 and 1985
on the gains reported in those years.
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parties to submit an agreed decision or separate computations for
entry of decision pursuant to Rule 155.
Although the parties generally agree with respect to the
terms of the Court's decision, petitioners contend that the
decision should state that the computations of the addition to
tax under section 6653(a)(2) and section 6621(c) interest are
subject to (and will be reduced by) the new interest-netting rule
contained in section 6621(d). Respondent counters: (1) The
question of the applicability of section 6621(d) in respect of
the computation of section 6621(c) interest is not ripe for
consideration in this deficiency proceeding; and (2) section
6621(d) does not affect the computation of the addition to tax
under section 6653(a)(2).
Discussion
Section 6621(d), enacted as part of the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3301, 112 Stat. 685, 741 provides:
To the extent that, for any period, interest is payable
under subchapter A and allowable under subchapter B on
equivalent underpayments and overpayments by the same
taxpayer of tax imposed by this title, the net rate of
interest under this section on such amounts shall be
zero for such period.
In sum, section 6621(d) provides that for any period during which
a taxpayer is simultaneously liable for an underpayment of tax
and entitled to a refund for an overpayment of tax in an
equivalent amount, the net rate of interest on such amount shall
be zero.
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Section 6621(c) Interest
Respondent argues that the question whether the interest-
netting rule affects the computation of section 6621(c) interest
is not ripe for consideration in this deficiency proceeding.
Citing the principle that the Court generally lacks jurisdiction
in a deficiency proceeding to redetermine interest, respondent
argues that the parties have not computed the amount of statutory
interest due from petitioners, and thus the parties are unable to
compute the amount of increased interest due under section
6621(c). Respondent contends that the legal question of the
effect of section 6621(d) is a matter that may only be raised
within the context of a supplemental proceeding brought pursuant
to section 7481(c).3
3
Sec. 7481(c), enacted in the Technical and Miscellaneous
Revenue Act of 1988, Pub. L. 100-647, sec. 6246(a), 102 Stat.
3342, 3751, confers jurisdiction on the Court to resolve disputes
over respondent's postdecision computation of statutory interest.
See note to Rule 261, 93 T.C. 1040-1041 (1989). Sec. 7481(c)
provides in pertinent part:
SEC. 7481(c) Jurisdiction Over Interest
Determinations.--Notwithstanding subsection (a), if–
(1) an assessment has been made by the Secretary
under section 6215 which includes interest as
imposed by this title,
(2) the taxpayer has paid the entire amount of
the deficiency plus interest claimed by the Secretary,
and
(continued...)
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Petitioners assert that, because the Court has jurisdiction
to redetermine their liability for section 6621(c) interest, the
Court also has jurisdiction to determine how such increased
interest is computed. Petitioners further assert that a plain
reading of the applicable provisions leads to the conclusion that
the amounts that they owe pursuant to section 6621(c), an item
that is tied directly to the rate of interest under section 6621,
will be substantially reduced when computed pursuant to the
interest-netting rule.
The Tax Court is a court of limited jurisdiction, and we may
exercise our jurisdiction only to the extent authorized by
Congress. See sec. 7442; Judge v. Commissioner, 88 T.C. 1175,
1180-1181 (1987); Naftel v. Commissioner, 85 T.C. 527, 529
(1985). It is well settled that this Court's jurisdiction to
redetermine a deficiency in tax generally does not extend to
statutory interest imposed under section 6601. See Bax v.
3
(...continued)
(3) within 1 year after the date the decision of
the Tax Court becomes final under subsection
(a), the taxpayer files a petition in the Tax
Court for a redetermination that the amount
of interest claimed by the Secretary exceeds
the amount of interest imposed by this title,
then the Tax Court may reopen the case solely to
determine whether the taxpayer has made an overpayment
of such interest and the amount of any such
overpayment. * * *
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Commissioner, 13 F.3d 54, 56-57 (2d Cir. 1993), affg. an Order of
this Court; LTV Corp. v. Commissioner, 64 T.C. 589, 597 (1975);
see also Asciutto v. Commissioner, T.C. Memo. 1992-564, affd. 26
F.3d 108 (9th Cir. 1994). In particular, section 6601(e)(1)
provides that interest prescribed by section 6601 is treated as
tax "except [for purposes of] subchapter B of chapter 63,
relating to deficiency procedures”. Because the effect of such
language is to exclude interest from the definition of a "tax"
for purposes of section 6211(a), it follows that such interest
does not constitute a deficiency within the meaning of that
provision. See Pen Coal Corp. v. Commissioner, 107 T.C. 249, 255
(1996); White v. Commissioner, 95 T.C. 209, 213 (1990). For this
reason, the Court's decision documents normally will not include
a reference to a taxpayer's liability for statutory interest.
See Thomas v. Commissioner, T.C. Memo. 1994-291.
Consistent with section 6601(e), the Court does have
jurisdiction to redetermine statutory interest where a taxpayer
has properly invoked the Court's overpayment jurisdiction
pursuant to section 6512. See Barton v. Commissioner, 97 T.C.
548, 554-555 (1991). In Winn-Dixie Stores, Inc. & Subs. v.
Commissioner, 110 T.C. 291 (1998), we held that the Court had
jurisdiction under section 6512 to review the taxpayers' claim
that they had overpaid statutory interest for the years in issue
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where the Commissioner had rejected the taxpayers' request
pursuant to section 6402(a) to offset the tax deficiencies (and
interest) for the years before the Court against the taxpayers'
overpayments for earlier years. Unlike the taxpayers in Winn-
Dixie Stores, Inc. & Subs. v. Commissioner, supra, petitioners
have not paid in full the agreed deficiencies with interest.
Accordingly, petitioners cannot invoke the Court's overpayment
jurisdiction.
Despite the Court's general lack of jurisdiction to
redetermine a taxpayer's liability for statutory interest in a
deficiency proceeding, the Court does have jurisdiction under
section 6621(c) to determine whether a taxpayer is liable for
increased interest. Section 6621(c), originally codified as
section 6621(d) and applicable with respect to interest accruing
after December 31, 1984, provides that interest payable under
section 6601 will be computed at a rate equal to 120 percent of
the normal rate provided under section 6601 on any substantial
underpayment of tax attributable to a tax-motivated transaction.4
Section 6621(c)(4) provided in pertinent part:
(4) Jurisdiction of Tax Court.--In the case of any
proceeding in the Tax Court for a redetermination of a
deficiency, the Tax Court shall also have jurisdiction
to determine the portion (if any) of such deficiency
4
Former sec. 6621(d) was added to the Internal Revenue
Code by the Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
144(a), 98 Stat. 494, 682. Sec. 6621(d) was redesignated sec.
6621(c) by the Tax Reform Act of 1986, Pub. L. 99-514, sec.
1511(c)(1)(A)-(C), 100 Stat. 2085, 2744. Sec. 6621(c) was
repealed by sec. 7721(b) of the Omnibus Budget Reconciliation Act
of 1989, Pub. L. 101-239, 103 Stat. 2106, 2399 effective with
respect to returns the due date for which is after Dec. 31, 1989.
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which is a substantial underpayment attributable to tax
motivated transactions.
In sum, section 6621(c)(4) establishes a limited exception to the
general rule that this Court lacks jurisdiction over statutory
interest by providing that, in a proceeding for redetermination
of a deficiency, this Court has jurisdiction to determine the
portion (if any) of such a deficiency that is a substantial
underpayment attributable to a tax-motivated transaction.
Based upon the plain language of section 6621(c)(4), we
conclude that Congress limited the Court's jurisdiction in a
deficiency proceeding to determining the portion of a deficiency
that will be subject to increased interest under section 6621(c).
In this connection, we conclude that Congress did not intend for
the Court to compute or otherwise instruct respondent how to
compute section 6621(c) interest in the context of a deficiency
proceeding.5
Section 6653(a)(2)
Contrary to respondent's argument with respect to section
6621(c), respondent asserts that the Court can reach the question
regarding the effect of section 6621(d) on the computation of the
addition to tax under section 6653(a)(2). Respondent maintains,
5
Although respondent contends that petitioners will be
able to raise the question of the impact of sec. 6621(d) on the
computation of increased interest under sec. 6621(c) pursuant to
a supplemental proceeding brought under sec. 7481(c), the scope
of the Court's jurisdiction in a sec. 7481(c) proceeding is not
properly before the Court at this time, and we express no opinion
on the point.
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however, that section 6621(d) does not affect the computation of
the addition to tax. Petitioners contend that the proper
application of section 6621(d) will have the effect of reducing
the amount of the addition to tax under section 6653(a)(2)
because there should not be any interest due with respect to the
portion of petitioners' income tax liabilities for the years in
issue that is offset by petitioners' income tax overpayments for
1984 and 1985.
Section 6653(a)(2) provides that, if a portion of an
underpayment is attributable to negligence, the taxpayer shall be
liable for an addition to tax "in an amount equal to 50 percent
of the interest payable under section 6601". The specific amount
of a taxpayer's liability for the addition to tax under section
6653(a)(2) is dependent upon a computation of statutory interest
payable under section 6601.
To date, respondent has not assessed or otherwise computed
the statutory interest payable under section 6601 in this case.
In short, respondent cannot make such a computation until the
Court has entered its decision. Because respondent has not
computed the amount of statutory interest payable under section
6601, any question pertaining to the correct computation of the
addition to tax under section 6653(a)(2) is premature and is not
ripe for consideration. We note that until respondent computes
and enters an assessment for the addition to tax under section
6653(a)(2), it is unclear whether the present computational
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dispute will materialize into a concrete controversy.6
Conclusion
Consistent with the preceding discussion, the Court will not
include the statement proffered by petitioners to be entered in
the decision in this case. Instead, the Court will enter a
decision consistent with the proposed decision submitted by
respondent.
Accordingly, upon due consideration of the parties’
contentions and for cause,
An appropriate decision
will be entered.
6
We express no view regarding the appropriate forum or
proceeding in which any such controversy might be resolved.