DocketNumber: Docket No. 7290-70.
Citation Numbers: 42 T.C.M. 719, 1981 Tax Ct. Memo LEXIS 305, 1981 T.C. Memo. 434
Filed Date: 8/17/1981
Status: Non-Precedential
Modified Date: 11/20/2020
By Memorandum Opinion filed July 6, 1977 this Court set forth the adjustments to petitioners' 1967 and 1968 Federal income tax returns that were agreed to by petitioners and respondent. Such Memorandum Opinion formed the basis for the computations under Rule 155 submitted by the parties. The computations differed with respect to the proper method of computing (1) petitioners' 1967 Federal tax liability under the income averaging provisions (
SUPPLEMENTAL MEMORANDUM OPINION
STERRETT,
Respondent filed his original computation for entry of decision under Rule 155 on June 17, 1980. On September *307 2, 1980, petitioners filed their computation for entry of decision under Rule 155. The two being at odds, a hearing took place in Los Angeles, California on November 18, 1980. On that same date, respondent filed a revised computation for entry of decision. The issues arising from the difference in the parties' computations are: (1) whether, in computing "averagable income" within the meaning of
The relevant income (loss) figures of petitioners for the indicated years, as agreed to by the parties, were as follows:
1968 | 1967 | 1966 | 1965 | |
Taxable income (loss) | ($ 6,900) | $ 62,781 | $ 38,094 | ($ 180) |
Capital gain net income | $ 902 |
1964 | 1963 | 1962 | |
Taxable income (loss) | $ 3,712 | $ 1,727 | $ 1,289 |
Capital gain net income | $ 35 | $ 337 |
Based *308 upon these amounts, petitioners' and respondent's computations reached the following results:
1967 | Petitioners | Respondent |
Tax assessed and paid 2 | $ 17,319 | $ 17,334 |
Tax liability (income averaging) | 16,746 | 17,081 |
Overpayment | $ 573 | $ 253 |
Addition to tax under sec. 6654(a) | $ 155 | |
1968 | ||
Net operating loss (NOL) | $ 4,798 | $ 4,798 |
Refund on carryback of NOL to | ||
prior year | $ 1,234 | $ 830 |
The variant tax liabilities resulted from differences in each party's income averaging calculation and their application of NOL carryback in such calculation.
In
The averaging provisions were enacted in 1964 for the purpose of mitigating the harsh effect of a progressive tax rate structure upon taxpayers having widely fluctuating or rapidly increasing incomes. 3 Generally, these provisions allow the excess of the current [or computation] year's taxable income (adjusted as provided in
The calculation of tax under the income averaging provisions is based upon a determination of "average base period income," which necessarily depends on a determination of "base period income."
(b) Base period income--(1) Definition. * * * Base period income for any taxable year may never be less than zero.
Turning to the heart of this controversy, petitioners contend that they were entitled to use a negative base period income in computing averagable income for purposes of determining their Federal income tax liability under the income averaging provisions. In accordance with this contention, petitioners included in their income averaging computation a $ 180 loss for the 1965 base year in arriving at their 1967 tax liability. Respondent, relying upon
We upheld the validity of
With respect to the second issue, it is apparent from petitioners' calculation that they consider income averaging to be an income-shifting *312 device. Put simply, petitioners calculated their 1966 Federal tax liability using the income averaging provisions. Thereafter, in computing their 1967 Federal tax liability by income averaging, petitioners proceeded on the theory that the 1966 income averaging computation effected a shift in a large portion of 1966 taxable income to the 1962 through 1965 base years. 7*313 Consequently, for the 1967 computation, average base period income under
We find petitioners' argument ingenious, but erroneous. This methodology is inconsistent with the statute, the regulations and prior case law. The definition of "base period income" in
The third issue focuses on the relationship between an NOL carryback *314 under section 172 and the income averaging provisions. While the income averaging provisions are concerned with the computation or limitation of tax, section 172 deals with the computation of net operating loss deductions used in determining adjusted gross income. Under section 172(b), net operating losses may be carried back to the 3 preceding tax years and forward to the 5 subsequent tax years. Consistent with their income-shifting argument, petitioners carried back the $ 4,789 NOL for 1968 to their 1965 "income after averaging." In other words, although 1965 was originally a loss year, after shifting portions of 1966 and 1967 incomes to 1965 (thereby creating taxable income for that year), petitioners asserted that they were entitled to carry back the full NOL to 1965. In this manner, petitioners concluded that they were entitled to a $ 1,234 tax refund.
Respondent, in opposition to petitioners' methodology, respected the integrity of each year's income averaging computation rather than resorting to an income-shifting theory. Respondent carried back the loss to 1965 and 1966, thereby allowing petitioners an $ 830 tax refund. 8*315
As we have previously held, petitioners' income-shifting theory finds no support in the statute or otherwise. Therefore, their NOL computation must be rejected. Respondent, on the other hand, properly treated the NOL carryback as a deduction in ultimately arriving at taxable income (loss) for 1965 and 1966. Base period income for 1966 under
We now turn to the issue of whether petitioners are liable for a $ 155 addition to tax under
Sections 6015, 6073, 6153 and 6654 deal with the requirement to file a declaration of estimated tax, the time for filing said declaration, the payment of said estimated tax and an addition to tax for the failure to make timely estimated tax payments.
Since we have found petitioners' theory of computing their final tax liability to be erroneous and the respondent's calculation to be correct, it follows that we hold for respondent on this issue. 10*317
1. Unless otherwise indicated, any reference to "Rules" shall be deemed to refer to the Tax Court Rules of Practice and Procedure. All section references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue.↩
2. It appears that respondent's 1967 "tax assessed and paid" amount of $ 17,334 is the correct figure. In any event, since such amount is more favorable to the petitioners than their figure ($ 17,319), we deem respondent's amount to be a concession.↩
3. H. Rept. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 233-234. ↩
4.
(1) 133-1/3 percent of average base period income, and
(2) the amount (if any) of the average base period capital gain net income.↩
5.
(c) Average Base Period Income.--For purposes of this part--
(1) In General.--The term "average base period income" means one-fourth of the sum of the base period incomes for the base period.
(2) Base Period Income.--The base period income for any taxable year is the taxable income for such year first increased and then decreased (but not below zero) in the following order:
(B) Taxable income shall be decreased by the capital gain net income.↩
6. See also
7. Summarizing petitioners' 1966 income averaging computation, they proceeded through the mathematical formula set forth in
1966 | 1965 | 1964 | 1963 | 1962 | |
Income | $ 38,094 | ($ 180) | $ 3,712 | $ 1,727 | $ 1,289 |
Averagable Income | |||||
Adjustment | (28,790) | 7,197 | 7,197 | 7,197 | 7,197 |
Income After Averaging | $ 9,304 | $ 7,017 | $ 10,909 | ||
$ 8,924 | $ 8,486 |
Thereafter, petitioners used the "income after averaging" amounts for 1963 through 1966 as the base period incomes in computing their 1967 tax liability under income averaging.
8. Petitioners take issue with respondent's treatment of 1965 medical expense deductions in the NOL carryback computation. See
9. It is interesting to note that, in this context, an NOL carryback has a double effect. First, petitioners were granted a tax refund as a consequence of the 1968 NOL carryback to 1965 and 1966. Second, because average base period income is reduced by the NOL, petitioners' 1967 tax also is reduced from that tax calculated prior to the incurrence of an NOL. However, it should also be noted that the carryback of an NOL to a computation year can result in the reduction or elimination of tax benefits permitted under the income averaging provisions. See
10. Petitioners also claim that
In addition, we note that certain figures computed by respondent in analyzing the exceptions specified in