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IRS DETERMINES SUBSTANTIAL UNDERPAYMENT PENALTIES FOR DIVERTED BUSINESS INCOME.

APR. 20, 1992

Opening Brief for Respondent

DATED APR. 20, 1992
DOCUMENT ATTRIBUTES
  • Case Name
    MILTON SCHWARTZ, DECEASED, NEIL SCHWARTZ, FIDUCIARY, AND ADA SCHWARTZ, DECEASED, NEIL SCHWARTZ, FIDUCIARY, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
  • Docket
    Docket No. 5470-90
  • Institutional Authors
    Internal Revenue Service
  • Cross-Reference
    Estate of Milton Schwartz, et al. v. Commissioner, Tax Ct. Dkt. No.

    5470-90 (Apr. 20, 1992)
  • Code Sections
  • Index Terms
    understatement, substantial
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 92-10763 (26 original pages)
  • Tax Analysts Electronic Citation
    92 TNT 239-23

Opening Brief for Respondent

 

=============== SUMMARY ===============

 

At issue is whether the taxpayer is liable for a substantial understatement penalty on his share of unreported business income. Milton Schwartz, now deceased, and his son, Neil, each owned 50 percent of the stock in Namtex Industries, Inc. Some invoices to Namtex's customers were issued in the name of N. Schwartz or N.E. Schwartz, rather than Namtex, and were paid by checks made payable to N. or N.E. Schwartz, which were cashed at a bank. While most of the cash so generated was used to pay business expenses of Namtex, the total of the substantiated expenses was less than the cash generated from the invoices. The cash receipts and expenses were not reflected on Namtex's books or shown on Namtex's income tax returns, and Milton Schwartz did not report his pro rata share of the cash receipts or deduct his pro rata share of the substantiated expenses on his income tax returns. It was stipulated that Milton Schwartz substantially understated the tax on his 1982 return, and that he was liable for additions to tax under section 6653(a).

The Service argues that all the statutory elements for the imposition of a section 6661 penalty have been stipulated in this case, and that it was appropriate for the IRS to decide not to waive the penalty. The IRS adds that there is no support for the estate's contentions that the section 6661 penalty does not apply to "factual" items such as failure to report income and that the imposition of a substantial understatement penalty in addition to negligence penalties constitutes an impermissible stacking of penalties. The Service claims that both the structure of section 6661 and the legislative history of the Omnibus Budget Reconciliation Act of 1989 show that, for 1982, both penalties could be imposed with regard to the same item.

 

=============== FULL TEXT ===============

 

OPENING BRIEF FOR RESPONDENT

ABRAHAM N. M. SHASHY, JR.

 

Chief Counsel

 

Internal Revenue Service

 

 

OF COUNSEL:

 

WILLIAM A. GOSS

 

Regional Counsel

 

BENJAMIN A. de LUNA

 

District Counsel

 

STEVE R. JOHNSON

 

Senior Attorney

 

 

TABLE OF CONTENTS

TABLE OF AUTHORITIES

PRELIMINARY STATEMENT

QUESTION PRESENTED

RESPONDENT'S REQUESTED FINDINGS OF FACT

POINTS RELIED UPON

ARGUMENT

I. THE STATUTORY ELEMENTS FOR IMPOSITION OF THE 6661 ADDITION ARE PRESENT IN THIS CASE

II. THE SERVICE DID NOT WAIVE, AND WAS RIGHT NOT TO WAIVE, THE SECTION 6661 ADDITION IN THIS CASE

III. THE PETITIONERS' DEFENSES DO NOT COMPEL RELIEF FROM THE SECTION 6661 ADDITION

A. The "Not Applicable to Factual Items" Defense Does Not Compel Relief from the Section 6661 Addition

B. The "No Stacking" Defense Does Not Compel Relief from the Section 6661 Addition

CONCLUSION TABLE OF AUTHORITIES

CASES

Alexander Shokai, Inc. v. Commissioner, T.C. Memo. 1992-41, 63 T.C.M. 1870

Camacho v. Commissioner, T.C. Memo. 1989-513, 58 T.C.M. 182

Cottrell v. Commissioner, 628 F.2d 1127 (8th Cir. 1980), rev'g 72 T.C. 489 (1979), overruled by Jewett v. Commissioner, 455 U.S. 305 (1982)

Day v. Commissioner, T.C. Memo. 1991-140, 61 T.C.M. 2258

Doffin v. Commissioner, T.C. Memo. 1991-114, 61 T.C.M. 2157

Hesselink v. Commissioner, 97 T.C. 94 (1991)

Horwich v. Commissioner, T.C. Memo. 1991-465, 62 T.C.M. 797

Mailman v. Commissioner, 91 T.C. 1079 (1988)

Pallottini v. Commissioner, 90 T.C. 498 (1988)

Payne v. Tennessee, 501 U.S. ___, 111 S. Ct. 2597 (1991)

Stucki v. Commissioner, T.C. Memo. 1992-85, 63 T.C.M. 2041

Zable v. Commissioner, T.C. Memo. 1990-55, 58 T.C.M. 1330

STATUTES

I.R.C. section 6661(a)

 

I.R.C. section 6661(b)(1)

 

I.R.C. section 6661(b)(2)(B)(i)

 

I.R.C. section 6661(b)(2)(B)(ii)

 

I.R.C. section 6661(b)(3)

 

I.R.C. section 6661(c)

 

I.R.C. section 6072(a)

 

Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239,

 

section 7721, 103 Stat. 2395

 

Tax Equity & Fiscal Responsibility Act of 1982, Pub. L. 97-248,

 

section 323, 96 Stat. 613

 

 

REGULATIONS

 

 

Treas. Reg. section 1.6661-4(b)(1)

 

Treas. Reg. section 1.6661-5(b)(1)

 

Treas. Reg. section 1.6661-6(a)

 

Treas. Reg. section 1.6661-6(b)

 

 

OTHER MATERIALS

 

 

H. Conf. Rep. No. 386, 101st Cong., 1st Sess. (1989), reprinted

 

at 1989 U.S. Code Cong. & Admin. News 3018

 

H. Rep. No. 247, 101st Cong., 1st Sess. (1989), reprinted at

 

1989 U.S. Code Cong. & Admin. News 1906

 

H. Rep. No. 426, 99th Cong., 1st Sess. (1985), reprinted at

 

1986-3 C.B. (vol. 2) 1

 

 

PRELIMINARY STATEMENT

The respondent issued a notice of deficiency which determined deficiencies in income taxes and additions to tax for tax years 1979, 1980, 1981, and 1982. The parties have resolved by agreement all issues except one. As stated in paragraph 5 of the Stipulation filed by the parties, the agreed items are as follows:

(1) There are no deficiencies or overpayments for 1979 or 1980 for either petitioner.

(2) Petitioner Milton Schwartz is liable for deficiencies of $13,667 for 1981 and $16,583 for 1982.

(3) Milton is not liable for additions to tax under I.R.C. sections 6653(b), 6653(b)(1), or 6653(b)(2) for any of 1979, 1980, 1981, or 1982.

(4) Milton is not liable for additions to tax under I.R.C. section 6653(a) for 1979 or 1980.

(5) Milton is liable for additions to tax under I.R.C. section 6653(a)(1) of $683 for 1981 and $829 for 1982.

(6) Milton is liable for additions to tax under I.R.C. section 6653(a)(2) of an amount equal to 50% of the interest due on $13,667 for 1981 and an amount equal to 50% of the interest due on $16,583 for 1982.

(7) Petitioner Ada Schwartz is an innocent spouse and so is not liable for any deficiencies or any additions to tax under any section of the Internal Revenue Code for any of 1979, 1980, 1981, or 1982.

The sole issue remaining in controversy is whether Milton is liable for an addition to tax under I.R.C. section 6661 for 1982. This issue was submitted to the Court on February 24, 1992, as fully stipulated under Tax Court Rule 122, and a Stipulation with accompanying Exhibits 1-A and 2-B has been filed.

The Court directed that simultaneous opening briefs be filed by April 20, 1992, and that simultaneous reply briefs be filed by June 8, 1992. References in respondent's briefs to paragraphs in the Stipulation will be identified as "Stip. paragraph ____," and references to the accompanying Exhibits will be identified as "Ex. ____."

Because of mutual concessions, a Rule 155 computation will be required.

QUESTION PRESENTED

Whether petitioner Milton Schwartz is liable for an addition to tax for tax year 1982 under I.R.C. section 6661 as then effective.

RESPONDENT'S REQUESTED FINDINGS OF FACT

The respondent requests the Court to find the following facts:

1. The notice of deficiency on which this case is based was issued on December 29, 1989. Ex. 1-A.

2. Milton and Ada Schwartz died in 1988 and 1989, respectively, i.e., prior to the time the petition in this case was filed. Stip. paragraph 1.

3. The petition was filed by Neil Schwartz as fiduciary for Milton and Ada. Neil was the only child of Milton and Ada and their sole heir. Neil filed with the respondent a Form 56 "Notice Concerning Fiduciary Relationship" with respect to Milton and Ada. Stip. paragraph 2.

4. Neil resides in Tarpon Springs, Florida. Id.

5. During 1982, Milton owned 50% of the stock in Namtex Industries, Inc. (the other 50% being owned by Neil). Namtex was a C corporation engaged in the manufacture and sale of textile goods. Stip. paragraph 6c(i).

6. Some of the invoices issued to Namtex's customers were issued in the name of "N. Schwartz" or "N.E. Schwartz," rather than in Namtex's name. These invoices were paid by checks made payable to N. Schwartz or N.E. Schwartz and were cashed at a bank. Stip. paragraph 6c(ii).

7. Most of the cash so generated was used to pay business expenses of Namtex, but the total of such substantiated expenses is less than the cash generated from the invoices issued under a name other than Namtex. Stip. paragraph 6c(iii).

8. Neither the cash receipts nor the expenses described above were reflected on Namtex's books and records, nor were they shown on Namtex's federal income tax returns. Stip. paragraph 6c(iv).

9. Milton did not report his pro rata share of the cash receipts and did not deduct his pro rata share of the expenses on his federal income tax returns.

10. Milton's pro rata share of the cash receipts was taxable income to him, and his pro rata share of the substantiated expenses were deductible by him. The $16,583 deficiency for 1982 is the amount of tax on the difference between such receipts and such expenses in that year. Stip. paragraph 6c(v).

11. The $16,583 deficiency for 1982 constitutes an "understatement" within the meaning of I.R.C. section 6661. Stip. 6e.

12. $16,583 exceeds the greater of $5,000 or $2,271.14, which is 10% of the tax required to be shown on Milton's 1982 Federal income tax return. Stip. paragraph 6f.

13. There was no substantial authority within the meaning of I.R.C. section 6661(b)(2)(B) for Milton's return position as to the 1982 income tax understatement. Stip. paragraph 6g.

14. The items giving rise to Milton's 1982 income tax understatement were not adequately disclosed in his 1982 return or in a statement attached to it within the meaning of I.R.C. section 6661(b)(2)(B). Stip. paragraph 6g.

The respondent requests the Court to make the following ultimate findings of fact and conclusions based on the entire record:

15. Milton is liable for a 25% addition to tax for 1982 under I.R.C. section 6661 (as then effective).

16. All other issues are resolved pursuant to agreement of the parties as set forth in Stip. paragraph 5.

POINTS RELIED UPON

The sole issue remaining in this case is whether Milton Schwartz is liable for an addition to income tax for 1982 under I.R.C. section 6661 (as then effective). It is not controverted that the following statutory elements of this addition are present here: there was an understatement of tax on Milton's 1982 return; the amount of the understatement exceeded the statutory threshold; and the understatement was mitigated neither by substantial authority nor by adequate disclosure. Moreover, this is not a case in which the Service exercised its discretion to waive the addition, nor should the Service have done so.

The respondent understands that the petitioners intend to make two arguments: (1) the addition should be limited to return positions based on faulty legal theories and should not apply to "factual" items such as failure to report income and (2) since the parties agree that Milton is liable for negligence additions for 1982, holding him liable also for a substantial understatement addition for that year would be an impermissible stacking cf penalties. Neither of these defenses is strong.

Acceptance of either defense would create a tension with previous decisions since this Court has on numerous occasions upheld imposition of section 6661 additions with respect to "factual" adjustments and has upheld imposition of section 6661 additions in addition to negligence or similar additions. Moreover, each defense fails on its own terms. Nothing in the statute, regulations, or case law prohibits imposing the section 6661 addition with respect to "factual" adjustments, and, for the tax year in question, nothing prohibited stacking the section 6661 addition and the negligence additions.

ARGUMENT

I

THE STATUTORY ELEMENTS FOR IMPOSITION OF THE SECTION 6661 ADDITION ARE PRESENT IN THIS CASE.

With respect to returns the due date for the filing of which was after December 31, 1982 and before January 1, 1990, I.R.C. section 6661(a) imposed an addition to tax equal to 25% of any underpayment attributable to a substantial understatement of income tax. Pallottini v. Commissioner, 90 T.C. 498 (1988). A substantial understatement is one that exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. I.R.C. section 6661(b)(1). If the taxpayer had substantial authority for the tax treatment on the return of the item in question, the understatement was reduced by the amount attributable to that item. I.R.C. section 6661(b)(2)(B)(i). Furthermore, if the taxpayer adequately disclosed on the return or a statement attached to it the relevant facts pertaining to the item in question, the understatement was reduced by the amount attributable to that item. I.R.C. section 6661(b)(2)(B)(ii).

It is clear that these statutory requisites for the imposition of the section 6661 addition are satisfied in this case. The due date of Milton's 1982 federal income tax return was April 15, 1983. I.R.C. section 6072(a). It is stipulated that there is a deficiency of $16,583 with respect to that return which constitutes an understatement for section 6661 purposes. Stip. paragraph 5b, 6e. It also is stipulated that this $16,583 understatement exceeds the greater of $5,000 or $2,271.14 (10% of the tax required to be shown on the return). Stip. paragraph 6f. It also is stipulated that I.R.C. section 6661(b)(2)(B) -- which contains both the deduction for substantial authority and the reduction for adequate disclosure -- does not apply to any portion of the understatement. Stip. paragraph 6g.

Accordingly, there is no controversy about the fact that the statutorily enumerated elements on which Congress chose to predicate the section 6661 addition are present as to Milton's 1982 return.

II

THE SERVICE DID NOT WAIVE, AND WAS RIGHT NOT TO WAIVE, THE SECTION 6661 ADDITION IN THIS CASE.

Congress gave the Service discretion to waive the section 6661 addition. The Commissioner's decision not to waive the section 6661 penalty is reviewable by the Court under an abuse of discretion standard. Mailman v. Commissioner, 91 T.C. 1079, 1084 (1988). Thus, unless the Commissioner's discretion has been exercised arbitrarily, capriciously or without sound basis in fact, the Court should not substitute its judgment for that of the Commissioner's. Id. at 1084.

The Service's decision not to waive the addition was appropriate. Congress provided that the Service could waive this addition "on a showing by the taxpayer that there was reasonable cause for the understatement (or part thereof) and that the taxpayer acted in good faith." I.R.C. section 6661(c). 1 Milton has not made such a showing in this case.

The only thing in the record from which Milton could attempt even to infer reasonable cause and good faith is the fact that the majority of the cash diverted from Namtex was shown to have been used to pay business expenses. Stip. paragraph 6c(iii). The petitioners may attempt to argue that, since most of the cash was used to pay business expenses, it can be inferred that the remainder of the cash -- i.e., the unsubstantiated portion on which the deficiency is based, see Stip. paragraph 6c(v) -- also was used to pay business expenses. They may argue that the respondent should have drawn such an inference and should have exercised its discretion to waive the section 6661 addition on the basis of it.

Any such argument, however, would fail for the following three reasons:

(1) The petitioners' inference is far from compelled. It simply does not follow that, since it has been substantiated that most of the cash was used to pay business expenses, the unsubstantiated portion of the cash was used in the same manner. An equally plausible inference from Milton's failure to substantiate the use of the remaining cash is that this remainder was not used to defray business expenses but instead was diverted to Milton's personal use and benefit. Indeed, the fact that the petitioners kept adequate records to substantiate business use of the bulk of the cash suggests that they would also have kept records showing business use of the remainder had that remainder in fact been used for business purposes. Congress committed the waiver decision to the Service's discretion, and it cannot be said that refusing to accept a taxpayer's inference is an abuse of discretion, especially when that inference is no more plausible than a competing inference adverse to the taxpayer.

(2) The plausibility of the petitioners' inference is undercut by the way Namtex and Milton dealt with the cash and the expenses for both accounting and tax reporting purposes. Assume for the moment that all of the cash really was used to pay Namtex's expenses. Had that been the case, the natural course would have been for Namtex to reflect the cash as receipts on its books and records and on its tax returns and to reflect the payments as expenses on its books and records and on its tax returns. It is stipulated, however, that Namtex did not do so. Neither the cash nor the expenses appeared on Namtex's books and records; also, they did not appear on Namtex's tax returns. Stip. paragraph 6c(v).

As a "second best" alternative, again assuming for the moment that all of the cash was used to pay Namtex's expenses, Milton at least would have reflected his share of the cash and the expenses on his return. Again, however, it is stipulated that he did not do so. Id.

The above accounting and tax treatment of the cash and expenses by Namtex and Milton is not easy to square with an assertion that only proper business transactions occurred here. 2 On these facts, skepticism is the better part of credulity. It was no abuse of discretion for the Service to choose not to waive the section 6661 addition here.

(3) The applicable regulation demonstrates that the Service did not abuse its discretion. Treasury Regulation section 1.6661-6(b) states in part that

reliance on erroneous information (such as an error relating to the cost of property, the date property was placed in service, or the amount of opening or closing inventory) inadvertently included in data compiled by the various divisions of a multidivisional corporation or in financial books and records prepared by those divisions would, in general, indicate reasonable cause and good faith, provided the corporation had internal controls and procedures, reasonable under the circumstances, that were designed to identify factual errors.

In this case, however, there was nothing approximating reasonable internal controls and procedures as to either use of the cash or tax reporting of such use. As previously noted, the petitioners cannot substantiate use of the remainder at issue; Namtex did not account for either the cash or the expenses on its books; and neither the petitioners nor Namtex reported the transactions on their tax returns. Given the guidance of the above regulation and the complete absence of adequate internal controls and procedures here, the Service did not abuse its discretion in concluding that the requisite reasonable cause and good faith are absent.

Accordingly, the Service chose not to waive the section 6661 addition in this case, and its decision in this regard was appropriate.

III

THE PETITIONERS' DEFENSES DO NOT COMPEL RELIEF FROM THE SECTION 6661 ADDITION.

From discussions with the petitioners' counsel, the respondent understands that the petitioners will offer either or both of two defenses: (1) that the section 6661 addition should apply only when the item in question is fundamentally legal, not factual and (2) that the section 6661 addition should not apply to items to which the negligence additions also apply. As shown below, neither of these defenses is strong.

As a starting point, it should be noted that both of these defenses exist in uneasy relationship to the already decided cases. In numerous cases, this Court has upheld imposition of the section 6661 addition to "factual" items or upheld its imposition conjunctively with the imposition of negligence or fraud additions. See, e.g., Estate of McClanahan v. Commissioner, 95 T.C. 98 (1990); Stucki v. Commissioner, T.C. Memo. 1992-85, 63 T.C.M. 2041; Alexander Shokai, Inc. v. Commissioner, T.C. Memo. 1992-41, 63 T.C.M. 1870; Horwich v. Commissioner, T.C. Memo. 1991-465, 62 T.C.M. 797; Day v. Commissioner, T.C. Memo. 1991-140, 61 T.C.M. 2258; Doffin v. Commissioner, T.C. Memo. 1991-114, 61 T.C.M. 2157; Zable v. Commissioner, T.C. Memo. 1990-55, 58 T.C.M. 1330; Camacho v. Commissioner, T.C. Memo. 1989-513, 58 T.C.M. 182. 3

Two of the above are illustrative of the other cited cases as well as numerous other cases. In Day, the taxpayers operated several massage parlors. In the absence of adequate books and records, the Service reconstructed the taxpayers' income, and the taxpayers could not substantiate offsetting business expense deductions. The Court upheld the determined deficiencies as well as both section 6653(b) and section 6661 additions. In Doffin, the taxpayer was allowed additional gambling losses offsetting some of his gambling winnings. The taxpayer could not substantiate that the offset was entire, however. As a result, the Court held that there were deficiencies and that both section 6653(a) and section 6661 additions were appropriate (assuming the section 6661(b)(1) numerical thresholds were met).

The instant case cannot be meaningfully distinguished from Day and Doffin. Here, Milton has failed to substantiate that his share of the business expenses completely offset his share of the diverted cash, see Stip. paragraph 6c(iii), just as the Days failed to substantiate that their massage parlor expenses completely offset their massage parlor receipts and just as Doffin failed to substantiate that his gambling losses completely offset his gambling winnings. The adjustment item here is just as "factual" as the adjustment items in Day and Doffin, and it is just as appropriate here as there to impose the section 6661 addition even though other additions also are being imposed on the same adjustment item.

Given the numerous and consistent court opinions applying the section 6661 addition to tax in "factual" situations, petitioners' argument must fail. Under the doctrine of stare decisis, the court is required to adhere to a principle of law settled by a series of decisions, except in egregious cases. 21 C.J.S., Courts section 140. "Stare decisis is the preferred course because it promotes the evenhanded, predictable and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process." Payne v. Tennessee, 501 U.S. ___, Ill S. Ct. 2597, 2609 (1991). The principle of stare decisis assumes increased importance in matters of statutory construction, for, in such cases, Congress may cure any error made by the courts. Hesselink v. Commissioner, 97 T.C. 94, 100 (1991), citing Cottrell v. Commissioner, 628 F.2d 1127, 1131 (8th Cir. 1980), rev'g 72 T.C. 489 (1979), overruled by Jewett v. Commissioner, 455 U.S. 305 (1982). Thus, this Court should apply the doctrine of stare decisis and reject petitioners' contention that the section 6661 addition does not apply to "factual" situations.

In addition to harmony with previous results, there are further reasons to reject the profferred defenses, as discussed below.

A. THE "NOT APPLICABLE TO FACTUAL ITEMS" DEFENSE DOES NOT COMPEL RELIEF FROM THE SECTION 6661 ADDITION.

Section 6661 is a clear statute, and it sets out unambiguously the factors that will prevent imposition of the addition. Congress provided that no section 6661 addition would be imposed if (i) the understatement fell below specified numerical thresholds, see I.R.C. section 6661(b)(1); (ii) the understatement was mitigated by either substantial authority or adequate disclosure, see I.R.C. section 6661(b)(2)(B); (iii) there was overlap with the 6659 addition for valuation overstatements, see I.R.C. section 6661(b)(3); or (iv) the Service exercised its discretion to waive the addition because both reasonable cause and good faith are present, see I.R.C. section 6661(c).

By the text of the statute itself, the above are the conditions which can render the section 6661 addition inapplicable. Significantly, Congress did not incorporate into the statute the further condition that the petitioners would read in, to wit, that the section 6661 addition will apply only to adjustments based on taxpayers' faulty legal theories. The petitioners' defense simply finds no support in the statute.

Moreover, the regulations make it clear that the section 6661 addition applies to "factual" adjustments, including, as here, a taxpayer's failure to substantiate that his deductible expenses equaled his taxable receipts. In discussing when items can be removed from section 6661 by disclosure or waiver, the regulations refer to various items as examples. Obviously, there would be no need to show how these items could be removed from section 6661 if they had never been subject to that section in the first place. Thus, the necessary import of the regulations is that such items are ones on which section 6661 additions can be based.

The significant point for present purposes is that many of the items so referred to are as inherently "factual" as the item at issue here. Thus, the fact that those items are within section 6661 indicates that the instant item is within section 6661. Specifically, the items referred to in the regulations include: (1) deduction of expenses for business supplies, Treas. Reg. section 1.6661-4(b)(1), (2) the taxpayer's motive for entering into a transaction, id. section 1.6661-5(b)(1), (3) a computational or transcription error, id. section 1.6661-6(b), (4) the cost of property, id., and (5) the amount of opening or closing inventory, id.

Thus, the statute nowhere states that the section 6661 addition cannot apply to "factual" items, and the regulations repeatedly show that "factual" items are within the ambit of section 6661. The petitioners' first anticipated defense is not strong.

B. THE "NO STACKING" DEFENSE DOES NOT COMPEL RELIEF FROM THE SECTION 6661 ADDITION.

Section 6661 was added to the Internal Revenue Code, effective for returns due after December 31, 1982, by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 323, 96 Stat. 613. It was repealed (with the addition being merged into the new accuracy- related penalty of section 6662), effective for returns due after December 31, 1989, by the Omnibus Budget Reconciliation Act of 1989 ("OBRA"), Pub. L. 101-239, section 7721, 103 Stat. 2395. The instant case involves 1982, thus pre-OBRA law, and it is clear that pre-OBRA law permitted the section 6661 addition to be imposed conjunctively with the section 6653(a) additions.

Two considerations point in this direction. First, Congress wrote a coordination provision into section 6661, expressly providing that the same adjustment could not give rise to both section 6659 and section 6661 additions. I.R.C. section 6661(b)(3). Congress chose not to craft a similar provision coordinating section 6653(a) and section 6661. This evinces a congressional intent that the section 6653(a) additions and the section 6661 addition can be asserted conjunctively.

Second, the legislative history of OBRA makes it clear that its elimination of penalty stacking was a change of law, not a mere clarification of existing law. See H. Conf. Rep. No. 386, 101st Cong., 1st Sess. 651-55 (1989), reprinted at 1989 U.S. Code Cong. & Admin. News 3018, 3254-58; H. Rep. No. 247, 101st Cong., 31st Sess. 1387-94 (1989), reprinted at 1989 U.S. Code Cong. & Admin. News 1906, 2857-64. 4 The fact that OBRA had to change the Code in order to eliminate stacking of the section 6653(a) and section 6661 additions demonstrates that pre-OBRA law permitted such stacking.

Accordingly, both the structure of section 6661 and OBRA's legislative history show that, for the year at issue, the section 6661 addition and the section 6653(a) additions could both be imposed with regard to the same adjustment item. The petitioners' second anticipated defense is not strong.

As seen previously, the elements prescribed by the statute for imposition of the section 6661 addition are present in this case. Neither of the petitioners' anticipated defenses warrants departure from the statutory result.

CONCLUSION

For the reasons stated above, the respondent's determination that petitioner Milton Schwartz is liable for an addition to tax under I.R.C. section 6661 for 1982 should be upheld. The respondent's other determinations in the notice of deficiency should be upheld as modified by the Stipulation of the parties.

ABRAHAM N. M. SHASHY, JR.

 

Chief Counsel

 

Internal Revenue Service

 

 

Date: March 18, 1992

 

 

By: Steve R. Johnson

 

Senior Attorney

 

T.C. Bar No. JS 0093

 

Box 35027, Federal Building

 

400 West Bay Street

 

Jacksonville, Florida 32202

 

Tel. No. (904) 791-2382

 

FTS 946-2382

 

 

OF COUNSEL:

 

 

WILLIAM A. GOSS

 

Regional Counsel

 

Post Office Box 1074

 

Atlanta, Georgia 30301

 

 

BENJAMIN A. de LUNA

 

District Counsel

 

Box 35027, Federal Building

 

400 West Bay Street

 

Jacksonville, Florida 32202

 

FOOTNOTES

 

 

1 Thus, there are two enumerated conditions of waiver and BOTH must be shown by the taxpayer to be present. See also Treas. Reg. section 1.6661-6(a). Congress' enumeration of these grounds precludes waiver being predicated on any other ground. Specifically, Congress did not provide that the Service should exercise its discretion to waive the addition when the item in question is more factual than legal or when some other additions (like the negligence additions) also are imposed with respect to the item.

2 Another consideration cuts in the same direction. If, for some proper purpose, it was necessary to generate cash, that could have been easily effected by issuing all invoices in Namtex's name. There would have been no need to issue any invoices in any name other than Namtex's.

3 In Estate of McClanahan v. Commissioner, 95 T.C. 98, the Court was faced with the argument that the additions to tax under sections 6653 and 6661 were not cumulative, but rejected it. Id. at 106. In the other cited cases and in similar cases, it is not apparent from the published opinions whether the defenses suggested here were advanced therein. At a minimum, however, these defenses cannot be squared with the results of those cases. Acceptance of either of the petitioners' defenses would create tension between this case and dozens, if not hundreds, of prior litigated cases and hundreds, if not thousands, of prior stipulated decisions.

4 In contrast, when a tax enactment is intended not to change prior law but merely to clarify it, the legislative history reflects that intention. See, e.g., H. Rep. No. 426, 99th Cong., 1st Sess. 249 (1985), reprinted at 1986-3 C.B. (vol. 2) 249 (in describing new section denying deduction of "greenmail" payments, stating: "In making this clarification, the committee does not intend to create any inference that the payments covered by this section would be deductible under present law.").

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    MILTON SCHWARTZ, DECEASED, NEIL SCHWARTZ, FIDUCIARY, AND ADA SCHWARTZ, DECEASED, NEIL SCHWARTZ, FIDUCIARY, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
  • Docket
    Docket No. 5470-90
  • Institutional Authors
    Internal Revenue Service
  • Cross-Reference
    Estate of Milton Schwartz, et al. v. Commissioner, Tax Ct. Dkt. No.

    5470-90 (Apr. 20, 1992)
  • Code Sections
  • Index Terms
    understatement, substantial
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 92-10763 (26 original pages)
  • Tax Analysts Electronic Citation
    92 TNT 239-23
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