Cline v. Commissioner

SUPPLEMENTAL MEMORANDUM OPINION

PARR, Judge: This case is before the Court due to conflicting proposed computations and decisions filed by the parties under Rule 155, ¹ in compliance with the Court's Memorandum Opinion filed June 27, 1989. Cline v. Commissioner,T.C. Memo. 1989-316.

*572 On August 24, 1989, Respondent's Computation For Entry Of Decision was filed with the Court, together with a proposed decision stating in part:

ORDERED and DECIDED: That there are deficiencies in income taxes due from petitioner for the taxable years 1982, 1983 and 1984 in the amounts of $5,618.00, $2,546.00, and $2,377.00, respectively;

That there are no additions to tax due from the petitioner for the taxable years 1982, 1983, and 1984, under the provisions of I.R.C. § 6661;

That there are additions to the tax due from the petitioner for the taxable years 1982, 1983, and 1984, under the provisions of section 6653(a)(1), in the amounts of $280.90, $127.30 and $118.85, respectively; and

For purposes of computing the 50% additions to tax pursuant to section 6653(a)(2) for the taxable years 1982, 1983 and 1984, the additions to tax shall be computed on $5,618.00, $2,546.00 and $2,134.00 of the deficiencies in income taxes, respectively. * * *

On August 28, 1989, Petitioner's Computation For Entry Of Decision was filed with the Court, together with a proposed decision. The terms of petitioner's proposed decision agreed with respondent's proposed decision, except as follows:

*573 That there are additions to tax due from the petitioner for the taxable years 1982, 1983, and 1984, under the provisions of section 6653 a)1), [in] the amounts of $121.00, $119.50, and $49.60, respectively; and

For purposes of computing the 50% additions to tax pursuant to section 6653 a)2) for the taxable years 1982, 1983, and 1984, the additions to tax shall be computed on $2,420.00, $2,390.00, and $992.00 of the deficiencies in income taxes, respectively. * * *

At issue, then, is the computation of the additions to tax under sections 6653(a)(1) and (a)(2). These sections provide in pertinent part:

(1) IN GENERAL. -- If any part of any underpayment (as defined in subsection (c)(1)) of any tax * * * is due to negligence or intentional disregard of rules or regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment.

(2) ADDITIONAL AMOUNT FOR PORTION ATTRIBUTABLE TO NEGLIGENCE, ETC. -- There shall be added to the tax (in addition to the amount determined under paragraph (1)) an amount equal to 50 percent of the interest payable under section 6601 --

(A) with respect to the portion of the underpayment*574 described in paragraph (1) which is attributable to negligence or intentional disregard referred to in paragraph (1) * * *.

If a return is timely filed, the term "underpayment" means a "deficiency" as defined in section 6211. See sec. 6653(c)(1). For purposes of this case, the terms "underpayment" and "deficiency" mean the excess of the tax liability required to be shown on a return over the tax liability actually shown on the return. See sec. 6211(a).

We held in our earlier opinion "that petitioner is liable for additions to tax for negligence under section 6653(a)(1) and an additional amount, under section 6653(a)(2), equal to 50 percent of the interest payable on the portion of the deficiency attributable to the overstated farm losses." Cline v. Commissioner,supra slip opinion at 4.

Petitioner computes the additions to tax under section 6653(a)(1) by applying the 5-percent factor only to the portion of the redetermined deficiency attributable to the overstated farm losses. In contrast, respondent applied the 5 percent factor to the total deficiency each year, which is consistent with the plain language of section 6653(a)(1). See Commissioner v. Asphalt Products Co.,482 U.S. 117 (1987).*575 Accordingly, we agree with and accept respondent's computation of the additions to tax under section 6653(a)(1).

Next, the parties computed the portion of the underpayment attributable to negligence or intentional disregard of rules or regulations under section 6653(a)(2) in different ways. Petitioner computes this amount by multiplying the disallowed farm losses each year times a fraction, the numerator of which is the redetermined deficiency (or underpayment) and the denominator of which is the redetermined taxable income. ² Respondent determines this amount by computing the excess of the tax liability on the redetermined taxable income over the tax liability on the redetermined taxable income without regard to negligent items, not to exceed the redetermined deficiency. ³ We agree with and accept respondent's computation.

*576 Petitioner's computation incorrectly assumes that the redetermined deficiency (the numerator) is attributable to the redetermined taxable income (the denominator), when it is actually attributable only to the total of all adjustments made to petitioner's reported taxable income. In doing so, petitioner's computation understates the portion of the deficiency attributable to the negligently claimed farm losses.

Petitioner's computation breaks down the components of the redetermined deficiencies for the years in issue as follows:

*577 Thus, petitioner's computation shows total adjustments to taxable income of $12,980 ($30,819 minus $17,839), $16,567 ($17,721 minus $1,154), and $10,244 ($23,184 minus $12,940), for 1982, 1983, and 1984, respectively. However, the disallowed farm losses were $13,227, $16,636, and $9,481, for the same respective years. ⁴

Accordingly, for 1982 and 1983, the disallowed farm losses due to negligence exceed the total of all adjustments to taxable income, which explains*578 why the "portion[s] of the underpayment[s] * * * attributable to negligence" for purposes of section 6653(a)(2) are the full redetermined deficiencies in such years. This was not the case for 1984. For 1984, the ratio of disallowed farm losses to total adjustments made to taxable income ($9,481/$10,244) times the redetermined deficiency ($2,377) equals $2,200. This amount exceeds the figure of $2,134 proposed by respondent as the portion of the underpayment attributable to negligence. This minor difference is due to the effect of adjustments to claimed investment tax credits on the computation.

To reflect the foregoing,

An appropriate decision will be entered.