Solomon v. Comm'r

PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect at the time the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, section references are to the Internal Revenue Code as amended and in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.

Respondent determined deficiencies of $ 18,300 and $ 17,446 and accuracy-related penalties of $ 3,660 and $ 3,489, respectively, in petitioners' 2003 and 2004 Federal income taxes. The issues for decision are: (1) Whether petitioners are entitled to claim fuel tax credits for 2003 and 2004 and (2) whether they are liable for penalties under section 6662(a) for the years in issue.

Petitioners resided in New Jersey when they filed the petition. William L. Solomon, Jr. (hereafter petitioner), is a truck driver who owns *95 and operates a tractor-trailer. Petitioner registered his 18-wheeler as a commercial vehicle and drove it only on roads and highways.

Sharon A. Jackson (Ms. Jackson) prepared their joint 2003 and 2004 Federal income tax returns using tax preparation software. She followed the prompts from the software and answered the questions posed, entering the year, make, model, and weight of the truck, tolls paid, amount of fuel used, type of fuel used (diesel), and other details. Ms. Jackson did not recall precisely what questions the software asked regarding the fuel tax credits and in particular did not remember answering questions about highway versus off-road use. She recalled the software asking her whether the truck used diesel fuel and explained her understanding of the significance of that question: "If it does, it can be entitled to a fuel tax credit."

Neither petitioner is a tax professional. For tax years prior to 2003, they hired a return preparer, but Ms. Jackson explained: "Well, we had an accountant, but the accountant was ripping us off, and he wasn't doing them properly either. I figured since he wasn't doing them properly, let me try it." Petitioners began preparing their own *96 tax returns and began using tax preparation software when Ms. Jackson prepared their 2003 tax return.

Petitioners claimed a fuel tax credit for diesel fuel for each of the years in issue. ¹ Upon examination, respondent disallowed the fuel tax credits for both years and determined that petitioners were liable for accuracy-related penalties under section 6662(a).

Generally, the burden of proof is on the taxpayer. Rule 142(a)(1). Respondent's determinations are presumed correct, and petitioners bear the burden of proving that they are erroneous. ² See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

1. Fuel Tax Credit

Section 4041(a)(1) imposes a tax on diesel fuel sold to an owner, lessee, or other operator of a diesel-powered highway vehicle for use as a fuel in such vehicle. *97 However, the tax is not imposed if the diesel fuel is "sold for use or used in an off-highway business use" as defined in section 6421(e)(2). Sec. 4041(b)(1)(A), (C). Off-highway business use includes any use in a trade or business other than as a fuel in a highway vehicle "which (at the time of such use), is registered, or is required to be registered, for highway use under the laws of any State". Sec. 6421(e)(2)(A).

Where a tax has been imposed under section 4041 on a sale of diesel fuel and the fuel is used by the purchaser for a nontaxable purpose, such as an off-highway business use, section 34 allows a credit against income tax for the section 4041 tax imposed on the sale. See sec. 34(a)(2) (payments under section 6421 for gasoline used other than as fuel for a highway vehicle) and (3) (payments under section 6427 for fuels used for nontaxable purposes); see also secs. 6421(i)(3), 6427(k)(3) (income tax credits in lieu of payment). ^{3*98 *99}

With regard to the credits payable under sections 34, 6421, and 6427, petitioners must prove that the fuel was used for nontaxable purposes; i.e., that the truck was not a highway vehicle that was registered or required to be registered for highway use. They must then establish the number of gallons of fuel so used or the amount of tax paid. Williams v. Commissioner, T.C. Memo. 1997-540. Petitioner testified not only that his truck was registered but also that he drove it exclusively on roads and highways.

We conclude that petitioners are not eligible for the claimed fuel tax credits because the fuel was not used in any off-highway business activity. Accordingly, respondent's determination is sustained.

2. Accuracy-Related Penalty

By virtue of section 7491(c), the Commissioner has the burden of production with respect to the accuracy-related penalty. To meet this burden, he must produce sufficient evidence indicating that it is appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). *100 Once the Commissioner satisfies this burden of production, a taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142(a); see Higbee v. Commissioner, supra.The burden of proving that the accuracy-related penalty should not be imposed rests with the taxpayer. Higbee v. Commissioner, supra.

Section 6662(a) provides:

SEC. 6662(a). Imposition of Penalty. -- If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.

Section 6662(b) provides that the accuracy-related penalty applies to the portion of any underpayment attributable to one or more of the five types of misconduct specified in that subsection. ⁴Section 6664(a) defines an underpayment as follows:

SEC. 6664(a). Underpayment. -- For purposes of this part, the term "underpayment" means 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), *101 over

(2) the amount of rebates made.For purposes of paragraph (2), the term "rebate" means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed was less than the excess of the amount specified in paragraph (1) over the rebates previously made. ⁵

As previously discussed there are deficiencies in income taxes for 2003 and 2004 because an overstated refundable credit is treated as a negative tax in the computation of a deficiency, effectively reducing the amount of tax shown by the taxpayer on his return. Sec. 6211(b)(4); see supra note 3.

The calculation of an underpayment does not require such an adjustment for *102 an overstated refundable credit. Sec. 6664(a); cf. Sadler v. Commissioner, 113 T.C. 99, 103 (1999) ("if a taxpayer overstates the credit for withholding, the overstatement decreases the amount shown as the tax by the taxpayer on his return and increases the underpayment of tax"); sec. 1.66642(c)(1), Income Tax Regs. (adjustments are made only for inflated withholding credits, estimated tax payments, and other payments made by the taxpayer). Because the underpayment calculation does not adjust for overstated refundable credits, such as the fuel tax credit, there are no underpayments in this case. Because an accuracy-related penalty is equal to 20 percent of certain underpayments, it follows that there can be no accuracy-related penalty without an underpayment.

The Commissioner is required to come forward with sufficient evidence to show that a taxpayer is liable for any penalty determined in the notice of deficiency. Sec. 7491(c). Respondent has not met this burden because there are no underpayments where the only adjustments are the disallowance of some or all of petitioners' claimed refundable credits. ^6*103

We hold that petitioners are not liable for the accuracy-related penalties for 2003 and 2004.

To reflect the foregoing,

Decision will be entered for respondent as to the deficiencies and for petitioners as to the section 6662(a) penalties.