In Uncategorized on 02/09/2016 at 17:04

Judge Halpern isn’t sure whether Oscar Wilde’s words apply to IRS’ correction of Jim’s and Sarah’s miscue, so as to give Jim and Sarah a substantial underpayment chop, so he wants briefs in James M. Galloway & Sarah M. Galloway, Docket No. 8170-14, filed 2/9/16.

Jim and Sarah forgot to carry a number from Form 8863, line 23, to their Form 1040, line 49, but did carry their Form 8863, line 14 number to their Form 1040, line 66. Now before you slap your forehead and say “How obvious!” Judge Halpern would have you know the following.

“Their failure to carry the nonrefundable portion to line 49 resulted in the total tax shown on Form 1040, line 61, $6,984, to be $4,500 greater than it would have been had they carried that amount to line 49. They showed their total tax total payments to be $11,287, comprised of Federal tax withheld of $8,287 and the line 66 amount of $3,000. They subtracted that amount from the $6,984 they had reported on line 61, which resulted in a $4,303 claimed overpayment of tax, which is less than the $8,803 refund that we believe that respondent made to them….” Order, at pp. 1-2.

So IRS changed Jim’s and Sarah’s numbers to correct their blooper with another blooper. And refunded more than they should have gotten.

Great, huh?

Guess what? Jim and Sarah got the benefit of the nonrefundable part of the American Opportunity Credit when IRS blew the adjustment, so now they have a deficiency greater than the five-and-ten ($5K or 10% of tax due), and are facing the 20% chop.

Hold it, you’ll say, what about Rand? See my blogpost “The Rebate Debate – Part Deux,”11/18/13.

Well, Congress fixed that wagon in the famous Protecting Americans from Tax Hikes Act last November. According to the Joint Committee on Taxation’s Technical Explanation, “The provision amends the definition of underpayment applicable to the determination of accuracy-related and fraud penalties by incorporating in the definition the rule that in determining the tax imposed and the amount of tax shown on the return, the excess of the refundable credits over the tax is taken into account as negative amount of tax. Thus, if a taxpayer files an income tax return erroneously claiming refundable credits in excess of tax, there is an underpayment on which a penalty may be imposed.” Order, at p. 3.

OK, so if Jim and Sarah got more than they should have., whether off tax they owed or as a refundable credit, they have to pay it back. No biggie, right?

But Judge Halpern can’t leave that sleeping critter lie.

“Respondent perfected petitioners’ return by giving them the benefit of the nonrefundable portion of the American Opportunity Credit that they had not carried over to their Form 1040. Had he not done so, the deficiency in tax would have been $4,500 less ($3,000 rather than $7,500) and the $3,000 refundable credit that petitioners did claim would not have resulted in a negative tax. Having given them that credit, however, and having now determined that petitioners are not entitled to that credit, it seems appropriate that, to reverse the benefit of the undeserved credit, respondent should include the nonrefundable credit in his determination of a deficiency. It is not clear to us, however, that, for purposes of applying the section 6662 accuracy-related penalty, respondent’s apparently gratuitous adjustment should be taken into account in determining whether petitioners substantially understated their income tax or underpaid that tax. We require the parties to address that issue.” Order, at p. 3.

Moreover, the revised statute didn’t pick up the cross-references from what Congress previously did. So the Section 6664(a) chop is up in the air.

Here’s the skinny for you tax techies.

“Our own examination of section 209 [of PATH] exposes what may be a problem in the application of the amendment to section 6664(a) that a rule similar to the rule of section 6211(b)(4) shall apply for purposes of section 6664(a). In pertinent part (and paraphrasing), section 6211(b)(4) states that, in determining a deficiency, the amount of the deficiency may include any negative tax caused by the section 25A(i)(6) refundable credit. The problem is that, section 25A(i)(6) does not any longer refer to the refundable portion of the American Opportunity Credit. The refundable portion of that credit is now addressed in section 25A(i)(5). The change was made by the American Taxpayer Relief Act of 2012, Pub. L. No. 112240, sec. 104(c)(2)(D)(i), 126 Stat. 2313, 2322 (2013). No change was made in the cross reference found in section 6211(b)(4).” Order, at p. 4.

In any case, IRS wants to chop John and Sarah for something IRS did. If they left John’s and Sarah’s mistake alone, there would have been no substantial understatement of tax; there would have been no understatement at all.

Now, remember Tax Court has no equitable jurisdiction. And John and Sarah didn’t brief this issue. I doubt too many of my readers would have briefed it either. I would have had a problem with it, I freely confess, except to make a losing equitable argument.

But Judge Halpern isn’t called Big Jim for nothing.

Let IRS show us they can do the right thing.

“In Rand v. Commissioner, 141 T.C. 393, we discussed the rule of lenity. We quoted the Supreme Court in Commissioner v. Acker, 361 U.S. 87 (1959), to the effect that, when concerned with tax acts imposing a penalty: ‘The law is settled that “penal statutes are to be construed strictly,” and that one “is not to be subjected to a penalty unless the words of the statute plainly impose it”.’ Id. at 91 (quoting FCC v. Am. Broadcasting Co., 347 U.S. 284, 296, 74 S. Ct. 593, 98 L.Ed. 699 (1954), and Keppel v. Tiffin Sav. Bank, 197 U.S. 356, 362, 25 S. Ct. 443, 49 L.Ed. 790 (1905)). We require the parties to discuss the rule of lenity and any other rule or doctrine addressing the problem presented by the apparent incorrect cross reference in section 6211(b)(4).

“The parties shall also discuss whether, assuming that the amendment to section 6664(a) is to apply, a similar rule is to be inferred with respect to the calculation of the understatement for purposes of section 6662(d)(2)(A).

“Finally, the parties shall address the implications of the rule of lenity with respect to imposition of the section 6662(a) accuracy-related penalty to any understatement of income tax or underpayment of income tax with respect to the nonrefundable portion of the credit, as discussed above.” Order, at pp. 4-5.

Take the hint, guys. Take the tax plus interest, let Jim and Sarah off the chop, and don’t do any more such good deeds.



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