William Levinson and William Levinson, Assignee of F.M.P. Corporation, Formerly Known as Fairmount Motor Products Co., Inc. v. United States
496 F.2d 651
3rd Cir.
1974
Check Treatment

*2 ently subject were not the of the subse Clary, Mimnaugh, John T. Andrew F. quent investigation fraud Pa., Philadelphia, Mullaney, Thomas J. based on payers suggest income. Thus the tax omitted appellants. for Rothwacks, Crampton, Meyer Scott P. fol should have English Kelsey, Car- Elmer J. David lowing formula: Washington, mack, C., E. J. Robert D. (tax x shown on [correct tax — 50% Pa., Curran, Philadelphia, appellee. original timely addi- filed return + WEIS, Circuit Before HUNTER tional tax of routine assessed because Judge. Judges, MILLER, District original return) audit on ] actually comput-

The fraud OF THE COURT OPINION oned the basis of this formula: on X tax —tax [correct 50% III, HUNTER, JAMES original timely filed return] Judge: argue Taxpayers the decisional appeal on de- sole issue supports applicable their law and statute proper termination method view that the fraud penalties civil tax are to be as- deficiencies to nonfraudulent assessed under adjustments as a of routine sessed (“IRS”) as- Service do returns. their sessed dif- 50% agree. ference between bility true lia- shown on tax- Internal Under the Revenue payers’ dis- tax returns. The penalty provision, sec- upheld compu- trict method any part 293(b), provided “if tion tation affirm. deficiency is due per total through Taxpayers’ . then centum for 1967 . . . shall 1959 were filed and the taxes (Emphasis .” timely paid. so assessed shown thereon When “Deficiency” un- added.) subsequently ex- conducted routine IRS 271(a) by following for- J. McDonnell v. B.T. mula: A. 685 propo- for the = sition that in pen- (tax tax — alty taxpayers the IRS should allow “le- return + amounts gitimate adjustments” to the tax sessed or collected without assessment ported on the —rebates)1 return.3 Taxpayers, however, have misread *3 Where there have been several deficien- McDonnell. penalty The cies, quite logically this definition 50% applied that case was quires that, computing difference the amount of between the correct tax and deficiency, giv- new credit should be shown on the return.4 The en for deficiencies assessed specifically court held that no error had or collected. compu- committed in the method of computing penalty under penalty.5 tation of the What Code, however, the 1939 courts consist say, far different from that ently penalty refused to taxpayers, contended only narrowly deficiency. computing liability the total E.g., Commissioner, Middleton v. F. 200 hence the deficiency, the IRS 1952); 2d 94 Romm v. Com give legitimate failed to credit for missioner, (4th Cir.), 245 F.2d 730 Taxpayers, deductions and losses. how- 862, 94, 78 2 L. ever, have not contested the final penal Ed.2d 68 Since the fraud determined IRS ty provision referred to “the total therefore McDonnell does not taxpayers’ position. deficiency,” amount of the courts con signifi- It is also sistently reasoned that where more than cant specifically that McDonnell was cit- assessed, one had been ed the same court in Wilson Com- penalty applied to all de missioner, 395, 7 T.C. when ;2 thus, ficiencies the total that, it noted was held to the difference between “[Sjince the Revenue Act of the correct tax tax shown on the consistently computed [IRS] has return. Romm v. Commission penalty upon [fraud] the total amount er, supra; Commissioner, Middleton v. understated on the return supra; ev- Still, Commissioner, Inc. v. ery coming instance in those cases be- (1953); T.C. 1072 Wilson Commis aware, fore us of sioner, which we are (1946); Mc T.C. J. approved computation.” have Commissioner, Donnell v. 6 B.T.A. 685 (Emphasis added.) We therefore conclude that under the Contrary taxpayers suggest, to what it we have under the found decision practice the court-sanctioned of the IRS from this 1939 code which deviated compute penalties on the differ- method of ence between the correct tax and the tax suggested or even that in certain situa- shown on the return. computation tions a different method of remaining question then whether the apply. Taxpayers rely heavily on would Appellants 3. Brief of at 9. 1. See Kurtzon v. 17 T.C. (1952) ; 60-214, 1960-1 Cum- Rev.Rul. 4. 6 B.T.A. at 690-691. See Wilson Com- Bull. 700. missioner, T.C. wherein 2. The to refuse to follow effect of this was explained the same court in McDonnell deficiency (which the literal definition of it had “held that puted upon to be com- pre- require given credit be would lia- excess of the tax entire deficiencies) viously whenever bility over that the return.” shown on g., imposed. See, e. Commissioner, supra. 5. 6 B.T.A. at 695. Romm v. Revenue Code which the IRS has enactment the Internal changes present proper case is under this sub- affected policy. not. See v. Commission- 1972). § stantive thinkWe er, provision, present In view of insistence that 6653(b), its differs from 26 U.S.C. § deficiencies assessed as predecessor use of the word in its routine applied of their must be audit deficiency: “underpayment” than rather pursuant a credit to 26 U.S.C. any underpay- any part of “If 6211(a) (1) (B), a few further observa- required to be ment ... appear necessary. First, tions section is due on a return prede- identical to its the tax an there shall be added to cessor the 1939 under percent equal of the un- 271(a)(1)(B), previously, and as noted added.) (Emphasis derpayment.” applied un- deficiencies were never *4 the Code as a in deter- in “Underpayment” defined section is mining deficiency subject to the “total” 6 by 6653(c) to the definition reference penalty. deficiency which of U.S.C. § taxpayers suggest pre predecessor, Second, virtually that identical to its is 6653(c), viously 271(a). how- deficiencies assessed section Section purposes applied ever, of defin- be as credit under section that for states deficiency, (a)(1)(B) just ing only circums on some the tax shown original Yet, timely return is be there filed to tances9 the legislative history statute, or in the its considered. applying for case law section changes appear face their these On selectively. 6211(a)(1)(B) merely appear to minor and most po- clarify practice Third, inequities been under of the had what the was the Con- Code. That this Had there been the 1939 sition manifest. gressional unquestionably deficiency clear coupled intent is a one with assessed history.8 legislative thus finding part from the agree the under- at least a of that the payment that the with Second due to then any previously did not of 1954 as- Internal Revenue Code change have would not deficiency taxpayers the of the method for which sessed by the method and that a credit under section could claim alia,: provides; “(1) inter § 26 U.S.C. the sum of section, by purposes “(A) term “For this the of shown as the the amount ‘underpayment’ taxpayer upon return, means— his if a return the gift “(1) Income, estate, taxpayer by tames. —In and an amount the was made (re- by case of a tax which section the to as the the gift taxes) lating income, estate, plus thereon, to deficiency previously applicable, “(B) in that assessed a as defined the amounts purpose, (except that, assessment) (or a the as de- section for without collected ficiency, to section tax shown on return referred over— 6211(a)(1)(A) “(2) rebates, taken into account shall be of the amount (b) (2), if such filed on or before return was made.” subsection day prescribed filing the the of such last history legislative the 8. For a of discussion regard exten- to determined with see ” filing) . . of time for sion such 1972). argue provides, Taxpayers apparently inter that 26 U.S.C. alia: § just applied deficiency to “Definition “legiti- “(a) general. purposes of this ti- assessed because of those deficiencies —For income, estate, gift adjustments” tle in the case mate their taxes, timely imposed by B, routine of a A the subtitles filed they ‘deficiency’ Presumably, that would add term means the amount which audit. imposed previously B A subtitles or exceeds the excess of— fraud. 6211(a)(1)(B). interpretations, cial response written in clearly quite applied to longer would have been to a exists, need which no underpayment, e., total the i. the differ- the prevail, Commissioner is able to thus increasing government’s between and the tax ence the correct the but revenue timely diminishing shown on the filed taxpay- resources likely turn. not seem Con- plain does er. Since I believe that word- gress ing would have conditioned the severi- prevail, the statute should I must ty on such a fortui- dissent. ty as whether or not a routine audit majority concedes, As conducted assessment on the “under- giving charge. rise to the fraud payment,” term is defined “deficiency,”2 Lastly, ambiguity if there is which the correct tax exceeds statutory language, we think the (a) sum the amount shown Congressional prev purpose clear must plus (b) pre- return Congress amounts unquestionably ail.10 Since viously assessed.3 modify intend the substan agree law agree tive under majority’s I with the statement with the Second Circuit of the formula: = prop under 26 6653 is (tax tax — erly computed on the dif basis return amounts + sessed) ference between the correct tax and tax shown on the filed *5 Applying literally the statute Accord, Commissioner, Papa return. v. taxpayer pay that the the here should 1972). 464 F.2d 150 Cir. percent of 50 the The order of the district court of-Au- of amount tax due of because fraud and gust 29,1973 portion will be affirmed. on that paid previous as a result of a adjustments sessment based for items WEIS, Judge (dissenting): legitimate as to which there was a basis dreary pages The of the Internal Rev- opinion. for difference of This result passages enue Code contain few of appear eminently sound and would to be taxpayer. petitioner comfort The reasonable. which, provisions here has found several literally given difficulty years ago when read and their com- The that meaning, support position construing mon sense his of the Inter- earlier versions bring equitable Code, and an about result. nal Revenue the Tax Court found only by previous upon judi- “loophole” obliged reliance felt which it 10, See, g., (a) general. purposes e. United States title American of this —Eor Trucking, 534, 543-549, estate, gift taxes, income, and in the case of imposed by B, 84 L.Ed. 1345 A ‘de- and the term subtitles ficiency’ by which the tax means the amount 6653(b) 1. Section the Internal Revenue by imposed ex- A or B exceeds the subtitles Code of 1954: cess of— any part any underpayment “If (1) the sum of required of tax to be on a return (A) by the the amount shown as there shall be added to the taxpayer upon his if a return was equal percent an amount to 50 of the under- taxpayer by an made and amount was the payment.” by taxpayer thereon, the the plus Internal Section the Revenue (or (B) the amounts Code assessment) without as a defi- collected ciency, 6211 of the over —(cid:127) Section rebates, the of 1954: (b) made.” “Definition of subsection problem Commissioner, close. The 464 F.2d 150 articulated Commissioner, (2d 1972), perti- Still v. the failed note T.C. Cir. aff’d, 1959), change and, (2d 218 F.2d 639 Cir. nent the 1954 Code reasoning adopting where the court of the older said 1077: cases,4 allow for an refused to “A who had filed a fraudu- by the Internal earlier assessment merely lent return would take his However, Papa, su- Revenue Service. chances not be would parte ex in the nature of an investigated then, discovered, or proceeding, appeal having tak- if investigation made, were would by en contest- the Commissioner simply pay any- the tax which he owed Furthermore, taxpayer. ed how, thereby nullify earlier penalty.” fraudulent. refused to credit was also adopted by This Equities, therefore, rationale was result in favor Appeal Courts of Papa, they Middleton Com supra, did in the earlier missioner, (5th 1952), cases. and Romm v. Here, however, fundamental fairness 1957), U. supports taxpayer’s position, and 78 S.Ct. 2 L.Ed.2d 68 why to be no reason there would seem These cases involve tax assessments today law decisional to the enactment originally developed to reme- which was and in each one all of the deficiencies statutory infirmity dy cured since were based on fraud. While legislative revision. might argument be some about peti- majority fault with finds power ignore wording court’s deficiency un- tioner’s contention statute, equities nevertheless the fa der section vor the result. of non- in circumstances credited assessments, dismisses “loophole” fraudulent about which the courts saying position through were concerned was closed con- gressional *6 statute no by including action interpretation. need not provision such a although case, point in this reach that my taxpayer’s “amount shown on a return” interpretation is mind the a return which filed. preferable one which Thus, far who learns his tax years com- made over being courts háve questioned and who disregarding all pletely files later amended return can secure plain despite paid word- assessments ing penal- reduction of the amount sug- petitioner’s ty of the statute. such action. calculation construc- gestion requires modest clearly of the fraud after 1954 equity, the deci- promote while tion to involves not an interpreta- major involves sional law Therefore, opportuni- one. amended inequity. ty furthers tion which sport to “make of the so-called fraud penalty” Still, su- petitioner concerned give I would long- supra, Romm, courts is no requires reverse statute er available. court. of the district decision T.C. 395 Still, Romm, supra, supra, and Wilson