Rev. Rul. 84-106

ISSUE

How is the addition to the tax for negligence under section 6653(a) of the Internal Revenue Code to be computed in the situation described below?

FACTS

X timely filed a federal income tax return for 1978 showing a tax liability of $100, which X paid. When the return was later examined, the Internal Revenue Service asserted a deficiency of $100, which X paid. X later reported a loss on its 1981 income tax return and under section 6411 of the Code carried the loss back to 1978. As a result, X was refunded a tentative allowance of $200. When the Service later examined X's 1981 return, it determined that X did not have a loss for 1981. The Service also determined that the addition to the tax for negligence under section 6653(a) was applicable.

LAW AND ANALYSIS

Section 6211(a) of the Code provides, generally, that a deficiency is the amount by which the tax imposed exceeds the excess of (1) the sum of the tax shown by the taxpayer on the return, plus amounts previously assessed (or collected without assessment) as a deficiency, over (2) the amount of any rebate.

Section 6211(b) of the Code defines a rebate as the portion of an abatement, credit, refund, or other repayment that was made because the tax imposed was less than the difference between the (1) amount of tax shown by the taxpayer on the return, plus amounts previously assessed (or collected without assessment), and (2) rebates previously made.

Section 6653(a) of the Code, as amended by section 722(b) of the Economic Recovery Tax Act of 1981 (E.R.T.A.), 1981-2 C.B. 256, 345, imposes an addition to the tax equal to 5 percent of the underpayment if any part of any underpayment is due to negligence or intentional disregard of rules or regulations (without intent to defraud).

Section 6653(c) of the Code states that the term "underpayment" for income tax purposes means a deficiency as defined in section 6211. Section 301.6653-1(c) of the Regulations on Procedure and Administration further defines an underpayment for purposes of section 6653 as the total amount of all deficiencies as defined in section 6211, if a return was timely filed ( including extensions), or if a return was not timely filed, the amount of income, estate or gift tax imposed.

Rev. Rul. 173, 1953-2 C.B. 227, holds that an addition to the tax for negligence, fraud, or delinquency that was based upon the amount of a deficiency that existed before a relief provision, such as a net operating loss carryback, was applied must be imposed on the entire deficiency, computed before application of such provision, even though the tax reported on the original return was equal to, or greater than, the correct tax as finally computed after the application of such provision. Thus a taxpayer cannot avoid imposition of an addition to the tax under section 6653 of the Code by subsequently incurring a loss carryback that in effect reduces a negligent or fraudulent underpayment.

Rev. Rul. 60-215, 1960-1 C.B. 642, holds that the 50-percent addition to the tax for fraud imposed by section 6653(b) of the Code applies to the deficiency assessed to recover an erroneous refund allowed as a result of a carryback adjustment under section 6411, if the adjustment was induced by fraud. The fraud carries over, and the 50-percent addition is applicable, to that deficiency. In addition, the revenue ruling states that the addition to the tax is computed not upon any part of the deficiency, but the total amount of the deficiency.

As Rev. Rul. 60-215 points out, in Kurtzon v. Commissioner, 17 T.C. 1542 (1952), the court reduced the definition of a deficiency to the following mathematical formula:

     Deficiency = correct tax (tax on return + prior assessments

     Deficiency = $200 ($100 + $100 $200)

However, sections 6211(a) and 6653(c) of the Code, taken together, logically limit the amount on which the addition to the tax is computed (the underpayment) to the amount of income tax imposed by subtitle A on the taxpayer for that year. In the present case, the underpayment subject to the negligence penalty is limited to $200 (the total liability for income tax imposed by subtitle A) rather than $300 (the total of all deficiencies assessed for the year).

HOLDING

The total deficiency subject to the addition to the tax under section 6653(a) of the Code is $200. The addition to the tax is 5 percent or $10.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 173 and Rev. Rul. 60-215 are amplified.