                        T.C. Memo. 2009-153



                      UNITED STATES TAX COURT



                  TOM I. LINCIR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13205-05L.             Filed June 29, 2009.



     Michael D. Savage, for petitioner.

     Benjamin J. Peeler, for respondent.



                        MEMORANDUM OPINION


     COHEN, Judge:   This proceeding was commenced in response to

a Notice of Determination Concerning Collection Action(s) Under

Section 6330 with respect to petitioner’s Federal income tax

liabilities for 1978, 1979, 1980, 1981, and 1982.

     The parties agree that the Appeals officer erred in

determining that section 6621(d) interest netting was unavailable
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to petitioner.   The issue for decision is whether the Appeals

officer abused his discretion in sustaining the proposed levy

against petitioner without considering:   (1) Whether section

6621(d) interest netting applies to the 1981 and 1982 additions

to tax for negligence under section 6653(a)(2); and (2) whether

section 6621(d) interest netting may be properly applied by the

Internal Revenue Service (IRS) issuing a refund and paying

petitioner taxable interest on overpayments of tax at the same

rate at which petitioner is charged interest on equal amounts of

underpayments of tax during periods when the overpayment and

underpayments overlap, or whether offsetting is the proper

method.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

                            Background

     This case was submitted fully stipulated under Rule 122, and

the stipulated facts are incorporated as our findings by this

reference.   Petitioner resided in California at the time his

petition was filed.

     During the years 1978 through 1982, petitioner and his

former spouse, Diane C. Lincir (Lincir), filed joint Federal

income tax returns.   Petitioner and Lincir (collectively, the
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Lincirs) divorced in 1992, and Lincir is not a party to this

action.

     On September 18, 1989, the Lincirs filed a petition in

docket No. 22934-89 to contest a notice of deficiency that denied

losses and deductions they claimed during tax years 1978 through

1982 in connection with the tax shelter programs known as

“Dorchester” and “Merit Securities, Inc.” (the lead cases).      The

notice of deficiency included additions to tax for negligence and

other additions to tax.

     On July 1, 1992, the Lincirs entered into a stipulated

settlement of adjustments relating to the Dorchester program.     On

August 1, 1996, the Lincirs entered a stipulation wherein they

agreed to be bound by the decision of this Court on the

adjustments resulting from the Merit Securities, Inc. proceeding.

This Court decided the Merit Securities, Inc. case in favor of

the Commissioner on January 28, 1999.    See Leema Enters., Inc. v.

Commissioner, T.C. Memo. 1999-18, affd. sub nom. Keeler v.

Commissioner, 243 F.3d 1212 (10th Cir. 2001).

     After the disposition of the lead cases, the Court conducted

a trial to redetermine the Lincirs’ liability for additions to

tax and section 6621(c) interest.     Lincir v. Commissioner, T.C.

Memo. 1999-98 (Lincirs’ 1989 case).    The Court sustained the
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Commissioner’s determinations that the Lincirs were liable for

various additions to tax (including section 6653(a)(2) additions

for 1981 and 1982) and section 6621(c) interest for the years in

issue.   These liabilities were attributable, in part, to the

disallowance of losses from straddle transactions attributable to

the lead cases that the Lincirs claimed on their tax returns.       On

their 1984 and 1985 tax returns the Lincirs reported gains

realized from the disposition of offsetting straddle transactions

and paid taxes on these gains.    Timely protective claims for

refunds for the taxes paid in 1984 and 1985, with interest, were

filed to protect the Lincirs in the event that the losses

previously claimed were disallowed.

     A Rule 155 proceeding followed the Lincirs’ 1989 case,

wherein the parties disputed the calculations of interest and

interest-sensitive additions to tax.     The parties brought this

matter before the Court in docket No. 22934-89.     Lincir v.

Commissioner, 115 T.C. 293 (2000), affd. 32 Fed. Appx. 278 (9th

Cir. 2002).   The issues raised in the Rule 155 proceeding

included:   (1) Whether interest netting under section 6621(d)

should be applied in the calculation of interest due on the

deficiencies for the years 1978 through 1982 and (2) whether

interest netting under section 6621(d) should also be applied to
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the calculation of the interest-sensitive additions to tax under

section 6653(a)(2).

     On October 2, 2000, this Court held that it did not have

jurisdiction to decide whether the IRS must apply interest

netting under section 6621(d) when calculating the increased

interest penalty before such a penalty had been assessed and

paid.   The Court further held that because the IRS had not

computed the amount of statutory interest under section 6601, the

question of the impact of section 6621(d) interest netting, if

any, on the calculation of the additions to tax under section

6653(a)(2) was not ripe for review.    The Lincirs appealed this

Court’s decision to the Court of Appeals for the Ninth Circuit on

December 19, 2000.

     On February 28, 2001, while the Lincirs’ appeal was pending,

the IRS assessed income taxes, interest, penalties, and additions

to tax against the Lincirs.   Section 6653(a)(2) additions to tax

for negligence were assessed for tax years 1981 and 1982.

     On July 3, 2001, the Lincirs filed a written request with

the IRS asking for section 6621(d) interest netting to be applied

to underpayments from 1978 through 1982, to the extent that

overpayments for 1984 and 1985 were outstanding at the same time.

     On February 22, 2002, the Court of Appeals for the Ninth
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Circuit upheld the October 2, 2000, decision of this Court in an

unpublished opinion.

     On December 5, 2002, the IRS sent to petitioner a Letter L-

1058, Final Notice of Intent to Levy and Notice of Your Right to

a Hearing, with respect to his income tax liabilities for years

1978 through 1982.   The IRS did not send Lincir a Letter L-1058.

     On December 30, 2002, petitioner, through counsel, timely

filed a Form 12153, Request for a Collection Due Process Hearing,

regarding the proposed levy.   Petitioner claimed, in part, that

the IRS incorrectly calculated the amounts of interest and

interest-sensitive additions to tax due because these amounts may

be reduced by the disposition of petitioner’s request for

interest netting under section 6621(d).

     During the Appeals process petitioner submitted an offer-in-

compromise that the Appeals officer rejected as monetarily

insufficient.   In the parties’ filed stipulation of settled

issues petitioner agreed that the Appeals officer did not abuse

his discretion in determining that the IRS properly reviewed

petitioner’s offer-in-compromise.

     In May 2005, petitioner and Lincir received checks from the

IRS for the 1984 and 1985 refund amounts, with interest.     The
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Lincirs cashed the refund checks, used a portion to pay the

Federal and State taxes due on the interest income for tax year

2005, and returned the balance of the refunds to the IRS.

     On June 15, 2005, the IRS sent to petitioner a Notice of

Determination Concerning Collection Action(s) Under Section 6330.

In the notice, the Appeals officer determined that the proposed

levy was appropriate and that interest netting was not available,

and addressed the interest netting issue by noting that

petitioner does not have any other accounts under examination and

“[a]ny tax refunds in subsequent years to which he may have

otherwise been entitled have been set off to the tax years listed

above.   The set off dates credited his delinquent accounts with

refunds as of the presumptive date of the filed return.”     In a

letter dated June 30, 2005, petitioner informed the Appeals

officer that he had received refund checks for 1984 and 1985;

thus, the refund amounts had not been “credited to the earliest

delinquent years”.

     In February 2006, petitioner and Lincir received a Form

1099-INT, Interest Income, reporting interest income for the year

2005 that resulted from the refunds issued that year for tax

years 1984 and 1985.   Petitioner reported half of the interest

income on his 2005 Federal and State tax returns.   Lincir
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reported the other half of the refunded interest on her tax

returns.   At this same time, petitioner filed a protective claim

for a refund with the IRS based on his calculation of the amount

of Federal income tax that he paid on his 2005 return for the

interest included in the refunds for 1984 and 1985.

                            Discussion

     Section 6330 generally provides that the IRS cannot proceed

with the collection of taxes by way of a levy on a taxpayer’s

property until the taxpayer has been given notice of and the

opportunity for an administrative review of the matter and, if

dissatisfied, with judicial review of the administrative

determination.   Section 6330(c)(2)(A) provides that the taxpayer

may raise “any relevant issue relating to the unpaid tax”

including spousal defenses, challenges to the appropriateness of

collection actions, and alternatives to collection.   The taxpayer

may also raise challenges to the existence or amount of the

underlying tax liability if he did not receive a statutory notice

of deficiency with respect to the underlying tax liability or did

not otherwise have an opportunity to dispute that liability.

Sec. 6330(c)(2)(B).

     Where the validity of the underlying tax liability is not

properly at issue, the Court will review the Commissioner’s
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administrative determination for abuse of discretion.   See Sego

v. Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner,

114 T.C. 176, 182 (2000).   An abuse of discretion is defined as

any action that is unreasonable, arbitrary or capricious, clearly

unlawful, or lacking sound basis in fact or law.   See Woodral v.

Commissioner, 112 T.C. 19, 23 (1999); see also Broemer v.

Commissioner, T.C. Memo. 2009-72.

     Section 6621(d), enacted as part of the Internal Revenue

Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.

105-206, sec. 3301(a), 112 Stat. 741, provides:

     To the extent that, for any period, interest is payable
     under subchapter A [sections 6601 and 6602] and
     allowable under subchapter B [section 6611] on
     equivalent underpayments and overpayments by the same
     taxpayer of tax imposed by this title, the net rate of
     interest under this section on such amounts shall be
     zero for such period.

The parties agree that respondent’s Appeals officer abused his

discretion in determining that the Lincirs were not entitled to

interest netting under section 6621(d) and that interest netting

should be applied to the calculation of interest in regard to the

underpayment interest for 1978, 1979, 1980, 1981, and 1982 and

the overpayment interest for 1984 and 1985.   However, the parties

dispute whether the application of section 6621(d) should be

extended further.
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Section 6653(a)(2) Computation

     Petitioner argues that the interest-netting rules of section

6621(d) apply to the section 6653(a)(2) additions to tax and,

upon application, will reduce the amounts assessed for the years

1981 and 1982.   Respondent asserts that section 6621(d) interest

netting does not affect the computation of the section 6653(a)(2)

additions to tax.

     Section 6653(a)(2) provides that if a portion of an

underpayment of tax is attributable to negligence, then the

taxpayer shall be liable for an addition to tax in “an amount

equal to 50 percent of the interest payable under section 6601”

with respect to the portion of the underpayment that is

attributable to negligence or intentional disregard of rules and

regulations. (Section 6653(a)(2), as amended, was repealed by the

Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.

7721(c)(1), 103 Stat. 2399, effective for returns due after

1989). The specific amount of a taxpayer’s liability for the

addition to tax under section 6653(a)(2) depends upon a

computation of statutory interest payable under section 6601.

Section 6601 provides that interest on underpayments of tax will

be imposed at an annual rate established under section 6621.
                              - 11 -

     In 1981 and 1982, section 6621 established an annual rate

that applied to both overpayments and underpayments, but this

section was amended to establish differing overpayment and

underpayment rates by the Tax Reform Act of 1986 (TRA 1986), Pub.

L. 99-514, sec. 1511(a), (b), (d), 100 Stat. 2744, 2746 (1986)

(applying section 6621 to underpayments that were still

outstanding at the end of 1986 as well as to new tax liabilities

that arose after 1986).   The interest rate imposed on

underpayments was higher than on overpayments, resulting in

taxpayers with overlapping periods of underpayment and

overpayment interest being assessed a net interest charge.      See

H. Conf. Rept. 105-599, at 256 (1998), 1998-3 C.B. 747, 1010.

In 1998, Congress removed this differential with the enactment of

section 6621(d).

     Thus, for any period during which a taxpayer is

simultaneously liable for an underpayment of tax and entitled to

a refund for an overpayment of tax in an equivalent amount, the

net rate of interest on such amount shall be zero.   Congress

included an uncodified provision in enacting section 6621(d) that

permits taxpayers to apply section 6621(d) to periods before the

effective date of July 22, 1998, provided certain requirements

are met.   RRA 1998 sec. 3301(c)(2), 112 Stat. 741, as amended by
                              - 12 -

the Omnibus Consolidated and Emergency Supplemental

Appropriations Act, 1999, Pub. L. 105-277, sec. 4002(d), 112

Stat. 2681-906 (1998).

     The parties agree that petitioner and Lincir are entitled to

interest netting under section 6621(d) for the calculation of

interest paid or payable regarding the underpayment interest

under section 6601, including section 6621(c) interest, for tax

years 1978 through 1982, and the overpayment interest for the

years 1984 and 1985.   Petitioner contends that interest netting

should also be applied to the additions to tax under section

6653(a)(2) assessed for 1981 and 1982 and articulates this

argument as follows:

     The Section 6653(a)(2) penalty is “50% of the interest
     payable under section 6601”. Under Section 6601
     interest is payable at the rate established in Section
     6621. The reference in Section 6601 to Section “6621”
     is not just a reference to Section 6621(a)(1)(A) (the
     underpayment rate), but is a reference to all of
     Section 6621, including Section 6621(d). And under
     Section 6621(d) the rate of interest on underpayments
     offset by overpayments is zero. Therefore, the
     interest payable under Section 6601 on such
     underpayments is zero, and the section 6653(a)(2)
     penalty on such underpayments, which is equal to 50% of
     the interest payable under Section 6601, is also zero.
In sum, petitioner’s position is that before the section

6653(a)(2) additions to tax are calculated, respondent should

calculate interest based on the interest rate that results after
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application of section 6621(d) interest netting--i.e., a zero

interest rate.

     The section 6653(a)(2) reference to section 6601 interest

provides a means to calculate the addition to tax with respect to

the portion of the underpayment attributable to negligent or

intentional disregard for rules or regulations.   Section 6601(a),

as in effect for the years 1981 and 1982, provided that the

interest rate is “an annual rate established under section 6621”.

In 1986, upon the enactment of differing overpayment and

underpayment interest rates, section 6601(a) was amended by

striking the above language and replacing it with “the

underpayment rate established under section 6621”.   TRA 1986 sec.

1511(c)(11), 100 Stat. 2745.   This is also the language of

section 6601(a) in 1998, when section 6621(d) was enacted.

      Although the addition to tax under section 6653(a)(2) is

calculated based on 50 percent of the section 6601 underpayment

interest, and section 6601 references “section 6621” in

determining the underpayment rate, it is the underpayment rate--

not the netted underpayment and overpayment rate--that is used to

calculate the section 6653(a)(2) addition to tax.    This follows

from the purpose for enacting section 6653(a)(2):
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          The Congress believed that the negligence penalty
     should be augmented to encourage accurate compliance
     with tax laws. After considering alternative ways of
     accomplishing this objective, the Congress decided that
     linking the penalty with the interest payable on tax
     underpayments will be an effective method of giving
     taxpayers an extra incentive to make sure that their
     actions or inactions are not negligent. In addition,
     by linking the new penalty to the interest payable on
     underpayments, the Congress believed that there will be
     less incentive to delay unduly the settlement of
     outstanding tax disputes. [Staff of Joint Comm. on
     Taxation, General Explanation of the Economic Recovery
     Tax Act of 1981, at 336 (J. Comm. Print 1981); emphasis
     added.]

     Additionally, even if all of section 6621 is considered

because of the cross-reference in section 6601, as petitioner

argues, section 6621(d) does not apply a zero interest rate but

rather provides that the net rate of interest shall be zero on

equivalent underpayments and overpayments.   The underpayment

interest rate, used to calculate the section 6653(a)(2) addition

to tax, does not itself become zero.

     Section 6621(d) does not refer to amounts that are not

interest, such as penalties or additions to tax.   Similarly, the

conference report accompanying RRA 1998 addressed the increased

rate of interest for large corporate underpayments under section

6621(c) and provided that the net interest rate of zero under

section 6621(d) would apply to that provision, but it does not

mention additions to tax or penalties.   See H. Conf. Rept. 105-
                              - 15 -

599, supra at 256-257, 1998-3 C.B. at 1010-1011.   We conclude

that it was not an abuse of discretion for respondent to deny the

application of section 6621(d) interest netting to the

calculation of the assessed section 6653(a)(2) additions to tax

for 1981 and 1982.

Refunds and Offsets

     A dispute also remains as to the proper implementation of

interest netting under section 6621(d).   Petitioner argues that

the only proper way to net interest is to credit overpayments

against underpayments so that no taxable interest is paid to

petitioner.   Respondent contends that interest netting may be

properly applied by decreasing the underpayment interest to equal

the amount of interest that petitioner and Lincir were paid on

the 1984 and 1985 refunds for the overlapping period.    Respondent

asserts that this accomplishes the purpose of section 6621(d)

because the rates of interest are effectively equalized, and

there is a net interest rate of zero.

     The Internal Revenue Code provides two means to address

interest rate imbalances on underpayments and overpayments.

Interest netting under section 6621(d) provides for a net

interest rate of zero on equivalent amounts of underpayments and

overpayments that were outstanding during the same period.
                               - 16 -

Alternatively, offsetting is the process of crediting an

overpayment against an outstanding liability pursuant to section

6402(a), and is only available if the deficiency and the

overpayment are both outstanding.   A special interest rule under

section 6601(f), as amended by RRA 1998 sec. 3301(b), 112 Stat.

741, applies to offsetting:

     If any portion of a tax is satisfied by credit of an
     overpayment, then no interest shall be imposed under
     this section on the portion of the tax so satisfied for
     any period during which, if the credit had not been
     made, interest would have been allowable with respect
     to such overpayment. The preceding sentence shall not
     apply to the extent that 6621(d) applies.

In enacting section 6621(d) Congress indicated that in situations

where interest is both payable and allowable by the same taxpayer

for the same period, the Commissioner will take all reasonable

steps to offset the liabilities, rather than process them

separately using the net interest rate of zero under section

6621(d).   See H. Conf. Rept. 105-599, supra at 257, 1998-3 C.B.

at 1011; see also Rev. Proc. 2000-26, sec. 2.04(4), 2000-1 C.B.

1257, 1257 (Congress recognized that the Treasury would take some

time to implement procedures to apply automatically the net rate

of zero in section 6621(d)).   However, section 6402(a) “‘leaves

to the Commissioner’s discretion whether to apply overpayments to

delinquencies or to refund them to the taxpayer’”.   See Bryant v.
                             - 17 -

Commissioner, T.C. Memo. 2009-78 (quoting Pettibone Corp. v.

United States, 34 F.3d 536, 538 (7th Cir. 1994)); see also Winn-

Dixie Stores, Inc. & Subs. v. Commissioner, 110 T.C. 291 (1998)

(holding that the Commissioner’s determination regarding whether

to offset the prior years’ overpayments against the present

years’ underpayments affected the interest due on the present

years’ underpayments); Steinberg v. Commissioner, T.C. Memo.

1999-311, affd. 19 Fed. Appx. 498 (9th Cir. 2001).

     In general, the IRS will not use section 6621(d) to

eliminate interest rate imbalances if, through crediting, the IRS

has eliminated the differing rates.    See sec. 6402(a); sec.

301.6402-1, Proced. & Admin. Regs.    Thus, section 6621(d)

operates as a safety net, needed if there is no prior crediting

because there has been a refund or tax payment.    See, e.g., Gen.

Elec. Co. & Subs. v. United States, 103 AFTR 2d 2009-858, 2009-1

USTC par. 50,234 (Fed. Cl. 2009).

     Respondent sent to petitioner a refund for the overpayments,

with interest, and has agreed that section 6621(d) interest

netting applies, thus eliminating the interest rate imbalances.

We conclude that there was no abuse of discretion for respondent

not to offset outstanding overpayments and underpayments.

     To reflect the foregoing and the stipulation of settled
          - 18 -

issues,


                    Decision will be entered

               under Rule 155.
