                  T.C. Summary Opinion 2001-60



                     UNITED STATES TAX COURT



     BLANEY H. HOWLE III AND POLLY T. HOWLE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 6702-00S.                     Filed April 23, 2001.


    Blaney H. Howle III and Polly T. Howle, pro sese.

    Amy Dyar Seals, for respondent.




     DEAN, 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.   Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.

     Respondent determined a deficiency of $5,000 in petitioners’

1997 Federal income tax.   The issues for decision are:

(1) Whether respondent subjected petitioners to multiple audits

for their 1997 taxable year in violation of section 7605(b); and

(2) whether respondent determined petitioners’ 1997 Federal

income tax correctly.

                            Background

     The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.   Petitioners resided in

Florence, South Carolina, at the time their petition was filed

with the Court.

     Petitioners are husband and wife.   Petitioner Blaney H.

Howle III (Mr. Howle) turned 62 on October 31, 1997, and

petitioner Polly T. Howle (Mrs. Howle) turned 62 on March 1,

1997.   Mr. Howle has been retired on disability from railroad

employment since the age of 57.

     In 1997, Mr. Howle received Tier 1 railroad retirement

benefits of $1,186, and Mrs. Howle received Tier 1 railroad

retirement benefits of $284.   Mr. Howle also received $23,083.28

in Tier 2 railroad retirement benefits and $516 in supplemental

annuity benefits.   Mr. Howle’s employee contributions toward

Tier 2 benefits total $20,365.56.   In 1997, Mrs. Howle received
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$5,387.40 in Tier 2 railroad retirement benefits.   Mrs. Howle has

no employee contributions to recover.

     Petitioners reported their $28,986.68 of Tier 2 railroad

retirement benefits and supplemental annuity benefits as “Social

Security benefits” and the $1,470 of Tier 1 railroad retirement

benefits as the “Taxable amount” on their joint 1997 Form 1040,

U.S. Individual Income Tax Return (return).   Petitioners made a

$3,000 math error in adding their itemized deductions on their

Schedule A, Itemized Deductions.   The Internal Revenue Service

(IRS) corrected this math error, and as a result, petitioners

received a refund of $684.63 for 1997 rather than the $2,221.93

they claimed for a refund on their return.

     By letter dated April 21, 1998, Mr. Howle asked the IRS to

explain how social security and railroad retirement benefits are

taxed.   The IRS responded by letter dated May 9, 1998, with

“corrected” copies of petitioners’ 1997 Form 1040, Schedule D,

Capital Gains and Losses, and Social Security Benefits Worksheet.

The IRS determined petitioners’ tax liability based on $1,470 of

Tier 1 railroad retirement benefits received and adjustments to

petitioners’ tax computations using maximum capital gains rates.

As a result, petitioners received an additional refund for 1997

of $1,395.30.   However, the IRS did not account for the Tier 2

railroad retirement and supplemental annuity benefits received by

petitioners.
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     By notice dated September 20, 1999 (September notice), the

IRS proposed to change petitioners’ 1997 return to include

unreported pension income.    The proposed changes appear to have

been brought about by review of petitioners’ return and the

information returns submitted to the IRS by the Railroad

Retirement Board.    Petitioners disagreed with the proposed

changes set forth, and the IRS realized that the proposed changes

failed to include $515 of the taxable Tier 1 railroad retirement

benefits.

     By letter dated December 2, 1999, the IRS acknowledged that

the changes proposed in its September notice were incorrect and

proposed revised changes to petitioners’ 1997 return (December

proposed changes).    The December proposed changes are the basis

for the statutory notice of deficiency issued petitioners on

April 7, 2000.

                             Discussion

     Since 1983, railroad retirees have been taxed on two

categories of benefits.    See Railroad Retirement Solvency Act of

1983, Pub. L. 98-76, 97 Stat. 411.      “Tier 1” benefits are taxed

in the same manner as Social Security benefits under the

provisions of section 86.    See sec. 86(d)(1)(B).   “Tier 2”

benefits are taxed in the same manner as pension benefits

provided under an employer plan that meets the requirements of

section 401(a).   See sec. 72(r).
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     Petitioners challenge the validity of respondent’s notice of

deficiency claiming that they have been subjected to multiple

audits for their 1997 tax year.   Although they concede that their

railroad retirement benefits are taxable, they challenge

respondent’s calculations.

     There is no express limit on the number of examinations that

may be pursued by the IRS for the same taxable year.   See Digby

v. Commissioner, 103 T.C. 441, 447 (1994).    Section 7605(b),

however, protects taxpayers from repetitive investigations

undertaken by the IRS as a means of harassment.   See Curtis v.

Commissioner, 84 T.C. 1349, 1352 (1985); Collins v. Commissioner,

61 T.C. 693, 698-699 (1974).   It provides:

     No taxpayer shall be subjected to unnecessary
     examination or investigations, and only one inspection
     of a taxpayer’s books of account shall be made for each
     taxable year unless the taxpayer requests otherwise or
     unless the Secretary, after investigation, notifies the
     taxpayer in writing that an additional inspection is
     necessary. [Sec. 7605(b).]

     In petitioners’ case, respondent has not violated either of

the two prohibitions contained in section 7605(b).   Petitioners

have not been subjected to an unnecessary examination or

investigation, nor have their books and records been reexamined

without written notice thereof.

     Nothing in the record suggests that petitioners were

subjected to an unnecessary examination.   Section 7605(b) was not

meant to restrict the scope of respondent's legitimate effort to
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protect the revenue.   See United States v. Powell, 379 U.S. 48,

54-56 (1964); Collins v. Commissioner, supra.      It is not to be

read so liberally as to defeat the powers granted to the IRS to

examine the correctness of taxpayers’ returns.      See De Masters v.

Arend, 313 F.2d 79, 86-87 (9th Cir. 1963).

     Petitioners did not include any of their Tier 2 railroad

retirement benefits in the gross income reported on their 1997

return, and they incorrectly included all of their Tier 1

benefits.   They now acknowledge that 85 percent of their Tier 1

benefits are includable in gross income, and they do not dispute

that their Tier 2 benefits are taxable in the same manner as

pension benefits.   Petitioners do not suggest that the IRS

properly accounted for these items in its previous adjustments to

their return.   Therefore, respondent did not subject petitioners

to an unnecessary examination.

     Further, nothing in the record suggests that respondent ever

examined or inspected petitioners’ books of account.      The IRS

first corrected a mathematical error made by petitioners on their

return.   In response to petitioners’ request for assistance, the

IRS then attempted to provide petitioners with a completed Form

1040 calculating their income tax liability.      It appears that the

IRS realized that the return it had completed was incorrect when

it matched petitioners’ return with information returns received

from the Railroad Retirement Board.      Based on this review, the
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IRS sent a notice proposing changes to petitioners’ return.

After petitioners objected to the proposed changes, the IRS

recognized it had failed to include $515 of the $1,250

petitioners now acknowledge is the portion of their Tier 1

benefit which is includable in their gross income.   The IRS

corrected this error and sent petitioners a new notice of

proposed changes.

     The IRS’ reconsideration of petitioners’ tax return and

accompanying schedules does not constitute an inspection of their

books of account.   See Curtis v. Commissioner, supra at 1351;

Benjamin v. Commissioner, 66 T.C. 1084, 1097 (1976), affd. 592

F.2d 1259 (5th Cir. 1979).   Likewise, respondent’s comparison of

petitioners’ return with the information returns of a third party

does not constitute an inspection of petitioners’ books of

account.   See Digby v. Commissioner, supra at 447-448.

     There is no evidence that petitioners’ books of account were

ever examined much less that they were examined for a second time

without the notice required by section 7605(b).   Thus, respondent

has not violated section 7605(b).

     We now turn to respondent’s computation of petitioners’

income tax liability.   Petitioners have conceded that $1,250

(85 percent) of their Tier 1 railroad retirement benefit is

includable in their 1997 gross income.   Petitioners do not

dispute that their Tier 2 and supplemental annuity benefits are
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taxable; however, they have challenged the amount of the

deficiency determined by respondent.     Therefore, an examination

of the taxable amount of petitioners’ Tier 2 and supplemental

annuity benefits is necessary.

     Tier 2 railroad retirement benefits are treated for tax

purposes as provided under an employer plan that meets the

requirements of section 401(a).    See sec. 72(r)(1).   Section

402(a) provides that such benefits are subject to tax to the

extent provided in section 72, which relates to annuities.

Section 72(a) generally requires any amount received as an

annuity to be included in gross income.    Section 72(d), however,

allows taxpayers to exclude the benefits which represent a return

of their own investment in their employer’s plan.    The method for

recovery of investment provided for in section 72(d)(1)(B)

excludes from gross income the amount of any monthly annuity

payment that does not exceed the amount obtained by dividing the

taxpayer’s contribution to the plan by the number of anticipated

payments.

     Section 1.72-15(b), Income Tax Regs., provides that section

72 does not apply to any amount received as an accident or health

benefit.    The pension benefits petitioners received as a result

of petitioner’s disability are accident or health benefits within

the meaning of section 1.72-15, Income Tax Regs.    See sec. 1.72-

15(a), Income Tax Regs.   If a plan provides that any portion of
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an accident or health benefit is attributable to the

contributions of the employee, then that portion of the benefit

is excludable from gross income under section 104(a)(3).    See

sec. 1.72-15(c)(1), Income Tax Regs.    If, however, the plan does

not expressly provide that the accident or health benefits are to

be provided with employee contributions and the portion of

employee contributions to be used for such purpose, it will be

presumed that none of the employee contributions is used to

provide such benefits.   See sec. 1.72-15(c)(2), Income Tax Regs.

     Absent disability, no railroad retirement benefits are paid

until the employee reaches age 62 or is at least 60 years old and

has completed 30 years of service.     See Railroad Retirement Act

of 1974, Pub. L. 93-445, sec. 2(a)(10), 88 Stat. 1312, currently

codified at 45 U.S.C. sec. 231(a)(1) (1994).    Petitioners have

not presented any evidence regarding Mr. Howle’s length of

service.   We thus conclude that Mr. Howle was not eligible for

retirement until he turned 62 on October 31, 1997, and that the

railroad retirement benefits petitioners received in 1997 were on

account of disability until such date.

     We have found no provision in the Railroad Retirement Act

expressly stating that disability benefits are to be provided

with employee contributions.   See 45 U.S.C. 231.   Therefore, all

of the Tier 2 benefits received by petitioners through

October 31, 1997, are to be included in gross income.
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     Petitioners, however, are entitled to exclude from gross

income the portion of Mr. Howle’s benefits received in November

and December that is attributable to his contributions.

Mr. Howle’s total employee contributions are $20,365.56.     The

number of anticipated monthly payments is 260.    See sec.

72(d)(1)(B).   Thus, petitioners may exclude $156.66 ($20,365.56

divided by 260 and multiplied by 2) of their Tier 2 benefits.

See id.   Because Mrs. Howle had no employee contributions, all of

her Tier 2 benefits are taxable.

     No part of an employee’s contribution is allocable to a

supplemental annuity.   See sec. 72(r)(2)(C).   Thus, the $516

Mr. Howle received as a supplemental annuity benefit is fully

includable in petitioners’ gross income.

     In view of the discrepancies among respondent’s computations

of petitioners’ income for 1997, we direct that a computation

under Rule 155 be made.

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                           Decision will be entered

                                    under Rule 155.
