                               141 T.C. No. 6



                      UNITED STATES TAX COURT



                  GLENN LEE SNOW, Petitioner v.
         COMMISSIONER OF INTERNAL REVENUE, Respondent*



     Docket No. 24783-09.                       Filed September 19, 2013.



            The issue before us concerns a dispute over the Rule 155
     computation of the “underpayment” for purposes of applying the
     I.R.C. sec. 6662(a) accuracy-related penalty. In Feller v.
     Commissioner, 135 T.C. 497 (2010), we held that sec. 1.6664-2(c)(1),
     Income Tax Regs., was valid. This Opinion follows Feller and
     applies and explains the other provisions of sec. 1.6664-2, Income
     Tax Regs., for determining the amount of an “underpayment” that
     were not addressed in Feller.

           Held: Respondent properly computed petitioner’s
     underpayment for purposes of I.R.C. sec. 6662(a).




     *
     This opinion supplements our prior Memorandum Opinion, Snow v.
Commissioner, T.C. Memo. 2013-114.
                                        -2-

      Glenn Lee Snow, pro se.

      Martha J. Weber, for respondent.



            SUPPLEMENTAL FINDINGS OF FACT AND OPINION


      RUWE, Judge: This matter is before the Court as a result of the parties’

dispute over the proper computations for entry of decision under Rule 1551 in

connection with our Memorandum Findings of Fact and Opinion in Snow v.

Commissioner, T.C. Memo. 2013-114. In Snow v. Commissioner, at *5, we held

that wages petitioner received as compensation for his work as a musician were

includable in his income. Additionally, we held that petitioner was liable for the

accuracy-related penalty under section 6662(a) due to negligence and a substantial

understatement of income tax. Id. at *6. We also imposed a penalty pursuant to

section 6673(a) of $8,000. Id. at *7.

      Respondent filed a computation for entry of decision under Rule 155 on

May 21, 2013. Respondent calculated that petitioner’s tax liability was $12,968,

his section 6662(a) penalty was $3,707, and his section 6673(a) penalty was


      1
       Unless otherwise indicated, all Rule references are to the Tax Court Rules
of Practice and Procedure, and all section references are to the Internal Revenue
Code (Code) in effect for the year at issue.
                                        -3-

$8,000. Petitioner filed an objection to respondent’s computation for entry of

decision under Rule 155 on June 11, 2013. Petitioner agreed that respondent

correctly calculated his tax liability of $12,968 in accordance with our opinion.

Petitioner did not dispute the amount of his section 6673(a) penalty. However,

petitioner disputed respondent’s calculation of his section 6662(a) penalty. The

issue for decision is whether respondent correctly calculated petitioner’s section

6662(a) penalty.

                               FINDINGS OF FACT

      On petitioner’s 2007 Form 1040, U.S. Individual Income Tax Return, he

reported $16,684.65 on line 64, “Federal income tax withheld from Forms W-2

and 1099”. Attached to his return were Forms 4852, Substitute for Form W-2,

Wage and Tax Statement, or Form 1099-R, Distributions From Pensions,

Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. On

the Forms 4852 petitioner reported that his various employers withheld

$11,122.52 of Federal income tax, $4,507.85 of Social Security tax, and $1,054.28

of Medicare tax, which totaled $16,684.65. Petitioner incorrectly reported his

Social Security tax and Medicare tax withholdings as Federal income tax

withholdings on line 64 of his Form 1040. As a result, petitioner incorrectly
                                        -4-

increased the amount he reported as his Federal income tax withholdings by

$5,562.13. Petitioner received a refund of $16,684.65.

      Respondent determined that only $11,117.65 of Federal income tax had

actually been withheld from petitioner’s compensation.2 Respondent subtracted

the $11,117.65 of Federal income tax withholdings from the $16,684.65 that

petitioner reported had been withheld to determine that petitioner had received a

$5,5673 refund for which there had not been any Federal income tax withholdings.

      In his computation for entry of decision respondent calculated that

petitioner’s tax liability is $12,968. In his calculation respondent added the

$5,567 to petitioner’s tax liability to determine a net underpayment of $18,535.

Respondent labeled the $5,567 as “Overstatement of prepayment credit: April 15,

2008”. Respondent then applied the 20% accuracy-related penalty under section

6662(a) to the $18,535 underpayment, calculating petitioner’s section 6662(a)

penalty to be $3,707.



      2
       The notice of deficiency gave petitioner credit for the amounts that third
party payors reported as Federal income tax withholdings to the Commissioner.
Petitioner did not address or raise an issue with the $5 difference between the
amount he reported as Federal income tax withholdings and the amount shown in
the notice of deficiency.
      3
      This amount consisted of $5,562.13 of Social Security and Medicare tax
withholdings and approximately $5 that had never been withheld.
                                         -5-

      Petitioner objected to respondent including the $5,567 in the calculation of

his underpayment.

                                       OPINION

      Section 6662(a) states “[i]f this section applies to any portion of an

underpayment of tax required to be shown on a return, there shall be added to the

tax an amount equal to 20 percent of the portion of the underpayment to which this

section applies.” Section 6662 applies to the portion of any underpayment which

is attributable to negligence or disregard of rules or regulations or any substantial

understatement of income tax. See sec. 6662(b)(1) and (2).

      Section 6664(a) provides the definition of the term “underpayment” for

purposes of section 6662.

             SEC. 6664(a). Underpayment.--For purposes of this part, the
      term “underpayment” means the amount by which any tax imposed
      by this title exceeds the excess of--

                    (1) the sum of--

                           (A) the amount shown as the tax by the taxpayer on
                    his return, plus

                           (B) amounts not so shown previously assessed (or
                    collected without assessment), over

                    (2) the amount of rebates made.
                                         -6-

      For purposes of paragraph (2), the term “rebate” means so much of an
      abatement, credit, refund, or other repayment, as was made on the
      ground that tax imposed was less than the excess of the amount
      specified in paragraph (1) over the rebates previously made.

      The Secretary has promulgated section 1.6664-2, Income Tax Regs., to help

clarify the term “underpayment” in section 6664. Section 1.6664-2(a), Income

Tax Regs., states:

               The definition of underpayment also may be expressed as--
                     Underpayment = W - (X + Y - Z), where
               W = the amount of income tax imposed;
               X = the amount shown as the tax by the taxpayer on his return;
               Y = amounts not so shown previously assessed (or collected
               without assessment); and
               Z = the amount of rebates made.

      As a result, in order to calculate a taxpayer’s underpayment we must

determine: (1) the amount of income tax imposed; (2) the amount of tax reported

on the return; (3) the amount of tax not shown on the return that was previously

assessed (or collected without assessment); and (4) the amount of rebates made.

1. The amount of tax imposed

      Section 1.6664-2(b), Income Tax Regs., provides that the amount of income

tax imposed is “the amount of tax imposed on the taxpayer under subtitle A for the

taxable year”.4 This amount is determined without regard to credits for tax

      4
          Federal income taxes are imposed under subtit. A of the Code. Social
                                                                       (continued...)
                                         -7-

withheld under section 31. Sec. 1.6664-2(b)(1), Income Tax Regs. The amount of

tax imposed on petitioner under subtitle A for the 2007 taxable year was $12,968.

2. The amount of tax shown on the return

      Section 6664(a)(1)(A) instructs us to determine the “amount shown as tax

by the taxpayer on his return”. Section 1.6664-2(c)(1), Income Tax Regs.,

provides:

      For purposes of paragraph (a) of this section, the amount shown as
      the tax by the taxpayer on his return is the tax liability shown by the
      taxpayer on his return, * * * except that it is reduced by the excess of--

             (i) The amounts shown by the taxpayer on his return as credits
      for tax withheld under section 31 (relating to tax withheld on wages)
      * * *, over

             (ii) The amounts actually withheld, actually paid as estimated
      tax, or actually paid with respect to a taxable year before the return is
      filed for such taxable year.

      In other words, section 1.6664-2(c)(1), Income Tax Regs., provides that for

purposes of paragraph (a) the amount of tax shown on petitioner’s return is

reduced by the excess of the amount shown on his return as a section 31 credit

(i.e., the amount of income tax withheld) over the amounts actually withheld.5 We


      4
       (...continued)
Security and Medicare taxes are imposed under subtit. C. See sec. 3101.
      5
          As previously explained sec. 1.6664-2(a), Income Tax Regs., provides the
                                                                       (continued...)
                                        -8-

have previously held that section 1.6664-2(c)(1), Income Tax Regs., is valid.

Feller v. Commissioner, 135 T.C. 497, 510-511 (2010). “The regulation extends

the meaning of ‘underpayment’ to include a taxpayer’s overstated credits for

withholding. Sec. 1.6664-2(g), Example (3), Income Tax Regs. Accordingly, if a

taxpayer overstates prepayment credits, such as the credit for wages withheld, the

overstatement decreases the amount of tax shown on the return and increases the

underpayment of tax.” Id. at 503.

      On his Federal income tax return petitioner reported that his tax liability

was zero. On line 64 of his return petitioner reported that $16,684.65 of Federal

income tax was withheld. This was the amount shown by petitioner as a credit for

tax withheld under section 31. However, the $16,684.65 that petitioner reported

as Federal income tax withheld erroneously included $5,562 of withheld Social

Security and Medicare taxes and $5 for which no taxes had been withheld.

Therefore, only $11,117.65 of Federal income tax was actually withheld.

      As a result, under section 1.6664-2(c)(1), Income Tax Regs., we reduce the

amount of petitioner’s tax shown on the return ($0) by the excess of the amount

shown on his return as withheld ($16,684.65) over the amount actually withheld


      5
      (...continued)
formula for computing the “underpayment”.
                                        -9-

($11,117.65). Therefore, in accordance with this regulation the amount shown as

the tax on petitioner’s return for purposes of the underpayment formula in section

1.6664-2(a), Income Tax Regs., was negative $5,567; i.e., $0 minus ($16,684.65

minus $11,117.65).

      In Feller v. Commissioner, 135 T.C. at 499-500, the taxpayer included

$135,000 of fictitious withholdings on his 1992 Federal income tax return in

which he claimed an $86,181 refund. Under section 1.6664-2(c)(1), Income Tax

Regs., the taxpayer in Feller appears to have had a negative tax shown on his

return. See id. at 529-530 (Gustafson, J., dissenting). Petitioner’s negative $5,567

“amount shown as tax” on his return appears to be similar to the negative “amount

shown as tax” in Feller. See id.

3. Amount of tax not shown on the return that was previously assessed (or
   collected without assessment)

      In Feller we found it unnecessary to address the meaning of section

6664(a)(1)(B) regarding amounts previously assessed (or collected without

assessment). Id. at 503. We think it necessary to discuss now.

      Section 1.6664-2(a)(1)(ii), Income Tax Regs., instructs us to determine the

“[a]mounts not so shown previously assessed (or collected without assessment) (as
                                      - 10 -

defined in paragraph (d) of this section)”. Section 1.6664-2(d), Income Tax Regs.,

provides:

      For purposes of paragraph (a) of this section, “amounts not so shown
      previously assessed” means only amounts assessed before the return
      is filed that were not shown on the return * * *. For purposes of
      paragraph (a) of this section, the amount “collected without
      assessment” is the amount by which the total of the credits allowable
      under section 31 * * * and other payments in satisfaction of tax
      liability made before the return is filed, exceed the tax shown on the
      return (provided such excess has not been refunded or allowed as a
      credit to the taxpayer). [Emphasis added.]

      No amounts were assessed by respondent before petitioner’s return was

filed. Petitioner had actual Federal income tax withholdings of $11,117.65. This

amount was remitted to respondent from third-party payors. This amount is a

section 31 credit. The $11,117.65 was remitted to respondent before petitioner’s

return was filed. Therefore, petitioner had $11,117.65 of credits allowable under

section 31, which might qualify as amounts “collected without assessment”.

However, petitioner received a refund of $16,684.65. Section 1.6664-2(d),

Income Tax Regs., provides that the excess of credits allowable over the tax

shown on the return is an amount “collected without assessment” if the excess has

not been refunded to the taxpayer.6 The excess of the amount of credits allowable

      6
      In sec. 1.6664-2(g), Examples (1) and (2), Income Tax Regs., the taxpayer
had $23,000 of claimed sec. 31 credits. The tax shown on the return was $18,000,
                                                                    (continued...)
                                      - 11 -

under section 31 ($11,117.65) over the tax shown on the return (negative $5,567)7

was refunded to petitioner ($11,117.65 + $5,567 = $16,684.65), therefore,

petitioner had $0 of collections without assessment. Therefore, under section

1.6664-2(a)(1)(ii), Income Tax Regs., petitioner had $0 amounts collected without

assessment.

4. The amounts of rebates made

      In Feller v. Commissioner, 135 T.C. at 503, we found it unnecessary to

address the meaning of rebates in section 6664(a)(2). We think it necessary to

discuss now.

      Section 1.6664-2(a)(2), Income Tax Regs., instructs us to determine the

“amount of rebates made (as defined in paragraph (e) of this section).” Section




      6
        (...continued)
and the taxpayer received a $5,000 refund. Additionally, “the taxpayer failed to
claim on the return a credit of $1,500 for income tax withheld. This $1,500
constitutes an amount collected without assessment as defined in paragraph (d) of
this section.” This is the case because the taxpayer had $24,500 of credits
allowable under sec. 31 ($23,000 claimed and $1,500 unclaimed). The $24,500 of
allowable credits exceeded the $18,000 tax shown on the return plus the $5,000 of
refunds by $1,500 ($24,500 - $18,000 - $5,000 = $1,500). Therefore, under sec.
1.6664-2(d), Income Tax Regs., the taxpayer had $1,500 of “[a]mounts not so
shown previously assessed (or collected without assessment).”
      7
      We use “the amount shown as the tax by the taxpayer on his return” as
determined under sec. 1.6664-2(c), Income Tax Regs.
                                       - 12 -

1.6664-2(e), Income Tax Regs., provides a formula to calculate rebates for

purposes of the underpayment formula in paragraph (a).

            (e). Rebates.--The term “rebate” means so much of an
      abatement credit, refund or other repayment, as was made on the
      ground that the tax imposed was less than the excess of--

             (1) The sum of--

             (i) The amount shown as the tax by the taxpayer on his return,
      plus
            (ii) Amounts not so shown previously assessed (or collected
      without assessment), over

             (2) Rebates previously made.[8]

      The term “rebate” means “so much of [i.e., that portion of] an abatement

credit, refund or other repayment, as was made on the ground [i.e., on the basis

of]” of the formula in section 6664(a) and section 1.6664-2(e), Income Tax Regs.9

      That formula starts with the “tax imposed” and factors in the amount shown

as the tax by the taxpayer on his return and amounts “previously” assessed or



      8
       This regulation tracks the statutory language of sec. 6664(a) which
provides: “For purposes of paragraph (2), the term ‘rebate’ means so much of an
abatement, credit, refund, or other repayment, as was made on the ground that tax
imposed was less than the excess of the amount specified in paragraph (1) over the
rebates previously made.”
      9
       An abatement, credit, or other repayment was not made to petitioner.
Therefore, in determining the amount of rebates we are concerned only with the
refund petitioner received.
                                        - 13 -

collected. See sec. 6664(a). Because the term “rebate” is computed with reference

to the taxpayer’s return for purposes of defining an underpayment of tax required

to be shown on a return, the term “rebates made” must refer to amounts claimed on

the taxpayer’s return. This is also consistent with the fact that the statutory and

regulatory formula for determining “rebates made” considers “rebates previously

made”.

      As we noted earlier, the tax imposed on petitioner for the 2007 taxable year

was $12,968.

      Section 1.6664-2(c)(1), Income Tax Regs., defines the amount shown as the

tax by the taxpayer on the return for purposes of paragraph (a). Section 1.6664-

2(a)(2), Income Tax Regs., provides that the term “amount of rebates” is defined

in paragraph (e). As a result, for purposes of computing rebates pursuant to

section 1.6664-2(e), Income Tax Regs., the term “amount shown as the tax by the

taxpayer on his return” is the amount that is determined under section 1.6664-2(c),

Income Tax Regs. Therefore, as previously explained the amount shown as the

tax by petitioner on his return is negative $5,567.

      Section 1.6664-2(d), Income Tax Regs., defines the amounts not so shown

previously assessed (or collected without assessment) for purposes of paragraph

(a). Paragraph (a) of the regulation provides that the amount of rebates is defined
                                       - 14 -

in paragraph (e). Thus, for purposes of computing rebates pursuant to section

1.6664-2(e), Income Tax Regs., the term “[a]mounts not so shown previously

assessed (or collected without assessment)” is the amount determined under

section 1.6664-2(d), Income Tax Regs. We have previously determined that

petitioner had $0 not so shown that was previously assessed or collected without

assessment under section 1.6664-2(d), Income Tax Regs. We will use this amount

($0) in calculating rebates under section 1.6664-2(e), Income Tax Regs.

      Section 1.6664-2(e)(2), Income Tax Regs., requires us to determine “rebates

previously made”. The regulation does not define rebates previously made. The

regulation provides that rebates previously made is a component of calculating

rebates. The use of the phrase “previously made” implies that there is a point in

time in which a “rebate” must be determined to have been made so that “rebates

previously made” were made prior to the “rebate”. The regulation does not

explicitly state the point in time.

      The logical cutoff point in time to determine a “rebate” would be at the time

the return that claims a refund is filed. Therefore, we would interpret “rebates

previously made” to mean rebates made before the return was filed. This

argument is supported by section 1.6664-2(d), Income Tax Regs., which provides

that the point in time to determine whether an amount has been assessed or
                                         - 15 -

collected without assessment is “before the return is filed”. If we look to when the

return was filed to determine whether an amount has been assessed or collected,

then it logically follows that we should also to look to the filing of the return to

determine whether a rebate was previously made.

       Furthermore, section 1.6664-2(e)(1)(i), Income Tax Regs., requires us to

look at the tax shown on the taxpayer’s return. The use of the return under section

1.6664-2(e)(1), Income Tax Regs., supports the argument that the point in time for

defining “rebates previously made” in section 1.6664-2(e)(2), Income Tax Regs.,

refers to rebates made prior to the filing of the taxpayer’s return.

       Although the regulation does not define “rebates previously made” a

commonsense interpretation would define this term to mean rebates made before

the return is filed.

       No rebates were made to petitioner before he filed his return.

       Since the tax imposed ($12,968) exceeded the amount shown as the tax on

petitioner’s return (negative $5,567) plus amounts not so shown that were

previously assessed or collected ($0) over rebates previously made ($0), then the

amounts of rebates made under section 1.6664-2(e), Income Tax Regs., is $0.
                                       - 16 -

5. The amount of the underpayment

      Section 1.6664-2(a), Income Tax Regs., provides that the amount of the

underpayment is equal to the amount of income tax imposed ($12,968) minus the

amount shown as tax by petitioner on his return (negative $5,567) minus amounts

of tax not shown on the return that were previously assessed or collected ($0) plus

the amounts of rebates made ($0). As a result, petitioner’s underpayment for

purposes of section 6664(a) was $18,535 ($12,968 plus $5,56710 minus $0 plus

$0). Accordingly, under section 6662(a) petitioner is liable for an accuracy-

related penalty of $3,707 (20% of $18,535).

      Our application of section 1.6664-2, Income Tax Regs., is consistent with

Feller and produces a result that bases the section 6662 penalty on an

“underpayment” amount that represents the amount of revenue that the

Government was deprived of as a result of amounts actually shown on petitioner’s

return. Petitioner did not pay his $12,968 tax liability and received a refund of

$16,684.65 that included $5,567 of reported withheld income tax that was never

actually withheld. As a result, $18,535 ($12,968 + $5,567) was the actual amount

of money that petitioner deprived the Government of. The underpayment as


      10
        Subtracting a negative subtrahend from a positive minuend results in
adding the absolute value of the subtrahend to the minuend.
                                       - 17 -

defined in section 1.6664-2(a), Income Tax Regs., is equal to the true amount the

Government was deprived of as a result of petitioner’s return.

Conclusion

      We hold that respondent correctly calculated petitioner’s section 6662(a)

penalty of $3,707.

      To reflect the foregoing,


                                                      An appropriate order will

                                                be issued, and decision will be

                                                entered for respondent.
