                   T.C. Summary Opinion 2011-1



                        UNITED STATES TAX COURT



               BEVERLY BERNICE BANG, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 9371-07S.                  Filed January 4, 2011.



     Kent Vriezelaar, for petitioner.

     Michael W. Bitner, for respondent.



     MORRISON, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.1    Under section 7463(b), the

decision to be entered is not reviewable by any other court,



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Bang resided in Iowa at the time her petition was filed.
                                - 2 -

and this opinion shall not be treated as precedent for any other

case.    Pursuant to section 6330(d), petitioner Beverly Bang seeks

review of the determination of the IRS Office of Appeals to

sustain a proposed levy.   Respondent, whom we refer to here as

the IRS, has filed a motion for summary judgment.

     The proposed levy seeks to collect interest and penalties

that arose from Bang’s failure to timely pay $2,636 of income tax

for her 1983 tax year.   The $2,636 payment, which was due on

April 15, 1984, was made on May 12, 2006.   The amount of the

proposed levy is $32,343.46.   The $32,343.46 comprises four

components:

     •underpayment interest under section 6601(a); i.e.
     $21,553.52 in interest on the $2,636 underpayment from the
     day the payment was due, April 15, 1984, until the date the
     $2,636 was assessed by the IRS, March 27, 2006 (the
     $21,553.52 does not include the additional interest that
     continued to accrue until the date Bang paid the $2,636 on
     May 12, 2006);2

     •tax-motivated transaction interest under former section
     6621(d)); i.e. the $21,553.52 computed above used an
     interest rate of 120 percent of the normal rate because the
     IRS had determined that the $2,636 underpayment was
     attributable to a tax-motivated transaction;3



     2
      Sec. 6601(a) requires that, if a taxpayer underpays tax,
the taxpayer must pay interest on the unpaid tax from the date
the tax is due until the date the tax is paid. The interest rate
is set for each calendar quarter.
     3
      Former sec. 6621(d) provided that if any underpayment of
tax was attributable to a “tax-motivated transaction” the
interest rate on that payment would be 20 percent more than the
ordinary interest rates on underpayments. See Deficit Reduction
Act of 1984, Pub. L. 98-369, sec. 144(a), 98 Stat. 682.
                              - 3 -

     •the 50-percent-of-interest negligence penalty under former
     section 6653(a)(2); i.e. $10,776.76, which was 50 percent of
     $21,553.52, reflecting the determination that the $2,636
     underpayment was due to negligence;4 and

     •a failure-to-pay-tax penalty; i.e. $13.18 assessed on June
     12, 2006.5

The levy did not include the $2,636 in additional income tax for

the 1983 year and did not include a $131.80 section 6653(a)(1) 5-

percent negligence penalty for underpaying her 1983 tax.6   Bang

had already paid these amounts.   At the Appeals Office, Bang was


     4
      Former sec. 6653(a)(2) (as amended by the Economic Recovery
Tax Act of 1981, sec. 722(b)(1), Pub. L. 97-34, 95 Stat. 342)
provided that if any underpayment of tax was attributable to
negligence, there would be an addition to tax equal to 50 percent
of the interest payable under sec. 6601 on the portion of the
underpayment due to negligence. The calculation of the 50-
percent addition to tax was made when the underlying tax was
either assessed or paid. Id.

     In 1986, former sec. 6653(a)(2) was renumbered as former
sec. 6653(a)(1)(B). Tax Reform Act of 1986 (TRA 1986), Pub. L.
99-514, sec. 1503(a), 100 Stat. 2742 (effective for returns the
due date for which (determined without regard to extension) is
after Dec. 31, 1986, id. sec. 1503(e), 100 Stat. 2743).
     5
      There are two failure-to-pay penalties in the Code. Sec.
6651(a)(3) provides that a taxpayer who underreports the tax owed
on the return and does not pay this underreported amount within
21 days from the date the IRS demands payment of the amount must
pay an addition to tax equal to 0.5 percent of the unpaid amount
per month, not exceeding 25 percent in the aggregate. Sec.
6651(a)(2) provides that a taxpayer who does not pay the tax
reported on a return must pay an addition to tax equal to 0.5
percent per month of the amount not paid, not exceeding 25
percent in the aggregate.
     6
      In 1986, former sec. 6653(a)(1) was renumbered as former
sec. 6653(a)(1)(A). TRA 1986, sec. 1503(a) (effective for
returns the due date for which (determined without regard to
extension) is after Dec. 31, 1986, id. sec. 1503(e)).
                                  - 4 -

not entitled to challenge her liability for, or the collection

of, these two amounts of $2,636 and $131.80.          These two amounts

are therefore not before the Tax Court.

                               Background

1.   The Contra Costa Partnership

     Bang was a partner in a partnership called Contra Costa

Jojoba Research Partners.      This partnership, which we shall refer

to as the Contra Costa partnership, filed a partnership tax

return for its 1983 tax year on which it deducted $437,500 in

research and experimental expenditures under section 174.            On her

own 1983 tax return, Bang reported a deduction of $12,500 for her

share of the $437,500 deduction that the partnership had claimed.

The 1983 tax return was due on April 15, 1984.          See sec. 6072.

     The IRS issued a Notice of Final Partnership Administrative

Adjustment (FPAA) regarding the Contra Costa partnership on April

12, 1989.   The FPAA determined that the $437,500 deduction for

research and experimental expenditure was erroneous and that the

appropriate deduction was zero.       In explaining the reasons for

the adjustment the FPAA stated:

     We have disallowed the amount above because it has been determined
     that there is insufficient evidence to demonstrate that the
     expenses listed above qualify as research and development
     expenditures. Further, it has been determined that a portion of
     the research and experimental expenditures listed in the return
     may be for items not associated with research and experimental
     costs.

The FPAA did not specifically mention penalties, except for the

following assertion:
                                   - 5 -
     THE FOLLOWING PENALTIES ARE APPLICABLE TO THE PARTNER/SHAREHOLDER

     Section 6661[7]

     On July 13, 1989, the Contra Costa partners challenged the

FPAA determination in a partnership-level proceeding before the

Tax Court, Contra Costa Jojoba Research Partners v. Commissioner,

docket No. 17323-89.8      On January 28, 1994, the parties to docket

No. 17323-89 stipulated to be bound by the legal theories and

findings of fact that would determine the eventual outcome of

partnership adjustments in Utah Jojoba I Research v.

Commissioner, Tax Court docket No. 7619-90.9           The stipulation

said:

     With respect to all adjustments in respondent’s Notice of Final
     Partnership Administrative Adjustment relating to Contra Costa
     Research Partners, a jojoba partnership, the parties stipulate to
     the following terms:

     1.     THE ABOVE ADJUSTMENTS[10] ARE THE ONLY ISSUES IN THE CASE.
            A.    UPON RESOLUTION OF THESE ISSUES, A PROPOSED DECISION
                  WILL BE PREPARED BY RESPONDENT’S COUNSEL.



     7
        During the tax year at issue, sec. 6661(a) provided:

           SEC. 6661(a). Addition to    Tax.--If there is a substantial
     understatement of income tax for   any taxable year, there shall be
     added to the tax an amount equal   to 10 percent of the amount of
     any underpayment attributable to   such understatement.

     8
      It was the tax matters partner who filed the petition in
the partnership-level proceedings, but the law considers all
partners to be parties to the proceeding. See sec. 6226(c)(1).
     9
      Bang did not sign the stipulation to be bound, but the tax
matters partner signed it, and he was authorized to sign on
behalf of all of the Contra Costa partners. See sec. 6224(c)(1),
(3).
     10
      The phrase “Above Adjustments” refers to the adjustments
in the IRS’s FPAA issued to the Contra Costa partnership.
                                       - 6 -
     2.       The above adjustments, as specified in the preamble, shall
              be redetermined by application of the same legal theories as
              that which resolved the same partnership item adjustments
              with respect to the following partnership:
              Name of Case:   Utah Jojoba I Research
              Tax Court Docket No.:   7619-90
              (hereinafter the CONTROLLING CASE)

     3.       All issues involving the above adjustments shall be resolved
              as if the partnership in this case was the same as the
              partnership in the CONTROLLING CASE;

              A.   If the Court makes findings of underlying facts with
                   respect to tax motivated transactions, a valuation
                   overstatement, or other elements applicable to a
                   determination of additions to tax and/or section
                   6621(c)[11] interest, which are attributable to the
                   above-designated partnership item adjustments, the
                   findings of fact in the CONTROLLING CASE shall apply
                   to the partners in Contra Costa Jojoba Research
                   Partners as if the partnership in this case was the
                   same as the partnership in the CONTROLLING CASE;
                   * * *.

          *        *       *       *           *     *        *

     9.       This stipulation applies to all partners in Contra Costa
              Jojoba Research Partners who were parties to the action
              within the meaning of I.R.C. § 6226(c) and (d) on the date
              the stipulation is executed by the respondent and whose
              partnership items have not subsequently converted to
              nonpartnership items pursuant to I.R.C. § 6231(b) prior to
              the entry of the decision in this case; * * * .

     In 1998, the Tax Court issued an opinion in Utah Jojoba I

Research v. Commissioner, T.C. Memo. 1998-6.             The Court held that

the Utah Jojoba I Research partnership was “not entitled to a

section 174(a) research and experimental expense deduction for

1982 because it did not directly or indirectly engage in research

or experimentation.”        Id.   The Court in Utah Jojoba I did not



     11
      Former sec. 6621(d), Deficit Reduction Act of 1984, Pub.
L. 98-369, sec. 144(a), 98 Stat. 682, as in effect for the 1983
year, imposed an increased interest rate on underpayments due to
tax-motivated transactions. The provision was later renumbered
sec. 6621(c) pursuant to TRA 1986 sec. 1511(c)(1), 100 Stat.
2744.
                                 - 7 -

make any finding or holding that expressly referred to penalties

or interest.12

     On April 11, 2005, the Tax Court issued an order and

decision in Contra Costa Jojoba Research Partners v.

Commissioner, docket No. 17323-89 (Contra Costa).      The order and

decision sustained the partnership item adjustments that the IRS

had determined in the Contra Costa FPAA.13

2.   The Notice of Deficiency:    March 13, 2006

     The IRS issued a deficiency notice to Bang on March 13,

2006.     Attached to the deficiency notice was a Form 4549-A,

Income Tax Discrepancy Adjustments.      We consider Form 4549-A to

be part of the deficiency notice issued to Bang.     Also attached

to the deficiency notice was a Form 4089-B, Notice of Deficiency

--Waiver.     We refer to the Form 4089-B as the waiver form.

     The first page of the deficiency notice itself (not the Form

4549-A or the Form 4089-B) contained the heading “Deficiency

(Increase in tax)”.     Under that heading, the following text


     12
      However, as we note later, the Utah Jojoba I opinion
established that the partners’ underpayment of tax was
attributable to a tax-motivated transaction.
     13
      Before the order and decision in the Contra Costa case was
entered, the Contra Costa partners asked the Court to relieve
them of their liability for accrued interest and penalties, in
part, because of the length of time the Contra Costa case was
pending. The Court rejected these arguments. It reasoned that
the accrued interest and penalties were a type of “affected item”
and thus were not properly before the Court in a partnership-
level proceeding.
                                  - 8 -

appeared:

     IRC 6653(a)(1)(A)[should be 6653(a)(1)]: $131.80
     IRC 6653(a)(1)(B)[should be 6653(a)(2)]: 50% of interest on $2,636.00.

The notice stated that

     We have determined that you owe additional tax or other amount(s),
     or both, for the tax years(s) identified above. This letter is
     your NOTICE OF DEFICIENCY, as required by law. The enclosed
     statement shows how we figured the deficiency.

The notice continued:

     If you want to contest this determination in court before making
     any payment, you have 90 days from the date of this letter * * *
     to file a petition with the United States Tax court for a
     redetermination of the deficiency * * * .

The notice added:

     If you decide not to file a petition with the Tax Court, please
     sign the enclosed waiver form and return it to us at the IRS
     address on the top of the first page of this letter. This will
     permit us to assess the deficiency quickly and can help limit the
     accumulation of interest.

     If you decide not to sign and return the waiver, and you do not
     file a petition with the Tax Court within the time limit, the law
     requires us to assess and bill you for the deficiency after 90
     days from the date of this letter * * * .

The section 6653(a)(1) and (2) penalties were discussed on a

“Continuation Sheet” to the notice.        The “Continuation Sheet”

said:

     It is determined that all or part of the underpayment of tax for
     the taxable year(s) is due to negligence or intentional disregard
     of rules and regulations. This penalty is five (5) percent of the
     full underpayment of tax (except that portion of the underpayment
     which is due to fraud) plus fifty (50) percent of the interest due
     on the part of the underpayment that is due to negligence. The
     penalty is figured on the earlier of the date of assessment or the
     date the tax was paid. If the return was not timely filed, the
     penalty is asserted on the full amount of the corrected tax
     instead of the underpayment of tax.
                                  - 9 -

     We now turn to Form 4549-A.       The Form 4549-A contained the

following chart showing the calculation of the $2,636 and

penalties:

     1. Adjustments to Income
           a. Ordinary Loss                                  12,500.00
     2. Total Adjustments                                    12,500.00
     3. Taxable Income Per Return or as Previously Adjusted   9,959.00
     4. Corrected Taxable Income                             22,459.00
           Tax Method                                        TAX TABLE
           Filing Status                                        Single
     5. Tax                                                   4,062.00
     6. Additional Taxes/Alternative Minimum                   [blank]
     7. Corrected Tax Liability                               4,062.00
     8. Less Credits
           a. Investment Credit                                 187.00
     9. Balance (Line 7 less total of Lines 8a thru 8d)       3,875.00
     10. Plus Other Taxes
           a. Alternative Minimum Tax                             0.00
     11. Total Corrected Tax Liability (Line 9 plus Lines 10a thru 10d)
                                                              3,875.00
     12. Total Tax Shown on Return or as Previously Adjusted 1,239.00
     13. Adjustments to a, b, c
     14. Deficiency- Increase in Tax or (Overassessment - Decrease in
       Tax) (Line 11 less Line 12 adjusted by Lines 13a thru 13d)
                                                              2,636.00
     15. Adjustments to Prepayment Credits-Increase (Decrease)
     16. Balance Due or (Overpayment) - (Line 14 adjusted by Line 15)
        (Excluding interest and penalties)                    2,636.00
     17. Penalties/Code Sections
         a. Negligence - IRC 6653(a)                            131.80
     18. Total Penalties                                        131.80

     Underreporter attributable to negligence: (1981-1987) A tax
     addition of 50 percent of the interest due on the underpayment
     will accrue until it is paid or assessed.                    0.00

     Underreporter attributable to fraud: (1981-1987) A tax addition of
     50 percent of interest due on the underpayment will accrue until
     it is paid or assessed.                                      0.00

     Underreporter attributable to Tax Motivated Transactions (TMT).
     Interest will accrue and be assessed at 120% of underpayment rate
     in accordance with IRC 6621(c).[14]                      2,636.00

After this, there appeared a section entitled “Summary of Taxes,

Penalties, and Interest”.      This is the text of that section:


     14
          See supra note 11.
                                     - 10 -

     a.    Balance due or (Overpayment) Taxes - (Line 16, Page 1) 2,636.00
     b.    Penalties (Line 18) - computed to 2/27/2006              131.80
     c.    Interest (IRC §6601) - computed to 3/29/2006               0.00
     d.    TMT interest - computed to 3/29/2006 (on TMT underpayment) 0.00
     e.    Amount due or refund - (sum of Lines a, b, c and d)    2,767.80

Beneath the Summary of Taxes, Penalties, and Interest was a box

entitled “Other Information”.          This box contained the following

discussion of the increased interest rate due to tax-motivated

transactions:

     The adjustment on this report is based on the changes made to
     Contra Costa Jojoba Research Partners EIN#XX-XXXXXXX per the Tax
     Court Decision.

     All or part of the underpayment of tax you were required to show
     on your return is a substantial understatement attributable to Tax
     Motivated Transactions, as defined by Section 6621(c)(3)[15] of the
     Internal Revenue Code. Accordingly, the annual interest rate
     payable on your income taxes on this understatement is 120 percent
     of the adjusted rate established under Code Section 6621(b).

     The Tax Deficiency and the Tax Motivated Transaction (TMT)
     Interest have been processed against your account, based on the
     Partnership examination results, and will be reflected on the
     Statement of Account.

     The Notice of Deficiency reflects only the penalty portion of this
     examination report * * *.

     If you require any further information, please contact your Tax
     Matters Partner.

On the next page, a section entitled “Explanation of Items”

discussed the negligence penalties under section 6653(a):

     Since all or part of the underpayment of tax you were required to
     show on your return is due to negligence or intentional disregard
     of rules and regulations, you are being charged a penalty under
     Section 6653(a) of the Internal Revenue Code. This penalty is 5
     percent of the full underpayment of tax plus 50 percent of the
     interest due on the part of the underpayment that is due to
     negligence. We figured the penalty as of the date of assessment
     or the date the tax was paid, whichever came first.




     15
          See supra note 14.
                               - 11 -

3.   IRS Assessed the Increase in Bang’s Tax Resulting From the
     Disallowance of the Contra Costa Deduction and Underpayment
     Interest: March 27, 2006

     On March 27, 2006, after the mailing of the deficiency

notice, the IRS assessed the $2,636 (the tax on the increased

income attributable to Bang’s share of the research and

experimental expenditures disallowed at the partnership level),

and the accumulated interest of $21,553.52 pursuant to section

6601 (underpayment interest) and former section 6621(d) (20-

percent increase in interest rate for tax-motivated transactions)

on the $2,636.16   The $21,553.52 represented the interest that

accumulated from the date the tax was due, April 15, 1984, until

the date of assessment, March 27, 2006.   Interest continued to

accrue after assessment until the date the tax was paid.   See

sec. 6601(a).   The interest charge included the 20-percent

additional interest for tax-motivated transactions, as explained

above.




     16
      As discussed below, assessment of the $2,636 did not
violate the restriction on assessments contained in sec. 6213(a)
because the $2,636 was a type of computational adjustment that
derived entirely from a concluded partnership proceeding and was
not subject to deficiency procedures. Interest on the $2,636
could also be assessed at the same time because sec. 6601(e)
provides that interest is not subject to deficiency procedures.
See Field v. United States, 381 F.3d 109, 113 (2d Cir. 2004);
Smith v. Commissioner, T.C. Memo. 2009-33. Only the 5-percent
and 50-percent-of-interest penalties determined were subject to
the deficiency procedures of secs. 6212 and 6213(a).
                                   - 12 -

4.   Bang Waived Restrictions on Assessment (May 8, 2006) and
     Made Payments (May 12, 2006)

     Bang did not file a petition with this Court in response to

the deficiency notice.        Instead, on May 8, 2006, she executed the

waiver form that had been attached to the deficiency notice.              The

waiver form listed the following under “Deficiency--Increase in

Tax and Penalties”:

     Tax Year Ended:                  December 31, 1983

     Deficiency:                                [blank]

     Increase in tax                            [blank]

     Penalties

          IRC 6653(a)(1)(A)                      131.80

          IRC 6653(a)(1)(B)[17]             See *a below

      *a 50% of interest on                    2,636.00

Above Bang’s signature, the waiver form reads:

     See the attached explanation for the above deficiencies.

     I consent to the immediate assessment and collection of the
     deficiencies (increase in tax and penalties) shown above, plus any
     interest provided by law.

     Bang sent a payment of $2,767.80 to the IRS (the sum of

$2,636 and $131.80).     The payment was received by the IRS on May

12, 2006, and applied to the account that the IRS used to keep

track of her 1983 tax year.18

     17
      The Internal Revenue Code references should have been to
sec. 6653(a)(1) and sec. 6653(a)(2), not sec. 6653(a)(1)(A) and
sec. 6653(a)(1)(B).
     18
      Bang would later claim in a letter attached to her Tax
Court petition that she consulted with her accountant before
making this payment and that “[my accountant] and I were totally
                                                   (continued...)
                             - 13 -

5.   Assessment of the Two Negligence Penalties and Failure-To-
     Pay Penalty: June 12, 2006

     On June 12, 2006, after Bang’s execution of the waiver form,

the IRS assessed the 5-percent negligence penalty of $131.80 (5

percent of $2,636), the 50-percent-of-interest negligence penalty

of $10,776.76 (50 percent of the $21,553.52 for tax-motivated

transaction and underpayment interest), and a failure-to-pay-tax

penalty of $13.18 (the latter of which was not mentioned in the

notice).19

     The $10,776.76 amount was 50 percent of the $21,553.52

interest charge on the $2,636 underpayment.   Calculating the 50-

percent-of-interest penalty in this way assumed that the entire

$2,636 underpayment was attributable to negligence.   See former

sec. 6653(a)(2) (penalty is 50 percent of interest on portion of

underpayment attributable to negligence).

     The record does not indicate whether the failure-to-pay-tax

penalty was the penalty imposed by section 6651(a)(2) (failure

to timely pay tax shown on return), or the penalty imposed under

6651(a)(3) (failure to timely pay tax that should have been shown



     18
      (...continued)
unaware that by paying this, I somehow agreed to any additional
penalties and interest.”
     19
      The deficiency, underpayment interest, and tax-motivated
transaction interest were assessed on Mar. 27, 2006, after the
mailing of the notice but before the execution of the waiver
form, as noted above. These items were thus excluded from the
June 12, 2006, assessment.
                                - 14 -

on return).    We do not have any information about how the $13.18

was calculated, although we observe that $13.18 is 0.5 percent of

$2,636.

6.   Bang’s Failure To File Tax Court Petition:    June 12, 2006

     June 12, 2006, was also the last day for Bang to file a

petition with the Court.    She did not file a petition.

7.   Final Notice of Intent To Levy:     August 23, 2006

     The IRS then issued to Bang a Final Notice of Intent to Levy

and Notice of Your Right to a Hearing on August 23, 2006,

notifying Bang that the IRS intended to levy to collect

$32,343.46.    Although the final notice of intent to levy does not

identify the components of the $32,343.46, we can tell from other

parts of the record that the $32,343.46 is composed of the

following amounts:

          Underpayment interest and tax-          $21,553.52
            motivated transaction interest

          50-percent-of-interest negligence        10,776.76
            penalty
          Failure-to-pay-tax penalty                   13.18
            Total                                  32,343.46

The $32,343.46 assessed therefore does not include the $2,636 and

the 5-percent negligence penalty of $131.80, which Bang had

already paid, as noted above.
                                  - 15 -

8.   Collection Due Process Hearing

     Bang’s accountant filed a Form 12153, Request for a

Collection Due Process Hearing, on her behalf, together with a

letter stating that

     it seems very unreasonable that [Bang] should be assessed, [sic]
     negligence, penalties and interest on deficiencies dating back to
     1983 and 1985. She promptly paid the tax deficiency in 2006 when
     notices were brought to her attention. We are requesting all
     penalties and interest be removed.

He also argued that Bang made her investment “in good faith

expecting a reasonable return.”

     The telephone conference occurred on January 25, 2007.

According to the Appeals officer’s notes of the conference,

Bang’s accountant

     confirmed the TP’s [taxpayer’s] primary issue is the liability.
     He firmly believes the TP [taxpayer] should not have been assessed
     the negligence penalty.

In his declaration accompanying the IRS’s motion for summary

judgment, the Appeals officer states that during the telephone

conference, the accountant “stated that the purpose behind the

filing of a Request for a Collection Due Process Hearing was to

challenge the merits underlying * * * Bang’s 1983 income tax

liability; [sic] including the negligence addition to tax.”20

The notes and the declaration say that Bang’s accountant offered

no collection alternatives.      The Appeals officer informed the



     20
      The Appeals officer does not clarify whether he was
referring to both the 5-percent and 50-percent-of-interest
negligence penalties or just one of the two.
                                      - 16 -

accountant that he could not raise objections to the negligence

penalty at a collection due process hearing because Bang had

received the deficiency notice and signed the waiver form.                 The

notes said:

       I explained that under IRS 6330(c)(2)(B) the taxpayer cannot raise
       liability in a Collection Due Process (CDP) Hearing if they have
       had a prior opportunity. In this case the taxpayer both received
       a SND and signed a F.4089-B agreement.

The notes stated that Bang’s accountant said that he was not

aware of such a rule, nor was he aware that his client had signed

a waiver form.

       On March 27, 2007, the IRS Appeals Office issued a Notice of

Determination Concerning Collection Action(s) Under Section 6320

and/or 6330 that sustained the proposed levy.              The determination

recognized that Bang’s request for a hearing contested her

liability for “assessed negligence, penalties, and interest.”

But the determination stated:

       Taxpayer was not able to dispute liability within the hearing.

And:

       Taxpayer did raise liability as an issue. Taxpayer was not
       allowed to raise liability because she had a prior opportunity to
       dispute the liability.

       *       *        *         *            *       *          *

       The taxpayer’s representative, Randall Kramer, stated the primary
       issue is the liability. He firmly believes the taxpayer should
       not have been assessed the negligence penalty. Settlement Officer
       Bruce Stork explained that under IRC 6330(c)(2)(B) the taxpayer
       cannot raise liability in a Collection Due Process (CDP) Hearing
       if they have had a prior opportunity. In this case the taxpayer
       both received a Statutory Notice of Deficiency and signed a
       F.4089-B agreement. The Audit Reconsideration Process was
       explained and recommended as the appropriate venue to get the
       taxpayer’s issue resolved.
                                    - 17 -
       Taxpayer presented no other issues.

Bang timely challenged the levy by petition to this Court on

April 27, 2007.      In a letter attached to her petition, she stated

that she felt it was “unreasonable” that she be “assessed a

penalty and 20 years [sic] worth of accrued interest” for an

investment she made with “her trusted investment advisor of many

years” with no tax avoidance purpose.

       The extensive procedural history of the Contra Costa

partners’ case and this case is summarized in the chart below.

                  Procedural History of Cases Against
                     Contra Costa Partners and Bang
  Date           Action                        Effect
Apr.         IRS issues        •IRS reduces $437,500 in deductions
12,          FPAA for          claimed by partnership to $0
1989         Contra Costa
             partnership
July         Contra Costa      •Agreement requires that the
13,          partners and      resolution of the partnership items in
1989         IRS agree to      Contra Costa partnership case would
             be bound by       follow the determinations made by the
             Utah Jojoba I     Tax Court in the partnership case Utah
             Research v.       Jojoba I Research v. Commissioner,
             Commissioner,     docket No. 7619-90
             docket No.
             7619-90
Jan. 5,      Tax Court         •Tax Court disallows the deductions
1998         issues            claimed by Utah Jojoba I partnership
             opinion in
             Utah Jojoba I
             Research v.
             Commissioner,
             T.C. Memo.
             1998-6
                              - 18 -

Apr.      Tax Court       •Tax Court upholds all adjustments in
11,       decides         the FPAA issued to Contra Costa
2005      Contra Costa    partnership
          case
March     IRS issues      •Calculations assume that Bang owes
16,       deficiency      $2,636 more tax than she reported in
2006      notice to       connection with the disallowed
          Bang            partnership loss.
                          •Bang owes $131.80, or 5-percent of
                          $2,636, for the 5-percent negligence
                          penalty.
                          •Bang owes 50 percent of interest on
                          $2,636 as the 50-percent negligence
                          penalty, calculated using the interest
                          accumulated from the date the tax was
                          due to the earlier of the date the tax
                          is assessed or the date the tax is
                          paid.
March     Assessment      Assessment includes:
27,       against Bang    •$2,636 increase in Bang’s tax
2006                      liability because of disallowance of
                          her share of the disallowed Contra
                          Costa deductions
                          •$21,553.52 in underpayment interest
                          on $2,636 (calculated at the 120-
                          percent rate because of the tax-
                          motivated transaction)
May 8,    Bang consents   Consent to assessment includes:
2006      to immediate    •$131.80 (5-percent negligence
          assessment      penalty)
                          •50 percent of interest on $2,636
May 12,   Bang’s          Payment includes:
2006      payment to      •$2,636
          the IRS is      •$131.80 (5-percent negligence
          received        penalty)

June      IRS assesses    Assessment includes:
12,       penalties       •$131.80 (5-percent negligence
2006                      penalty)
                          •$10,776.76 (50-percent negligence
                          penalty)
                          •$13.18 failure-to-pay-tax penalty
                                  - 19 -

June        Last day for    Amounts Bang could challenge by filing
12,         Bang to         a petition:
2006        challenge       •$131.80 (5-percent negligence
            deficiency      penalty)
            notice by       •$10,776.76 (50-percent negligence
            filing a Tax    penalty)
            Court
            petition
August      IRS issues      Final notice of intent to levy
23,         final notice    includes:
2006        of intent to    •$10,776.76 (50-percent negligence
            levy            penalty)
                            •$21,553.52 in underpayment interest
                            on $2,636 (calculated at the 120-
                            percent rate because of the tax-
                            motivated transaction)

March       IRS issues      •Sustains levy
27,         notice of
2007        determination

                              Discussion

1.     Arguments of the Parties

       The IRS asserts in its motion for summary judgment that

Bang’s receipt of the deficiency notice precludes her from

challenging the 50-percent-of-interest negligence penalty.      The

IRS also argues that Bang’s complaint over the unreasonableness

of the accrual of interest was not made with sufficient

specificity at the hearing to be considered a claim for interest

abatement under section 6404(e).      According to the IRS, Bang

failed to specify grounds on which an interest abatement claim

could be granted, such as a specific error or delay caused by a

ministerial act of the IRS.    The IRS also argues that even if the

Court could consider whether Bang is entitled to abatement of
                                  - 20 -

interest under section 6404(e), the Court should sustain the

Appeals officer’s decision not to abate interest.

     With respect to the amount of its assessment of tax-

motivated transaction interest, the IRS claims that the

stipulation to be bound and the findings of fact in Utah Jojoba I

are sufficient “to establish that petitioner’s involvement in

Contra Costa Jojoba Research Partners was a ‘tax motivated

transaction’”, [and] that “petitioner’s underpayment was

attributable to the tax motivated transactions of the Contra

Costa Jojoba Research Partners partnership” and that the

underpayment is substantial.

     The IRS did not make any arguments in its submission to this

Court regarding the failure-to-pay-tax-penalty assessed.

     Bang’s response to the IRS’s motion for summary judgment was

as follows:

     Petitioner objects to and resists Respondent’s Motion for Summary
     Judgment on the following grounds:

     1.    The calculation and assessment of Restricted Interest and
     the Negligence Penalty are both incorrectly determined and exceed
     the maximum amount allowable by law.

     2.   The signature of Petitioner on the Notice of
     Deficiency/Waiver dated May 8, 2006 was improperly obtained
     because the listing of income tax discrepancy adjustments did not
     include the Restricted Interest or the Negligence Penalty amounts
     causing the taxpayer to believe that the amount she was agreeing
     to was only $2,767.80, rather than the additional amount of
     $32,000.00 plus dollars. Therefore it should be thrown out and
     the taxpayer allowed to contest the entire balance assessed.

     THEREFORE, Petitioner respectfully requests that Respondent’s
     Motion for Summary Judgment be denied and for such other and
     further relief as the Court deems just.
                              - 21 -

We interpret Bang’s response as a challenge to her liability for

the underpayment interest, the increased rate of interest for a

tax-motivated transaction, the 50-percent-of-interest negligence

penalty, and the failure-to-pay-tax penalty, but not her

liability for the $2,636 and the 5-percent negligence penalty.

2.   Standard of Review and Issues To Be Decided

     A motion for summary judgment will be granted if the

pleadings, answers to interrogatories, depositions, admissions,

and other acceptable materials, together with any affidavits,

show that there is no genuine issue as to any material fact and

that a decision may be rendered as a matter of law.   Rule 121(b);

Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238 (2002).     A

partial summary adjudication may be made which does not dispose

of all the issues in the case.   Rule 121(b); Tracinda Corp. v.

Commissioner, 111 T.C. 315, 323-324 (1998).   The moving party,

here the IRS, has the burden of proving that no genuine issue of

material fact exists and that it is entitled to judgment as a

matter of law.   Rauenhorst v. Commissioner, 119 T.C. 157, 162

(2002).

     At a collection due process hearing, a taxpayer may raise

challenges to the existence or amount of the “underlying tax

liability” only if the taxpayer “did not receive any statutory

notice of deficiency for such tax liability or did not otherwise

have an opportunity to dispute such tax liability.”   Sec.
                                   - 22 -

6330(c)(2)(B).21       If a taxpayer is not permitted under section

6330 to raise a challenge to the underlying tax liability, the

only issues that a taxpayer can raise before the Appeals officer

are appropriate spousal defenses, challenges to the

appropriateness of collection actions, and any collection

alternatives.       Sec. 6330(c)(2)(A).

     Section 6330(d)(1) provides a person with the right to

obtain Tax Court review of the administrative determination by

filing a petition with the Court within 30 days of the

determination.       If the validity of the underlying tax liability

is properly at issue, the Court will review the determination de

novo.        Giamelli v. Commissioner, 129 T.C. 107, 111 (2007); Davis

v. Commissioner, 115 T.C. 35, 39 (2000); Sego v. Commissioner,

114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176,

181-182 (2000).       All other elements of the determination are

reviewed for abuse of discretion.         Sego v. Commissioner, supra at

610; Goza v. Commissioner, supra at 181-182.        Whether an abuse of

discretion has occurred depends upon whether the exercise of

discretion is without sound basis in fact or law.        Freije v.

Commissioner, 125 T.C. 14, 23 (2005).        Generally we consider only


        21
      See Goza v. Commissioner, 114 T.C. 176, 182-183 (2000) (a
taxpayer who received deficiency notice was precluded from
contesting his tax liability for the underlying taxes at the
Appeals Office collection due process administrative hearing, or
at the Tax Court on appeal of the Appeals Office determination).
The phrase “underlying tax liability” includes all forms of
interest and all penalties described in the Code.
                                - 23 -

those arguments, issues, and other matters (including a challenge

to the underlying tax liability) that the taxpayer raised at the

collection hearing or otherwise brought to the attention of

Appeals.   Giamelli v. Commissioner, supra at 112-113; Magana v.

Commissioner, 118 T.C. 488, 493 (2002); see also sec. 301.6330-

1(f)(2), Q&A-F3, Proced. & Admin. Regs.

     Bang did not offer a specific collection alternative to be

considered by the Appeals officer, nor did she raise any other

appropriate defenses to collection.      See sec. 6330(c)(2)(A),

(3)(B).    Her sole contention is that she is not liable for

various interest and penalties, specifically underpayment

interest, the 20-percent increase in interest rate for

underpayments attributable to tax-motivated transactions, the 50-

percent-of-interest penalty for underpayments resulting from

negligence, and the failure-to-pay penalty.

3.   Underpayment Interest

     Section 6601(a) provides that if a taxpayer fails to pay the

tax imposed by the Code, interest shall accrue from the date that

the tax payment is due until the date it is paid.      The rate of

interest is “the underpayment rate established under section

6621”.22   Id.   To illustrate the calculation of underpayment



     22
      This statutory language is in effect for interest accruing
after December 31, 1986. For interest accruing before then, the
statute is worded differently, but is substantively the same for
these purposes.
                               - 24 -

interest, suppose that a taxpayer fails to pay $1,000 in tax that

was due on April 15.   Assume that the underpayment rate is 6

percent for the second quarter of the same hypothetical year.     On

May 15, the taxpayer would owe interest of $1,000 x

(1+(0.06/365))30-$1,000.   This amount reflects 30 days of

interest, compounded daily.    Sec. 6622(a).23   This amount is

separate from the $1,000 tax liability.

     On her 1983 income tax return, Bang claimed a $12,500

deduction.   The Tax Court in the partnership-level Contra Costa

partnership proceeding determined that Bang was not entitled to

the deduction.   Without the deduction, Bang’s tax liability for

1983 was $2,636 more than she reported and paid on her 1983

return. Thus, under section 6601(a), Bang owed underpayment

interest on the $2,636 from April 15, 1984, until May 12, 2006,

the day she paid the $2,636.

     On March 27, 2006, the IRS assessed the $2,636 increase in

tax resulting from the disallowance of Bang’s share of the

partnership’s deduction.   That same day, it assessed $21,553.52

in interest on the $2,636 underpayment, calculated to the day of


     23
      The interest, based on the formula in the text, is
$4.943279. The IRS issued tables to be used in computing
underpayment interest. Rev. Proc. 95-17, 1995-1 C.B. 556, 556.
The tables show that the interest accruing over 30 days, at a
rate of 6 percent, is equal to 0.004943279 multiplied by the
principal amount. Id. table 17, 1995-1 C.B. at 571. The factor
in the tables, 0.004943279, is arithmetically equivalent to
(1+(0.06/365))30-1. Multiplying this by $1,000, we arrive at
$4.943279.
                                - 25 -

assessment.     The interest was calculated at 120 percent of the

normal rate because the IRS had determined that the entire

underpayment was attributable to a tax-motivated transaction.

     The IRS notified Bang that it intended to levy to collect

the underpayment interest (among other amounts).     Bang challenged

the levy at the administrative level.     Bang contested her

interest liability in her request for a hearing.     Her contention

was that the interest was compounded over an excessive amount of

time.     The Appeals officer did not consider Bang’s contention.

     A.      Except for Entitlement to Interest Abatement Under
             Section 6404(e)(1), We Will Not Consider Any Issues
             Related to Bang’s Liability for Underpayment Interest.

        The IRS argues in its motion for summary judgment that Bang

should be considered to have raised her liability for interest at

the hearing only as a request for interest abatement under

section 6404(e)(1) (a provision that permits the IRS to abate

interest accruals caused by IRS errors and delays), not as a

challenge to any other aspect of her interest liability.       Thus,

the IRS urges us not to reach any other aspect of Bang’s

liability for underpayment interest.     We agree with the IRS that

our review should be limited.     We note that in her response to

the IRS’s motion for summary judgment, Bang failed to point to

any other error in the IRS’s determination that she was liable

for underpayment interest.
                                - 26 -

     B.     Whether Bang Preserved Her Interest Abatement Claim for
            Judicial Review

     The IRS also contends that Bang failed to make a claim for

interest abatement with sufficient specificity at the

administrative level and that consequently the Court in reviewing

the determination of the Appeals officer cannot consider her

claim for interest abatement.    The IRS cites Giamelli v.

Commissioner, supra at 113, in support of this proposition.       We

disagree.

     Bang’s accountant argued in his letter attached to the

request for a hearing that the underpayment interest should be

abated because it had accrued over an unreasonably long time and

because she paid the underlying amount of $2,636 when it was

finally brought to her attention.    These statements sufficiently

preserved Bang’s argument regarding interest abatement for

judicial review.    In Brecht v. Commissioner, T.C. Memo. 2008-213,

a taxpayer made no argument to the Appeals officer explaining why

interest should be abated, and the Court held that it could not

review the taxpayer’s entitlement to interest abatement.     By

contrast with Brecht, Bang presented her arguments about interest

abatement in her request for a hearing.   The Appeals officer’s

failure to determine whether Bang was entitled to interest

abatement does not preclude us from making the determination

ourselves.    See Urbano v. Commissioner, 122 T.C. 384, 391 (2004)

(citing Katz v. Commissioner, 115 T.C. 329, 340-341 (2000))
                              - 27 -

(holding that we can review an Appeals officer’s denial of

interest abatement if the issue was raised at the collection due

process hearing).   The alternative of remanding the case for the

Appeals officer to determine interest abatement is not

appropriate because Bang has been given sufficient opportunity

both at her hearing and in this proceeding to explain why she is

entitled to interest abatement.   See Lunsford v. Commissioner,

117 T.C. 183, 189 (2001) (declining to remand collection review

case to Appeals officer when the Court can evaluate the merits of

the taxpayer’s arguments without a remand).

     C.   Bang Is Not Entitled to Interest Abatement

     Bang’s main argument, presented by her accountant at the

hearing, is that the interest assessed has accrued over an

unreasonably long time because of pending litigation about which

she had no knowledge.   However, the length of time which

partnership-level litigation takes to resolve is not a delay in a

“ministerial act” on which an abatement claim may be based.     Lee

v. Commissioner, 113 T.C. 145, 150 (1999) (“The mere passage of

time in the litigation phase of a tax dispute does not establish

error or delay by the Commissioner in performing a ministerial

act.”); Corson v. Commissioner, T.C. Memo. 2009-95; Kimball v.
                                    - 28 -

Commissioner, T.C. Memo. 2008-78.         Bang is therefore not entitled

to interest abatement.       The IRS did not err in failing to abate

interest.24

4.   20 Percent Additional Interest for Tax-Motivated
     Transactions

     Under former section 6621(d) (renumbered as section 6621(c)

pursuant to the Tax Reform Act of 1986, see supra note 11), the

annual rate of interest on the portion of an underpayment that is

attributable to a tax-motivated transaction is 120 percent of the

“underpayment rate” established under section 6621(b).             Deficit

Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 682.25            The


     24
      In 1996, Congress amended sec. 6404(e) to provide that
interest abatement is available for an “unreasonable” delay in
performing a “ministerial or managerial” act. Taxpayer Bill of
Rights 2, Pub. L. 104-168, sec. 301(a), 110 Stat. 1452, 1457
(1996). This amendment applies only to tax years beginning after
July 30, 1996. Id. sec. 301(c).
     25
          Former sec. 6621(d) provides:

      SEC. 6621(d). Interest on Substantial Underpayments Attributable to Tax
Motivated Transactions.--

           (1) In general.–-In the case of interest payable under
     section 6601 with respect to any substantial underpayment
     attributable to tax motivated transactions, the annual rate of
     interest established under this section shall be 120 percent of
     the adjusted rate established under subsection (b).

           (2) Substantial underpayment attributable to tax motivated
     transactions.–-For purposes of this subsection, the term
     “substantial underpayment attributable to tax motivated
     transactions” means any underpayment of taxes imposed by subtitle
     A for any taxable year which is attributable to 1 or more tax
     motivated transactions if the amount of the underpayment for such
     year so attributable exceeds $1,000.

             (3) Tax motivated transactions.--

                        (A) In general.–-For purposes of this subsection, the
                                                             (continued...)
                                     - 29 -

increase in the interest rate required by former section 6621(d)

affects the interest rate only for the period from December 31,

1984--the effective date of section 6621(d)--until the date the

tax is finally paid.         For periods before December 31, 1984, the

interest rate is unaffected by former section 6621(d).

       To illustrate the calculation of the interest rate for tax-

motivated transactions, suppose that a taxpayer fails to pay

$1,000 in tax on April 15, when the tax return and the tax are

due.    Assume further that the failure to timely pay the entire

$1,000 is due to a tax-motivated transaction.              Assume that the

underpayment rate is 6 percent for the second quarter of the year

in which the return is due.         Section 6621(d) would require that

the 6-percent interest rate be increased by 20 percent to 7.2

percent.       On May 15, the taxpayer would owe interest of $1,000 x


       25
            (...continued)
                    term “tax motivated transaction” means--

                                (i) any valuation overstatement (within
                    the meaning of section 6659(c)),

                                (ii) any loss disallowed by reason of
                    section 465(a) and any credit disallowed under
                    46(c)(8),

                                (iii) any straddle (as defined in section
                          1092(c) without regard to subsections (d) and
                    (e) of section 1092), and

                                (iv) any use   of an accounting method
                    specified in regulations   prescribed by the
                    Secretary as a use which   may result in a substantial
                    distortion of income for   any period.

Clause (v) was added by TRA 1986 sec. 1535(a), 100 Stat. 2750,
and applies to interest accruing after Dec. 31, 1984.
                               - 30 -

(1+(0.072/365))30-$1,000, an amount that reflects 30 days of

interest accumulation compounded daily.   Sec. 6622(a).   This

amount is separate from the $1,000 tax liability.

     Bang did not have an opportunity before the collection

hearing to contest all of the elements of the tax-motivated

interest penalty.   The deficiency notice was not such an

opportunity.   Even though the deficiency notice contained the

assertion that Bang was liable for increased interest on the

portion of her underpayment attributable to a tax-motivated

transaction and even though Bang could have filed a Tax Court

petition in response to the deficiency notice, the Court would

not have had jurisdiction in a partner-level deficiency case to

determine Bang’s liability for the increased interest.    The

reason is that increased interest is not a deficiency.      Odend’hal

v. Commissioner, 95 T.C. 617, 621 (1990); White v. Commissioner,

95 T.C. 209, 214 (1990).    Thus, the Appeals officer who made the

determination sustaining the levy against Bang had jurisdiction

to determine whether Bang should be subject to the increased

interest rate for a tax-motivated transaction.   Although Bang’s

Appeals officer did not consider Bang’s argument why she should

not be subject to the increased interest rate for tax-motivated

transactions, this does not preclude us from considering whether

Bang is liable ourselves.
                                - 31 -

     Bang is liable for the increased interest for tax-motivated

transactions.   First, the transactions of the partnership

were tax motivated.   A tax-motivated transaction includes a

transaction for which there is “an accounting method specified in

regulations prescribed by the Secretary as a use which may result

in a substantial distortion of income for any period.”     Former

sec. 6621(d)(3)(A)(iv).    Substantial distortions of income

include a deduction which results in a “material distortion of

income”.   Sec. 301.6621-2T, Q&A-3(9)(iii), Temporary Proced. &

Admin. Regs., 49 Fed. Reg. 50392 (Dec. 2, 1984).     The Contra

Costa partners agreed to be bound by the determinations of issues

made in Utah Jojoba I Research v. Commissioner, docket No. 7619-

90, including “findings of underlying facts with respect to tax

motivated transactions, a valuation overstatement, or other

elements applicable to a determination of additions to tax and/or

section 6621(c) interest.”     The Tax Court held in Utah Jojoba I

Research v. Commissioner, T.C. Memo. 1998-6, that the “R&D

agreement before us was mere window dressing, designed and

entered into solely to decrease the cost of participation in the

jojoba farming venture for the limited partners through the

mechanism of a large up-front deduction for expenditures that in

actuality were capital contributions.”     To claim a large upfront

deduction for nondeductible capital expenditures is a material

distortion of income.     The underpayment resulting from such a
                               - 32 -

deduction is attributable to a tax-motivated transaction.      Bailey

v. Commissioner, 90 T.C. 558, 629 (1988), affd. in part and

vacated in part 912 F.2d 44 (2d Cir. 1990); Glassley v.

Commissioner, T.C. Memo. 1996-206.      Because the Contra Costa

partners, including Bang, were bound by the disposition of issues

and findings of fact in Utah Jojoba I, the Contra Costa

partnership’s transactions were tax motivated.

     Second, we must determine the amount of Bang’s underpayment

of tax that was attributable to the partnership’s tax-motivated

transaction and whether that underpayment was substantial.     See

former sec. 6621(d), Deficit Reduction Act of 1984, Pub. L. 98-

369, sec. 144(a), 98 Stat. 682.   The record indicates that the

entire $12,500 adjustment of Bang’s research and experimental

expenditures deduction is attributable to the partnership’s tax-

motivated transaction.   The underpayment stemming from this

adjustment ($2,636) is substantial because it exceeds $1,000.

See id.    As all elements of former section 6621(d) interest have

been established, we sustain the Appeals officer’s determination

with respect to tax-motivated transaction interest.

5.   Fifty-Percent-of-Interest Negligence Penalty

     The IRS argues that Bang was not entitled to dispute her

liability for the 50-percent-of-interest penalty with the Appeals

officer.    It contends that Bang had already received a deficiency

notice for the liability.   We agree.
                                    - 33 -

     Under former section 6653(a)(2), if a portion of an

underpayment is attributable to negligence (or intentional

disregard of the rules or regulations), there is added to the tax

50 percent of the interest payable under section 6601 on the

portion of the underpayment attributable to such negligence.26

For this purpose, the interest payable under section 6601

includes the 120-percent increased interest rate for tax-

motivated transaction interest if the portion of the underpayment

that is attributable to negligence is also attributable to a tax-

motivated transaction.       The interest period for which the 50-

percent-of-interest negligence penalty applies begins on the day

the payment of tax was due and stops accruing once the taxpayer

pays the tax or the IRS assesses the tax.           Id.


     26
          Former sec. 6653(a)(2) provides:
           (2) Additional amount for portion attributable to
     negligence, etc.–-There shall be added to the tax (in addition to
     the amount determined under paragraph (1)) an amount equal to 50
     percent of the interest payable under section 6601--

                   (A) with respect to the portion of the underpayment
             described in paragraph (1) which is attributable to the
             negligence or intentional disregard referred to in paragraph
             (1), and


                   (B) for the period beginning on the last date
             prescribed by law for payment of such underpayment
             (determined without regard to any extension) and ending on
             the date of the assessment of the tax (or, if earlier, the
             date of the payment of the tax).

The Technical Corrections Act of 1982, Pub. L. 97-448, sec.
107(a)(3), 96 Stat. 2391, inserted the phrase “(or, if earlier,
the date of the payment of the tax)” at the end of former sec.
6653(a)(2) above. The insertion was retroactively effective to
the date of sec. 6653(a)(2)’s enactment. Id. sec. 109.
                                 - 34 -

     To illustrate how this penalty is calculated, assume that a

taxpayer fails to pay $1,000 of tax due on April 15.           Suppose

further that of this $1,000 underpayment, $200 is both (1) the

result of the taxpayer’s negligence, and (2) attributable to a

tax-motivated transaction.   Suppose that over the next 3 years

the underpayment interest rate is a constant 6 percent and that

the tax is assessed 3 years later on April 15.           Interest will be

computed at an interest rate of 6 percent, increased by 20

percent for tax-motivated transactions, resulting in a total

interest charge of 7.2 percent that is compounded daily under

section 6662.    The 3-year interest charge would be $48.22 (that

is, $200 x (1+(0.072/365))(365   x 3)
                                        )-$200.   The taxpayer would then

owe a negligence penalty of $24.11 (that is, 50 percent of the

entire interest charge of $48.22).

     Bang claimed on her 1983 income tax return that she had a

$12,500 loss stemming from a loss claimed by the Contra Costa

partnership.    She and the other Contra Costa partners then agreed

to be bound by the decision in the Utah Jojoba partnership case.

The Court in the Contra Costa case disallowed the losses claimed

by the Contra Costa partnership.          The amount of the 50-percent-

of-interest negligence penalty is a deficiency attributable to an

affected item that requires a partner-level determination.27


     27
      See former sec. 6230(a)(2)(A)(i) (as amended by TRA 1986),
sec. 1875(d)(2)(A), 100 Stat. 2896 (applying subch. B to any
                                                   (continued...)
                             - 35 -



     27
      (...continued)
deficiency attributable to affected items which require partner-
level determination); N.C.F. Energy Partners v. Commissioner, 89
T.C. 741, 744-745 (1987) (“In contrast, the other type of
affected item requires factual determinations to be made at the
partner level. For example, a partner will be liable for the
addition to tax for negligence pursuant to section 6653(a) if he
has an underpayment of tax some part of which is due to
negligence. The existence of an underpayment of tax at the
partner level cannot be made until the partner’s share of
distributable items of income, loss, deduction, and credit is
determined in the partnership level proceeding. Once the
partnership level proceeding ends, however, the factual question
of whether any part of the underpayment was due to the partner’s
negligence must be answered at the partner level. In such
instances, unless conceded by the partner, respondent will issue
a notice of deficiency for the addition to tax under section
6653(a) to the partner after the completion of the partnership
level proceedings. The partner may then file a petition in this
Court for redetermination of that deficiency. The prior
partnership level proceeding will be res judicata as to the
partnership adjustments, and in the subsequent litigation, we
will decide only whether some part of the underpayment, if any,
was due to negligence.”).

     Sec. 6230(a)(2)(A)(i) was amended in 1997 to provide that
penalties related to partnership adjustments be determined at the
partnership level and therefore not be included in a notice of
deficiency. Taxpayer Relief Act of 1997, Pub. L. 105-34, sec.
1238(b)(2), (c), 111 Stat. 1026, 1027; New Millennium Trading,
L.L.C. v. Commissioner, 131 T.C. 275, 279 (2008); Domulewicz v.
Commissioner, 129 T.C. 11, 22 (2007), affd. in part and remanded
sub nom. Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009).
Under post-1997 law, once the partnership level proceedings are
concluded and a decision in favor of the IRS becomes final, the
IRS can assess the penalty without issuing a notice of
deficiency. Callaway v. Commissioner, 231 F.3d 106, 110 n.5 (2d
Cir. 2000), affg. T.C. Memo. 1998-99; New Millennium Trading,
L.L.C. v. Commissioner, supra at 280, citing sec. 6230(a)(1) and
N.C.F. Energy Partners v. Commissioner, supra at 744); Domulewicz
v. Commissioner, supra at 23; sec. 6231(a)(6)-1(a)(3), Proced. &
Admin. Regs. After the 1997 amendment, an individual partner’s
only recourse to present any partner-level reasonable cause and
good faith defense he or she may have is to file a claim for
refund under sec. 6230(c)(1) after paying the applicable penalty
                                                   (continued...)
                                   - 36 -

Thus, the IRS was required to issue Bang a deficiency notice to

assert that Bang was liable for the 6653(a)(2) negligence

penalty.     See former sec. 6662(a)(2); Tax Equity and Fiscal

Responsibility Act of 1982, Pub. L. 97-248, sec. 323(a), 96 Stat.

613 (renumbering former section 6660 of the Internal Revenue Code

of 1954, stating in part that references to “tax” in the Code

include additions to tax and penalties, and additions to tax and

penalties must be collected in the same manner as taxes, unless a

statutory exception applies).       (This is so even though the amount

of underpayment interest, including the increased 120-percent

rate for a tax-motivated transaction, is not subject to

deficiency procedures.)     The IRS issued such a deficiency notice.

This Court has jurisdiction in deficiency cases to redetermine

the amounts of penalties pursuant to section 6214(a).28           Thus,


     27
      (...continued)
in full. New Millennium Trading, L.L.C. v. Commissioner, supra
at 280; sec. 301.6221-1(d), Proced. & Admin. Regs. The pre-1997
rule applies to any redetermination of the amounts reported in
the Contra Costa partnership’s 1983 return.
     28
          Sec. 6214(a) provides:

           SEC. 6214(a). Jurisdiction as to Increase of Deficiency,
     Additional Amounts, or Additions to the Tax.-–Except as provided
     by section 7463, the Tax Court shall have jurisdiction to
     redetermine the correct amount of the deficiency * * *, notice of
     which has been mailed to the taxpayer, and to determine whether
     any additional amount, or any addition to tax should be assessed,
     if claim therefor is asserted by the Secretary at or before the
     hearing or a rehearing.

Thus, if the addition to tax is asserted in the notice of
deficiency, this Court has jurisdiction to redetermine it because
                                                   (continued...)
                              - 37 -

had Bang challenged the 50-percent-of-interest-negligence penalty

by filing a petition in response to her deficiency notice, this

Court would have had the power to decide if she should have been

relieved of it.   See Ghose v. Commissioner, T.C. Memo. 2008-80

(after the Tax Court entered the decision against the Contra

Costa partners at the partnership level, the IRS issued a notice

of deficiency to one of Bang’s partners for the 1983 year,

alleging a penalty of $272.30 under former section 6653(a)(1),

and “50 percent of the interest” due on the deficiency for the

1983 taxable year under former section 6653(a)(2); the partner

filed a petition, and after a trial, this Court held that the

partner was liable for the additions to tax under section

6653(a)(1) and (2)).29


     28
      (...continued)
it was asserted before a potential hearing.

     The Court’s jurisdiction in a partner-level proceeding to
redetermine affected items such as penalties does not extend to
the partnership-item component of penalties. Partnership items
are determined solely at the partnership level. Former sec.
6221.
     29
      In Helbig v. Commissioner, T.C. Memo. 2008-243, affd.
without published opinion 106 AFTR 2d 2010-6820, 2010-2 USTC par.
50,692 (9th Cir. 2010), Helbig, a partner in the Contra Costa
partnership, claimed deductions from the partnership on his 1983,
1984, and 1985 tax returns. After the Tax Court entered a
decision against the Contra Costa partnership regarding the 1983,
1984, and 1985 tax years, the IRS issued deficiency notices to
Helbig in which the IRS asserted that Helbig owed penalties under
sec. 6653(a)(1) and (2). Helbig petitioned the Tax Court, which
found that he was negligent.

                                                    (continued...)
                               - 38 -

     Mathematically, the penalty is 50 percent of the interest

payable under section 6601(a) on the amount of the underpayment

due to negligence.   The amount of interest payable under section

6601(a), for purposes of calculating the penalty against Bang,

ran until the tax was assessed on March 27, 2006.    The deficiency

notice did not notify Bang of the absolute amount of the 50-

percent-of-interest penalty because the notice was issued on

March 13, 2006, 2 weeks before the interest period closed.      See

Kamholz v. Commissioner, 94 T.C. 11, 12 (1990) (“In fact, the

amount [of the section 6653(a)(2) penalty] could not have been

determined when the notice was mailed, since the amount of

interest on which it was based had not been finally

determined.”).    But the penalty was certainly invoked in the

deficiency notice.    The first page of the notice of deficiency

(and the waiver form) stated that “50% of interest on $2,636.00”

would be due.    The “Continuation Sheet” stated that the IRS

determined a “fifty (50) percent of the interest due on the part



     29
      (...continued)
     In Swanson v. Commissioner, T.C. Memo. 2009-31, Swanson, a
partner in California Jojoba Ventures, claimed deductions from
the partnership on his 1983 tax return. In the partnership case
the partners agreed to be bound by Utah Jojoba I Research v.
Commissioner, docket No. 7619-90. After Utah Jojoba I was
decided, the Tax Court in the California Jojoba Ventures case
sustained the FPAA issued to California Jojoba Ventures. The IRS
issued notices of deficiency asserting that Swanson was liable
for the sec. 6653(a)(1) and (2) penalties. Swanson filed a Tax
Court petition, and the Court found that Swanson was not
negligent and should not be subject to the penalty.
                              - 39 -

of the underpayment that is due to negligence”.     It also

explained how the penalty was calculated:     “The penalty is

figured on the earlier of the date of assessment or the date the

tax was paid.”

     Section 6330(c)(2)(B) provides that a taxpayer may contest

the underlying tax liability if the taxpayer “did not receive any

statutory notice of deficiency for such tax liability or did not

otherwise have an opportunity to dispute such tax liability.”

The question is whether the deficiency notice was “for” Bang’s

liability for the 50-percent-of-interest negligence penalty.       The

parties have not pointed us to any legal authority discussing

what it means for a statutory notice of deficiency to be “for” a

particular tax liability for the purpose of section

6330(c)(2)(B).   Besides section 6330(c)(2)(B), there are other

provisions that require an evaluation of the relationship between

a statutory notice of deficiency and a particular tax liability.

Section 7522(a) requires a deficiency notice to “describe the

basis for, and identify the amounts (if any) of, the tax due,

interest additional amounts, additions to the tax, and assessable

penalties included in such notice.     An inadequate description

under the preceding sentence shall not invalidate such notice.”

In Burnside v. Commissioner, T.C. Memo. 1994-308, the Tax Court

held that a deficiency notice explaining that the IRS had
                              - 40 -

determined a penalty under section 6653(a)(1)(B),30 in an amount

equal to “50 percent of the interest due on the portion of the

underpayment attributable to negligence”, was in compliance with

section 7522(a).

     Rule 142(a) provides that the burden of proof falls on the

taxpayer with respect to issues raised in the deficiency notice

and falls on the IRS with respect to issues raised in the answer.

In Farr v. Commissioner, T.C. Memo. 1993-29, affd. without

published opinion 41 F.3d 1513 (9th Cir. 1994), the IRS issued a

notice of deficiency determining an addition to tax equal to “50

percent of the interest due on the portion of the underpayment

attributable to negligence pursuant to sec. 6653(a)(1)(B).”   The

Tax Court held that the taxpayer had the burden of proving she

was not liable for the section 6653(a)(1)(B) penalty.

     The deficiency notices in Burnside and Farr invoked section

6653(a)(1)(B) using words like those used in the deficiency

notice issued to Bang.   In each case, this Court held that the

liability for the section 6653(a)(1)(B) penalty was sufficiently

described in the deficiency notices for the purpose of the rules

at issue in those cases.

     The statements in the notice of deficiency explaining the

50-percent-of-interest negligence penalty made the deficiency



     30
      Sec. 6653(a)(2) was renumbered (with minimal substantive
change) as sec. 6653(a)(1)(B) pursuant to TRA 1986 sec. 1503(a).
                                   - 41 -

notice “for” the penalty.       Bang “received” the deficiency notice.

Therefore, Bang was not entitled to raise a challenge to the

amount of the penalty at the collection review hearing.                 We

sustain the Appeals officer’s determination with respect to the

50-percent-of-interest penalty.

6.   Failure-To-Pay-Tax Penalty

     The proposed levy that was sustained by the Appeals officer

included, among other things, the amount of $13.18.               All we know

about this $13.18 is that the same amount was listed on the IRS

record of its transactions with Bang for her 1983 income tax year

as a failure-to-pay-tax penalty and that it was assessed on June

12, 2006.     Two types of failure-to-pay-tax penalties appear in

the Internal Revenue Code, section 6651(a)(2) and section

6651(a)(3).     Section 6651(a)(2) imposes a penalty for failure to

timely pay tax shown on the return on or before the date

prescribed for payment.31      As Bang did pay the tax shown on her


     31
          Sec. 6651(a)(2) provides:

     SEC. 6651(a).   Addition to the Tax.–-In case of failure--

     *           *       *            *       *         *           *

           (2) to pay the amount shown as tax on any return * * * on
     or before the date prescribed for payment of such tax (determined
     with regard to any extension of time for payment), unless it is
     shown that such failure is due to reasonable cause and not due to
     willful neglect, there shall be added to the amount shown as tax
     on such return 0.5 percent of the amount of such tax if the
     failure is for not more than 1 month, with an additional 0.5
     percent for each additional month or fraction thereof during which
     such failure continues, not exceeding 25 percent in the aggregate
     * * *
                                                             (continued...)
                                   - 42 -

1983 return, the penalty is inapplicable to her.             Section

6651(a)(3) imposes a penalty for the failure to timely pay tax

that should have been shown on the return if the taxpayer does

not pay the tax within 21 days of notice and demand for payment

of the tax.32     Recall that Bang filed her 1983 tax return


     31
      (...continued)
     Sec. 6651(b)(2) provides:

     SEC. 6651(b).   Penalty Imposed on Net Amount Due.–-For purposes of--

             *        *        *            *            *             *
     *
           (2) subsection (a)(2), the amount of tax shown on the return
     shall, for purposes of computing the addition for any month, be
     reduced by the amount of any part of the tax which is paid on or
     before the beginning of such month and by the amount of any credit
     against the tax which may be claimed on the return * * *

     To illustrate how the penalty is calculated, assume that a
taxpayer fails to pay $1,000 of tax shown on her return and due
on Apr. 15. The taxpayer does not pay the tax until Apr. 15 of
the following year. The taxpayer would owe a failure to timely
pay penalty of $60 (that is, $1,000 x 0.005 x 12).
     32
          Sec. 6651(a)(3) provides:

     SEC. 6651(a).   Addition to the Tax.–-In case of failure--

     *           *         *          *          *        *            *

           (3) to pay the amount in respect of any tax required to be
     shown on a return * * * which is not so shown * * * within 21
     calendar days from the date of notice and demand therefor * * *,
     unless it is shown that such failure is due to reasonable cause
     and not due to willful neglect, there shall be added to the amount
     of tax stated in the such notice and demand 0.5 percent of the
     amount of such tax if the failure is for not more than 1 month,
     with an additional 0.5 percent for each additional month or
     fraction thereof during which such failure continues, not
     exceeding 25 percent in the aggregate.




                                                              (continued...)
                                      - 43 -

claiming a $12,500 deduction.           Bang paid her tax liability as if

she was entitled to the $12,500 deduction.             In 2005, the Court in

the partnership-level proceeding determined that Bang and the

other partners were not entitled to the deductions they had

claimed.        The IRS issued a deficiency notice to Bang on March 13,

2006.        The deficiency notice did not include a determination

regarding the failure-to-pay-tax penalty.             The IRS assessed the

$2,636 increase in tax and the underpayment interest of

$21,553.52 on March 27, 2006.           Bang paid the $2,636 increase in

tax (as well as the 5-percent negligence penalty), and the

payment was received by the IRS 4 days later on May 12, 2006; but

the record does not state when a notice and demand for payment

was issued to collect the $2,636.            The IRS assessed a $13.18

failure-to-pay-tax penalty on June 12, 2006 (an amount which is


        32
         (...continued)
        Sec. 6651(b)(3) provides:

        SEC. 6651(b).   Penalty Imposed on Net Amount Due.–-For Purposes of--

        *           *         *          *        *         *         *

              (3) subsection (a)(3), the amount of tax stated in the
        notice and demand shall, for the purpose of computing the addition
        for any month, be reduced by the amount of any part of the tax
        which is paid before the beginning of such month.

     To illustrate how the penalty is calculated, assume that a
taxpayer fails to pay $1,000 of tax not shown on her return (but
required to be shown on the taxpayer’s return) within 21 days of
the date of notice and demand for payment of the tax. The
taxpayer does not pay the tax until 1 year following the 21st day
after the date of notice and demand for payment. The taxpayer
would owe a failure to timely pay penalty of $60 (that is, $1,000
x 0.005 x 12).
                               - 44 -

0.5 percent of $2,636).    The IRS then notified Bang on August 23,

2006, that it would levy to collect an amount that included the

$13.18.   The Appeals officer refused to consider any of Bang’s

arguments at the administrative hearing, asserting that all of

the arguments were about liability and that the arguments were

improper because Bang had a prior opportunity to dispute her

liability.   The IRS did not explain in its motion for summary

judgment why Bang had a prior opportunity to dispute the failure-

to-file penalty, or alternatively, why the determination of the

Appeals officer should be sustained with respect to the levy of

the failure-to-file penalty.    Nor did the IRS provide any facts

through affidavits or other attachments to its motion that relate

to this penalty, such as whether and when the IRS issued a notice

and demand for payment of the $2,636.     Under these circumstances,

we will deny the motion for summary judgment to the extent that

it asks us to sustain the determination of the Appeals officer

regarding the existence or amount of Bang’s liability for the

$13.18 failure-to-pay-tax penalty.

                             Conclusion

     Respondent’s motion for summary judgment will be granted in

part and denied in part.


                                           An appropriate order

                                     will be issued.
