                  T.C. Summary Opinion 2008-95



                     UNITED STATES TAX COURT



 WILLIAM L. SOLOMON, JR., AND SHARON A. JACKSON, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1843-07S.              Filed July 31, 2008.



     William L. Solomon, Jr., and Sharon A. Jackson, pro sese.

     Robert W. Mopsick, for respondent.



     PANUTHOS, Chief Special Trial Judge:    This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.

Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be

treated as precedent for any other case.    Unless otherwise

indicated, section references are to the Internal Revenue Code as
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amended and in effect for the years in issue, and Rule references

are to the Tax Court Rules of Practice and Procedure.

     Respondent determined deficiencies of $18,300 and $17,446

and accuracy-related penalties of $3,660 and $3,489,

respectively, in petitioners’ 2003 and 2004 Federal income taxes.

The issues for decision are:    (1) Whether petitioners are

entitled to claim fuel tax credits for 2003 and 2004 and (2)

whether they are liable for penalties under section 6662(a) for

the years in issue.

                              Background

     Petitioners resided in New Jersey when they filed the

petition.   William L. Solomon, Jr. (hereafter petitioner), is a

truck driver who owns and operates a tractor-trailer.     Petitioner

registered his 18-wheeler as a commercial vehicle and drove it

only on roads and highways.

     Sharon A. Jackson (Ms. Jackson) prepared their joint 2003

and 2004 Federal income tax returns using tax preparation

software.   She followed the prompts from the software and

answered the questions posed, entering the year, make, model, and

weight of the truck, tolls paid, amount of fuel used, type of

fuel used (diesel), and other details.     Ms. Jackson did not

recall precisely what questions the software asked regarding the

fuel tax credits and in particular did not remember answering

questions about highway versus off-road use.     She recalled the
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software asking her whether the truck used diesel fuel and

explained her understanding of the significance of that question:

“If it does, it can be entitled to a fuel tax credit.”

     Neither petitioner is a tax professional.   For tax years

prior to 2003, they hired a return preparer, but Ms. Jackson

explained:   “Well, we had an accountant, but the accountant was

ripping us off, and he wasn’t doing them properly either.     I

figured since he wasn’t doing them properly, let me try it.”

Petitioners began preparing their own tax returns and began using

tax preparation software when Ms. Jackson prepared their 2003 tax

return.

     Petitioners claimed a fuel tax credit for diesel fuel for

each of the years in issue.1   Upon examination, respondent

disallowed the fuel tax credits for both years and determined

that petitioners were liable for accuracy-related penalties under

section 6662(a).

                            Discussion

     Generally, the burden of proof is on the taxpayer.   Rule

142(a)(1).   Respondent’s determinations are presumed correct, and




     1
       Petitioners claimed fuel tax credits of $18,300 and
$17,446 for 2003 and 2004, respectively, for 75,000 and 71,500
gallons of diesel fuel, respectively, at $0.244 per gallon.
                                 - 4 -

petitioners bear the burden of proving that they are erroneous.2

See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

1. Fuel Tax Credit

     Section 4041(a)(1) imposes a tax on diesel fuel sold to an

owner, lessee, or other operator of a diesel-powered highway

vehicle for use as a fuel in such vehicle.    However, the tax is

not imposed if the diesel fuel is “sold for use or used in an

off-highway business use” as defined in section 6421(e)(2).    Sec.

4041(b)(1)(A), (C).    Off-highway business use includes any use in

a trade or business other than as a fuel in a highway vehicle

“which (at the time of such use), is registered, or is required

to be registered, for highway use under the laws of any State”.

Sec. 6421(e)(2)(A).

     Where a tax has been imposed under section 4041 on a sale of

diesel fuel and the fuel is used by the purchaser for a

nontaxable purpose, such as an off-highway business use, section

34 allows a credit against income tax for the section 4041 tax

imposed on the sale.   See sec. 34(a)(2) (payments under section

6421 for gasoline used other than as fuel for a highway vehicle)

and (3) (payments under section 6427 for fuels used for




     2
       Neither party addresses   sec. 7491(a). On the record
before us we conclude that the   burden of proof does not shift to
respondent with respect to any   of the factual issues in this
case. See sec. 7491(a)(1) and    (2)(A) and (B).
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nontaxable purposes); see also secs. 6421(i)(3), 6427(k)(3)

(income tax credits in lieu of payment).3

     With regard to the credits payable under sections 34, 6421,

and 6427, petitioners must prove that the fuel was used for

nontaxable purposes; i.e., that the truck was not a highway

vehicle that was registered or required to be registered for

highway use.   They must then establish the number of gallons of

fuel so used or the amount of tax paid.     Williams v.



     3
       The record does not include the second pages of
petitioners’ 2003 and 2004 Forms 1040, U.S. Individual Income Tax
Return. However, the record does contain the Forms 4136, Credit
for Federal Tax Paid on Fuels, for 2003 and 2004. The Court
notes that ll. 67 and 69 on the second page of a 2003 and 2004
Form 1040, respectively, permit entry of credits claimed on Form
4136. These credits are treated as payments on Form 1040. The
Forms 4340, Certificate of Assessments, Payments, and Other
Specified Matters, include self-assessed taxes and refundable
credit claims consistent with petitioners’ entering the credits
on the Forms 1040.

       Sec. 6211(a) defines the term “deficiency” and is limited
to subtits. A and B and chs. 41, 42, 43, and 44. Subtit. D
contains the fuel tax in secs. 4041 and 4081. However, sec. 34
allows fuel tax payments to be made as credits against income
tax. When so claimed, the fuel tax credit comes under subtit. A
and is subject to deficiency proceedings. Sec. 6211(b)(4)
provides that the excess of such credits over the amount shown as
tax on the return shall be taken into account as a negative tax.

       Sec. 301.6211-1(b), Proced. & Admin. Regs., states:
“Payments on account of estimated income tax, like other payments
of tax by the taxpayer, shall likewise be disregarded in the
determination of a deficiency.” Although treated as a payment on
Form 1040, this refundable credit is not actually a payment by a
taxpayer; rather, it is a negative tax. Sec. 6211(b)(4). Thus,
it is considered in calculating the deficiency. Hence,
respondent determined deficiencies equal to petitioners’
disallowed fuel tax credits.
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Commissioner, T.C. Memo. 1997-540.       Petitioner testified not only

that his truck was registered but also that he drove it

exclusively on roads and highways.

     We conclude that petitioners are not eligible for the

claimed fuel tax credits because the fuel was not used in any

off-highway business activity.    Accordingly, respondent’s

determination is sustained.

2. Accuracy-Related Penalty

     By virtue of section 7491(c), the Commissioner has the

burden of production with respect to the accuracy-related

penalty.   To meet this burden, he must produce sufficient

evidence indicating that it is appropriate to impose the penalty.

See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).      Once the

Commissioner satisfies this burden of production, a taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect.   Rule 142(a); see Higbee v.

Commissioner, supra.   The burden of proving that the accuracy-

related penalty should not be imposed rests with the taxpayer.

Higbee v. Commissioner, supra.

     Section 6662(a) provides:

          SEC. 6662(a). Imposition of Penalty.--If 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.
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     Section 6662(b) provides that the accuracy-related penalty

applies to the portion of any underpayment attributable to one or

more of the five types of misconduct specified in that

subsection.4   Section 6664(a) defines an underpayment as follows:

          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.

     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 the tax imposed was less than
     the excess of the amount specified in paragraph (1) over the
     rebates previously made.[5]

     As previously discussed there are deficiencies in income

taxes for 2003 and 2004 because an overstated refundable credit

is treated as a negative tax in the computation of a deficiency,




     4
       The penalized conduct includes, inter alia, negligence or
disregard of rules or regulations, sec. 6662(b)(1), and any
substantial understatement of income tax, sec. 6662(b)(2).
     5
       The refunds petitioners received resulted from their
claiming refundable fuel tax credits. Those refunds were not
paid because the taxes imposed were less than the amounts shown
as tax by petitioners on their returns. Thus, petitioners’ 2003
and 2004 tax refunds do not fit within the narrow definition of
“rebate” in the flush language of sec. 6664(a).
                               - 8 -

effectively reducing the amount of tax shown by the taxpayer on

his return.   Sec. 6211(b)(4); see supra note 3.

     The calculation of an underpayment does not require such an

adjustment for an overstated refundable credit.    Sec. 6664(a);

cf. Sadler v. Commissioner, 113 T.C. 99, 103 (1999) (“if a

taxpayer overstates the credit for withholding, the overstatement

decreases the amount shown as the tax by the taxpayer on his

return and increases the underpayment of tax”); sec. 1.6664-

2(c)(1), Income Tax Regs. (adjustments are made only for inflated

withholding credits, estimated tax payments, and other payments

made by the taxpayer).   Because the underpayment calculation does

not adjust for overstated refundable credits, such as the fuel

tax credit, there are no underpayments in this case.    Because an

accuracy-related penalty is equal to 20 percent of certain

underpayments, it follows that there can be no accuracy-related

penalty without an underpayment.

     The Commissioner is required to come forward with sufficient

evidence to show that a taxpayer is liable for any penalty

determined in the notice of deficiency.   Sec. 7491(c).

Respondent has not met this burden because there are no

underpayments where the only adjustments are the disallowance of

some or all of petitioners’ claimed refundable credits.6


     6
       Even if underpayments existed to trigger sec. 6662(a), we
would not hold petitioners liable for the penalties respondent
                                                   (continued...)
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     We hold that petitioners are not liable for the accuracy-

related penalties for 2003 and 2004.

     To reflect the foregoing,



                                         Decision will be entered for

                                 respondent as to the deficiencies

                                 and for petitioners as to the

                                 section 6662(a) penalties.




     6
      (...continued)
determined because: (1) Considering petitioners’ credible
testimony and the level of their education, experience, and
knowledge of Federal income tax, we are convinced that
petitioners honestly misunderstood the fuel tax credit and that
they acted in good faith; (2) given the technical nature of the
Code provisions, we conclude that petitioners acted with
reasonable cause; and (3) the accuracy-related penalty is not
imposed with respect to any portion of an underpayment as to
which the taxpayer acted with reasonable cause and in good faith.
Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. 438, 448
(2001).
