Filed: Aug. 25, 2010
Latest Update: Nov. 14, 2018
Summary: MICHAEL C. WINTER AND LAUREN WINTER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 5035–05. Filed August 25, 2010. P, as an employee of a subch. S bank, received a bonus that was repayable in part if he quit or was fired for cause. P reported the full amount of the bonus but now argues that part was a nontaxable loan. P, as a shareholder, reported his share of the company’s earnings from its regulatory financial filings and not from the Schedule K–1 which the bank pre- p
Summary: MICHAEL C. WINTER AND LAUREN WINTER, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 5035–05. Filed August 25, 2010. P, as an employee of a subch. S bank, received a bonus that was repayable in part if he quit or was fired for cause. P reported the full amount of the bonus but now argues that part was a nontaxable loan. P, as a shareholder, reported his share of the company’s earnings from its regulatory financial filings and not from the Schedule K–1 which the bank pre- pa..
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MICHAEL C. WINTER AND LAUREN WINTER, PETITIONERS v.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 5035–05. Filed August 25, 2010.
P, as an employee of a subch. S bank, received a bonus that
was repayable in part if he quit or was fired for cause. P
reported the full amount of the bonus but now argues that
part was a nontaxable loan. P, as a shareholder, reported his
share of the company’s earnings from its regulatory financial
filings and not from the Schedule K–1 which the bank pre-
pared for him. P did not notify R of this inconsistent
reporting; and only after the issuance of the notice of defi-
ciency did R assess the income tax resulting from this incon-
sistent treatment. R contends: (1) The entire bonus was tax-
able income in the year received, (2) P should have reported
his shareholder income consistently with the bank’s Schedule
K–1, and (3) P failed to include some dividend, interest, and
gambling income on his return. R issued a notice of deficiency
determining a deficiency and imposing an accuracy-related
penalty under sec. 6662(a), I.R.C. P has conceded R’s adjust-
ments relating to dividend, gambling, and interest income. P
and R agree that this Court has jurisdiction to decide all
issues. However, the Court raises the question of whether
secs. 6037(c) and 6213(b)(1), I.R.C., remove the adjustment
relating to P’s inconsistently reported shareholder income
from our jurisdiction. This Opinion addresses only that ques-
tion. Held: R’s failure to assess the amount of the deficiency
attributable to the amount reported inconsistently with the
Schedule K–1 before issuing the notice of deficiency does not
exclude this amount of tax from the deficiency as defined in
sec. 6211, I.R.C., and we have jurisdiction to redetermine R’s
adjustment.
John B. Beery, Joseph M. Laub, and John J. Scharkey III,
for petitioners.
Kathleen C. Schlenzig and Julie A. Jebe, for respondent.
238
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(238) WINTER v. COMMISSIONER 239
OPINION
GOEKE, Judge: Michael Winter owned stock in the sub-
chapter S bank where he worked. The bank paid him a large
bonus in 2002 but then fired him and demanded part of the
bonus back in 2003. On his 2002 Federal income tax return
Winter reported the full amount of his bonus and his share
of the bank’s income and deductions—not as those items
were reported by the bank but from his own estimates of
what they were.
The parties have argued mostly about the consequences of
Winter’s failure to report his income from the bank in a
manner consistent with the bank’s reporting on its return
and about the taxability of his bonus in the year he received
it. We ourselves question whether we have jurisdiction over
these issues because the Internal Revenue Code provides
that adjustments arising from inconsistencies between the
return of a taxpayer and that of an S corporation in which
the taxpayer has an ownership interest should be treated as
math errors. The parties tell us that this has no effect on our
jurisdiction. This Court agrees with the parties.
Background
Builders Bank (Builders), a corporation wholly owned by
Builders Financial Corp. (BFC), hired Winter in 2001 to be its
chairman and CEO and granted him a large number of stock
options. Winter exercised these options, and by 2002 he
owned over 26 percent of BFC. Builders also paid Winter a $5
million bonus that was repayable in part if he quit or were
fired for cause. BFC was an S corporation.
Within a year Builders grew dissatisfied with Winter. It
fired him on December 26, 2002, and claimed the firing was
a termination for cause. In early 2003 it demanded repay-
ment of the unearned portion of the bonus, which by that
time was a bit more than $4 million. Winter refused to pay,
and he and Builders took their dispute to State court, where
Winter argued that Builders had no cause to fire him. The
case seems to have been settled, because it was dismissed in
January 2004 without opinion.
But before then, in 2003, Winter needed to figure out how
much income he had and how to report it on his 2002 income
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240 135 UNITED STATES TAX COURT REPORTS (238)
tax return. S corporations 1 are required to send their share-
holders Schedules K–1, Shareholder’s Share of Income,
Credits, Deductions, etc., listing the amounts of passthrough
income or loss they should report on their individual income
tax returns.
On its 2002 tax return 2 BFC deducted about $1 million of
Winter’s bonus payment as a salary expense. BFC split the
remaining $4 million—reporting $2 million as prepaid com-
pensation and reducing retained earnings by the same
amount, neither of which it deducted against income for
2002. BFC included a copy of each shareholder’s Schedule K–
1 in the 2002 return that it filed, including one for Winter
that showed $820,031 in ordinary passthrough income and
$5,062 as his share of BFC’s charitable contributions. The
Internal Revenue Service (IRS) later audited BFC’s return but
ended up accepting it as filed.
S corporation shareholders usually report their shares of
the corporation’s items the same way those items are
reported on the Schedules K–1, if only because they know S
corporations send the information to the IRS. But Winter
broke this pattern. Instead of using the information on the
Schedule K–1, he looked up BFC’s regulatory financial state-
ments on the FDIC Web site, took the net loss reported there,
and multiplied it by his percentage ownership at the end of
2001. (Winter owned 26.82 percent of BFC at the end of 2001
and claims he was unaware of an equity distribution that left
him with only 26.32 percent at the end of 2002.) This calcula-
tion would probably work if BFC treated each item identically
for both tax and regulatory reporting purposes. But BFC’s
2002 regulatory statements showed a charge against
earnings for the entire bonus paid to Winter, in contrast to
its 2002 tax return on which it claimed a deduction for just
one-fifth. Winter’s calculations—based on the regulatory
report—therefore showed a total 2002 passthrough loss of
1 If a business meets the requirements of sec. 1361, it may elect to become an ‘‘S corporation’’
and pay no corporate tax. An S corporation’s income and losses, like a partnership’s, flow
through to its shareholders, who then pay income tax.
All section references in this Opinion are to the Internal Revenue Code in effect for the year
at issue unless otherwise indicated. All Rule references are to the Tax Court Rules of Practice
and Procedure.
2 Builders and BFC filed consolidated Federal and State income tax returns and consolidated
regulatory and financial statements. Under sec. 1361(b)(3) in certain circumstances an S cor-
poration that wholly owns another company may elect to combine assets, liabilities, income, de-
ductions, and credits for Federal income tax purposes.
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(238) WINTER v. COMMISSIONER 241
about $1.2 million and not the passthrough income of about
$820,000 that BFC had reported on Winter’s Schedule K–1.
Winter also failed to claim his share of BFC’s charitable con-
tributions reported on its tax return.
Winter’s excuse for this deviation from normal reporting
procedures was that he never received a Schedule K–1. The
record shows, however, that Builders sent an overnight pack-
age via FedEx to Winter on March 13, 2003. Builders claims
that the package held a cover letter and Winter’s 2002
Schedule K–1. Winter claims that he never got the package.
We find that Builders used the correct name, street address,
State, and ZIP Code but listed the wrong Chicago suburb
(Highland Park instead of Deerfield) on the mailing label.
There was another Michael Winter who lived in Highland
Park, but his house number, street name, and ZIP Code were
all different. The parties offer no evidence that this other
Michael Winter received the package; and though FedEx did
not obtain a signature, Builders did receive confirmation of
delivery on March 14, 2003. Winter also never asked
Builders or the IRS for another copy of the Schedule K–1.
On February 24, 2006, respondent issued Winter a notice
of deficiency, including respondent’s determination that
Winter should have reported BFC income consistent with the
income shown on the Schedule K–1. After the issuance of
the notice of deficiency, respondent summarily assessed the
amount of tax based upon the reporting inconsistent with the
Schedule K–1.
Winter was a resident of Illinois when he timely filed his
petition, and he petitioned the Schedule K–1 disputed
amount as well as other issues. Trial was set to begin in Chi-
cago when the parties agreed to submit the case for decision
under Rule 122 on March 13, 2006. In the course of drafting
the Opinion, the Court identified a possible jurisdictional
problem and asked the parties for their views. We therefore
decide whether we have jurisdiction before addressing the
substantive issues in a subsequent opinion.
Discussion
The issue is whether this Court has jurisdiction over the
adjustment to Winter’s distributive share of S corporation
income or whether respondent must assess the tax related to
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242 135 UNITED STATES TAX COURT REPORTS (238)
the adjustment as a math error under section 6213(b)(1), pre-
cluding the inclusion in the notice of deficiency of the
increase in tax relating to that adjustment. The parties
argue that the examination for petitioners’ 2002 tax year
determined there was a deficiency, as defined in section
6211(a), and that a notice of deficiency was therefore a
proper way for the IRS to provide petitioners with respond-
ent’s determination.
The concern regarding our jurisdiction arises because
Winter failed to comply with section 6037(c) by either
reporting consistently with the Schedule K–1 as required by
section 6037(c)(1) or notifying the IRS of the possibility of an
inconsistency as required by section 6037(c)(2)(A). Section
6037(c)(3) provides potential consequences of Winter’s failure
to comply:
(3) EFFECT OF FAILURE TO NOTIFY. * * *
* * * * * * *
any adjustment required to make the treatment of the items by such
shareholder consistent with the treatment of the items on the corporate
return shall be treated as arising out of mathematical or clerical errors
and assessed according to section 6213(b)(1). Paragraph (2) of section
6213(b) shall not apply to any assessment referred to in the preceding sen-
tence.
Section 6213(b)(1) provides:
SEC. 6213(b). EXCEPTIONS TO RESTRICTIONS ON ASSESSMENT.—
(1) ASSESSMENTS ARISING OUT OF MATHEMATICAL OR CLERICAL
ERRORS.—If the taxpayer is notified that, on account of a mathematical
or clerical error appearing on the return, an amount of tax in excess of
that shown on the return is due * * * such notice shall not be consid-
ered as a notice of deficiency * * * and the taxpayer shall have no right
to file a petition with the Tax Court based on such notice, nor shall such
assessment or collection be prohibited * * *
Reading the two sections together, our colleague suggests
that when a deficiency arises from an inconsistency between
a shareholder’s return and his S corporation’s return and the
shareholder fails to report it, the IRS must issue a math-error
notice and use summary-assessment procedures.
That is not what happened here in the first instance.
Instead of summarily assessing the tax arising from the
inconsistent reporting and issuing a notice of deficiency for
the rest, respondent originally issued a single notice of defi-
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(238) WINTER v. COMMISSIONER 243
ciency for both the increase in tax due to inconsistent
reporting and the much smaller increase in tax due to Win-
ter’s failure to report income listed on some Forms 1099.
Winter’s petition disputes the entire amount of the defi-
ciency, and respondent summarily assessed the tax caused by
the inconsistent reporting only after the jurisdiction issue
was raised in this docketed case. This raises the question
whether the failure of the IRS to summarily assess before the
issuance of the notice of deficiency precludes our jurisdiction
on the issue of the correct income from the S corporation.
The parties agree with each other that we have jurisdiction
over all issues and make four points. First, they say that sec-
tion 6037 lets the Commissioner choose either to issue a
notice of deficiency or to summarily assess. They also both
argue more generally that because the notice of deficiency in
this case undoubtedly gives us jurisdiction over some issues,
it also gives us jurisdiction over all the other issues needed
to redetermine Winter’s entire 2002 tax liability, including
the portion resulting from his inconsistent reporting.
Respondent also argues that the principles of res judicata
and judicial economy also suffice to give us jurisdiction.
The more direct answer to this jurisdiction issue is found
in the definition of ‘‘deficiency’’. Section 6211(a) defines ‘‘defi-
ciency’’ as the amount by which the correct tax imposed by
the Code exceeds the amount of tax shown on the return plus
the amount of tax previously assessed less any rebates. Here
a notice of deficiency was issued. This is the traditional
‘‘ticket to the Tax Court’’ under section 6213(a). Robinson v.
United States, 920 F.2d 1157, 1158 (3d Cir. 1990). The
amount of tax resulting from the inconsistent treatment was
included in the calculation of the deficiency, and the merits
of this tax liability are before us by the parties’ pleadings.
Section 6212 authorizes the mailing of a notice of defi-
ciency and contains no restrictions prohibiting the inclusion
of mathematical or clerical adjustments. Section 6213 gives
the Tax Court jurisdiction to redetermine a deficiency when
a petition is filed timely in response to a notice of deficiency.
Such jurisdiction does not depend on whether the Commis-
sioner’s determination in the notice of deficiency is correct as
‘‘it is not the existence of a deficiency but the Commissioner’s
determination of a deficiency that provides a predicate for
Tax Court jurisdiction.’’ Hannan v. Commissioner, 52 T.C.
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244 135 UNITED STATES TAX COURT REPORTS (238)
787, 791 (1969). Once we have jurisdiction, it generally
covers all items necessary to determine the correct tax. 3 Sec-
tion 6214(a) gives the Tax Court jurisdiction to ‘‘redetermine
the correct amount of the deficiency even if the amount so
redetermined is greater than the amount * * * [in the
notice]’’. Thus, even if the Schedule K–1 adjustment had not
been in the notice of deficiency, section 6214 allows
respondent to ask for an increased deficiency based on the
Schedule K–1 adjustment.
Section 6512(b) provides the Tax Court with jurisdiction to
determine overpayments. Estate of Baumgardner v. Commis-
sioner, 85 T.C. 445, 449 (1985). Petitioners are claiming an
overpayment. Amended Pet. par. 5d and e. In order to deter-
mine whether there is an overpayment, the Court must
determine the correct tax that should have been paid. The
correct tax for determining overpayments even includes
unassessed tax, the assessment of which is barred by the
statute of limitations. Bachner v. Commissioner, 109 T.C. 125
(1997), affd. without published opinion 172 F.3d 859 (3d Cir.
1998). These jurisdictional provisions of section 6512 provide
the Tax Court with authority to decide all issues necessary
to determine the correct amount of income tax for the taxable
year in issue. Even if respondent made the adjustment based
on the Schedule K–1 as a mathematical adjustment, as has
now been done, the correctness of the adjustment can still be
placed in issue, as can any other previously assessed tax in
order to determine the correct amount of the deficiency or
overpayment. 4 As stated in Russell v. United States, 592
F.2d 1069, 1072 (9th Cir. 1979):
There can be no question that when the taxpayer petitioned the Tax
Court to redetermine the asserted deficiency, the Tax Court acquired juris-
diction to decide the entire gamut of possible issues that controlled the
determination of the amount of tax liability for the year in question. A
party cannot, in such a case, by failing to raise an issue, or by asking the
court not to consider it, escape the Res judicata effect of the decision. This
is hornbook law.
3 Neither
party raises any question about the validity of the notice of deficiency.
4 Sec.
6211(a) defines ‘‘deficiency’’ without tying it to the date of the notice of deficiency or
any other particular date. Consequently, when the Tax Court pursuant to sec. 6214(a) redeter-
mines the ‘‘correct amount of the deficiency’’, we apply sec. 6211(a) as of the date of our decision
and compute the deficiency taking into account any amount assessed ‘‘previously’’; i.e., before
the decision. After all, the effect of our decision is to allow the IRS to assess the deficiency.
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(238) WINTER v. COMMISSIONER 245
Our colleague emphasizes that section 6037(c)(3) mandates
that an adjustment thereunder ‘‘shall be * * * assessed
according to section 6213(b)(1).’’ (Emphasis added.) We note,
however, that even if this provision requires the IRS to make
summary assessment, the IRS complied with this provision
when it, timely, summarily assessed the tax after the notice
of deficiency was issued and the petition was filed. Section
6037(c) does not contain any ‘‘express restrictions’’ on our
‘‘jurisdiction’’. Section 6037 does not even mention the Tax
Court or its jurisdiction. Rather, to read section 6037 as
denying our jurisdiction requires inferences that we abandon
the literal language of the jurisdictional provisions of the
Code and the established caselaw regarding the scope of our
jurisdiction.
Section 6037 is unlike the provisions of the Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97–248,
sec. 402(a), 96 Stat. 648, which specifically provide a parallel
scheme of jurisdiction in this Court for partnership cases.
Sec. 6226. Congress originally included S corporations in the
TEFRA unified audit procedures but eliminated them in 1996
in adopting section 6037(c) in the Small Business Job Protec-
tion Act of 1996, Pub. L. 104–188, sec. 1307(c), 110 Stat.
1781. Congress specifically determined S corporations should
not be treated the same as partnerships in adding section
6037(c). 5 It is inconsistent with this legislative history to
assume that Congress intended to eliminate S corporation
items from the deficiency jurisdiction of this Court involving
individual shareholders, because there is no provision for a
separate judicial determination of the inconsistently reported
item in the case of an S corporation. Thus, there is no neces-
5 H. Conf. Rept. 104–737, at 223 (1996), 1996–3 C.B. 741, 963, states:
Present law
* * * * * * *
In addition, the audit procedures adopted by the Tax Equity and Fiscal Responsibility Act of
1982 (‘‘TEFRA’’) with respect to partnerships also apply to S corporations. Thus, the tax treat-
ment of items is determined at the corporate, rather than individual level.
House bill
* * * * * * *
In addition, the House bill repeals the TEFRA audit provisions applicable to S corporations
and would provide other rules to require consistency between the returns of the S corporation
and its shareholders.
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246 135 UNITED STATES TAX COURT REPORTS (238)
sity to defer the individual case for an action at the level of
the corporation.
As noted previously, respondent assessed the tax arising
from the inconsistent reporting of the S corporation income
after the Court raised this issue and respondent suspended
collecting the assessment pending resolution of the jurisdic-
tion issue. If there is any question whether respondent must
summarily assess to raise the inconsistency issue, it is not
before us, and we leave that question for future cases.
In conclusion, we have jurisdiction over all of the issues in
this case.
An appropriate order will be issued.
Reviewed by the Court.
COLVIN, WELLS, GALE, THORNTON, MARVEL, WHERRY,
KROUPA, GUSTAFSON, PARIS, and MORRISON, JJ., agree with
this majority opinion.
HALPERN, J., concurring in the result only:
I. The Majority
Although I agree with the result the majority reaches, I
find its analysis confusing because of the reservation in the
penultimate paragraph. The majority states: ‘‘If there is any
question whether respondent must summarily assess to raise
the inconsistency issue, it is not before us, and we leave that
question for future cases.’’ Majority op. p. 246.
The majority concludes that we have jurisdiction to con-
sider petitioner’s claim that his income from BFC was less
than the amount reported on the Schedule K–1 he received
from Builders. The majority so concludes principally on two
alternative grounds. The first is that petitioner assigned
error to the entire deficiency that respondent determined,
and the alleged unreported income was one of respondent’s
adjustments contributing to that deficiency. Majority op. p.
243. The second is that, pursuant to our overpayment juris-
diction (which petitioner has invoked), we have ‘‘authority to
decide all issues necessary to determine the correct amount
of income tax for the taxable year in issue.’’ Majority op. p.
244. The majority points out that the correct amount of the
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(238) WINTER v. COMMISSIONER 247
year’s tax even includes amounts that cannot be assessed
because the period of limitations on assessment and collec-
tion has expired. Majority op. p. 244.
What is confusing about the reservation in the penultimate
paragraph is that assessment plays no role in either of the
majority’s principal grounds.
II. The Dissent
I do not agree with Judge Holmes, whose argument, I
believe, rests on a doubtful premise. As Judge Holmes points
out, following the repeal of the two-tier TEFRA audit provi-
sions applicable to S corporations, Congress enacted section
6037(c)(3), which applies the summary assessment rule to S
corporation shareholders who report inconsistently. Section
6037(c) was described as ‘‘[requiring] consistency between the
returns of the S corporation and its shareholders.’’ S. Rept.
104–281, at 51 (1996). In the case of an S corporation share-
holder who fails to notify the Secretary of inconsistent treat-
ment, section 6037(c)(3) undoubtedly allows the Commis-
sioner to summarily assess any adjustment necessary to
make his return consistent with that of the S corporation. I
do not extract from that rule, however, a further rule that an
S corporation shareholder can litigate an inconsistency
between his return and the S corporation’s return only by
‘‘prepaying the tax and filing a claim for refund.’’ Dissenting
op. p. 259.
What if an S corporation shareholder’s only inconsistent
reporting (which he does not identify for the Secretary) were
his failure to claim a $100 deduction (like the charitable con-
tribution deduction in this case)? The Commissioner would
not (indeed, could not) because of that inconsistency assess
any additional tax. Now assume that the Commissioner for
the same year determines a $35 deficiency in the share-
holder’s income tax on the ground that he failed to report a
$100 taxable dividend from a source other than the S cor-
poration. The shareholder petitions this Court and assigns
error to the Commissioner’s determination solely on the
ground that there is no deficiency because the omitted $100
dividend (which he concedes) is exactly offset by the omitted
$100 deduction (which, for the first time, he now claims) and
his income tax liability is no greater than the liability shown
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248 135 UNITED STATES TAX COURT REPORTS (238)
on his return. 1 The Commissioner thinks the deduction
involves an unresolved question of fact and will not concede
any offset. Judge Holmes, I suppose, would refuse to hear the
shareholder’s offset claim and would send him off with a $35
deficiency and, perhaps, the advice to pay it and sue for a
refund. The shareholder’s refund claim would not, however,
in Judge Holmes’ terms, dissenting op. p. 264, ‘‘fit snugly’’
within section 6512(a)(2)—‘‘any amount collected in excess of
an amount computed in accordance with the decision of the
Tax Court’’—since the collection would equal (and not exceed)
the deficiency we upheld. More importantly, nothing in sec-
tion 6037(c) requires any such inefficient approach.
The Internal Revenue Code is extraordinarily complex, and
its parts do not always fit together well. The arguments and
evidence that Judge Holmes assembles are insufficient to
convince me that his reading is correct. Although a taxpayer
who receives notification of inconsistent treatment cannot, in
response to that notification, petition the Tax Court, a tax-
payer who receives a statutory notice of deficiency is explic-
itly so empowered. While undoubtedly there will be difficul-
ties in harmonizing section 6037(c) with the deficiency proce-
dures, I do not find in that section the wholesale restriction
on our jurisdiction to redetermine deficiencies that Judge
Holmes finds.
GOEKE and GUSTAFSON, JJ., agree with part II of this
concurring opinion.
HOLMES, J., dissenting: No one disputes that Winter
reported inconsistently with his S corporation’s return and
that this forced the Commissioner to make adjustments. Sec-
tion 6037(c) commands that ‘‘any adjustment required to
make the treatment of the items by such shareholder con-
sistent with the treatment of the items on the corporate
return shall be * * * assessed according to section
6213(b)(1). Paragraph (2) of section 6213(b) shall not apply to
any assessment referred to in the preceding sentence.’’
1 A deficiency is defined in part as the excess of ‘‘the tax imposed by subtitle A’’ (i.e., the tax-
payer’s income tax liability) over ‘‘the amount shown as the tax by the taxpayer upon his re-
turn’’. Sec. 6211(a). The taxpayer in the example in the text is arguing no deficiency on the
ground that, taking into account the two adjustments (dividend and unclaimed deduction), the
tax imposed by subtit. A is exactly equal to the tax shown on his return.
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(238) WINTER v. COMMISSIONER 249
The majority doesn’t really wrestle with the meaning of
this section, but instead pokes around in other corners of the
Code to find support for its holding that we have jurisdiction
to review the Commissioner’s adjustments to Winter’s return.
But section 6037(c) doesn’t go away if we cite the Code’s
more general jurisdictional sections. The result the majority
reaches forces us to pretend that section 6037’s ‘‘shall make
adjustments’’ using summary assessments really means ‘‘may
make adjustments;’’ that section 6213(b)(1)’s command that
taxpayers may not file a petition in our Court to contest such
adjustments really means that they can file a petition with
Tax Court to contest such adjustments; and that the phrase
‘‘any adjustment required to make the treatment of the items
* * * consistent with the treatment of the items on the cor-
porate return shall be * * * assessed according to section
6213(b)(1)’’ really means that any such adjustment shall be
assessed according to section 6213(b)(1) or section 6214 or
section 6215, or refunded according to section 6512.
I disagree.
I.
Inconsistent reporting results when a taxpayer reports an
item on his tax return differently than another entity or tax-
payer reports the same item. Before 1982, inconsistent
reporting between partners and their partnership, and
between S corporation shareholders and their corporation,
was a particularly difficult problem for the IRS. The Code
doesn’t tax partnerships and S corporations at the entity
level, and inconsistent reporting forced the IRS to fight part-
nership or corporate issues with each individual partner or
shareholder. This was burdensome, repetitive, and easily led
to inconsistent results among similarly situated taxpayers.
In 1982 Congress armed the IRS with a powerful weapon
against inconsistency, the Tax Equity and Fiscal Responsi-
bility Act of 1982 (TEFRA), Pub. L. 97–248, 96 Stat. 324.
TEFRA’s purpose was ‘‘to promote increased compliance and
more efficient administration of the tax laws,’’ H. Conf. Rept.
97–760, at 600 (1982), 1982–2 C.B. 600, 662, or—in other
words—to promote consistency. Blonien v. Commissioner, 118
T.C. 541, 563 (2002) (citing Greenberg Bros. Pship. #4 v.
Commissioner, 111 T.C. 198, 201 (1998), affd. sub nom.
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250 135 UNITED STATES TAX COURT REPORTS (238)
Cinema ’84 v. Commissioner, 294 F.3d 432 (2d Cir. 2002)),
supplemented by T.C. Memo. 2003–308. Congress created
entity-level tax proceedings to determine the proper treat-
ment of entity-level items in a single forum. It also stripped
courts of their jurisdiction to hear entity-level disputes at the
individual-taxpayer level. See, e.g., Subchapter S Revision
Act of 1982, Pub. L. 97–354, sec. 4(a), 96 Stat. 1691 (adding
sections 6241–6245); Blonien, 118 T.C. at 563. Partners or
shareholders of those entities would then be bound by the
determinations made in their entity’s case.
Most S corporations were at first subject to these TEFRA
procedures. But in 1996, Congress repealed the laws that
created the S-corporation procedures and decreed that S cor-
porations would no longer have to follow TEFRA. Small Busi-
ness Job Protection Act of 1996 (SBJPA), Pub. L. 104–188, sec.
1307(c)(1), 110 Stat. 1781. The sparse legislative history
states only that Congress removed S corporations from the
TEFRA procedures because it believed that entities with a lim-
ited number of owners should not be subject to TEFRA. See,
e.g., S. Rept. 104–281, at 51 (1996). 1 Congress did not how-
ever, return to the status quo ante—it still wanted to solve
the problem of inconsistent reporting. But the legislative his-
tory says only that the Act had ‘‘other rules to require
consistency between the returns of the S corporation and its
shareholders.’’ Id.
One of these ‘‘other rules’’ is section 6037(c), which
requires shareholders to notify the Commissioner of any
inconsistent reporting. If they don’t, section 6037(c)(3) pro-
vides consequences:
(3) EFFECT OF FAILURE TO NOTIFY. * * *
* * * * * * *
any adjustment required to make the treatment of the items by such
shareholder consistent with the treatment of the items on the corporate
return shall be treated as arising out of mathematical or clerical errors
and assessed according to section 6213(b)(1). Paragraph (2) of section
6213(b) shall not apply to any assessment referred to in the preceding sen-
tence.
On its face, this requires a taxpayer to notify the Commis-
sioner of inconsistent reporting or face assessment according
1 There is an analogous exception for partnerships with a small number of partners. Sec.
6231(a)(1)(B).
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(238) WINTER v. COMMISSIONER 251
to section 6213(b)(1)—so-called summary assessment (i.e.,
assessment without a notice of deficiency and chance for Tax
Court review). It is this language that the parties and, I fear,
my colleagues are trying to ignore. 2
Everyone else involved in this case agrees that the Tax
Court has jurisdiction over all the issues Winter raises. They
do not agree on exactly why that should be so. The parties
argue that section 6037 gives the Commissioner his pick of
procedures. They also argue that because the notice in this
case undoubtedly gives us jurisdiction over some issues, it
gives us supplemental jurisdiction over all the other issues
needed to redetermine Winter’s entire 2002 tax liability. And
finally the Commissioner tacks on arguments that res judi-
cata and judicial economy mandate our jurisdiction.
The majority adopts some of these, but skips over the lan-
guage of section 6037(c) to focus on more general provisions
in the Code. It first says that the amount of any adjustment
from inconsistent reporting is included in the definition of
‘‘deficiency’’ under section 6211, which means we have juris-
diction under sections 6212 and 6213(a). In the alternative it
agrees with the parties that we have supplemental jurisdic-
tion under section 6214(a) because Winter was properly in
Tax Court to argue about other items in the notice of defi-
ciency. The majority also reasons that we have jurisdiction
under section 6512(b) because Winter claims he overpaid his
taxes. 3 The majority doesn’t bother parsing section 6037(c),
but instead reasons that we had jurisdiction before Congress
enacted TEFRA’s sections governing S corporations, section
6037(c) doesn’t expressly remove that jurisdiction, and there-
2 Similar language has since become popular with legislative draftsmen. See Jobs and Growth
Tax Relief Reconciliation Act of 2003, Pub. L. 108–27, 117 Stat. 753 (enacting sec. 6429); Eco-
nomic Growth & Tax Relief Recognition Act of 2001, Pub. L. 107–16, sec. 101(b), 115 Stat. 42
(enacting sec. 6428, originally with regard to an acceleration of the 10-percent income tax rate
bracket); Taxpayer Relief Act of 1997, Pub. L. 105–34, sec. 1222(a), 111 Stat. 1008 (enacting
secs. 6246(c) and 6241(b)); id. sec. 1027(a), 111 Stat. 925 (enacting sec. 6034A(c)). Our decision
today will likely subvert these other Congressional commands to the Commissioner to sum-
marily assess.
3 The majority cites paragraphs 5d and 5e of the amended petition to show that Winter is
claiming an overpayment. Majority op. p. 244. But those paragraphs do not allege an overpay-
ment of tax; they allege only an overreporting of income. In his amended petition Winter merely
requests that this Court determine there is no deficiency and that the amount shown on his
return should be reduced. A review of Winter’s tax records submitted by the Commissioner after
this case was referred to conference shows that Winter substantially underpaid the taxes he re-
ported on his return. No payment accompanied his return, and his withholding credit was so
small as to trigger nearly $50,000 in underwithholding penalties. I do not think the record fairly
read supports either an allegation or a finding of actual overpayment jurisdiction in this case.
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252 135 UNITED STATES TAX COURT REPORTS (238)
fore the repeal must have revived it. And finally, the
majority concludes that even if ‘‘shall’’ means ‘‘shall’’, the
Commissioner did summarily assess inconsistency adjust-
ments against Winter after he filed his petition, and that’s
good enough.
A.
I begin with the language of section 6037(c), which raises
three questions. The first is the meaning of the phrase
‘‘adjustment required to make the treatment of the items by
such shareholder consistent with the treatment of the items
on the corporate return.’’ Section 6037 refers the reader to
section 6213, which defines adjustments as changes in the
correct amount of tax due. The best reading of section 6037
would then be that ‘‘adjustments’’ to make a shareholder’s
treatment of an item consistent with his corporation’s means
adjustments to the amount of tax owed flowing from the
inconsistency.
The second question is the meaning of section 6037(c)
when it says such consistency adjustments ‘‘shall be * * *
assessed according to section 6213(b)(1)’’. Section 6213 again
gives the answer: It means assessment on the ‘‘basis of what
would have been the correct amount of tax but for’’ the
inconsistency. The same section provides that any notice of
such an assessment is not a notice of deficiency, the taxpayer
receiving such a notice has no right to file a petition with the
Tax Court based on such a notice, and assessments and
collections of any tax due are not subject to the limits nor-
mally imposed on the IRS between the time a taxpayer files
a petition with us and the time our decision becomes final.
The final question is: what does section 6037(c)(3)’s last
sentence—‘‘Paragraph (2) of section 6213(b) shall not apply
to any assessment referred to in the preceding sentence’’—
mean? Just reading the words should be enough. Paragraph
(2) tells a taxpayer how to respond to a math-error notice if
he wants an abatement of the assessment followed by an
attempt by the Commissioner to reassess. Any such reassess-
ment must, the paragraph says, be subject to ‘‘deficiency
procedures.’’ By making paragraph (2) inapplicable, section
6037(c) is saying that a taxpayer has no right to abatement
of a summary assessment for tax owed due to inconsistent
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(238) WINTER v. COMMISSIONER 253
reporting, and no right to reassessment using ‘‘deficiency
procedures prescribed by this subchapter.’’ Sec. 6213(b)(2)(A).
(‘‘[T]his subchapter’’ means everything from section 6211 to
section 6216, including section 6211’s definition of deficiency
and section 6215’s provision for assessment of deficiencies
found by the Tax Court.)
If ‘‘shall’’ means ‘‘shall’’, this means that consistency
adjustments have to be assessed under section 6213(b), not
adjusted by assessment under sections 6212 and 6213(a) or
readjusted under section 6214 or 6512 after a deficiency peti-
tion is filed.
I would therefore hold that we lack jurisdiction in a defi-
ciency case to decide the amount of Winter’s passthrough
income or loss from BFC. The Commissioner had no power to
issue a notice of deficiency with respect to this item—and
even though he issued one anyway, that doesn’t give our
Court power to review the adjustments it makes. Congress
could of course have written the Code to give the Commis-
sioner more than one way to assess, and sometimes it has.
Consider the procedure for correcting tentative carryback
adjustments. This, too, is an exception to the restrictions on
assessment in section 6213(a). Section 6213(b)(3) governs the
problem, and says that the Secretary ‘‘may assess * * * the
amount of the excess as a deficiency as if it were due to a
mathematical or clerical error appearing on the return.’’
(Emphasis added.) A related regulation provides that
The method * * * to recover any amount applied, credited, or refunded in
respect of an application for a tentative carryback adjustment which
should not have been so applied, credited or refunded is not an exclusive
method. Two other methods are available to recover such amount: (a) By
way of a deficiency notice under section 6212; or (b) by a suit to recover
an erroneous refund under section 7405. * * * [Sec. 301.6213–1(b)(2)(ii),
Proced. & Admin. Regs.; emphasis added.]
See generally Ron Lykins, Inc. v. Commissioner, 133 T.C. 87
(2009). The difference in wording is obvious—section 6213
uses the word ‘‘may’’, instead of section 6037’s ‘‘shall’’, and
the related regulation leaves the choice of method up to the
Commissioner. There’s no regulation like that one here, and
so I have to conclude that section 6037(c) makes summary
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254 135 UNITED STATES TAX COURT REPORTS (238)
assessment the exclusive procedure for the Commissioner to
use to correct inconsistent reporting like Winter’s. 4
Section 6201(a)(3), governing erroneous refunds sent to
taxpayers who overstate the amount of their tax
withholdings, is another example showing that Congress
knows how to give the Commissioner a choice when it wants
to. That section provides that an overstatement ‘‘may be
assessed * * * in the same manner as in the case of a
mathematical or clerical error’’ but also provides that ‘‘the
provisions of section 6213(b)(2) * * * shall not apply.’’ Id.
(emphasis added). This means that if the Commissioner
chooses to summarily assess, the taxpayer has no right to
demand an abatement and detour through the deficiency
procedures. We looked at the consequences of this for our
jurisdiction twenty years ago and concluded:
although actual mathematical or clerical errors that are summarily
assessed may become subject to the normal deficiency procedures after
abatement, sec. 6213(b)(2)(A), this is not so for the deemed mathematical
or clerical errors at issue here. Section 6201(a)(3) expressly provides that
abatement is not available for summary assessments of overstated with-
held taxes. [Schlosser v. Commissioner, 94 T.C. 816, 826 (1990).]
These examples stand in stark contrast to section 6037(c)’s
use of ‘‘shall’’. And section 6037(c) isn’t unique in limiting the
Commissioner to summary assessment under section
6213(b)(1). See secs. 6034A(c) (inconsistent reporting between
trust or estate and beneficiary), 6428(f)(1) (adjustment for
advance receipt of 2008 recovery rebate, originally enacted in
2001 for an acceleration of ten-percent income tax rate
bracket), 6429(d)(1) (adjustment for advance receipt of 2003
child tax credit increase); cf. secs. 6246(c)(1) (rules ‘‘similar’’
to section 6213(b)(1) shall apply to mathematical or clerical
error on partnership return), 6241(b) (assessment of
inconsistency on partner’s return is limited to math-error
procedures). Some of these sections prohibit section
6213(b)(2)’s channeling of disagreements into deficiency
actions, see secs. 6034A(c), 6241(b), and some of them do not,
4 And while we have held that ‘‘it is not the existence of a deficiency but the Commissioner’s
determination of a deficiency that provides a predicate for Tax Court jurisdiction,’’ Hannan v.
Commissioner, 52 T.C. 787, 791 (1969), the issue here is whether the Commissioner had the
power to determine a deficiency that included adjustments to make Winter’s return consistent
with BFC’s. ‘‘While a deficiency notice is a necessary requisite to the commencement of a case
in this Court, this simply is a procedural precondition and in no way operates to confer jurisdic-
tion upon us over substantive issues.’’ Bradley v. Commissioner, 100 T.C. 367, 371 (1993).
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(238) WINTER v. COMMISSIONER 255
see secs. 6428(f)(1), 6429(d)(1). Section 6246(c)(1) has both—
generally allowing abatement and deficiency procedures in
subparagraph (A) but removing the taxpayer’s right in
subparagraph (B) when the Commissioner’s adjustment is
due to inconsistent reporting. The majority states that sec-
tion 6212 doesn’t forbid the Commissioner from including a
math-error adjustment in a notice of deficiency. Majority op.
p. 243. That’s true, and when nothing in the Code says other-
wise one could logically conclude that the Commissioner has
his choice of procedures. But when the Commissioner makes
a consistency adjustment to align a shareholder’s return with
his S corporation’s, section 6037(c) governs. That section says
the Commissioner shall assess according to section 6213(b)(1)
if the taxpayer failed to file the required statement. In this
case, section 6212’s silence cannot trump section 6037(c)’s
command.
B.
The majority implicitly disagrees with my view that this
case forces us into a close reading of section 6037. It instead
begins its analysis of the jurisdictional question by asserting
that ‘‘[t]he more direct answer to this jurisdiction issue is
found in the definition of ‘deficiency,’ ’’ majority op. p. 246,
though it declines to enlighten us on what that direct answer
is. If the majority is implying that the consistency adjust-
ment is properly part of the original deficiency determined by
the Commissioner simply by definition, then it should say so
and explain how this is consistent with sections 6037(c) and
6213(b)(1).
This would be a very tough chore. For, if the majority is
right that the consistency adjustment in this case is a defi-
ciency by definition, simply because the Commissioner deter-
mined it was, majority op. p. 243, then section 6213(a) would
forbid the Commissioner from assessing or collecting it until
our decision was final: ‘‘No assessment of a deficiency * * *
shall be made, begun, or prosecuted * * * if a petition has
been filed with the Tax Court, until the decision of the Tax
Court has become final.’’ But section 6037(c)’s plain language
commands that any adjustment due to inconsistent reporting
‘‘shall be * * * assessed according to section 6213(b)(1)’’ and
‘‘paragraph (2) of section 6213(b) shall not apply.’’ (Emphasis
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256 135 UNITED STATES TAX COURT REPORTS (238)
added.) The general deficiency rules would, in other words,
collide head on with section 6213(b)(1), which lifts those
restrictions for summary assessments: ‘‘nor shall such assess-
ment or collection be prohibited by the provisions of sub-
section (a) of this section.’’ So, if the general deficiency rules
apply to consistency adjustments, section 6213(a) commands
that any resulting deficiency may not be assessed or collected
while a case is pending in our Court, while section 6213(b)
commands that assessment of such deficiencies shall not be
prohibited. These provisions cannot simultaneously apply to
the same adjustment. It stands to reason, then, that an item
required to be assessed under section 6213(b)(1)—without
resort to the escape hatch in section 6213(b)(2)—cannot be
assessed as a run-of-the-mill deficiency.
Yet, despite the plain meaning of the word ‘‘shall’’ and our
repeated recognition of that word’s mandatory nature, see,
e.g, Abdel-Fattah v. Commissioner, 134 T.C. 190, 207 (2010),
the majority doesn’t hold the Commissioner to Congress’s
command. Instead, the majority reads other general grants of
jurisdiction as overriding section 6037(c)’s specific language.
C.
The majority correctly notes that when we have jurisdic-
tion over part of a taxpayer’s tax liability for a particular
year, we generally have jurisdiction to decide all the issues
necessary to determine the correct tax for that year. Majority
op. p. 244. Section 6214 generally gives us jurisdiction over
an increase in a deficiency if a petition is properly before us.
And section 6512(b) generally gives us jurisdiction to deter-
mine that a taxpayer has overpaid his taxes, again assuming
a petition is properly before us. Quoting Russell v. United
States, 592 F.2d 1069, 1072 (9th Cir. 1979), the majority
says:
There can be no question that when the taxpayer petitioned the Tax
Court to redetermine the asserted deficiency, the Tax Court acquired juris-
diction to decide the entire gamut of possible issues that controlled the
determination of the amount of tax liability for the year in question. A
party cannot, in such a case, by failing to raise an issue, or by asking the
court not to consider it, escape the Res judicata effect of the decision. This
is hornbook law. [Majority op. p. 244.]
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(238) WINTER v. COMMISSIONER 257
Denying that there can be a question about our jurisdiction
sort of assumes the answer about whether we have jurisdic-
tion. The quoted passage is, nevertheless, an excellent
starting point. The very next sentence in Russell, however,
says: ‘‘We have held that there is an exception to the fore-
going well established rule.’’ Id. at 1072 (discussing the Tax
Court’s lack of equity jurisdiction); see also Domulewicz v.
Commissioner, 129 T.C. 11, 22–23 (2007) (holding that we
don’t have jurisdiction to hear partner-level defenses to pen-
alties imposed in a partnership-level proceeding, even if we
have jurisdiction over other items on the notice of deficiency),
affd. in part and remanded on other grounds sub nom.
Desmet v. Commissioner, 581 F.3d 297 (6th Cir. 2009).
The majority doesn’t ask the seemingly inevitable next
question of whether section 6037(c) slices out another excep-
tion to these general grants of jurisdiction. It does assert that
‘‘to read section 6037 as denying our jurisdiction requires
inferences that we abandon the literal language of the juris-
dictional provisions of the Code and the established caselaw
regarding the scope of our jurisdiction.’’ Majority op. p. 245. 5
I certainly don’t suggest abandoning section 6213(a), 6214(a),
or 6512(b), but rather would read them together with section
6037(c), recognizing the basic principles of statutory
construction that ‘‘ ‘a statute ought, upon the whole, to be so
construed that, if it can be prevented, no clause, sentence, or
word shall be superfluous, void, or insignificant,’ ’’ TRW, Inc.
v. Andrews, 534 U.S. 19, 31 (2001) (quoting Duncan v.
Walker, 533 U.S. 167, 174 (2001)), and that where two stat-
utes conflict, specific laws govern general ones, Pilaria v.
Commissioner, T.C. Memo. 2002–230 (citing Bulova Watch
Co. v. United States, 365 U.S. 753, 758 (1961)).
In Hinck v. United States, 550 U.S. 501 (2007), a taxpayer
filed a claim in the United States Court of Federal Claims
under section 6404(e)(1) for abatement of interest. Before
1996, federal courts had held that these claims were not sub-
ject to judicial review. But in 1996 Congress explicitly pro-
vided for judicial review and additionally said that the Tax
5 As Code sections go, section 6037 is still fairly new and neither it nor any of the even newer
sections with identical or similar language, see supra note 2, have before now produced any
caselaw that the majority, the parties, or I have found analyzing whether our jurisdiction ex-
tends to items that Congress directs the Commissioner to summarily assess but which he in-
stead includes in a notice of deficiency.
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258 135 UNITED STATES TAX COURT REPORTS (238)
Court shall have jurisdiction over any action brought by tax-
payers who meet certain net-worth thresholds. Id. at 503–04.
Hinck recognized that the Code gave the Tax Court juris-
diction in some circumstances, but argued that its silence
about the jurisdiction of other courts should not be read as
making our jurisdiction exclusive. He urged the Supreme
Court to follow the Fifth Circuit’s opinion in Beall v. United
States, 336 F.3d 419, 430 (5th Cir. 2003), which held that the
Code’s new section, by providing an abuse-of-discretion
review standard, meant that IRS decisions denying the abate-
ment of interest were no longer standardless agency
decisions necessarily unreviewable according to general prin-
ciples of administrative law. The Fifth Circuit reasoned that
district courts had always had jurisdiction and while the
Code may have given the Tax Court jurisdiction of some spe-
cific determinations, that didn’t mean other courts lacked
concurrent jurisdiction. Id. at 428–29.
The Supreme Court disagreed. In holding that we had
exclusive jurisdiction, the Court said it was governed by ‘‘the
well-established principle that, in most contexts, ‘‘ ‘a precisely
drawn, detailed statute pre-empts more general remedies,’ ’’
Hinck, 550 U.S. at 506 (quoting EC Term of Years Trust v.
United States, 550 U.S. 429, 433 (2007)), and ‘‘guided by our
past recognition that when Congress enacts a specific remedy
when no remedy was previously recognized, or when previous
remedies were ‘problematic,’ the remedy provided is gen-
erally regarded as exclusive,’’ id. (citing Block v. N.D. ex rel.
Bd. of Univ. & Sch. Lands, 461 U.S. 273, 285 (1983)).
Similar reasoning should guide us here. TEFRA originally
supplied the Commissioner with procedures to enforce con-
sistent reporting among S-corporation shareholders,
including corporate-level remedies for those taxpayers. But
after several years, Congress found those remedies to be a
problem for entities with a small number of affected share-
holders. To fix this, it exempted S corporations from TEFRA,
and enacted section 6037(c) in TEFRA’s place. Like the statute
in Hinck, section 6037(c) is narrowly drawn—it affects only
S-corporation shareholders who fail to notify the Commis-
sioner of their inconsistent reporting of a subchapter-S item.
And it requires assessment through section 6213(b)(1). In
this case, because section 6037(c) does not allow a taxpayer
to invoke deficiency procedures under section 6213(b)(2), a
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(238) WINTER v. COMMISSIONER 259
taxpayer’s established remedy is prepaying the tax and filing
a claim for refund.
Following Hinck, I think we must reject the argument that
silence overrides a limitation on a taxpayer’s remedy. Even
if the Code’s general provisions would give us jurisdiction,
where a specific section says otherwise we can’t justifiably
argue that the general trumps the specific. Hinck points us
in exactly the opposite direction—that section 6037(c)’s road
to assessment is the only one open for the Commissioner for
the particular class of adjustments at issue here. See id. at
506.
D.
The majority does argue that even if Congress meant what
it said when it said the Commissioner ‘‘shall’’ assess
according to section 6213(b)(1), the Commissioner satisfied
that requirement because he did summarily assess Winter’s
consistency adjustments, albeit after issuing the notice of
deficiency. Majority op. p. 245. But does the Commissioner’s
postpetition summary assessment somehow give us jurisdic-
tion to readjust those items? The majority implicitly holds
that it does—but its failure to analyze the question creates
some serious problems in reconciling section 6213(a) and
(b)(1).
The problems harken back to the definition of deficiency.
Recall that if the consistency adjustment is part of the defi-
ciency, then the Commissioner cannot assess or collect it
until our decision becomes final; but if it isn’t, then the
Commissioner shall make an immediate assessment and
demand payment. See Bregin v. Commissioner, 74 T.C. 1097,
1102 (1980). There are only two possibilities. The first is that
consistency adjustments are a ‘‘deficiency’’ (as the majority,
remember, holds at the start of its analysis). But that would
make this postpetition summary assessment invalid under
the section 6213(a) ban on postpetition assessments. Which
would mean the Commissioner still hasn’t complied with sec-
tion 6037(c). The alternative possibility is that consistency
adjustments are not a ‘‘deficiency’’. But then we don’t have
jurisdiction to redetermine them, because their readjustment
wouldn’t be a redetermination of a ‘‘deficiency’’.
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260 135 UNITED STATES TAX COURT REPORTS (238)
The majority seems to avoid this problem by quoting the
definition of ‘‘deficiency’’ as ‘‘the amount by which the correct
tax imposed by the Code exceeds the amount of tax shown
on the return plus the amount of tax previously assessed less
any rebates.’’ Majority op. p. 243. This is almost right—sec-
tion 6211(a) actually says it’s the amount ‘‘previously
assessed (or collected without assessment) as a deficiency’’
that is relevant. (Using a word in its definition is never help-
ful, but we shouldn’t just lop off the whole phrase without
mention.)
We have never directly interpreted in our precedential
caselaw what it means for something to be assessed ‘‘as a
deficiency.’’ 6 In Heasley v. Commissioner, 45 T.C. 448, 458
(1966), we suggested that an amount summarily assessed
due to a math error could be considered either as an amount
shown on a return, or as an ‘‘amount assessed as a deficiency
for which no notice was required.’’ In Acme Steel Co. v.
Commissioner, T.C. Memo. 2003–118, we suggested in dicta
that a summary assessment is an assessment as a deficiency.
But, in distinguishing between summary and deficiency
assessments, the Seventh Circuit (where an appeal in this
case would lie) has held that ‘‘unlike a summary assessment,
a deficiency assessment requires the IRS to follow a number
of statutory steps before it may undertake to collect the defi-
ciency.’’ Murray v. Commissioner, 24 F.3d 901, 903 (7th Cir.
1994). Under Murray, an amount assessed as a deficiency
seems to be limited to an amount that was subject to the
deficiency procedures. I don’t resolve this issue, but only
point out that the majority’s assertion is sound only if a sum-
mary assessment is not one assessed as a deficiency.
A related difficulty is that section 6211(a) doesn’t specify
from which date something is ‘‘previously assessed’’—the
date of the notice of deficiency, the date of our decision, or
some other date? The majority does address this problem and
holds that we redetermine deficiencies as of the date of our
decision, so ‘‘previously assessed’’ means assessed before our
decision. Majority op. note 4. So, according to the majority,
a deficiency would reflect any amounts summarily assessed
after the petition is filed and while the case is pending. The
6 In Lawless v. Commissioner, T.C. Summary Opinion 2001–178, we determined that an as-
sessment not made in accordance with the deficiency procedures was not previously assessed
‘‘as a deficiency.’’ But because this was a Summary Opinion, we do not rely on it.
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(238) WINTER v. COMMISSIONER 261
majority, however, then offhandedly notes that the effect of
our decision is to allow the Commissioner to ‘‘assess’’ (by
which I think it means ‘‘reassess’’ or ‘‘abate and reassess’’)
the deficiency we just redetermined. Majority op. note 4.
Reading ‘‘previously assessed’’ to mean ‘‘assessed before we
enter a final decision’’ may look uncontroversial. But it may
lead to some strange results if we’re not careful in analyzing
whether the Commissioner’s summary assessment is an
‘‘[amount] previously assessed * * * as a deficiency.’’ The
majority opinion is deeply ambiguous on this point. But con-
sider the two alternatives. The first is that the summary
assessment makes the consistency adjustments in this case
‘‘an amount of tax previously assessed as a deficiency.’’ But
that would mean—because the Code excludes such amounts
from section 6211(a)’s definition of deficiency—that we don’t
have jurisdiction to redetermine it. 7
The second alternative is that an amount that is sum-
marily assessed is not ‘‘an amount of tax previously assessed
as a deficiency.’’ This would solve the jurisdictional problem
from the majority’s perspective—our decision would allow the
Commissioner to assess the full deficiency we redetermine,
as the majority puts it in note 4. But then what effect would
a summary assessment have?
Look at a simplified example. Recall the definition of defi-
ciency. In algebraic form, d = t – (s + a), where deficiency (d)
equals the actual tax imposed by the Code (t) less the total
tax shown on the return (s) plus prior assessments as a defi-
ciency (a). 8 See Estate of Branson v. Commissioner, 113 T.C.
6, 37–38 (1999) (Beghe, J., concurring), affd.
264 F.3d 904
(9th Cir. 2001). Imagine an S-corporation shareholder—let’s
call her Spring. Assume the tax imposed by the Code on
Spring’s income in 2002 is $1,000, but she only reported $400
on her return. Of the remaining $600, $550 is due to incon-
sistent reporting of her passthrough income from her S cor-
poration and $50 is due to unreported dividend income.
7 Things get even stranger if one imagines a case like Winter’s, except that the only contested
items are consistency adjustments. The majority would presumably hold that we have jurisdic-
tion once a petition is filed challenging consistency adjustments determined in a notice of defi-
ciency. But would we then lose jurisdiction as soon as the Commissioner summarily assesses
the precise amount at issue? Or would we be forced to enter a decision of no deficiency because
a summary assessment would become—at any time before entry of decision—‘‘an amount of tax
previously assessed as a deficiency?’’
8 Winter’s case doesn’t involve any rebates or collections made without assessments, so I ex-
clude them.
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262 135 UNITED STATES TAX COURT REPORTS (238)
Spring neglected to file a Form 8082, Notice of Inconsistent
Treatment or Administrative Adjustment Request, but the
Commissioner issued a notice of deficiency instead of sum-
marily assessing, and he included both the consistency
adjustment and the dividend income. Spring timely peti-
tioned the Tax Court. Later, but before our decision, the
Commissioner summarily assessed the tax due to the
inconsistently reported income.
Thinking through the implications of the majority’s asser-
tion that a summary assessment is an ‘‘amount previously
assessed’’ if it’s made before the date of our decision—and if
a summary assessment is considered an ‘‘amount previously
assessed * * * as a deficiency,’’ Spring’s deficiency would be
$50. Her true tax ($1,000) minus the sum of her self-reported
tax ($400) plus any amount previously assessed as a defi-
ciency ($550) is $50. In pure numbers: $1,000 – ($400 + $550)
= $50. Not coincidentally, this is the same amount of tax due
to her unreported dividend income which has not already
been assessed. It also quite clearly does not include the $550
amount summarily assessed. So if summary assessments are
considered amounts previously assessed as a deficiency, then
they are not part of the current deficiency and we don’t have
jurisdiction to redetermine them. (And this dissent would be
a concurrence.)
If this is not true—if a summary assessment is not consid-
ered an ‘‘amount previously assessed * * * as a deficiency’’—
Spring’s deficiency would be $600. Her true tax ($1,000)
minus the sum of her self-reported tax ($400) plus any
amount previously assessed as a deficiency ($0) is $600.
Again, in numbers: $1,000 – ($400 + $0) = $600. This sug-
gests that both the consistency adjustment and the unre-
ported dividend income are part of the deficiency and we
have jurisdiction to redetermine both. (The majority’s
holding, after all, is that we do have jurisdiction to redeter-
mine the Commissioner’s summarily assessed consistency
adjustments to Winter’s tax bill.)
The problem here is that the majority says the effect of its
holding is to allow the Commissioner to assess Spring’s
newly determined deficiency of $600. This potentially leaves
Spring with quite a tax bill. She has reported $400, which
was undoubtedly assessed as required under section
6201(a)(1), and the Commissioner summarily assessed $550
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(238) WINTER v. COMMISSIONER 263
after she petitioned the Tax Court (thereby complying with
the provision of section 6037), and now the Commissioner
has permission to assess another $600. Although the actual
tax imposed by the Code is $1,000, the majority’s reading
would allow the Commissioner to assess $1,550. One might
hope that, in his mercy, the Commissioner would not press
the majority’s logic to its double-counting extreme and would
provide some kind of relief if different parts of the bureauc-
racy inadvertently acted to produce such a result. But I think
it generally unwise to read the Code in a way in which a sen-
sible result depends on the forbearance of one of the parties.
One may also suggest that we have the authority under
section 6213(a) to order the Commissioner to abate the sum-
mary assessment or enjoin collection, but the Code removes
that power when the Commissioner summarily assesses
under section 6213(b)(1) (‘‘nor shall such assessment or
collection be prohibited by the provisions of subsection (a) of
this section’’). It would be best to avoid such a muddle.
E.
Turning now to some arguments that the parties alone
made, I first address the Commissioner’s argument that if
summary assessment is his exclusive avenue under section
6037, a shareholder’s only recourse is to sue for a refund in
district court, which may lead to res judicata trouble. A
problem might arise, he says, if the taxpayer has to bring
two suits to redetermine liability for the same tax year: one
in the Tax Court in response to the notice of deficiency and
one in district court in response to a summary assessment.
He argues that because the taxpayer’s 2002 tax year is a
single cause of action, see Commissioner v. Sunnen, 333 U.S.
591, 598 (1948), Winter must be able to bring all issues
relating to the determination of his income tax liability
before us or be forever barred from doing so.
I disagree. Section 6212(c)(1) says that the IRS can’t issue
a notice of deficiency for a tax year that is already the sub-
ject of litigation in the Tax Court. A math-error notice, how-
ever is, by definition, not a notice of deficiency. Secs.
6212(c)(1), 6213(b)(1); cf. Jefferson Smurfit Corp. v. United
States, 439 F.3d 448, 453 (8th Cir. 2006) (‘‘Congress intended
to exclude * * * [the assessments listed in section 6212(c)(1)]
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264 135 UNITED STATES TAX COURT REPORTS (238)
from the general policy of finality’’). The Code therefore
allows the IRS to issue both a notice of deficiency and a math-
error notice for the same tax year without the first barring
the second. I think it unlikely that cases arising from section
6037(c)—with its cross-reference incorporating math-error
procedures under section 6213(b)(1)—would somehow end up
being treated differently.
The Code has a somewhat similar rule in section 6512(a).
That section says that a taxpayer cannot petition our Court
and then seek a refund for the same tax year in district
court. But there is an exception: Section 6512(a)(2) allows a
taxpayer to pursue a refund ‘‘as to any amount collected in
excess of an amount computed in accordance with the deci-
sion of the Tax Court which has become final.’’ See also sec.
301.6512–1(e), Proced. & Admin. Regs. If the Commissioner
were to summarily assess a consistency adjustment following
a final decision of the Tax Court for the same tax year (but
related to other items), anything that he collected as a result
of the summary assessment would fit snugly within this
provision. This is especially true if one reads section
6512(a)(2) together with section 6213(b)(1)’s command that a
math-error notice ‘‘shall not be considered as a notice of defi-
ciency for the purposes * * * of section 6512(a)’’—meaning
that a taxpayer who is issued a deemed math-error notice
may still pay and then pursue a refund in a refund court. 9
Section 7422(e) likewise prevents two courts from having
jurisdiction over the same tax year at the same time. But in
Hemmings v. Commissioner, 104 T.C. 221, 229 (1995), we
said that this section ‘‘does not prohibit two actions involving
the same taxable year from being litigated seriatim.’’
Requiring the IRS to use summary assessment to adjust the
portion of Winter’s tax liability arising from inconsistent
9 There are also situations where the Tax Court can become a refund court. Section 6512(a)
requires a taxpayer who has a potential refund claim and who has received a notice of deficiency
and who wants to contest that notice in the Tax Court to file a case here that both contests
the alleged deficiency and makes the case for a refund. But that’s not Winter’s case—he paid
nothing after the summary assessment, and doesn’t allege that he overpaid before.
Judge Halpern’s hypothetical consistency adjustment in a taxpayer’s favor—an overlooked
flowthrough charitable deduction offsetting an uncontested increase in unreported and unrelated
dividend income—hardly undermines this analysis. A consistency adjustment (or a net consist-
ency adjustment of several items) in a taxpayer’s favor would not trigger an assessment, it
would trigger a refund. Sec. 601.105(a), Statement of Procedural Rules. (Math errors in tax-
payer’s favor trigger refunds.) The prohibition on a taxpayer’s use of deficiency procedures to
contest such an assessment would not apply—section 6037(c)(3)’s last sentence refers only to
‘‘assessments,’’ not all possible deemed math errors.
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(238) WINTER v. COMMISSIONER 265
reporting would square with both a plain reading of section
6037(c) and the Code’s related procedural requirements. And
our related caselaw agrees—we held in Trost v. Commis-
sioner, 95 T.C. 560, 566 (1990), that res judicata does not
block us from deciding an issue when a taxpayer could not
have raised it in an earlier case because we lacked jurisdic-
tion. See also Ron Lykins, 133 T.C. at 109; Vines v. Commis-
sioner, T.C. Memo. 2009–267.
F.
The Commissioner finally argues that it would be more
efficient to consolidate in one proceeding all the issues that
Winter is raising. I don’t necessarily disagree, 10 but some-
times cracking one tax year into two cases is just what the
Code requires. Our opinion in Tigers Eye Trading, LLC v.
Commissioner, T.C. Memo. 2009–121, is an example. We
described in Tigers Eye how Congress intentionally
bifurcated penalty proceedings under TEFRA, giving us juris-
diction to decide liability for the penalties at the partnership
level, and shooing partners who say they have defenses
against those penalties to separate refund suits, even when
we have before us a partner-level case on other items related
to the same year and the same taxpayer. Sec. 6221; sec.
301.6221–1(c), Proced. & Admin. Regs. And jurisdiction splits
aren’t limited to the partnership-partner context. See Hinck,
550 U.S. at 509 (finding ‘‘nothing tellingly awkward’’ about
sending interest abatement and refund claims to two dif-
ferent courts ‘‘even if in some respects it ‘may not appear to
be efficient’ ’’); Ron Lykins, 133 T.C. at 109 (finding a con-
stellation of Code sections work together to permit a tax-
payer to split his claim into two Tax Court proceedings as
related to tentative carryback refunds); Odend’hal v.
Commissioner, 95 T.C. 617, 622 (1990) (rejecting conven-
10 Although the Commissioner argues that splitting the claim would not be efficient, in the
past the IRS has noted how much more expensive it is for the Commissioner to maintain a defi-
ciency case than to summarily assess. S. Rept. 94–938, at 375 (1976). In a deficiency case, for
example, the taxpayer may get two prepayment bites at the apple—one following the notice of
deficiency to establish the liability and another following a notice of determination after the
Commissioner tries to collect. If the Commissioner summarily assesses, the taxpayer has to pre-
pay to contest the liability, thus bypassing the collection trial, or alternatively will only be able
to contest the collections without paying, thus bypassing the liability trial. So it’s not even clear
that the benefits from a consolidated trial would outweigh the efficiency of summary assess-
ment—especially in cases like this one where the items not subject to summary assessment were
small and conceded.
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266 135 UNITED STATES TAX COURT REPORTS (238)
ience-of-the-forum argument because the language of now-
repealed section 6621(c)(4) gave the Tax Court only limited
jurisdiction over interest determination). This might not be
efficient, but policy can’t override plain language.
G.
We do sometimes depart from a literal reading of a statute
when the related legislative history shows clear but contrary
legislative intent. See Domulewicz, 129 T.C. at 22 (citing
Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447
U.S. 102, 108 (1980); United States v. Am. Trucking Associa-
tions, 310 U.S. 534, 543 (1940)). But in its only argument
explicitly mentioning section 6037(c), the majority looks to
legislative history to find support for the plain meaning and,
finding none, decides Congress could not have meant what it
said.
The majority contends that because Congress removed S
corporations from TEFRA, it would be inconsistent with legis-
lative history to ‘‘assume that Congress intended to eliminate
S corporation items from the deficiency jurisdiction of this
Court * * * because there is no provision for a separate
judicial determination of the inconsistently reported item.’’
Majority op. p. 245. The majority misreads my point—I don’t
suggest that we reinstitute a corporate-level proceeding in
the Tax Court for S corporations. Instead, section 6037(c)
penalizes taxpayers who fail to file Form 8082 by stripping
them of a prepayment forum (and consequently stripping us
of jurisdiction). 11 The majority forgets that taxpayers who
cannot petition our Court may still find relief by paying the
disputed tax and petitioning a district court or the Court of
Federal Claims—so there is a provision for a separate
judicial determination of the inconsistently reported item, it’s
just not with us. And this scheme would be consistent with
the legislative history which demonstrated Congress’s desire,
despite removing the entity-level proceeding, to ensure
11 Winter might be able to petition our Court and contest his tax liability in one narrow cir-
cumstance: In Perkins v. Commissioner, 129 T.C. 58 (2007), a taxpayer who received a math-
error notice didn’t use the abatement procedures available to him. We held that he could chal-
lenge the underlying tax liability at his later collection due process appeal to our Court because
he had had no prior opportunity to contest it. Id. at 64–67. We need not now decide Perkins’s
effect on Winter’s case.
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(238) WINTER v. COMMISSIONER 267
consistency among S corporations and their shareholders.
See S. Rept. 104–281, at 51.
The majority also implies that section 6037(c) couldn’t be
about our jurisdiction because it doesn’t use the word ‘‘juris-
diction.’’ Majority op. p. 245. But when our jurisdiction
depends on a notice of deficiency, we must look at statutes
limiting the use of those notices as inherently about our
jurisdiction.
We’ve been through this before. In Ewing v. Commissioner,
118 T.C. 494, 503–504 (2002), revd.
439 F.3d 1009 (9th Cir.
2006), superseded by statute, Tax Relief and Healthcare Act
of 2006, Pub. L. 109–432, sec. 408, 120 Stat. 3061, as recog-
nized in Ware v. Commissioner, T.C. Memo. 2007–112, we
reasoned that we had jurisdiction over innocent-spouse cases
before the 2000 amendment to section 6015(e), that that
amendment and its legislative history didn’t mention juris-
diction, and so concluded that we still had jurisdiction after
the amendment became effective. In Petaluma FX Partners,
LLC v. Commissioner, 131 T.C. 84, 100 (2008), affd. in part
and revd. in relevant part 591 F.3d 649 (D.C. Cir. 2010), we
reasoned that we had jurisdiction despite literal language to
the contrary, because we needn’t turn ‘‘a blind eye’’ to an
easily answered question.
This just doesn’t work out well for us. See Commissioner
v. Ewing, 439 F.3d 1009, 1014 (9th Cir. 2006) (‘‘Tax Court
simply has written the language out of the statute’’), revg.
118 T.C. 494 (2002) and vacating
122 T.C. 32 (2004), super-
seded by statute, Tax Relief and Healthcare Act of 2006, Pub.
L. 109–432, sec. 408, 120 Stat. 3061, as recognized in Ware,
T.C. Memo. 2007–112; Bartman v. Commissioner, 446 F.3d
785, 787 (8th Cir. 2006) (same), affg. in part and vacating in
part T.C. Memo. 2004–93, superseded by statute, Tax Relief
and Healthcare Act of 2006, Pub. L. 109–432, sec. 408, 120
Stat. 3061, as recognized in Ware, T.C. Memo. 2007–112; see
also Petaluma FX Partners, LLC v. Commissioner, 591 F.3d
at 655 (‘‘that a determination seems obvious or easy does not
expand the court’s jurisdiction’’).
And in other cases we have found statutes not using the
magic word ‘‘jurisdiction’’ to still limit ours. For example, in
New Millennium Trading, L.L.C. v. Commissioner, 131 T.C.
275, 280 (2008), we read sections 6230 and 6221 together to
mean that partners can challenge partnership-level penalties
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268 135 UNITED STATES TAX COURT REPORTS (238)
only in refund actions, though neither of these sections uses
the word ‘‘jurisdiction’’ in the relevant provisions. And in
Domulewicz, 129 T.C. at 23, we even read these provisions
to defeat our supplemental jurisdiction under section 6214(a).
Like section 6230, section 6037(c) limits the parties involved
to nondeficiency procedures—it first says the Commissioner
shall assess according to section 6213(b)(1) (which doesn’t
involve deficiency procedures), and then it says that a tax-
payer can’t resort to section 6213(b)(2) to invoke deficiency
procedures, either.
To summarize, section 6037 governs the audit and litiga-
tion procedures that replaced TEFRA for S corporations. It
imposes duties on both the Commissioner and the share-
holder. The shareholder who wants to avoid summary assess-
ment and keep open his door to the Tax Court has a duty
to either report subchapter S items consistently or file an
extra form with his return telling the Commissioner he isn’t.
None of our general grants of jurisdiction nullify this specific
statute.
II.
If we were to respect Congress’s choice of the word ‘‘shall’’,
we would have to determine which items on Winter’s return
were required to be summarily assessed. Although we’ve
been discussing Winter’s passthrough income from BFC, the
statute actually imposes a consistent reporting duty for any
‘‘subchapter S item.’’ Sec. 6037(c)(1). Section 6037(c)(4)
defines a subchapter S item as ‘‘any item of an S corporation’’
that the regulations say is ‘‘more appropriately determined at
the corporation level than at the shareholder level.’’ So I
would look to each contested item to determine if it meets
that definition. The contested items include:
•Winter’s passthrough income from BFC;
•proper timing for BFC’s deduction of Winter’s bonus;
•characterization and timing of Winter’s bonus;
•Winter’s share of BFC’s charitable contributions; and
•any related penalties.
I’ll address them in order.
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(238) WINTER v. COMMISSIONER 269
Winter’s Passthrough Income
The relevant regulation tells us that subchapter S items
include ‘‘[t]he S corporation aggregate and each shareholder’s
share of * * * [i]tems of income, gain, loss, deduction, or
credit of the corporation.’’ Sec. 301.6245–1T(a)(1), 12 Tem-
porary Proced. & Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30,
1987). The regulation’s plain language therefore makes Win-
ter’s overall passthrough income or loss from BFC a sub-
chapter S item. I would therefore hold that we lack jurisdic-
tion in a deficiency case to decide the amount of Winter’s
passthrough income or loss from BFC.
Proper Timing for BFC’s Deduction of Winter’s Bonus
Whether BFC should have deducted Winter’s bonus in full
on its 2002 return is an item of deduction of the corporation,
and therefore it, too, is a subchapter S item. See id. If Winter
was right and BFC was wrong, Winter’s remedy was to report
it correctly on his return and file a Form 8082, alerting the
Commissioner to BFC’s error and the inconsistency created by
his correction. Winter didn’t do this, so I would leave this
question to a refund forum as well.
Characterization and Timing of Winter’s Bonus
Winter was not only a shareholder of BFC but also an
employee. When he filed his 2002 return, he reported his
entire prepaid bonus as taxable employee income, which was
consistent with the W–2 Builders sent to him. But now
Winter claims only a portion of the bonus should be taxable
in 2002 either because it was really a loan and not income
(the characterization issue); or, if it was income, because he
did not have unrestricted access to it and so should not be
taxed on it until some later year (the timing issue).
This item isn’t in the notice of deficiency, but that doesn’t
matter. This is an instance where Winter argues that he
overpaid his 2002 taxes, and section 6512(b) generally gives
us jurisdiction over such claims. But unlike the majority I
would take an additional step to ensure that this general
power isn’t subject to a specific exception tucked into section
6037(c). If the character or timing of Winter’s bonus is a sub-
12 Section 6037(c)(4) was previously codified as section 6245, but this related temporary regu-
lation was not renumbered.
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270 135 UNITED STATES TAX COURT REPORTS (238)
chapter S item and he did not report consistently with BFC’s
return, then I would hold that we don’t have jurisdiction over
this issue either.
The first step is to decide whether the character of the
bonus (as compensation or a loan) is a subchapter S item. I
look again to the regulation, which says that subchapter S
items include:
(5) Items relating to the following transactions, to the extent that a
determination of such items can be made from determinations that the cor-
poration is required to make with respect to an amount, [or] the character
of an amount, * * * for purposes of the corporation’s books and records or
for purposes of furnishing information to a shareholder.
* * * * * * *
(c) Illustrations—(1) In general. This paragraph (c) illustrates the provi-
sions of paragraph (a)(5) of this section. * * * The critical element is that
the corporation is required to make a determination with respect to a
matter for the purposes stated * * *.
* * * * * * *
(3) Distributions. For purposes of its books and records, or for purposes
of furnishing information to a shareholder, the S corporation must deter-
mine:
(i) The character of the amount transferred to a shareholder (for
example, whether it is a dividend, compensation, loan, or repayment of a
loan) * * *
[Sec. 301.6245–1T, Temporary Proced. & Admin. Regs., supra.]
So the regulation says if the S corporation has to determine
the character of an item for its own purposes, then it’s a sub-
chapter S item. The regulation gives us examples of what an
S corporation has to decide for its own purposes—including
the characterization of amounts transferred to shareholders.
BFC was required to make a determination at the corporate
level as to whether the payment to Winter was a loan or pre-
paid compensation—and it did so by treating the amount as
compensation. Thus the characterization of Winter’s bonus as
a loan or compensation again fits within the definition of a
subchapter S item. Winter thus had a duty to report this
item consistently with BFC’s characterization or file a Form
8082.
But he did his duty. Winter and BFC each reported the
bonus as compensation and not a loan. Although BFC didn’t
claim a current deduction for the entire amount of the bonus,
it treated the payment as a corporation should treat a par-
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(238) WINTER v. COMMISSIONER 271
tially prepaid bonus (or so the IRS thought when it accepted
BFC’s return as filed): by claiming the earned portion of the
bonus as a deduction in 2002, reporting the rest as either
prepaid wages or a decrease in retained earnings, and by
reflecting the entire amount on Winter’s W–2. Winter like-
wise reported the income as a cash-basis taxpayer should
report a prepaid bonus—with the entire amount taxed in the
year received, as reported on his W–2. Therefore, even
though he now argues that he treated it incorrectly, Winter
reported consistently with the way BFC did and did not lose
his access to the Tax Court.
If we find Winter’s bonus payment was income, we also
must decide whether Winter reported the income in the
appropriate year. And so again we must analyze whether
Winter’s timing is a subchapter S item. Our trusty regulation
tells us that even factors that affect the determination of
subchapter S items are subchapter S items. It says: ‘‘The
term ‘subchapter S item’ includes * * * the legal and factual
determinations that underlie the determination of the exist-
ence, amount, timing, and characterization of items of
income, credit, gain, loss, deduction, etc.’’ Sec. 301.6245–
1T(b), Temporary Proced. & Admin. Regs., supra (emphasis
added). At least some of the legal and factual determinations
we must consider in deciding when Winter’s bonus was tax-
able to him correspond to factors dictating BFC’s treatment of
the payment at the S corporation level (whether he had an
unrestricted right to the money in 2002, for example). The
timing of Winter’s payment is also a subchapter S item and
section 6037(c) applies. 13
But again Winter’s reporting was consistent with BFC’s
return. Though Winter now contests it, both he (on his tax
return) and BFC (in the W–2) originally reported the income
as an unrestricted payment, taxable to him entirely in 2002.
Therefore, Winter has met his consistent-reporting duty, and
I would hold that we have jurisdiction over this issue.
13 It may seem anomalous that the timing of an employee’s income recognition is a subchapter
S item and thus considered more appropriately determined at the corporate level. The regulation
is quite broad, however, and the proper timing for Winter’s receipt of the money hinges on its
characterization. Its characterization could in turn affect BFC’s treatment of the payment, which
is a determination in turn to be made at the corporate level.
I also note that if Winter’s timing issue is not a subchapter S item, then he didn’t have a
duty to report consistently and we would have jurisdiction anyway.
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272 135 UNITED STATES TAX COURT REPORTS (238)
Winter’s Share of Charitable Contributions
An S corporation can make charitable contributions, but it
doesn’t deduct them when calculating its income. See sec.
301.6245–1T(a)(1)(ii), Temporary Proced. & Admin. Regs.,
supra. Instead, it notifies its shareholders of their pro-rata
share so each may deduct his portion on their individual
return, subject to each shareholder’s individual limits on
charitable giving. See, e.g., sec. 170(b).
On the K–1 that it sent to Winter, BFC listed $5,062 as his
share of its charitable contributions. Winter did not claim
this deduction on his return, and the Commissioner ques-
tioned in his pretrial brief whether Winter should now be
able to.
The regulation tells us that each shareholder’s share of
‘‘expenditures by the corporation not deductible in computing
its taxable income (for example, charitable contributions)’’ is
a subchapter S item. Sec. 301.6245–1T(a)(1)(ii), Temporary
Proced. & Admin. Regs., supra. Winter’s proper share of
BFC’s charitable contributions is therefore a subchapter S
item, but because he neither reported that item consistently
with BFC’s return nor notified the Commissioner about his
deviation, we should have no jurisdiction to decide this issue.
Related Penalties
The last issue we would need to resolve is whether Winter
owes a penalty. The jurisdictional problem here makes this
issue particularly murky. No one contests that we have juris-
diction over the interest, dividend, and gambling income that
Winter left off his return and therefore we have jurisdiction
over any related penalty as well, see sec. 6665(a)—absent
direction to the contrary of course, see Domulewicz, 129 T.C.
at 23.
If we didn’t find jurisdiction over Winter’s inconsistent
reporting, however, we would still have to decide whether we
have jurisdiction over the related penalties (whether for neg-
ligence or substantial understatement). Looking first to the
Code, section 6665(a) says:
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(238) WINTER v. COMMISSIONER 273
Except as otherwise provided in this title—
(1) [T]he additions to the tax, additional amounts, and penalties pro-
vided by this chapter [14] shall be paid upon notice and demand and shall
be assessed, collected, and paid in the same manner as taxes * * *.
We have interpreted this section to mean that, absent some
exceptions to the general rule, an addition to tax measured
by a tax deficiency is subject to deficiency procedures. See
Meyer v. Commissioner, 97 T.C. 555, 560 (1991); Estate of
DiRezza v. Commissioner, 78 T.C. 19, 25–27 (1982). By con-
trast, the Commissioner may summarily assess penalties or
additions to tax measured by self-reported income on a tax-
payer’s return—again unless the Code says otherwise. Meyer,
97 T.C at 559; Estate of DiRezza, 78 T.C. at 29. The Third
Circuit summarized it well:
Thus, the Code logically provides that where the penalty is measured by
a tax deficiency it is subject to the same procedure as the deficiency, for
if the deficiency is revised by the Tax Court the penalty will be revised
along with it. * * * If self-returned taxes are collected without the
issuance of * * * [notices of deficiency], it follows simpliciter that none are
required for delinquency penalties measured thereon. [United States v.
Erie Forge Co., 191 F.2d 627, 630–31 (3d Cir. 1951). 15]
We have usually addressed this issue in the context of pen-
alties measured by a deficiency determined by the Commis-
sioner (which are subject to deficiency procedures) versus
penalties measured by self-reported taxes (which are sum-
marily assessed). But Winter’s case is subtly different—what
do we do with penalties measured by an asserted deficiency
made by the Commissioner that is not subject to deficiency
procedures?
In Estate of DiRezza, the taxpayer agreed to the Commis-
sioner’s adjustment but not an addition to tax 16 measured by
that adjustment. Estate of DiRezza, 78 T.C. at 21–22. The
Commissioner therefore sent a notice of deficiency that
asserted an addition to tax but determined no underlying
14 Section 6665 is in chapter 68, which includes the Commissioner’s asserted section 6662 pen-
alties.
15 Though the Third Circuit was construing the Internal Revenue Code of 1939, Congress
wrote section 6659 in 1954 to ‘‘conform to the rules under existing law.’’ Estate of DiRezza, 78
T.C. at 28 (reviewing relevant legislative history). Section 6659 later became section 6665.
16 Section 6665(a) treats additions to tax and penalties identically so we compare the additions
to tax in Estate of DiRezza to the penalties here. Estate of DiRezza later relies on section 6659(b)
(now section 6665(b)), but this section by its terms relates only to additions to tax and so we
won’t discuss it here.
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274 135 UNITED STATES TAX COURT REPORTS (238)
deficiency. We nevertheless held that we had jurisdiction
under section 6659 (a near identical predecessor to section
6665), because the addition to tax was ‘‘attributable to a defi-
ciency.’’ Id. at 25. We noted that ‘‘section 6659(a) sets forth
the general rule that the deficiency procedures applicable to
income * * * taxes are equally applicable to additions to
tax.’’ Id. at 26 (emphasis added). This made sense at the time
because we (and the legislative history we reviewed) con-
templated a tax world divided into only two parts: tax
assessed on income self-reported on a return and
tax assessed after the Commissioner sent out a notice of defi-
ciency. Id. at 27. We didn’t consider Winter’s situation, where
an adjustment might not be subject to deficiency procedures.
And it isn’t surprising that we didn’t discuss it—the Code
sections that deny taxpayers access to deficiency procedures
for such adjustments were enacted more than fourteen years
after we decided Estate of DiRezza. See Taxpayer Relief Act
of 1997, Pub. L. 105–34, sec. 1222(a), 111 Stat. 1008
(enacting sections 6246(c) and 6241(b)); id. sec. 1027(a), 111
Stat. 925 (enacting section 6034A(c)); SBJPA sec. 1307(c)(2),
110 Stat. 1781 (enacting section 6037(c) in 1996). 17
We also said in Estate of DiRezza, 78 T.C. at 29, that the
legislative history showed ‘‘that Congress intended to exclude
from the deficiency procedures only those additions which are
attributable to the tax shown on the return.’’ In the light of
the more recent statutory requirements for the Commissioner
to summarily assess certain adjustments, however, I would
now find that statement to be too narrow. When we read sec-
tion 6665(a) as making deficiency procedures the default
option when it comes to asserting penalties, we were implic-
itly reading the word ‘‘deficiency’’ into the Code where it
didn’t appear. Section 6665(a) actually says only that pen-
alties will be assessed and collected in the same manner as
taxes. And where there is more than one way to assess taxes,
I would hold that the Code commands the Commissioner to
assess and collect any penalty in the same manner as the
related tax—whether by deficiency procedures or summary
17 Section 6201(a)(3), allowing the Commissioner to summarily assess overstated withholdings
and denying abatement procedures, was in place when we decided Estate of DiRezza. A few
years before, however, we had decided that overstated withholdings aren’t deficiencies under
section 6211, and so are not subject to deficiency procedures. Bregin v. Commissioner, 74 T.C.
1097, 1105 (1980).
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(238) WINTER v. COMMISSIONER 275
assessment. I see no reason why the logic regarding penalties
related to self-reported income should not extend to other
taxes required to be summarily assessed.
Therefore, unless the Code says otherwise, I would hold
that the jurisdiction for the penalty follows the jurisdiction
for the related tax. This makes sense. For us to find neg-
ligence or substantial understatements where we had no
jurisdiction over the underlying issue would require us to
improperly conclude that there was an understatement in
the first place. And if we sustained a negligence penalty and
Winter later pursued his case in a refund forum, our opinion
would be merely advisory. Further, a substantial understate-
ment penalty is purely computational and based on the
amount of the total understatement, which in my view we
have no jurisdiction to determine. See Petaluma FX Partners,
591 F.3d at 655–56 (finding itself ‘‘unable to uphold’’ the pen-
alty determinations in a Tax Court partnership proceeding
where the penalties could not be computed without a sepa-
rate partner-level proceeding). I would therefore hold that
Winter’s penalties relating to his inconsistent reporting, like
the inconsistently reported items themselves, are not subject
to deficiency procedures; and it follows that we lack jurisdic-
tion over them. Sec. 6213; Meyer, 97 T.C. at 562.
My conclusion in this case might involve more work than
the majority’s rolling of all issues into a single deficiency
case, but I prefer to respect the plain language of the statute.
Some may also find my reading harsh—it would require S
corporation shareholders who fail to notify the Commissioner
that they are taking a position inconsistent with their cor-
porations to prepay their taxes before disputing them.
But we live in a textualist world, and the text requires this
result. A general grant of jurisdiction need not be specifically
repealed, a limitation on jurisdiction need not be spe-
cially noted in legislative history, we need not have to dis-
cern some good policy reason or purpose in the words of the
Code that—even inadvertently—limit our power in a par-
ticular case or over a particular issue or (as here) over any
‘‘adjustment required to make the treatment of the items by
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276 135 UNITED STATES TAX COURT REPORTS (238)
such shareholder consistent with the treatment of the items
on the corporate return.’’ Sec. 6037(c).
I respectfully dissent.
f
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