127 T.C. No. 12



                UNITED STATES TAX COURT



   SUSAN BOCOCK AND JACK CARL RYALS, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 11161-05.                 Filed October 30, 2006.



     Ps made certain payments before filing their 2002
tax return and intended that the payments would be
applied to their 2002 taxable year. R first credited
the payments to Ps’ 2002 taxable year but later
credited the payments to P husband’s outstanding tax
liability from 1978 after Ps filed their 2002 tax
return on which they claimed an overpayment. R
subsequently determined a deficiency in income tax and
an accuracy-related penalty pursuant to sec. 6662(a),
I.R.C., for Ps’ 2002 taxable year and sent Ps a notice
of deficiency. Ps timely petitioned this Court for a
redetermination of the deficiency and contended that
the Court has deficiency jurisdiction over the issue of
whether R improperly applied the payments intended for
Ps’ 2002 taxable year to P husband’s 1978 tax liability
because the payments were amounts “collected without
assessment” within the meaning of sec. 6211(a)(1)(B),
I.R.C.
                               - 2 -

          Held: This Court does not have jurisdiction over
     the issue of whether R improperly applied the 2002
     payments to P husband’s 1978 tax liability because R
     credited P husband’s 1978 tax liability pursuant to
     sec. 6402(a), I.R.C., after Ps reported an overpayment
     on their 2002 tax return. This Court does not have
     jurisdiction to review any credit or reduction made by
     the Commissioner pursuant to sec. 6402(a), I.R.C. Sec.
     6512(b)(4), I.R.C.; Savage v. Commissioner, 

, 49-51 (1999).



     Keith H. Johnson, for petitioners.

     Lauren Epstein, for respondent.



     WELLS, Judge:   The instant case is before the Court on

respondent’s motion to enter a decision.    The parties previously

had represented to the Court that the case was settled and filed

a stipulation of settled issues.   We must decide:   (1) Whether we

have jurisdiction to decide whether respondent improperly

credited to an earlier taxable year an overpayment that

petitioners reported on their income tax return for taxable year

2002, and, (2) if we find that we have such jurisdiction, whether

respondent improperly credited the overpayment.   Unless otherwise

indicated all section references are to the Internal Revenue

Code, as amended.

                         FINDINGS OF FACT

     Some of the facts and certain exhibits have been stipulated.

The parties’ stipulations of fact are incorporated in this
                                 - 3 -

Opinion by reference and are found as facts.     At the time of

filing the petition, petitioners resided in Archer, Florida.

     Petitioners owned a minority interest, as tenants by the

entirety, in AllChem Industries Holding Corp. (AllChem), an

S corporation.    AllChem made distributions to shareholders

primarily to help them pay income taxes for the current taxable

year.    On April 10, 2003, AllChem received a notice of assignment

from petitioners, in which petitioners expressed their intention

that all of the proceeds from any dividend distribution be

allocated to the Internal Revenue Service (IRS), and that one-

half of any distribution be applied as an “advance payment”

toward petitioners’ 2002 taxable year and the other half as an

“estimated payment” for the first quarter of petitioners’ 2003

taxable year.    On April 11, 2003, respondent sent AllChem a

notice of levy with respect to petitioner Ryals’s (Mr. Ryals’s)

unpaid income tax liabilities for taxable years 1977 and 1978.1

Four days later, on April 15, 2003, AllChem declared a dividend.

        On April 15, 2003, petitioners filed a request for an

extension of time to file their 2002 tax return and also

submitted two payments of $11,000 and $2,000 to be applied to

their 2002 taxable year.     Petitioners previously had made, on

June 19, 2002, another estimated payment of $2,000 to be applied



     1
      The notice of levy stated that, as of May 11, 2003, Mr.
Ryals’s 1977 and 1978 tax liabilities would total $1,687,539.78.
                               - 4 -

to their 2002 taxable year.   Respondent had not determined a

deficiency in income tax for petitioners’ 2002 taxable year at

the time petitioners filed their extension request on April 15,

2003.

     On May 9, 2003, respondent received from AllChem two

separate checks each in the amount of $7,000 that petitioners

intended as estimated tax payments for their 2002 and 2003

taxable years.2   Respondent credited one of the $7,000 payments

to petitioners’ 2002 taxable year.3

     On October 15, 2003, petitioners timely filed their 2002 tax

return and reported:   A tax liability of $23,979, withholding

credits of $12,694, estimated tax payments of $18,000,4 $11,000


     2
      In a letter attached to the checks, AllChem’s vice
president of finance stated:

     Pursuant to the IRS Notice of Levy dated April 11,
     2003, enclosed are two separate checks in the amount of
     $7,000 each made payable to the IRS which represent a
     dividend distribution of AllChem Industries Holding
     Corporation (the “Company”) approved April 11, 2003 and
     otherwise payable to Jack C. Ryals and Susan Bocock
     Ryals as tenants by the entireties. Also enclosed are
     an Assignment of Dividend Distribution and a Notice of
     Assignment provided to us by Mr. and Mrs. Ryals on
     April 10, 2003.
     3
      Respondent credited the other $7,000 payment from AllChem,
that petitioners intended as estimated tax payments for 2003, to
Mr. Ryals’s 1977 tax liability. We note that petitioners’ 2003
taxable year is not at issue in the instant case.
     4
      Petitioners’ arguments have not been consistent. The
$18,000 of estimated tax payments that petitioners claimed on
their 2002 tax return includes the $7,000 payment from AllChem,
                                                   (continued...)
                                 - 5 -

paid with their request for an extension to file, and an

overpayment of $17,645 and requested a refund of $17,585.5

Pursuant to section 6402(a), respondent credited to Mr. Ryals’s

1978 income tax liability $10,406.63 of petitioners’ claimed

overpayment.

     Respondent later determined a deficiency in petitioners’

income tax of $18,481 and a section 6662(a) penalty of $3,696 for

their 2002 taxable year and sent petitioners a notice of

deficiency on March 28, 2005.    Petitioners timely petitioned this

Court.

     At the call of the instant case for trial during the Court’s

trial session on January 23, 2006, the parties appeared and

represented to the Court that the case was settled and filed a

stipulation of settled issues.    We granted the parties an

additional 30 days to submit a decision document.    After the

trial session, a dispute arose between the parties regarding

whether certain payments petitioners intended to be applied to

their 2002 taxable year were properly credited to earlier years



     4
      (...continued)
that petitioners intended as an estimated tax payment for 2003,
but that respondent credited to Mr. Ryals’s 1977 tax liability.
See supra note 3. For the reasons explained below, we do not
have jurisdiction to decide whether respondent improperly
credited Mr. Ryals’s earlier tax liabilities.
     5
      The record does not indicate why petitioners requested a
refund that was $60 less than the amount of their claimed
overpayment.
                                - 6 -

by respondent.    Petitioners refused to sign the decision document

prepared by respondent’s counsel.    The proposed decision document

stated that there was a deficiency in petitioners’ Federal income

tax of $18,481 and a section 6662(a) penalty of $1,848.

Petitioners contend that respondent improperly credited to Mr.

Ryals’s 1978 tax liability one $7,000 payment and the two $2,000

payments and that those payments should have been applied to

petitioners’ 2002 taxable year.    Petitioners contend that the

decision document should reflect the payments as credits against

their 2002 tax liability.    On February 23, 2006, at the end of

the 30-day period, respondent filed the instant motion for entry

of a decision in accordance with respondent’s proposed decision

document.   On March 23, 2006, petitioners filed an objection to

respondent’s motion.    The motion was then set for hearing on

April 26, 2006.

                               OPINION

     We must decide whether we have jurisdiction to decide

whether respondent improperly credited the payments in issue to

Mr. Ryals’s 1978 tax liability.    The Tax Court is a court of

limited jurisdiction and may exercise jurisdiction only to the

extent expressly authorized by Congress.    Naftel v. Commissioner,

 (1985).    Our deficiency jurisdiction encompasses the

redetermination of deficiencies under section 6214(a) and of

overpayments, subject to certain limitations, under section
                                   - 7 -

6512(b).   Petitioners raise no overpayment issues within the

scope of section 6512(b)(1); therefore our overpayment

jurisdiction under section 6512 does not apply.    Petitioners

contend, however, that the Court has jurisdiction over the proper

application of the payments in issue because those payments are

included in the calculation of a deficiency and therefore must be

included in any decision we enter in the instant case.

Respondent contends that the payments in issue are estimated tax

payments that are not included in the calculation of a deficiency

and that, because there is no question of the correct amount of

the deficiency, the Court should grant respondent’s motion and

enter a decision without the inclusion of those payments.

     For purposes of section 6214, deficiencies are defined by

section 6211 as follows:

     SEC. 6211.    DEFINITION OF A DEFICIENCY.

          (a) In General.-–For purposes of this title in the
     case of income, estate, and gift taxes imposed by
     subtitles A and B and excise taxes imposed by chapters
     41, 42, 43, and 44 the term “deficiency” means the
     amount by which the tax imposed by subtitle A or B, or
     chapter 41, 42, 43, or 44 exceeds the excess of–-

                  (1) the sum of

                       (A) the amount shown as the
                  tax by the taxpayer upon his
                  return, if a return was made by the
                  taxpayer and an amount was shown as
                  the tax by the taxpayer thereon,
                  plus
                                - 8 -

                      (B) the amounts previously
                 assessed (or collected without
                 assessment) as a deficiency, over–-

                (2) the amount of rebates, as defined in
           subsection (b)(2), made.

     Petitioners contend that the payments in issue fall within

the parenthetical language of section 6211(a)(1)(B), “(or

collected without assessment)”.   We disagree.   Petitioners’

argument ignores the language immediately following the

parenthetical phrase; i.e., “as a deficiency”.    Petitioners

contend that they intended the payments in issue to be estimated

tax payments for taxable year 2002.     At the time petitioners made

the payments in issue, they had not even filed their 2002 tax

return.   Section 6211(b) provides that, for purposes of that

section, the tax imposed by subtitle A and the tax shown on the

return “shall both be determined without regard to payment on

account of estimated tax”.   See Mackey v. Commissioner, T.C.

Memo. 2004-70; Malachinski v. Commissioner, T.C. Memo. 1999-182,

affd. 

 (7th Cir. 2001); see also sec. 301.6211-1(b),

Proced. & Admin. Regs. (“Payments on account of estimated income

tax * * * shall likewise be disregarded in the determination of a

deficiency.”).

     We therefore conclude that the payments in issue were

estimated tax payments and not amounts assessed (or collected

without assessment) as a deficiency pursuant to section
                               - 9 -

6211(a)(1)(B).   Accordingly, the payments in issue did not reduce

the deficiency in the instant case.

     We do not have jurisdiction over the issue of whether

respondent improperly credited the payments in issue because

respondent credited $10,406.63 to Mr. Ryals’s 1978 tax liability,

pursuant to section 6402(a), after petitioners reported an

overpayment of $17,645 on their 2002 tax return.   This Court does

not have jurisdiction to review the credit made by the

Commissioner pursuant to section 6402(a) in the instant case.

See sec. 6512(b)(4); Savage v. Commissioner, 

, 49-51

(1999).6

     Because our decision will include a section 6662(a) penalty,

we address whether the payments in issue reduce the underpayment

on which the penalty is imposed even though the parties did not

raise the issue.   In Woods v. Commissioner, 

, 99

(1988), we held that “withholding credits must be subtracted from

the ‘understatement’ to arrive at the ‘amount of any

underpayment’” in computing the addition to tax under section

6661(a).7

     After our decision in Woods, the Omnibus Budget

Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721, 103 Stat.

     6
      Cf. Smith v. Commissioner, 

, 26 (2004), revd. on
other grounds 

 (5th Cir. 2005).
     7
      Former sec. 6661 provided an addition to tax for a
substantial understatement of a liability. The amount of the
addition to tax was 25 percent of the amount of any underpayment
attributable to such understatement.
                                  - 10 -

2395, repealed section 6661 and replaced it with section 6662.

Section 6664 was also enacted, defining the term “underpayment”.

Sections 6662(a) and 6664(a) provide, in pertinent part, as

follows:

     SEC. 6662.    IMPOSITION OF ACCURACY RELATED PENALTY ON
                   UNDERPAYMENTS.

          (a) Imposition of Penalty.--If this section
     applies to any portion of an underpayment of tax
     required to be shown on a return, there shall be added
     to the tax an amount equal to 20 percent of the portion
     of the underpayment to which this section applies.

           *         *        *        *     *         *       *

     SEC. 6664.    DEFINITIONS AND SPECIAL RULES.

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

           (1) the sum of--

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

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

           (2) the amount of rebates made. [Emphasis added.]

Section 1.6664-2(d), Income Tax Regs., provides further guidance

regarding the phrase “collected without assessment” in section

6664(a)(1)(B):

          (d) Amounts not so shown previously assessed (or
     collected without assessment). * * * For purposes of
     [defining an underpayment for purposes of section
     6662], the amount "collected without assessment" is the
     amount by which the total of the credits allowable
                               - 11 -

     under section 31 (relating to tax withheld on wages)
     * * * estimated tax payments, and other payments in
     satisfaction of tax liability made before the return is
     filed, exceed the tax shown on the return (provided
     such excess has not been refunded or allowed as a
     credit to the taxpayer). [Emphasis added.]

Thus, section 1.6664-2(d), Income Tax Regs., provides that

amounts “collected without assessment” can include estimated tax

payments, but only to the extent those payments, along with

withholding or other credits, exceed the tax shown on the return,

and only so long as the excess has not been refunded or allowed

as a credit to the taxpayer.

     As we have found above, respondent first credited the

disputed estimated tax payments to petitioners’ taxable year

2002.    After petitioners reported an overpayment of $17,645 on

their 2002 tax return, respondent credited $10,406.63 of the

claimed overpayment to Mr. Ryals’s 1978 tax liability pursuant to

section 6402(a).8   As stated above this Court does not have

jurisdiction to review any credit or reduction made by the

Commissioner pursuant to section 6402(a).   See sec. 6512(b)(4);

Savage v. Commissioner, supra at 49.    Accordingly, we hold that

we do not have jurisdiction to decide whether respondent




     8
      Respondent was not precluded from subsequently determining
a deficiency for petitioners’ 2002 taxable year despite allowing
a portion of the claimed overpayment. See Terry v. Commissioner,

, 87 (1988).
                             - 12 -

improperly credited the payments in issue to Mr. Ryals’s 1978 tax

liability.

     To reflect the foregoing,


                                           An appropriate order

                                      granting respondent’s motion

                                      and a decision in accordance

                                      with respondent’s proposed

                                      decision will be entered.