The burden of proof is upon respondent to prove that petitioner has filed a false return with the intent to evade tax for each year at issue. See sec. 7454(a); Rule 142(b). Because direct evidence of an intent to evade tax is rarely available, intent may be proved by circumstantial evidence and reasonable 135 T.C. 497">*502 inferences from the facts. Petzoldt v. Commissioner, 92 T.C. 661">92 T.C. 661, 92 T.C. 661">699 (1989).

Petitioner pleaded guilty to willfully making and submitting a false tax return for 1997 in violation of section 7206(1) and admitted, in his plea agreement, that to obtain refunds he falsified personal tax returns for each of the years at issue by attaching to his returns fictitious Forms W-2 which overstated income tax withheld. Throughout the 6 years at issue, petitioner was licensed as a certified public accountant practicing in an accounting firm that prepared income tax returns for clients. He held himself out to the public as sophisticated and knowledgeable in the preparation of tax returns. He prepared his own returns and those needed for businesses in which he had invested.

Critically, petitioner falsified his 2010 U.S. Tax Ct. LEXIS 41">*50 own returns and Forms W-2 for the businesses in the same manner for 6 consecutive years and stopped only when confronted by the authorities. On each of his returns, among other things, he overstated and falsified (1) partnership losses, (2) itemized deductions for State taxes withheld, and (3) Federal withholding credits. Through his conduct he obtained $320,078 in Federal refunds to which he was not entitled over the 6-year period. Petitioner testified that he intended to pay back the refunds he received as soon as he overcame troubles in his personal life, but there is no evidence that petitioner at any time made an effort to repay even after his conduct was discovered. Petitioner's explanation for his behavior is implausible.

We find that respondent has shown by clear and convincing evidence that petitioner filed his returns for the years at issue with the intent to evade tax. See Brister v. United States, 35 Fed. Cl. 214">35 Fed. Cl. 214 (1996) (involving an accountant and bookkeeper who overstated withholding credits to obtain refunds). Therefore, the 3-year period of limitations under section 6501(a) does not apply for any of the years at issue, and respondent was not barred from issuing the notices 2010 U.S. Tax Ct. LEXIS 41">*51 of deficiency for those years.

Respondent has established that petitioner intended to evade tax and thus engaged in fraudulent conduct. However, 135 T.C. 497">*503 before there can be an imposition of a fraud penalty, respondent must also prove that the fraud resulted in underpayments of tax required to be shown on the returns. Section 6663(a) sets out the fraud penalty:

SEC. 6663(a). Imposition of Penalty.—If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

Section 1.6664-2(c)(1), Income Tax Regs., interprets the definition of "underpayment" in section 6664 by stating that the tax shown on the return is reduced by the excess of:

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

(ii) The amounts actually withheld, * * * with respect to a taxable year before the return is filed for such taxable year.

Petitioner contends that section 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., is invalid because the statute which it interprets, section 6664, 2010 U.S. Tax Ct. LEXIS 41">*53 does not refer to credits for tax withheld, and it was not Congress' intent to include withholding 135 T.C. 497">*504 credits in the calculation of an underpayment. Petitioner notes that repealed section 6653, which previously had imposed the fraud penalty, defined an underpayment with reference to a deficiency as defined in section 6211. Section 6211(b)(1) excludes credits for taxes withheld from the calculation of a deficiency, and consequently such credits did not affect the calculation of an underpayment under repealed section 6653(c). Therefore, petitioner bases his argument in legislative history that the definition of an underpayment in section 6664(a) as in effect for the years at issue was "not intended to be substantively different from * * * [previous] law." H. Rept. 101-247, at 1394 (1989).

Respondent argues that Congress enacted a new penalty regime and significantly reworded the definition of "underpayment" for income tax purposes, thereby justifying the Secretary's clarification of the treatment of overstated prepayment credits.

As a threshold matter, both parties agree that the regulation was issued under section 7805(a) and is applicable to the computation of the underpayments in the instant 2010 U.S. Tax Ct. LEXIS 41">*54 case. Accordingly, our next step is to determine whether the regulation warrants judicial deference.

Much ink has been spilled on the question of the level of judicial deference to be afforded to regulations. See, e.g., Berg, "Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments", 61 Tax Law. 481 (2008). The Court of Appeals for the Sixth Circuit, to which any appeal of this case would lie absent a written stipulation to the contrary, has held that regulations issued under the general authority of the Secretary to promulgate necessary rules, with notice and comment procedures, are entitled to judicial deference as outlined by the U.S. Supreme Court in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837">467 U.S. 837, 104 S. Ct. 2778">104 S. Ct. 2778, 81 L. Ed. 2d 694">81 L. Ed. 2d 694 (1984). See sec. 7482(b)(2); Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971); Estate of Timken v. United States, 601 F.3d 431">601 F.3d 431, 601 F.3d 431">434-435 (6th Cir. 2010); Estate of Gerson v. Commissioner, 507 F.3d 435">507 F.3d 435 (6th Cir. 2007), affg. 127 T.C. 139">127 T.C. 139 (2006).

135 T.C. 497">*505 In Chevron, the Supreme Court addressed the circumstances in which the judiciary is to afford an agency 2010 U.S. Tax Ct. LEXIS 41">*55 discretion to interpret the statutes the agency administers. In what is commonly referred to as the two-step "Chevron analysis", the Supreme Court stated:

When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.

"[T]he cardinal rule [is] that a statute is to be read as a whole * * * since the meaning of statutory language, plain or not, depends on context." King v. St. Vincent's Hosp., 502 U.S. 215">502 U.S. 215, 502 U.S. 215">221, 112 S. Ct. 570">112 S. Ct. 570, 116 L. Ed. 2d 578">116 L. Ed. 2d 578 (1991). Sections 6663 and 6664 impose a fraud penalty when taxpayers, with intent to evade, underpay the income tax shown on their returns. We will examine the language and history of those sections to determine what the term "underpayment" means in the context of a fraud statute. The examination requires us to analyze the definitions of a "deficiency" and of an "underpayment" and their interrelationship, if any, in interpreting sections 6663 and 6664. We must consider whether an underpayment can exist without a deficiency.

The definition of a deficiency in section 6211(a) as it relates to income tax has remained essentially unchanged since the 1954 codification of the internal revenue laws. ⁴The 135 T.C. 497">*506 basic formula is to determine the correct tax and reduce it by the tax reported by the taxpayer. The resulting amount is the deficiency. In calculating the deficiency, estimated 2010 U.S. Tax Ct. LEXIS 41">*57 tax payments and withholding credits are ignored. Sec. 6211(b)(1).

The definition of an underpayment for purposes of the civil fraud penalty remained unchanged from the 1954 codification of the Internal Revenue Code until 1989. In 1989 Congress repealed sections of the Code, ⁵ including section 6653, that imposed accuracy-related penalties, and replaced them with sections 6662 through 6665. Omnibus 2010 U.S. Tax Ct. LEXIS 41">*58 Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7721(a), 103 Stat. 2395. Congress' primary focus in enacting a new penalty regime was to alleviate taxpayer confusion and the difficulties of administration of several different penalties relating to the accuracy of a tax return. H. Rept. 101-247, supra at 1388. The House report also stated that the definition of "underpayment" in section 6664(a) was not "intended to be substantively different from * * * [previous] law." Id. at 1394.

Repealed section 6653(b)(1) provided that if any part of any underpayment (as defined in subsection (c)) of tax required to be shown on a return was due to fraud, certain penalties applied. ⁶Section 6653(c) tied the definition of an underpayment to the definition of a deficiency.

SEC. 6653(c). Definition of Underpayment.—For purposes of this section, the term "underpayment" means—

(1) Income, estate, gift, and certain excise taxes.—In the case of a tax to which section 6211 (relating 2010 U.S. Tax Ct. LEXIS 41">*59 to income, estate, gift, and certain 135 T.C. 497">*507 excise taxes) is applicable, a deficiency as defined in that section (except that, for this purpose, the tax shown on a return referred to in section 6211(a)(1)(A) shall be taken into account only if such return was filed on or before the last day prescribed for the filing of such return, determined with regard to any extension of time for such filing) * * *

Sections 6663 and 6664 replaced repealed section 6653. For convenience, we again set out the pertinent portions of sections 6663 and 6664. Section 6663(a) deals with imposition of the fraud penalty:

SEC. 6663(a). Imposition of Penalty.—If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment 2010 U.S. Tax Ct. LEXIS 41">*60 which is attributable to fraud.

However, in a fraud case where there is no deficiency but excess withholding credits have been claimed, as is the case here, or in a fraud case where there is a deficiency and such credits have been claimed, the effect of the statutory changes, in relation to the amount of any underpayment, is unclear from sections 6663 and 6664(a) on their face. The definition of an underpayment is no longer tied to the definition of a deficiency under section 6211, 2010 U.S. Tax Ct. LEXIS 41">*61 as it had been in section 6653(c), and the restrictions in section 6211(b)(1), 135 T.C. 497">*508 excluding estimated tax and withholding credits from the calculation of a deficiency, no longer apply to an underpayment by explicit cross-reference. Consequently, the statutes do not speak expressly to the precise issue whether withholding credits can be taken into account when calculating an underpayment for purposes of sections 6663 and 6664(a).

Therefore, we find under Chevron step 1 that for the determination of an underpayment, Congress seems to have retained the basic formula (correct tax - reported tax = underpayment) in section 6664 but has deleted the express cross-reference to the definition of a deficiency in section 6211. Section 6664 is silent and ambiguous with respect to the issue before us; i.e., Congress has not directly addressed the meaning of the term "underpayment" when a taxpayer has overstated withholding credits.

The Secretary has promulgated section 1.6664-2(c)(1) and (g), Example (3), Income Tax Regs., to address the issue. Under Chevron step 2 we must determine whether the regulation is based upon a permissible construction of the statute. We "need not conclude that the agency construction 2010 U.S. Tax Ct. LEXIS 41">*62 was the only one it permissibly could have adopted to uphold the construction, or even the reading * * * [we] would have reached if the question had arisen in a judicial proceeding." Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 843 n.11. Rather, "considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer." 467 U.S. 837">Id. at 844. The Court should not disturb the agency's action unless it appears from the statute or its legislative history that it is one that Congress would not have sanctioned. 467 U.S. 837">Id. at 845.

On March 4, 1991, the Federal Register published a notice of proposed rulemaking regarding the accuracy-related penalty under section 6662, the fraud penalty under section 6663, and the definitions and rules for purposes of both penalties under section 6664. See Notice of Proposed Rulemaking, 56 Fed. Reg. 8943 (Mar. 4, 1991). The preamble to the proposed regulations explained that: (1) Overstated prepayment credits increase the amount of an underpayment but have no effect on the calculation of a deficiency; (2) whether a position with respect to an item has substantial authority or is disclosed on 2010 U.S. Tax Ct. LEXIS 41">*63 a return is relevant to the determination of the amount of a deficiency, but not to the 135 T.C. 497">*509 determination of the amount of an underpayment; and (3) the amount of an underpayment is reduced by amounts not shown on the return that have been previously assessed (or collected without assessment), but the amount of a deficiency is not. Id. at 8947. Commentators on the proposed regulation objected to factoring in overstated prepayment credits in the calculation of the underpayment. The basis of their objection was that the overstated prepayment credits are not taken into account in computing the amount of a deficiency under section 6211. A public hearing was held on June 3, 1991.

The proposed regulations were adopted and published as final regulations on December 31, 1991. T.D. 8381, 1992-1 C.B. 374. The preamble to the accuracy-related penalty final regulations rejected the position of the commentators and stated: "There are differences in the section 6664 definition of 'underpayment' and the section 6211 definition of 'deficiency' that warrant taking overstated prepayment credits into account for purposes of the accuracy-related penalty." Id., 1992-1 C.B. at 379.

For convenience, we will again 2010 U.S. Tax Ct. LEXIS 41">*64 set out the pertinent portion of the regulations. Section 1.6664-2(c)(1), Income Tax Regs., interprets the definition of "underpayment" in section 6664 by stating that the tax shown on the return is reduced by the excess of:

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

(ii) The amounts actually withheld, * * * with respect to a taxable year before the return is filed for such taxable year.

Petitioner contends that the regulation is inconsistent with congressional intent. ^{72010 U.S. Tax Ct. LEXIS 41">*65} He stresses the House report which stated that the definition of "underpayment" in section 6664(a) was not "intended to be substantively different from * * * [previous] law." H. Rept. 101-247, supra at 1394. On the basis of that statement, petitioner argues that the definition of an underpayment, as contemplated by section 6664, 135 T.C. 497">*510 should not be different from what it was under section 6653(c) and thus withholding credits should be excluded from the computation of an underpayment.

We disagree with petitioner's position. Neither section 6664(a) nor the regulation differs substantively from prior law. The basic formula (correct tax - reported tax = underpayment) is retained, and in cases involving a deficiency in which no excess withholding credits are claimed, the calculation of an underpayment, for purposes of section 6664 and its regulations, is no different from what it would have been under former section 6653(c)(1).

If Congress had intended the old and the new penalty regimes to be identical in every respect, we may infer that it would have equated the term "underpayment" with "deficiency" and carried forward section 6653(c)(1) verbatim into section 6664(a). ⁸Congress did not do so. Congress has amended section 66642010 U.S. Tax Ct. LEXIS 41">*66 on three occasions but has not altered the definition of the term "underpayment" in response to the regulation. See Pension Protection Act of 2006, Pub. L. 109-280, sec. 1219, 120 Stat. 1083; Gulf Opportunity Zone Act of 2005, Pub. L. 109-135, sec. 403, 119 Stat. 2615; American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 812, 118 Stat. 1577.

The Secretary has followed Congress' intent to carve out a specialized set of rules for the penalties applicable to the accuracy of a return. The application of the regulation is by its terms specifically limited to underpayments for purposes of section 6662 (relating to the accuracy-related penalty) and section 6663 (relating to the fraud penalty) for purposes of income taxes imposed under subtitle A. Sec. 1.6664-2(a), Income Tax Regs. By fleshing out the mechanics of what factors into the section 6664 underpayment 2010 U.S. Tax Ct. LEXIS 41">*67 calculation when a deficiency is not present, it promotes fairness in the administration of the penalties. It also facilitates the standardization of the reasonable cause/good faith exception criteria for the application of all accuracy-related penalties.

Our examination of whether the regulation is based on a permissible construction of section 6664 reveals that the Secretary 135 T.C. 497">*511 reasonably construed the statute through the regulation. Accordingly, we hold the regulation to be valid. See Estate of Gerson v. Commissioner, 507 F.3d 435">507 F.3d at 441.

If the Commissioner proves that any portion of an underpayment is due to fraud, the entire underpayment will be treated as attributable to fraud for purposes of the penalty under section 6663(b), except any portion of the underpayment that the taxpayer establishes by a preponderance of the evidence is not attributable to fraud. Knauss v. Commissioner, T.C. Memo 2005-6. Respondent has proved that petitioner committed fraud in filing his returns for the years at issue. Petitioner has not shown that any portion of the underpayment in any year at issue is not attributable to fraud. Therefore, the underpayments for the years at issue are subject in their entirety 2010 U.S. Tax Ct. LEXIS 41">*68 to fraud penalties. Sec. 6663(b).

In reaching our holdings herein, we have considered all arguments made, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered for respondent.

Reviewed by the Court.

COLVIN, COHEN, WELLS, GALE, THORNTON, GOEKE, KROUPA, HOLMES, PARIS, and MORRISON, JJ., agree with this majority opinion.

The contemporaneous 1954 legislative history sheds some light on this provision:

Under this new paragraph refunds caused by erroneous prepayment credits may be recovered by assessment in the same manner as in the case of a mathematical error on the return. For example, assume a case in which the tax shown on the return is $100, the claimed prepayment 2010 U.S. Tax Ct. LEXIS 41">*70 credit is $125, and refund of $25 is made, and that it is later determined that the prepayment credits should have been only $70. Under existing law, $30 (the tax of $100 as shown on the return less the $70 credit) can be immediately assessed as tax shown on the return which was not paid, but the remaining $25 must be recovered by suit in court. Under the new provision, the entire $55 can be assessed and collected. [H. Rept. 1337, 83d Cong., 2d Sess. A404 (1954).]

As this history indicates, the legislative impetus for section 6201(a)(3) was the perceived need to give the IRS a means, previously lacking, of recouping erroneous refunds attributable to overstated withholding credits without having to file suit. The legislative solution, as effected in section 6201(a)(3), was to permit the IRS to assess, "in the same manner as in the case of a mathematical or clerical error appearing upon the return," not only the erroneous refund ($25 in the above example), but also the amount of overstated withholding credits that the IRS had previously "allowed" against the tax shown on the return but that had not generated a refund ($30 in the example). ^{12010 U.S. Tax Ct. LEXIS 41">*71 2010 U.S. Tax Ct. LEXIS 41">*72}

135 T.C. 497">*513 Section 6201(a)(3) authorizes overstated withholding credits to be "assessed". And because under section 6201(a) the IRS' assessment authority pertains only to "taxes", it follows that assessment of overstated withholding credits under section 6201(a)(3) is properly considered as assessment of additional taxes. ^{22010 U.S. Tax Ct. LEXIS 41">*73} Furthermore, because section 6213(b) is the only Code provision that expressly addresses the process for making assessments arising out of math errors, it is reasonable to conclude that section 6201(a)(3), in directing that overstated withholding credits may be assessed "in the same manner as in the case of a mathematical or clerical error appearing upon the return," means in the same manner as described in section 6213(b). Otherwise, this directive would not be meaningful. Consequently, we look to section 6213(b) for guidance.

Pursuant to section 6213(b)(1), summary assessment is permitted (i.e., the restrictions applicable to deficiencies are made inapplicable) if a math error on a return gives rise to an amount of tax "in excess of that shown on the return". From this phrase it is clear that the tax "shown on the return" is the amount the taxpayer has shown on the return before any adjustment is made to correct the math error; i.e., the amount "shown on the return" is the amount that reflects the math error. Because there is no suggestion in the Code that the amount of tax "shown on the return" should mean different things in different sections, the same analysis holds true in determining the impact of a math error on the tax "shown * * * [on the] return" under section 6211(a)(1) (defining "deficiency" by reference to the amount of tax shown on the return) and section 6664(a)(1) (defining "underpayment" 135 T.C. 497">*514 by reference to the amount of tax shown on the return).

Furthermore, because section 6201(a)(3) directs that overstated withholding credits be assessed in the same manner as math errors, it is reasonable to conclude that the same analysis holds true for overstated withholding credits. In other words, 2010 U.S. Tax Ct. LEXIS 41">*74 for overstated withholding credits under section 6201(a)(3), as for other types of math errors under section 6213(b)(1), summary assessment is permitted if overstated withholding credits give rise to an amount of tax "in excess of that shown on the return". Sec. 6213(b)(1). As with math errors, this means that the amount of tax "shown on the return" is the amount shown by the taxpayer that reflects the overstated withholding credits. Again, absent some contrary statutory signal, it is reasonable to conclude that this result carries over to section 6664(a)(1), where tax "shown * * * [on the] return" is a relevant consideration. ^{32010 U.S. Tax Ct. LEXIS 41">*75} In short, under this statutory framework the "amount shown as the tax by the taxpayer on his return" under section 6664(a)(1)(A) is the amount that reflects reduction for excess withholding credits. This is precisely the result achieved by the regulation. ⁴

The legislative history of section 6664(a) indicates that its new (in 1989) definition of "underpayment" was not intended to differ "substantively" from prior law. H. Rept. 101-247, at 1394 (1989). But in the same sentence this legislative history states that the new definition was intended to "simplify and coordinate" diverse "underpayment" definitions under former law. Id. And in fact the new "underpayment" definition in section 6664(a) differs in various ways from the old "underpayment" definitions which it replaced. ⁵ Of special importance 135 T.C. 497">*515 for present purposes, it differs from the former section 6653(c)(1) definition by dropping the cross-reference to the section 6211 "deficiency" definition with its directive 2010 U.S. Tax Ct. LEXIS 41">*76 that the "tax imposed" and the "tax shown on the return" should be "determined without regard to" withholding credits, among other things.

Judge Gustafson suggests that this striking difference between these two "underpayment" definitions is of no consequence. Citing the 1944 legislative history of section 6211, he contends that the phrase "determined without regard to" was meant merely to clarify that "refunds" of claimed overpayments of withheld tax should not increase any deficiency. 2010 U.S. Tax Ct. LEXIS 41">*77 He suggests that this "clarification" was omitted from the section 6664(a) "underpayment" definition merely because section 6664 defined "rebates" in such a manner as to eliminate the former confusion about "refunds", making the phrase "determined without regard to" redundant and unnecessary. ⁶ See Gustafson op. pp. 66-67.

But this analysis fails to take into account the problem of erroneous refunds arising from overstated withholding credits. As we have seen, Congress separately addressed that problem in 1954 with the enactment of section 6201(a)(3), authorizing the IRS to process an assessment to recover or disallow excess withholding credits as an adjustment to the income tax return on which the credit was claimed. The former section 6653(c)(1)2010 U.S. Tax Ct. LEXIS 41">*78 "underpayment" definition excluded such amounts from an underpayment only by virtue of the definition's express linkage to the "determined without regard to" phrase of section 6211(b). The breaking of that linkage in 1989 in the new section 6664(a) "underpayment" definition had the consequence of permitting overstated withholding credits to be factored into an underpayment, as provided by the regulation. ^{72010 U.S. Tax Ct. LEXIS 41">*79}

135 T.C. 497">*516 In the final analysis, "the amount shown as the tax by the taxpayer on his return" is a term of art, as is the section 6664(a) definition of "underpayment" of which it is a component. That the meanings of these terms of art may not be immediately plain on their face is attributable in part to the intricate interplay of Code provisions. But the regulation is based upon a construction of these terms and of the larger statutory framework that is, in my view, not merely permissible but correct. For these reasons and the reasons stated in the majority opinion, the regulation is valid.

COLVIN, COHEN, GALE, MARVEL, GOEKE, KROUPA, HOLMES, and HAINES, JJ., agree with this concurring opinion.

Section 6664(a)(1)(B), and its differences with section 6211(a)(1)(B), creates an opening, through which the Commissioner has dragged withholding credits into the equation for calculating an underpayment. ³

Unfortunately for the Commissioner, neither the preamble to the proposed or final regulations nor the regulations themselves clarify why including withholding credits in amounts collected without assessment, under section 6664(a)(1)(B), 135 T.C. 497">*519 also requires that we reduce amounts shown 2010 U.S. Tax Ct. LEXIS 41">*85 as tax under section 6664(a)(1)(A) by any overstated withholding credits. Even worse, under the plain meaning of the Commissioner's own regulations, in a case where there is no deficiency as defined in section 6211(a), a refund of overstated withholding credits would constitute a rebate under section 6664(a)(2). Consequently, the regulations would count this refunded amount twice in calculating an underpayment, once by reducing the amount shown as the tax pursuant to section 1.6664-2(a) and (c)(1), Income Tax Regs., and then again as a rebate pursuant to section 1.6664-2(a) and (e), Income Tax Regs.

Respondent tries to disavow this anomalous effect of his own handiwork. Respondent's posttrial brief and section 1.6664-2(g), Examples (1) and (3), Income Tax Regs., imply that when withholding credits are refunded, they cease to be amounts collected without assessment and this cessation somehow has retroactive effect so that the refund does not constitute a rebate within the meaning of section 6664(a)(2). Reaching this conclusion, however, requires reversing the laws of space and time, the rules of logic and grammar, and the force of our own precedent.

Respondent presumably relies on the 2010 U.S. Tax Ct. LEXIS 41">*86 parenthetical "(provided such excess has not been refunded or allowed as a credit to the taxpayer)" in section 1.6664-2(d), Income Tax Regs., to conclude that when withholding credits are refunded, they no longer constitute amounts collected without assessment. Therefore, according to respondent, the refund cannot be a rebate under section 6664(a)(2). This flies in the face of the obvious implication of the regulatory text itself that until such time as a withholding credit is refunded, it remains an amount collected without assessment. In fact, section 1.6664-2(g), Example (2), Income Tax Regs., suggests as much. It should follow that as long as the tax shown on the return is no less than the tax imposed, so that there is no deficiency under section 6211(a), any refund of the withholding credit could only have been "made on the ground that the tax imposed was less than * * * Amounts not so shown previously assessed (or collected without assessment)". Sec. 1.6664-2(e), Income Tax Regs.

Respondent appears to construct a multiverse version of reality in which the moment a withholding credit is refunded, it enters a parallel universe, as it were, where the refunded 2010 U.S. Tax Ct. LEXIS 41">*87 amount was never an amount collected without assessment to begin with. Tax law, alas, must inhabit our universe where the arrow of time can move in only one direction and cause must precede its effect. If a withholding credit is an amount collected without assessment, then it must remain so until it is refunded. And if the refund, when made, is made on the ground that the tax imposed is less than the amount of withholding credits, then that refund must constitute a rebate under section 6664(a)(2).

Respondent's difficulty lies in the fact that the statutory design envisions any amount collected without assessment as potentially affecting the calculation of an underpayment in two ways: (1) Negatively, under section 6664(a)(1)(B); and (2) positively, under section 6664(a)(2). ^{42010 U.S. Tax Ct. LEXIS 41">*88} Because respondent has included withholding credits in amounts collected without assessment under section 6664(a)(1)(B), his attempt to deny their existence in computing a rebate under section 6664(a)(2) is logically irreconcilable.

Grammar and our own precedent also undermine respondent's cause. The Commissioner's own words in the regulations refer to the amount by which withholding credits "and other payments in 2010 U.S. Tax Ct. LEXIS 41">*89 satisfaction of tax liability made before the return is filed, exceed the tax shown on the return (provided 135 T.C. 497">*521 such excess has not been refunded or allowed as a credit to the taxpayer)." Sec. 1.6664-2(d), Income Tax Regs. (emphasis supplied). The use of the present perfect tense in the parenthetical dictates that the parenthetical apply at the time that the underpayment is calculated. We have long maintained that for purposes of the civil fraud penalty, the base on which the penalty is imposed be determined as of the time when the return is filed and not any later time such as when the notice of deficiency is issued. See, e.g., Stewart v. Commissioner, 66 T.C. 54">66 T.C. 54 (1976).

Underpinning such decisions was the rationale that a taxpayer should not, after fraudulently understating his tax liability, retain the power to avoid the fraud penalty by the simple expedient of later paying the remainder of his correct tax upon discovering his return was under audit. * * *

Clearly, then, so long as a taxpayer 2010 U.S. Tax Ct. LEXIS 41">*90 has no deficiency under section 6211(a), the plain meaning of the regulations' language would cause a refund of a withholding credit to be a rebate under section 6664(a)(2). ^{52010 U.S. Tax Ct. LEXIS 41">*91} Further, any refund that this taxpayer obtains by overstating withholding credits would also constitute a section 6664(a)(2) rebate since this refund must necessarily have been "made on the ground that the tax imposed was less than" (emphasis supplied) the amounts collected without assessment. Sec. 6664(a). In fact, there could exist no other grounds for making this refund.

Finally, to the case of Rick D. Feller, where the notices of deficiency evidence the absence of a section 6211(a) deficiency in each of the tax years at issue. For the reasons discussed above, section 1.6664-2(d) and (e), Income Tax Regs., would cause petitioner's section 6664(a) underpayment to include so much of his overstated withholding credits that he claimed and received as a refund. However, if the challenged regulation, section 1.6664-2(c)(1), Income Tax Regs., is valid, we would consider the overstatement of withholding credits yet again. Specifically, we would adjust the tax shown on the return by subtracting from it the entire 2010 U.S. Tax Ct. LEXIS 41">*92 amount of the overstated withholding credits. ^{62010 U.S. Tax Ct. LEXIS 41">*93} We would then use this adjusted figure, rather than the actual tax shown on the return, to calculate petitioner's underpayment. The refunded portion of the overstated withholding credits would, thus, be counted one more time. ⁷ This bizarre result is untenable, and either section 1.6664-2(c)(1), Income Tax Regs., or both section 1.6664-2(c)(1) and (d), Income Tax Regs., must give way. ^{82010 U.S. Tax Ct. LEXIS 41">*94 2010 U.S. Tax Ct. LEXIS 41">*95}

135 T.C. 497">*523 I agree with Judge Gustafson that "section 6664(a)(1)(A) is not ambiguous, and under the Supreme Court's Chevron analysis, the inquiry stops there." Gustafson op. p. 76. Moreover, as I have shown, section 1.6664-2(c)(1), Income Tax Regs., as currently written, causes the Commissioner's regulatory scheme to generate results that are incorrect, illogical and incoherent. I would, 2010 U.S. Tax Ct. LEXIS 41">*96 therefore, invalidate section 1.6664-2(c)(1), Income Tax Regs.⁹

However, I also believe that the omission of the phrase "as a deficiency" in section 6664(a)(1)(B), when compared with section 6211(a), leaves the former sufficiently ambiguous to invite regulatory interpretation. Under "step 2" of a Chevron analysis, I would then consider whether the interpretation that the Commissioner has provided in section 1.6664-2(d), Income Tax Regs., is "based on a permissible construction of the statute." Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837">467 U.S. 837, 467 U.S. 837">843, 104 S. Ct. 2778">104 S. Ct. 2778, 81 L. Ed. 2d 694">81 L. Ed. 2d 694 (1984).

The Commissioner's interpretation is by no means "the only one * * * [he] permissibly could have adopted". Id. n.11. But I can find nothing in the statute that would indicate that Congress would not have sanctioned including withholding credits in amounts previously collected without assessment. See 467 U.S. 837">id. at 845. Further, as the majority discusses at length, there is sufficient legislative history 2010 U.S. Tax Ct. LEXIS 41">*97 to support the proposition that Congress wanted to distinguish an underpayment under section 6664(a) from a deficiency under section 6211(a). I would, therefore, defer to respondent's interpretation 135 T.C. 497">*524 of section 6664(a)(1)(B), which he provides in section 1.6664-2(d), Income Tax Regs.

Applying the unambiguous plain language of that regulation section to petitioner's case and tracing its consequences sequentially through section 1.6664-2(e) and (a), Income Tax Regs., I would find underpayments in the amounts of the overstated withholding credits claimed and received as refunds. ^{102010 U.S. Tax Ct. LEXIS 41">*98} I would, therefore, sustain a section 6663 civil fraud penalty not on the entire amount by which petitioner overstated his withholding credits for each tax year at issue but only on such portion of the overstated withholding credits as he had claimed and received as a refund. ^{112010 U.S. Tax Ct. LEXIS 41">*99 2010 U.S. Tax Ct. LEXIS 41">*100 2010 U.S. Tax Ct. LEXIS 41">*101 2010 U.S. Tax Ct. LEXIS 41">*102 2010 U.S. Tax Ct. LEXIS 41">*103}

I believe that the Commissioner could have drafted an expanded version of the current section 1.6664-2(d), Income Tax Regs., in a manner that delivered results mathematically identical to those that section 1.6664-2(c)(1), Income Tax Regs., seeks to attain. He could have done so without the 135 T.C. 497">*526 double-counting error that plagues the current set of regulations. Our mandate, however, is to test the validity of the regulations as the Commissioner has drafted them and seeks to apply them, not to improve or improvise upon them in order to achieve a "just" result. I would hold section 1.6664-2(c)(1), Income Tax Regs., 2010 U.S. Tax Ct. LEXIS 41">*104 to be an impermissible construction of section 6664(a)(1)(A). I respectfully dissent.

HALPERN and GUSTAFSON, JJ., agree with this dissent.

Petitioner Rick D. Feller filed income tax returns for 1992 through 1997 on which he reported income tax liabilities 2010 U.S. Tax Ct. LEXIS 41">*105 greater than he actually owed, because he incorrectly reported as wages certain amounts that he did not in fact receive. For example, for 1992 he reported a total tax liability of $60,380, ¹ whereas the IRS determined that in fact he owed 135 T.C. 497">*527 only $30,022. That is, Mr. Feller's returns overstated his total tax liability.

However, Mr. Feller also incorrectly reported, as Federal tax withholding from wages, certain amounts that were not in fact withheld from his wages (because the wages were fictitious). For example, for 1992 he reported total tax withholding from wages as $138,097, whereas only $3,097 was actually withheld, and $135,000 was a fraudulent overstatement of his withholding. As a result, Mr. Feller reported on his returns net amounts due that were much less than he actually owed. That 2010 U.S. Tax Ct. LEXIS 41">*106 is, his returns understated his net amount due to the IRS and in fact claimed instead for 1992 (for example) a refund of $86,181.

When Mr. Feller was discovered, he pleaded guilty to submitting a false tax return for one of the years in issue. For his crime he was sentenced to 15 months in prison.

The IRS also determined against Mr. Feller a civil fraud penalty pursuant to section 6663(a), which penalty applies "[i]f any part of any underpayment of tax required to be shown on a return is due to fraud". (Emphasis added.) The term "underpayment" is defined in section 6664(a) of the Internal Revenue Code and in section 1.6664-2(a) of the Income Tax Regulations (26 C.F.R.). This case turns on the meaning of "underpayment" in section 6664(a), which in turn depends on the meaning of the term "amount shown as the tax by the taxpayer on his return" that appears in that statute.

Section 6664(a) defines the "underpayment" to which the fraud penalty of section 6663(a) applies. In simplified terms, the "underpayment" is the excess of one's actual liability over his reported liability—i.e., tax "imposed" minus tax "shown" equals 2010 U.S. Tax Ct. LEXIS 41">*107 "underpayment". Section 6664(a) provides as follows:

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

(1) the sum of—

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

135 T.C. 497">*528 (B) amounts not so shown previously assessed (or collected without assessment), over

(2) the amount of rebates made.

However, unlike the definition of "underpayment" in section 6664(a), the definition of "deficiency" in section 6211(a) is qualified by section 6211(b)(1), which provides that "For 2010 U.S. Tax Ct. LEXIS 41">*109 purposes of this section [i.e., not "For purposes of this title"] * * * [t]he tax imposed by subtitle A and the tax shown on the return shall both be determined * * * without regard to the credit under section 31 [i.e., "Tax Withheld on Wages"]". Withholding credits are thus explicitly excluded from the Code's "deficiency" equation; but the Code's "underpayment" equation in section 6664(a) that is at issue here does not mention withholding credits.

The regulation implementing the fraud penalty largely repeats the definition of "underpayment" given in the statute. Moreover, the regulation defines "tax imposed" in a manner consistent with the use of that term in the deficiency context. That is, even though section 6664(a) is, as we have 135 T.C. 497">*529 noted, silent about withholding credits, the regulation borrows from the deficiency context (section 6211(a)) and explicitly defines the minuend of the equation—"tax imposed"—without regard to withholding credits: ^{32010 U.S. Tax Ct. LEXIS 41">*112}

(b) Amount of income tax imposed. For purposes of paragraph (a) of this section, the "amount of income tax imposed" is the amount of tax imposed on the taxpayer under subtitle A for the taxable year, 2010 U.S. Tax Ct. LEXIS 41">*110 determined without regard to—

(1) The credits for tax withheld under sections 31 (relating to tax withheld on wages) and 33 (relating to tax withheld at source on nonresident aliens and foreign corporations) * * *.

Without this provision, if Mr. Feller's "amount shown as the tax" ($60,380 for 1992) is subtracted from his "tax imposed" ($30,358), then the difference is less than zero, he has no underpayment at all, and he is not subject to the 135 T.C. 497">*530 fraud penalty. The effect of this regulatory provision, however, is to reduce the "amount shown as the tax" (Mr. Feller's $60,380) by the excess withholding credits ($135,000 for 1992) in order to reveal the extent to which the taxpayer under-reported his net liability. For Mr. Feller this modification yields an "amount shown" that is negative ($60,360 - $135,000 = -$74,640) and that therefore, when subtracted from "tax imposed", does not decrease his "underpayment" but rather increases it. This regulation thus aims to measure the true culpability of a return like Mr. Feller's, rather than overlooking the excess credits in the computation of the penalty.

Under our Constitution, it is Congress that enacts laws. See U.S. Const., art. I, sec. 7. The first enumerated power given to Congress (and not to the Executive) is the "Power To lay and collect Taxes, Duties, Imposts and Excises". Id. sec. 8, cl. 1. 2010 U.S. Tax Ct. LEXIS 41">*113 ^{42010 U.S. Tax Ct. LEXIS 41">*114} As the Supreme Court observed in Whitman v. Am. Trucking Associations, 531 U.S. 457">531 U.S. 457, 531 U.S. 457">472, 121 S. Ct. 903">121 S. Ct. 903, 149 L. Ed. 2d 1">149 L. Ed. 2d 1 (2001):

Article I, § 1, of the Constitution vests "[a]ll legislative Powers herein granted ... in a Congress of the United States." This text permits no delegation of those powers * * *.

However, since at least as early as 1828 (i.e., 40 years after the Constitution was ratified), the Secretary of the Treasury has been explicitly authorized by statute to promulgate "regulations". ⁵ Such regulations acquire the force of law only derivatively, through statutes enacted by Congress—135 T.C. 497">*531 either because a statute explicitly authorizes an agency to promulgate "legislative regulations" or because the agency that is charged by law with administering a statute issues "interpretive regulations" ^{62010 U.S. Tax Ct. LEXIS 41">*115} that interpret the statute, and the courts defer to that interpretation. See Chevron, U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837">467 U.S. 837, 467 U.S. 837">843-845, 104 S. Ct. 2778">104 S. Ct. 2778, 81 L. Ed. 2d 694">81 L. Ed. 2d 694 (1984).

The parties and the majority of this Court acknowledge that the regulation 2010 U.S. Tax Ct. LEXIS 41">*116 at issue—26 C.F.R. section 1.6664-2(c)(1)—is in the second category described in Chevron—i.e., so-called "interpretive regulations". Such interpretive regulations embody the Treasury "department's construction of a statutory scheme it is entrusted to administer", Chevron, 467 U.S. at 844, and are generally authorized in section 7805(a) ("the Secretary shall prescribe all needful rules and regulations for the enforcement of this title").

In reviewing interpretive regulations, "a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency." 467 U.S. 837">Id. at 844. As the majority explains, following Chevron we conduct a two-step review of the regulation: First, we ask "whether Congress has directly spoken to the precise question at issue"; and second, if the statute is "silent or ambiguous", we ask whether the regulation reflects a reasonable construction of the statute. Majority op. pp 13-14 (citing Chevron, 467 U.S. 837">467 U.S. at 842-843).

There is no question that the deliberate reporting of fictitious withholding credits is fraudulent. There is no question that Congress could well impose a civil penalty on such 2010 U.S. Tax Ct. LEXIS 41">*117 fraud (in addition to the criminal penalties that it has imposed and 135 T.C. 497">*532 that Mr. Feller has borne). The question is whether in fact Congress did so when it imposed the fraud penalty on "underpayments", defined as "tax imposed" minus "amount shown", or whether instead the Treasury Department went beyond the statute when it promulgated the regulation.

The term at issue is "the amount [1] shown [2] as the tax [3] by the taxpayer [4] on his return". Sec. 6664(a)(1)(A). Under section 6664(a) this amount is subtracted from "tax imposed" (i.e., the actual tax liability) to yield the "underpayment". The plain meaning of this term could hardly be clearer:

In the first place, the amount in section 6664(a)(1)(A) is an amount "shown". It is therefore an amount that is visible. The plain language steers us away from an amount that would need to be determined by investigation or correction and points us simply to what is "shown". Section 1.6664-2(c)(1) of the regulations, however, employs the "tax liability shown * * * except that it is reduced by" excess credits, which are determined by reference to "amounts actually withheld" as compared to "amounts 2010 U.S. Tax Ct. LEXIS 41">*118 shown by the taxpayer on his return as credits". (Emphasis added.) In Mr. Feller's case, the resulting negative number 135 T.C. 497">*533 (-$74,640) is not shown anywhere on his 1992 return, nor does the return show the constituent numbers necessary to yield that negative number. Rather, Mr. Feller hid the amount "actually withheld"—i.e., $3,097—and certainly did not cause it to be "shown" on his return. The regulation thus looks to what is deliberately not shown and thereby ignores the plain language of the statute that describes an amount "shown".

Second, the amount in section 6664(a)(1)(A) is "tax". Of course, the Code also has provisions about other kinds of amounts—e.g., of income, deductions, costs, basis, exclusions, credits, payments, penalties, and so on—but section 6664(a)(1)(A) refers to an amount of "tax", a term not at all interchangeable with those other kinds of amounts. Section 1.6664-2(c)(1) of the regulations, on the other hand, though it properly begins with the "tax" shown, reduces it by excess withholding credits to yield not the taxpayer's tax shown but a number—in Mr. Feller's case, a fictitious negative number (-$74,640 for 1992)—that is neither his actual tax liability nor his 2010 U.S. Tax Ct. LEXIS 41">*119 reported tax liability. This negative number is instead a number that, when used in the underpayment calculation, shows the size of his net liability to the IRS. However, the plain meaning of the statutory language restricts us to "tax" that is shown on the return, and the statutory language gives no warrant for injecting excess credits into the equation.

Third, the amount in section 6664(a)(1)(A) is shown "by the taxpayer". Of course, the Code authorizes the IRS to make its own determinations of amounts relevant to tax liabilities; but plainly section 6664(a)(1)(A) describes an amount shown "by the taxpayer". Section 1.6664-2(c)(1) of the regulations, on the other hand, corrects the amount shown "by the taxpayer" on his return and replaces it with a number determined by the IRS. The formula in the regulation thus wanders from the plain language of section 6664(a)(1)(A), which looks to an amount shown "by the taxpayer".

Fourth, the amount in section 6664(a)(1)(A) is an amount shown "on his return". If Mr. Feller's 1992 return had included a $135,000 entry explicitly for "excess credits" (or an amount of tax reduced by $135,000 of excess credits), then there could hardly have been fraud 2010 U.S. Tax Ct. LEXIS 41">*120 on the return, since that candid reporting would have confessed the very fabrication that was perpetrated on the return. But of course the excess withholding credit amount of $135,000 was an amount that did not appear as such anywhere on, and could not be derived from, his return. By bringing that undisclosed amount into the computation, the regulation contradicts the plain meaning of the statutory description of an amount "on the return".

It is true that some terms in the Code are "terms of art" whose true meaning "may not be immediately plain on their face". Concurring op. p. 32. But this is a term so explicit, so at odds with the regulatory definition, and so consistent with the tax return itself that it cannot be explained away in this fashion. The Form 1040 tax return does not raise any question about the plain meaning of the term but faithfully corresponds to it—and not to the artful revision of the regulation. The return includes a line for "total tax", and withholding credits are reported on the return only after that 135 T.C. 497">*534 "total tax" entry. ^{72010 U.S. Tax Ct. LEXIS 41">*122} One looks in vain on the Form 1040 for any "show[ing]" of excess withholding credits. More important, one looks in vain on the Form 1040 for 2010 U.S. Tax Ct. LEXIS 41">*121 any entry denominated "tax" that takes into account any withholding credits, whether "actual" or "shown". Instead, the only "amount shown as the tax by the taxpayer on his return" is a "total tax" amount before any payments or credits. On Mr. Feller's tax return for 1992, that "total tax" (before withholding credits) that was "shown as the tax by the taxpayer on [line 53 of] his return" was no less than $60,380. (See supra note 1.) Since the "tax imposed" was less than this amount, there was no "underpayment" reflected on the return.

The majority observes, however, that—

the statutes do not speak expressly to the precise issue whether withholding credits can be taken into account when calculating an underpayment for purposes of sections 6663 and 6664(a).

* * * Section 6664 is silent and ambiguous with respect to the issue before us; i.e., Congress has not directly addressed the meaning of the term "underpayment" when a taxpayer 2010 U.S. Tax Ct. LEXIS 41">*123 has overstated withholding credits.

Section 6664(a)(1)(A) can be said to be "silent" about withholding credits—but only in the same way that it is silent about the fuel credit under section 34, silent about payments designated to the Presidential Election Campaign Fund under section 6096, silent about interest under section 6601, and silent about a host of other provisions in the Code that Congress could have incorporated into the "underpayment" definition but did not. It is true that when a statute is "silent", that silence may leave a gap that can legitimately be filled by regulation, see Chevron, 467 U.S. 837">467 U.S. at 843; but for this purpose a statute can fairly be called "silent" only 2010 U.S. Tax Ct. LEXIS 41">*124 when it cannot be said that "the intent of Congress is clear", see 467 U.S. 837">id. at 842. Statutory specificity about one subject cannot sensibly be construed as gap-creating "silence" about other subjects. In section 6664(a)(1)(A)Congress was silent about withholding credits because it was providing a rule about tax. When Congress states a plain and unambiguous term involving "the amount shown as the tax by the taxpayer on his return", the IRS cannot take that enactment as an occasion to craft rules about different subject matter not addressed in the statute—i.e., excess withholding credits not shown by the taxpayer and not appearing on the return—as if Congress had left a gap to be filled in.

The majority's apparent basis for discerning ambiguity in "the amount shown as the tax" is this: That term appears both in the definition of "underpayment" in section 6664(a) and in the similar but not identical definition of a "deficiency" in section 6211(a). See majority op. p. 18. For purposes of defining a "deficiency", section 6211(b)(1) provides: "The tax imposed by subtitle A and the tax shown on the 2010 U.S. Tax Ct. LEXIS 41">*125 return⁸ shall both be determined without regard to", inter 135 T.C. 497">*536 alia, withholding credits. (Emphasis added.) Section 6664(a) defining "underpayment", on the other hand, has no equivalent "without regard to" provision. This contrast evidently prompts the suggestion that, for purposes of defining a "deficiency", the tax "shown on the return" should be determined without regard to withholding credits; but for purposes of defining an "underpayment", the tax "shown on the return" should be determined with regard to withholding credits. However, an examination of the origin of section 6211(b)(1) shows that this suggestion is not warranted.

The basic definition of a "deficiency" in section 271 of the 1939 Code, like today's definition in section 6211(a), was "tax imposed" minus "amount shown as the tax"; but 2010 U.S. Tax Ct. LEXIS 41">*126 in the 1939 Code the "amount shown" was "decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax" (emphasis added); and the deficiency was therefore increased by those amounts. The 1939 Code had no provision that "tax imposed" or "amount shown" should be "determined without regard to" withholding credits, since those credits had yet to be invented.

The 1939 provision that a "deficiency" would be increased by amounts "refunded" began to be awkward in 1943, when the Current Tax Payment Act of 1943, ch. 120, 57 Stat. 126, provided for the now-familiar mechanism of payroll withholding. For the first time, employers withheld tax from wages, id. sec. 2, and the employee claimed that withholding as a credit (i.e., a payment) on his return, id. sec. 3, 57 Stat. 139. If that resulted in an overpayment of tax, then the overpayment was refunded to the employee. Id. sec. 4, 57 Stat. 140. The next year Congress noted that this regime raised questions about the definition of a "deficiency" ^{92010 U.S. Tax Ct. LEXIS 41">*129 2010 U.S. Tax Ct. LEXIS 41">*130} (i.e., "tax 135 T.C. 497">*537 imposed" over "amount shown" minus "refunds"), which now needed to be revised to make clear that a mere refund of a claimed overpayment of withheld 2010 U.S. Tax Ct. LEXIS 41">*127 tax (what is now called a "non-rebate refund") did not skew the computation by reducing tax "shown". Congress therefore deleted from section 271 the phrase "decreased by the amounts previously abated, credited, refunded, or otherwise repaid" and in its place incorporated and defined the term "rebate". After this 1944 amendment, section 271 provided (in language very similar to current section 6211):

SEC. 271. DEFINITION OF DEFICIENCY.

(a) In General.—* * * "deficiency" means the amount by which the tax imposed by this chapter exceeds the excess of—

(1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, * * * plus (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.

(b) Rules for Application of Subsection (a).—For the purposes of this section—

(1) The tax imposed by this chapter and the tax shown on the return shall both be determined without regard to payments on account of estimated tax, [and] without regard to the credit under section 35 * * *;

(2) The term "rebate" means so much of an abatement, credit, refund, or other repayment, as was made on the ground 2010 U.S. Tax Ct. LEXIS 41">*128 that the tax imposed by this chapter was less than the excess of the amount specified in subsection (a)(1) over the amount of rebates previously made * * *. [Emphasis added.]

When the current penalty regime was enacted in 1989, ¹¹Congress preempted any equivalent confusion about the effect of non-rebate refunds on the computation of an "underpayment". It did so by enacting in section 6664(a) a definition of "underpayment" that, like the 1944 "deficiency" definition, 2010 U.S. Tax Ct. LEXIS 41">*131 omitted any mention of "refunds" and instead subtracted "rebates" from the tax shown on the return. Admittedly, this new "underpayment" definition did not include any instruction that "tax imposed" or "tax shown" is determined without regard to withholding credits and other prepayments. However, the 1944 origin of that language in the deficiency context, set out above, shows that the absence of that instruction in section 6664(a) is not significant. The provision about, and the definition of, "rebates" made such an instruction unnecessary.

The "underpayment" definition, new in 1989, never included any mention of non-rebate "refunds" that might have skewed the definition. That 1943-era confusion as to deficiencies was solved in 1944 by the "rebate" provision; and any potential similar confusion as to 2010 U.S. Tax Ct. LEXIS 41">*132 underpayments was preemptively solved in 1989 when the "underpayment" definition included, in the first instance, the equivalent "rebate" provision. There was therefore never an occasion for including in section 6664(a) a provision that withholding credits should not affect the computation of tax shown. Such a provision would have been redundant. (And the absence in section 6664(a) of any reminder that "tax imposed" is determined without regard to withholding credits did not prevent the agency from so providing, in section 1.6664-2(b) of its regulation, for purposes of computing an underpayment.)

Section 6201(a)(3) refers to excess withholding credits that are allowed against "tax shown on the return". The concurring opinion observes the following: Section 6201(a)(3) provides that such overstated withholding amounts are to be "assessed by the Secretary in the same manner as in the case of a mathematical or clerical error", and the provision cross-references section 6213(b). Concurring op. pp 27-28. Section 6213(b)(1) provides for an assessment of an amount of tax "in excess of that shown on the return", so that 2010 U.S. Tax Ct. LEXIS 41">*133 the amount "shown on the return" must be an amount that reflects the math error. Concurring op. p. 28. With excess withholding credits, "[a]s with math errors, * * * the amount of tax 'shown on the return' is the amount shown by the taxpayer that reflects the overstated withholding credits." That is, tax "shown" under section 6201(a)(3)) must mean tax reduced by excess credits (as the regulation provides under section 6664(a)). Concurring op. p. 29.

It is surely proper to attempt to bring these other sections to bear on the meaning of tax "shown" in section 6664(a), but I submit that there are skips and flaws in this analysis of sections 6201(a)(3) and 6213(b). The House Report that the concurring opinion cites clearly states that then-current law (before section 6201(a)(3)) already allowed the IRS to retrieve, without deficiency procedures, any excess credit that had been mistakenly allowed against the tax liability. Retrieval of those credits that had been mistakenly allowed against tax liability did not require any new assessment authority to be enacted in section 6201(a)(3). What was new in that section was a procedure for retrieval of refunded credits. Section 6201(a)(3) does not 2010 U.S. Tax Ct. LEXIS 41">*134 cross-reference section 6213(b)(1)—the paragraph critical to the argument in the concurring opinion—but refers only to section 6213(b)(2) (to make clear that it does not apply). Section 6201(a)(3) does not state or even imply that excess credits are a constituent of tax "shown". On the contrary, the statute conceives of the tax liability and excess credits as distinct, since it refers to 135 T.C. 497">*540 excess credit "allowed against the tax shown on the return". (Emphasis added.) ^{122010 U.S. Tax Ct. LEXIS 41">*135}

Furthermore, it is far from clear what the statute means when it states that an overstated credit allowed against tax shown on the return may be "assessed". Payments that are credited (or not credited) against the tax liability do not increase or decrease the amount of the tax liability. If an ostensible payment or credit that was originally allowed against that liability proves in fact to be no good, that hardly increases the amount of tax; instead it decreases the amount of payments that should be entered. The Internal Revenue Manual (IRM) reflects this 2010 U.S. Tax Ct. LEXIS 41">*136 distinction. It states that an excess withholding credit, once discovered, is in fact not assessed by the IRS as additional tax. Instead, excess credits are recovered either by "an assessment (a TC 290) for the amount of the overstated withholding credit or in limited circumstances with a reversal (TC 807) of the overstated amount." IRM pt. 21.4.5.4.3(4) (Jan. 24, 2008). ("TC 290" is the code for "Additional Tax Assessment", and "TC 807" is the code for "Withholding Credits Reversed".) ¹³ What is that "limited circumstance" that gets TC 807 treatment?—It is none other than excess credits that have been wrongly applied to the reported liability. The IRM makes it clear that these excess credits wrongly applied are "recovered with a reversal of the credit (i.e., TC 807 * * *)" (emphasis added), not by an assessment of additional tax. IRM pt. 21.4.5.4.3(6) (Jan. 24, 2008). The IRM gives an example:

Mary Smith filed her 2008 income tax return reporting a tax liability of $700 and withholding credits of $500. She overstated her withholding by $100 and the error was not corrected when IRS processed the return. Since 135 T.C. 497">*541 Ms. Smith did not claim the overstated amount as a refund (she reported a 2010 U.S. Tax Ct. LEXIS 41">*137 balance due) and the overstated amount did not result in a refund, a TC 807 may be used to correct the overstatement. [Id.]

The meaning of tax "shown" in section 6664(a) is not illuminated by section 6201(a)(3). Section 6201(a)(3) does not state or imply that excess withholding credits that were wrongly allowed against the tax liability are later assessed as part of tax "shown". They are reversed (despite the statute's loose reference to their being "assessed"), and the suggestion that they are assessed as tax "shown" requires subtle and creative cross-referencing not warranted in the statute.

For the reasons stated above, section 6664(a)(1)(A) is not ambiguous, and under the Supreme Court's Chevron analysis, the inquiry stops there. However, if we were to assume arguendo that the statute is ambiguous and 2010 U.S. Tax Ct. LEXIS 41">*138 were to proceed to Chevron's "step 2", we would then need to determine "whether the agency's answer is based on a permissible construction of the statute". Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. at 843. Undertaking that step 2 analysis, I find that the definition of "amount shown as the tax" in section 1.6664-2(c)(1) of the regulations (i.e., tax shown reduced by excess credits) is not a permissible construction of the statute.

Because the penalty provision in former section 6653(a) incorporated the deficiency definition into the definition of "underpayment", the pre-1989 penalties did not reach excess withholding credits (which, as we have noted, are expressly excluded from the "deficiency" calculation by section 6211(b)(1)). As the majority acknowledges, majority op. p. 21, the 1989 legislative history includes a statement in a House Report "that the definition of 'underpayment' in section 6664(a) was not 'intended to be substantively different from * * * [previous] law.' H. Rept. 101-247, supra at 1394." A 135 T.C. 497">*542 regulation that would impose the penalty on a new circumstance (excess withholding credits) that had not formerly been reached by the penalty is "substantively 2010 U.S. Tax Ct. LEXIS 41">*139 different" from the prior law. The IRS's interpretation is therefore at odds with express congressional intent.

If in 1989 Congress had intended to impose a penalty that reached not only under-reporting of "the amount shown as the tax" but also over-reporting of withholding credits, then it would not have used the language that appears in section 6664(a)(1)(A). A different penalty provision in section 6694, enacted in 1976, sheds a helpful light in this regard. Section 6694 imposes an assessable penalty on a tax return preparer for an "Understatement of Taxpayer's Liability". The definition of that "understatement" is telling:

SEC. 6694(e). Understatement of Liability Defined.—For purposes of this section, the term "understatement of liability" means any understatement of the net amount payable with respect to any tax imposed by this title or any overstatement of the net amount creditable or refundable with respect to any such tax. * * *

Only the legislature can legislate; only Congress can impose a penalty. I would hold that the penalty that the IRS has determined here—a fraud penalty on overstated withholding credits—has simply not been enacted to the extent that the regulation provides. The regulation's imaginative definition of "amount shown as the tax by the taxpayer on his return" is not a reasonable interpretation of the statute 135 T.C. 497">*543 but is the agency's impermissible attempt to supplement the statute.

HALPERN and WHERRY, JJ., agree with this dissent.