CCA 200851079: A court opinion read the underpayment definition without the subsection that decides it

Plain-English summary

A critique of a court opinion, written for internal use, and the criticism is narrow and specific: the opinion applied one half of a two-part definition.

The accuracy-related penalty is computed on an underpayment. An underpayment is the amount of income tax imposed, less the amount shown as the tax by the taxpayer on the return. Both halves of that subtraction are defined by regulation, in adjacent provisions. The opinion at issue quoted the provision defining the amount shown by the taxpayer on the return, and reasoned from it that the credit in question would not adjust that amount. What it did not address, according to this release, is the provision defining the other half.

That other provision defines the amount of income tax imposed as the tax imposed under subtitle A for the year, determined without regard to certain items, among them the credit for tax withheld on wages and the credit for tax withheld at source on nonresident aliens and foreign corporations. The list of exclusions is the whole of the argument. A 2001 service center advice memorandum, attached to this message, reasoned that because the regulation explicitly excludes only those two credits, other credits must be included in the calculation. The credit at issue in the court case is a different one again, and on that reasoning it is included as well. Once it is included, the two halves of the subtraction no longer match, and the result is an underpayment.

So the disagreement is not about what the credit does, but about which side of the subtraction it lands on. The opinion looked only at the taxpayer's side and concluded the credit changed nothing there. The release accepts that and says it is beside the point, because the credit changes the other side.

Two cautions about using this release. The court decision is identified only by a party name, with no citation, no court and no year, and the attached opinion was not released with the message, so the criticism cannot be checked against what the court actually said. And this is one writer's view of a decided case, sent to a colleague; it is not a statement of litigating position or an announcement that the Service will not follow the opinion. The subject line refers to the earned income credit while the credit the writer says was actually at issue is a different section, which is a distinction the reader should carry rather than smooth over.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the misspelling "amout" for amount; the memorandum number given as "SCA 2001113028" in the body with one more digit than the "SCA 200113028.pdf" named in the attachment line; and the abbreviations "Reg." and "Reg. sec." used inconsistently in the same message.

Ruling snapshot

• Question: Was a court correct that the credit at issue produced no underpayment for accuracy-related penalty purposes?
• Outcome: Advice given. The court seems to have gotten it wrong. The opinion relied on Treas. Reg. section 1.6664-2(c)(1), which defines the amount shown as the tax by the taxpayer on the return, but did not take into account Treas. Reg. section 1.6664-2(b), which defines the amount of income tax imposed as determined without regard only to credits under sections 31 and 33. On the reasoning of the attached service center advice, a section 34 credit is taken into account, which results in an underpayment.
• Key authorities: Treas. Reg. section 1.6664-2(b) and 1.6664-2(c)(1); IRC sections 31, 32, 33, 34; SCA 200113028, attached.

Full text (IRS public release)

ID: CCA_2008090816213943 Number: 200851079
Office: -------------- Release Date: 12/19/2008

UILC: 6664.00-00

From: --------------------
Sent: Monday, September 08, 2008 4:21:40 PM
To: --------------------
Cc: ------------------
Subject: FW: EITC & Accuracy-Related Penalty

The court seems to have gotten it wrong. The "amount of income tax imposed" is defined by Reg. 1.6664-2(b) as the amount of tax imposed on the taxpayer under subtitle A for the taxable year determined without regard to, among other things, credits under sections 31 (relating to tax withheld on wages) and 33 (relating to tax withheld at source on nonresident aliens and foreign corporations). SCA 2001113028 reasons that because the reg. explicitly excludes only section 31 and 33 credits from the amount of income tax imposed, section 32 credits must be included in the calculation. The credit at issue in Solomon is found in section 34 of the Code. As a result, the amout shown as the tax by the taxpayer on his return should be computed with regard to section 34. This results in an underpayment.

Note that the opinion cites Reg. sec. 1.6664-2(c)(1) for the definition of "amount shown as the tax by the taxpayer on his return" to show that that amount would not be adjusted by the credit. However, it fails to take into account Reg. sec. 1.6664-2(b), which defines "amount of income tax imposed", and which amount would take into account any credit under section 34 under the reasoning set forth in the SCA.

Please let me know if you have any questions. My direct line is -------------------.

ATTACHMENTS: SCA 200113028.pdf; Solomon.opinion.pdf