BALDWIN v. COMMISSIONER OF INTERNAL REVENUE

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Docket Number

No. 315-91.

Attorney(S)

Neil Deininger, for the petitioners. Amy Dyar Seals, for the respondent.

Judges

PARKER, Judge:

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Smart Summary

Factual and Procedural Background

Petitioners Jerry C. Baldwin and Patricia A. Baldwin, cash-basis, calendar-year taxpayers residing in Arkansas, filed a joint Federal income tax return for 1985 showing a tax liability of $53,866 with only $5,795 paid, leaving $48,071 unpaid at filing. In 1987, petitioner filed a Form 1045 application for a tentative refund to carry back a net operating loss (NOL) of $151,502 from 1987 to 1984 and 1985, resulting from a business bad debt deduction claimed in 1987. The tentative carryback adjustment credited $48,407.80 against the unpaid 1985 tax liability. Subsequently, the Commissioner disallowed the 1987 NOL, determined a deficiency for 1985 in the amount of the previously allowed credit, and issued statutory notices of deficiency for both 1985 and 1987. Petitioners did not contest the 1987 notice but filed a petition with the Tax Court challenging the 1985 deficiency determination. They moved to dismiss for lack of jurisdiction on the ground that no "deficiency" as defined in section 6211(a) exists.

Legal Issues Presented

Whether an amount credited against petitioners' 1985 tax liability as a result of an application for a tentative carryback adjustment for a 1987 net operating loss constitutes a "rebate" within the meaning of section 6211(b)(2) of the Internal Revenue Code.
Whether the Tax Court has jurisdiction to consider the deficiency notice issued for 1985 based on the disallowance of the 1987 NOL carryback adjustment.

Arguments of the Parties

Petitioners' Arguments

The credit allowed under Form 1045 is not a "rebate" within the meaning of section 6211(b)(2) because the correct amount of tax was shown on their 1985 return, even though it was unpaid.
Since the credit was allowed under a Form 1045 and the 1985 return showed the correct tax liability, the credit cannot create a "deficiency" under section 6211(a), depriving the Court of jurisdiction.
Deficiency procedures apply only to deficiencies arising from errors in the original tax year return, not to later disallowance of tentative carryback adjustments made under section 6411, which is in subtitle F, not subtitle A.

Respondent's Arguments

The credit against unpaid taxes allowed as a result of a tentative carryback adjustment under section 6411 constitutes a "rebate" within the meaning of section 6211(b)(2), just like a refund.
The disallowance of the 1987 NOL carryback adjustment results in a deficiency for 1985 within the meaning of section 6211(a), and thus the Court has jurisdiction.
Form 1045 applications for tentative carryback adjustments, although not claims for refund under section 6511, constitute part of the return framework and affect the determination of deficiency.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Pesch v. Commissioner, 78 T.C. 100 (1982)	Recognition that a refund resulting from a Form 1045 tentative carryback adjustment is a "rebate" under section 6211(b)(2).	The Court applied Pesch to hold that a credit (not just a refund) resulting from a Form 1045 tentative carryback adjustment similarly constitutes a "rebate," supporting the existence of a deficiency and jurisdiction.
Friedman v. Commissioner, 97 T.C. 606 (1991)	Form 1045 may not be a return standing alone but is an intrinsic part of the taxpayer's return for related years.	The Court referenced this case to note that petitioners' argument that Form 1045 is not a return need not be addressed here, as Form 1045 is integrated with the tax return.
Midland Mortgage Co. v. Commissioner, 73 T.C. 902 (1980)	One of the remedies available to the Commissioner to recover erroneous carryback adjustments.	Supported the proposition that deficiencies attributable to tentative carryback adjustments can be recovered through deficiency procedures.
Fine v. Commissioner, 70 T.C. 684 (1978)	Remedies for recovering erroneous carryback adjustments.	Confirmed the availability of deficiency procedures to recover such amounts.
Neri v. Commissioner, 54 T.C. 767 (1970)	Deficiency procedures apply even if the original return was correct but a subsequent carryback adjustment is disallowed.	Supported the Court’s holding that a deficiency can arise solely from disallowance of a tentative carryback adjustment.
Polachek v. Commissioner, 22 T.C. 858 (1954)	Procedural authority for deficiency assessments.	Referenced as part of established remedies for erroneous refunds or credits.
Kurtzon v. Commissioner, 17 T.C. 1542 (1952)	Procedural authority for deficiency assessments.	Referenced similarly as precedent for deficiency procedures.
Hannan v. Commissioner, 52 T.C. 787 (1969)	The Court’s jurisdiction depends on the Commissioner’s determination of deficiency, not the actual existence of a deficiency.	The Court relied on this to emphasize that jurisdiction exists upon issuance of a deficiency notice, regardless of whether a deficiency actually exists.

Court's Reasoning and Analysis

The Court analyzed the statutory definition of "deficiency" under section 6211(a), which is the amount by which the tax imposed exceeds the sum of the tax shown on the return plus previously assessed amounts, less any rebates made as defined in section 6211(b)(2). The central question was whether the credit resulting from the Form 1045 tentative carryback adjustment constitutes a "rebate."

The Court noted that section 6411 authorizes filing a Form 1045 for a tentative carryback adjustment but does not constitute a claim for refund under section 6511. The Court declined to decide whether Form 1045 is a "return" for purposes of section 6211, referencing prior case law holding that Form 1045 is intrinsically part of the return.

Invoking the precedent in Pesch v. Commissioner, the Court held that a refund resulting from a Form 1045 is a "rebate" and extended that holding to credits, as the statutory definition of "rebate" includes abatements, credits, refunds, or other payments. The Court applied the formula in section 6211(a) to the facts, confirming a deficiency of $48,407.89 based on the tax imposed ($53,866.09), tax shown on the return ($53,866), no prior assessments, and rebates made ($48,407.80).

The Court rejected petitioners' argument that deficiency procedures only apply to errors on the original return, emphasizing that the deficiency here arises from the disallowance of the tentative carryback adjustment, not from the original return. The Court noted that the Commissioner has multiple remedies to recover erroneous carryback adjustments, including deficiency procedures.

Finally, the Court emphasized that jurisdiction depends on the Commissioner’s determination of a deficiency, not on the actual existence of a deficiency, citing Hannan v. Commissioner, to avoid absurd jurisdictional results.

Holding and Implications

The Court held that a credit against unpaid taxes resulting from a tentative carryback adjustment under section 6411 constitutes a "rebate" within the meaning of section 6211(b)(2), and that the disallowance of the 1987 NOL carryback adjustment creates a deficiency under section 6211(a).

As a consequence, the Court has jurisdiction to hear the case under deficiency procedures. The decision confirms that deficiency procedures apply not only to errors on the original tax return but also to subsequent disallowances of tentative carryback adjustments. No new legal precedent was created beyond applying existing statutory definitions and prior case law to affirm jurisdiction and procedural propriety.

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JERRY C. BALDWIN AND PATRICIA A. BALDWIN, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PARKER, Judge:

Respondent determined a deficiency of $48,407.89 in petitioners' 1985 Federal income tax.

This case is before the Court on petitioners' motion to dismiss for lack of jurisdiction on the ground that there is no "deficiency" as defined in section 6211 (a). Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the pertinent years, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The issue for decision is whether an amount credited against petitioners' 1985 tax liability as a result of an application for a tentative carryback adjustment for a 1987 net operating loss is a "rebate" within the meaning of section 6211 (b)(2).

FINDINGS OF FACT

Petitioners Jerry C. Baldwin and Patricia A. Baldwin lived in Cabot, Arkansas, at the time they filed their petition. Petitioners were cash-basis, calendar-year taxpayers filing a joint Federal income tax return (Form 1040) for 1985. All references to petitioner in the singular will be to petitioner Jerry C. Baldwin.

On their 1985 tax return, petitioners showed total tax of $53,866, total payments of $5,795, and an amount owing of $48,071. Apparently no payment of that $48,071 was made when the return was filed.

Respondent says that the tax was remitted with the original return and was subsequently refunded to petitioners. Petitioners say they did not pay the tax and that the tax was later wiped out by the credit from the net operating loss carryback. The "plain language transcript" attached to petitioners' reply to respondent's response is not entirely clear, but seems to support petitioners' contention. In any event, the result we reach is the same whether there was a "refund" or a "credit" from the tentative carryback adjustment. Payment of the original 1985 tax vel non can be conclusively resolved along with all other factual issues at the trial on the merits scheduled for Jan. 27, 1992.

Petitioner Jerry C. Baldwin filed a single Federal income tax return for 1987. In conjunction with this 1987 tax return, petitioner filed a Form 1045, Application for Tentative Refund, in order to carry back a net operating loss (NOL) of $151,502 from 1987 to the taxable years 1984 and 1985. The NOL resulted from petitioner's claim of a business bad debt deduction in 1987. In his Form 1045 petitioner applied $3,264 of the NOL against 1984 adjusted gross income and the remaining $148,238 against 1985 adjusted gross income.

Because of the NOL carryback, petitioner, on the Form 1045, showed a refund of $47,044 for the 1985 taxable year, and since the 1985 tax liability had not been paid, he requested that the tentative refund be applied against that unpaid 1985 tax liability. Respondent made a mathematical correction and, on June 20, 1988, credited $48,407.80 against petitioners' 1985 unpaid tax liability.

See supra note 1. In the deficiency notice respondent later determined a deficiency of $48,407.89, the $.09 difference being attributable to the fact that respondent determined a tax liability of $53,866.09 for the 1985 year, rather than the rounded figure of $53,866 reported on petitioners' Form 1040 for that year.

On October 3, 1990, respondent issued to petitioners two statutory notices of deficiency for the 1985 and 1987 taxable years. Petitioners did not file a petition in this Court with respect to the statutory notice for 1987. On January 7, 1991, petitioners filed the petition in this case, relating to the 1985 taxable year. The $48,407.89 deficiency for 1985 is the result of respondent's disallowance of the 1987 bad debt deduction that gave rise to the NOL and hence disallowance of the NOL. See supra note 2.

The petition was timely mailed on the 90th day, and thus is deemed to be timely filed. Sec. 7502.

On October 10, 1991, petitioners filed, pursuant to Rules 40 and 53, a motion to dismiss for lack of jurisdiction on the ground that there is no "deficiency" within the meaning of section 6211 (a).

OPINION

Petitioners' argument is that this Court lacks jurisdiction because the amount determined as a deficiency by respondent in the statutory notice of deficiency is not a "deficiency" within the meaning of section 6211. For the reasons that follow, we hold that there is such a deficiency.

Section 6211 provides:

SEC. 6211 (a). IN GENERAL. — For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B * * *, the term "deficiency" means the amount by which the tax imposed by subtitle A or B * * * 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

(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 purposes of this section —

* * * * * * *

(2) The term "rebate" means so much of an abatement, credit, refund, or other payment, as was made on the ground that the tax imposed by subtitle A or B * * * was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.

Petitioners' argument turns on the assertions that (1) the Form 1045 is not a "return" and (2) the amount credited by respondent as a result of a Form 1045 is not a "rebate" within the meaning of section 6211 (a)(2) and (b)(2).

The authority for Form 1045 is found in section 6411, which provides:

SEC. 6411 (a). APPLICATION FOR ADJUSTMENT. — A taxpayer may file an application for a tentative carryback adjustment of the tax for the prior taxable year affected by a net operating loss carryback provided in section 172 (b), * * *.

An application for a tentative carryback adjustment does not constitute a claim for credit or refund within the meaning of section 6511. Sec. 6411 (a); sec. 1.6411-1 (b)(2), Income Tax Regs. Petitioners' argument that the Form 1045 does not constitute a return need not be addressed in this case.

In a recent case where respondent argued that a Form 1045 does not constitute a return within the meaning of section 6013 (e), we concluded that:
Although the Form 1045, standing alone, might not be a return, it was intended to modify, and, in that regard, did become an intrinsic part of petitioners' 1981 and 1982 returns. We think that relationship, resulting from the merger of that jointly executed Form 1045 and the 1981 and 1982 joint returns, satisfies the "on such return" language of section 6013 (e)(1)(B). Friedman v. Commissioner, 97 T.C. 606, 610-611 (1991).

We have previously held that a refund of taxes resulting from a Form 1045 is a "rebate" within the meaning of section 6211 (a)(2) and (b)(2). Pesch v. Commissioner, 78 T.C. 100, 109-112 (1982). Petitioners try to distinguish their case on the ground that it involves a credit rather than a refund. That, however, is a distinction without a difference. The definition of "rebate" in section 6211 (b)(2) expressly includes any "abatement, credit, refund, or other payment."

As we did in Pesch v. Commissioner, 78 T.C. at 111, we will examine each of the elements of the section 6211 (a) definition of a "deficiency." The tax imposed is $53,866.09, the amount respondent determined in the notice of deficiency. The amount shown as the tax on petitioners' original 1985 return is $53,866. There is no amount previously assessed as a deficiency. The amount of rebates made for 1985 is $48,407.80. See infra note .

The "rebates" referred to in the sec. 6211 (a)(2) portion of the definition of a deficiency include all rebates made for the particular taxable year (here $48,407.80 for 1985). The "rebates previously made" language in the sec. 6211 (b)(2) definition of rebates contemplates the possibility of several rebates being made at different times for the same taxable year. That occurred in Pesch v. Commissioner, 78 T.C. 100, 106-107, 109-110 (1982). That did not occur here. Only one rebate was made on June 20, 1988, and at that time there were no "rebates previously made."

Applying the definition in section 6211 (a), as we did in Pesch, we find that there is a "deficiency" in petitioners' 1985 income tax so as to confer jurisdiction on this Court: Tax imposed by subtitle A ................................ $53,866.09 Less: Amount shown as the tax by the taxpayers upon their return .......... 53,866.00 Plus: Amount previously assessed as a deficiency .......................... 0 --------- 53,866.00 Less: Amount of rebates made ............... 48,407.80 --------- 5,458.20 --------- Amount of deficiency ................. 48,407.89 Petitioners' basic argument against this result, variously phrased, is that deficiency procedures apply only to deficiencies arising out of the 1985 tax year itself, or that deficiency procedures do not apply to a later disallowance of a previously allowed tentative carryback adjustment under section 6411. Hence, petitioners emphasize that the credit was given under section 6411 which is in subtitle F, not subtitle A. Petitioners say that a credit resulting from a tentative carryback adjustment under section 6411 (Form 1045) is not a "credit * * * made on the ground that the tax imposed by subtitle A * * * was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made." Sec. 6211 (b)(2). However, at the time the application for a tentative carryback adjustment was approved in 1988 and the credit made against petitioners' unpaid 1985 tax liability, that credit was made precisely because the amount of tax imposed by subtitle A after the NOL was determined to be less than the excess of the amount specified in subsection (a)(1) (the amount of $53,866 shown on the 1985 return) over "the rebates previously made" (zero).^fn5 Sec. 6211 (b)(2).

Petitioners make their argument by assuming the answer, assuming that a credit (or refund of taxes) arising out of a tentative carryback adjustment under section 6411 cannot constitute a rebate. Petitioners' real argument becomes more clearly focused when they say "the credit, in order to be a rebate, must result from the taxpayers' return showing less than the tax required by Subtitle A." In other words, since their 1985 return as filed showed tax of $53,866, which is substantially the correct income tax imposed by subtitle A ($53,866.09), there can be no deficiency. Petitioners would limit a deficiency to an error on the 1985 return itself. Petitioners ignore that they never paid the tax shown on their 1985 return and ignore that their tax liability was eliminated only by the credit resulting from the tentative carryback of the 1987 NOL, which has now been determined to have been erroneous.

In Pesch v. Commissioner, supra, where the tentative carryback adjustment resulted in a tax refund, we held that such tax refund was a "rebate" under section 6211 (b)(2). Petitioners have not suggested, and we cannot think of, any reason why they should be treated differently when they did not even pay the 1985 tax in the first instance. Moreover, in Pesch the taxpayers' return did not show less tax than the tax required by subtitle A. Their tax return reported tax of $461,768, whereas the Commissioner determined that the tax imposed by subtitle A was $161,346. There was a deficiency in that case because the $461,768 had to be reduced by the total amount of the rebates made (the refund of $364,394 as a result of three applications for tentative carryback adjustments for NOL's from other years (1972, 1973, and 1974) to 1971). Sec. 6211 (a)(2). There we held that all three applications were granted "and refunds made in the amounts requested `on the ground that the tax imposed by subtitle A * * * is less than the excess of (1) the amount shown as the tax by the taxpayer upon his return * * * over (2) the amount of rebates previously made.'" Pesch v. Commissioner, 78 T.C. at 111; sec. 6211 (b)(2). Thus we held that the tax refunds were rebates within the meaning of section 6211 (a)(2) and (b)(2).

The taxpayers in Pesch argued that the quick refund under the Forms 1045 could not be recovered through the deficiency procedures "because it did not give rise to a deficiency within the meaning of section 6211 (a)." 78 T.C. at 110. We rejected that argument there as to the tax refunds. We reject it here as to credits. In Pesch, as in this case, the deficiency was attributable solely to the later disallowance of the NOL carrybacks that had been tentatively allowed based on the Forms 1045. 78 T.C. at 107.

It is well established that respondent has three remedies by which to recover an "abatement, credit, refund, or other payment" erroneously allowed pursuant to applications under section 6411. These three methods include (1) an assessment of the deficiency attributable to a tentative carryback adjustment as if due to a mathematical error under section 6213 (b)(1); (2) a civil action under section 7405; or (3) a notice of deficiency under section 6212. Pesch v. Commissioner, 78 T.C. at 117-118; Midland Mortgage Co. v. Commissioner, 73 T.C. 902, 905-906 (1980); Fine v. Commissioner, 70 T.C. 684, 687-688 (1978); Neri v. Commissioner, 54 T.C. 767, 770-771 (1970); Polachek v. Commissioner, 22 T.C. 858, 863-864 (1954); Kurtzon v. Commissioner, 17 T.C. 1542, 1547-1548 (1952). The deficiency may be due solely to the tentative carryback adjustment, and there need not be any error in the original return as filed.

Accordingly, we conclude that there was a rebate within the meaning of section 6211 (a)(2) and (b)(2) in this case, that this is a proper case for deficiency procedures, that respondent has determined such a deficiency, and that this Court has jurisdiction in the case.

It should be noted that it is the Commissioner's "determination" of a deficiency and not the existence of a deficiency (i.e., not the correctness of that determination) that is the predicate for this Court's jurisdiction. Hannan v. Commissioner, 52 T.C. 787, 790-791 (1969). This Court's jurisdiction is to "redetermine" the deficiency, i.e., decide whether or not the Commissioner's determination is correct, and this Court may find that the correct amount of tax is less than or more than the Commissioner has determined in the deficiency notice. Thus, the fact of a deficiency is not necessary for our jurisdiction, and as Hannan v. Commissioner points out at 791:

Indeed, were this not true, then the absurd result would be that in every case in which the Court determined that no deficiency existed, our jurisdiction would be lost.

To reflect the foregoing,

An appropriate order will be issued.