WINTER v. COMM. OF INT'L

shall have jurisdiction over any action brought by tax-payers who meet certain net-worth thresholds. Id. at 503-04.

Hinck recognized that the Code gave the Tax Court jurisdiction in some circumstances, but argued that its silence about the jurisdiction of other courts should not be read as making our jurisdiction exclusive. He urged the Supreme Court to follow the Fifth Circuit's opinion in Beall v. United States, 336 F.3d 419, 430 (5th Cir. 2003), which held that the Code's new section, by providing an abuse-of-discretion review standard, meant that 1RS decisions denying the abatement of interest were no longer standardless agency decisions necessarily unreviewable according to general principles of administrative law. The Fifth Circuit reasoned that district courts had always had jurisdiction and while the Code may have given the Tax Court jurisdiction of some specific determinations, that didn't mean other courts lacked concurrent jurisdiction. Id. at 428-29.

The Supreme Court disagreed. In holding that we had exclusive jurisdiction, the Court said it was governed by "the well-established principle that, in most contexts, "`a precisely drawn, detailed statute pre-empts more general remedies, `" Hinck, 550 U.S. at 506 (quoting EC Term of Years Trust v. United States, 550 U.S. 429, 433 (2007)), and "guided by our past recognition that when Congress enacts a specific remedy when no remedy was previously recognized, or when previous remedies were `problematic, `the remedy provided is generally regarded as exclusive," id. (citing Block v. N.D. ex rel. Bd. of Univ. Sch. Lands, 461 U.S. 273, 285 (1983)).

Similar reasoning should guide us here. TEFRA originally supplied the Commissioner with procedures to enforce consistent reporting among S-corporation shareholders, including corporate-level remedies for those taxpayers. But after several years, Congress found those remedies to be a problem for entities with a small number of affected shareholders. To fix this, it exempted S corporations from TEFRA, and enacted section 6037(c) in TEFRA'S place. Like the statute in Hinck, section 6037(c) is narrowly drawn — it affects only S-corporation shareholders who fail to notify the Commissioner of their inconsistent reporting of a subchapter-S item. And it requires assessment through section 6213(b)(1). In this case, because section 6037(c) does not allow a taxpayer to invoke deficiency procedures under section 6213(b)(2), a taxpayer's established remedy is prepaying the tax and filing a claim for refund.

Following Hinck, I think we must reject the argument that silence overrides a limitation on a taxpayer's remedy. Even if the Code's general provisions would give us jurisdiction, where a specific section says otherwise we can't justifiably argue that the general trumps the specific. Hinck points us in exactly the opposite direction — that section 6037(c)'s road to assessment is the only one open for the Commissioner for the particular class of adjustments at issue here. See id. at 506.

D.

The majority does argue that even if Congress meant what it said when it said the Commissioner "shall" assess according to section 6213(b)(1), the Commissioner satisfied that requirement because he did summarily assess Winter's consistency adjustments, albeit after issuing the notice of deficiency. Majority op. p. 245. But does the Commissioner's postpetition summary assessment somehow give us jurisdiction to readjust those items? The majority implicitly holds that it does — but its failure to analyze the question creates some serious problems in reconciling section 6213(a) and (b)(1).

The problems harken back to the definition of deficiency. Recall that if the consistency adjustment is part of the deficiency, then the Commissioner cannot assess or collect it until our decision becomes final; but if it isn't, then the Commissioner shall make an immediate assessment and demand payment. See Bregin v. Commissioner, 74 T.C. 1097, 1102 (1980). There are only two possibilities. The first is that consistency adjustments are a "deficiency" (as the majority, remember, holds at the start of its analysis). But that would make this postpetition summary assessment invalid under the section 6213(a) ban on postpetition assessments. Which would mean the Commissioner still hasn't complied with section 6037(c). The alternative possibility is that consistency adjustments are not a "deficiency". But then we don't have jurisdiction to redetermine them, because their readjustment wouldn't be a redetermination of a "deficiency".

The majority seems to avoid this problem by quoting the definition of "deficiency" as "the amount by which the correct tax imposed by the Code exceeds the amount of tax shown on the return plus the amount of tax previously assessed less any rebates." Majority op. p. 243. This is almost right — section 6211(a) actually says it's the amount "previously assessed (or collected without assessment) as a deficiency" that is relevant. (Using a word in its definition is never helpful, but we shouldn't just lop off the whole phrase without mention.)

We have never directly interpreted in our precedential caselaw what it means for something to be assessed "as a deficiency." In Heasley v. Commissioner, 45 T.C. 448, 458 (1966), we suggested that an amount summarily assessed due to a math error could be considered either as an amount shown on a return, or as an "amount assessed as a deficiency for which no notice was required." In Acme Steel Co. v. Commissioner, T.C. Memo. 2003-118, we suggested in dicta that a summary assessment is an assessment as a deficiency. But, in distinguishing between summary and deficiency assessments, the Seventh Circuit (where an appeal in this case would lie) has held that "unlike a summary assessment, a deficiency assessment requires the 1RS to follow a number of statutory steps before it may undertake to collect the deficiency." Murray v. Commissioner, 24 F.3d 901, 903 (7th Cir. 1994). Under Murray, an amount assessed as a deficiency seems to be limited to an amount that was subject to the deficiency procedures. I don't resolve this issue, but only point out that the majority's assertion is sound only if a summary assessment is not one assessed as a deficiency.

In Lawless v. Commissioner, T.C. Summary Opinion 2001-178, we determined that an assessment not made in accordance with the deficiency procedures was not previously assessed "as a deficiency." But because this was a Summary Opinion, we do not rely on it.

A related difficulty is that section 6211(a) doesn't specify from which date something is "previously assessed" — the date of the notice of deficiency, the date of our decision, or some other date? The majority does address this problem and holds that we redetermine deficiencies as of the date of our decision, so "previously assessed" means assessed before our decision. Majority op. note 4. So, according to the majority, a deficiency would reflect any amounts summarily assessed after the petition is filed and while the case is pending. The majority, however, then offhandedly notes that the effect of our decision is to allow the Commissioner to "assess" (by which I think it means "reassess" or "abate and reassess") the deficiency we just redetermined. Majority op. note 4.

Reading "previously assessed" to mean "assessed before we enter a final decision" may look uncontroversial. But it may lead to some strange results if we `re not careful in analyzing whether the Commissioner's summary assessment is an "[amount] previously assessed * * * as a deficiency." The majority opinion is deeply ambiguous on this point. But consider the two alternatives. The first is that the summary assessment makes the consistency adjustments in this case "an amount of tax previously assessed as a deficiency." But that would mean — because the Code excludes such amounts from section 6211(a)'s definition of deficiency — that we don't have jurisdiction to redetermine it.

Things get even stranger if one imagines a case like Winter's, except that the only contested items are consistency adjustments. The majority would presumably hold that we have jurisdiction once a petition is filed challenging consistency adjustments determined in a notice of deficiency. But would we then lose jurisdiction as soon as the Commissioner summarily assesses the precise amount at issue? Or would we be forced to enter a decision of no deficiency because a summary assessment would become — at any time before entry of decision — "an amount of tax previously assessed as a deficiency?"

The second alternative is that an amount that is summarily assessed is not "an amount of tax previously assessed as a deficiency." This would solve the jurisdictional problem from the majority's perspective — our decision would allow the Commissioner to assess the full deficiency we redetermine, as the majority puts it in note 4. But then what effect would a summary assessment have?

Look at a simplified example. Recall the definition of deficiency. In algebraic form, d = t — (s + a), where deficiency (d) equals the actual tax imposed by the Code (t) less the total tax shown on the return (s) plus prior assessments as a deficiency (a). See Estate of Branson v. Commissioner, 113 T.C. 6, 37-38 (1999) (Beghe, J., concurring), aff'd. 264 F.3d 904 (9th Cir. 2001). Imagine an S-corporation shareholder — let's call her Spring. Assume the tax imposed by the Code on Spring's income in 2002 is $1,000, but she only reported $400 on her return. Of the remaining $600, $550 is due to inconsistent reporting of her passthrough income from her S corporation and $50 is due to unreported dividend income. Spring neglected to file a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, but the Commissioner issued a notice of deficiency instead of summarily assessing, and he included both the consistency adjustment and the dividend income. Spring timely petitioned the Tax Court. Later, but before our decision, the Commissioner summarily assessed the tax due to the inconsistently reported income.

Winter's case doesn't involve any rebates or collections made without assessments, so I exclude them.

Thinking through the implications of the majority's assertion that a summary assessment is an "amount previously assessed" if it's made before the date of our decision — and if a summary assessment is considered an "amount previously assessed * * * as a deficiency," Spring's deficiency would be $50. Her true tax ($1,000) minus the sum of her self-reported tax ($400) plus any amount previously assessed as a deficiency ($550) is $50. In pure numbers: $1,000 — ($400 + $550) = $50. Not coincidentally, this is the same amount of tax due to her unreported dividend income which has not already been assessed. It also quite clearly does not include the $550 amount summarily assessed. So if summary assessments are considered amounts previously assessed as a deficiency, then they are not part of the current deficiency and we don't have jurisdiction to redetermine them. (And this dissent would be a concurrence.)

If this is not true — if a summary assessment is not considered an "amount previously assessed * * * as a deficiency" — Spring's deficiency would be $600. Her true tax ($1,000) minus the sum of her self-reported tax ($400) plus any amount previously assessed as a deficiency ($0) is $600. Again, in numbers: $1,000 — ($400 + $0) = $600. This suggests that both the consistency adjustment and the unreported dividend income are part of the deficiency and we have jurisdiction to redetermine both. (The majority's holding, after all, is that we do have jurisdiction to redetermine the Commissioner's summarily assessed consistency adjustments to Winter's tax bill.)

The problem here is that the majority says the effect of its holding is to allow the Commissioner to assess Spring's newly determined deficiency of $600. This potentially leaves Spring with quite a tax bill. She has reported $400, which was undoubtedly assessed as required under section 6201(a)(1), and the Commissioner summarily assessed $550 after she petitioned the Tax Court (thereby complying with the provision of section 6037), and now the Commissioner has permission to assess another $600. Although the actual tax imposed by the Code is $1,000, the majority's reading would allow the Commissioner to assess $1,550. One might hope that, in his mercy, the Commissioner would not press the majority's logic to its double-counting extreme and would provide some kind of relief if different parts of the bureaucracy inadvertently acted to produce such a result. But I think it generally unwise to read the Code in a way in which a sensible result depends on the forbearance of one of the parties.

One may also suggest that we have the authority under section 6213(a) to order the Commissioner to abate the summary assessment or enjoin collection, but the Code removes that power when the Commissioner summarily assesses under section 6213(b)(1) ("nor shall such assessment or collection be prohibited by the provisions of subsection (a) of this section"). It would be best to avoid such a muddle.

E.

Turning now to some arguments that the parties alone made, I first address the Commissioner's argument that if summary assessment is his exclusive avenue under section 6037, a shareholder's only recourse is to sue for a refund in district court, which may lead to res judicata trouble. A problem might arise, he says, if the taxpayer has to bring two suits to redetermine liability for the same tax year: one in the Tax Court in response to the notice of deficiency and one in district court in response to a summary assessment. He argues that because the taxpayer's 2002 tax year is a single cause of action, see Commissioner v. Sunnen, 333 U.S. 591, 598 (1948), Winter must be able to bring all issues relating to the determination of his income tax liability before us or be forever barred from doing so.

I disagree. Section 6212(c)(1) says that the 1RS can't issue a notice of deficiency for a tax year that is already the subject of litigation in the Tax Court. A math-error notice, however is, by definition, not a notice of deficiency. Sees. 6212(c)(1), 6213(b)(1); cf. Jefferson Smurfit Corp. v. United States, 439 F.3d 448, 453 (8th Cir. 2006) ("Congress intended to exclude * * * [the assessments listed in section 6212(c)(1)] from the general policy of finality"). The Code therefore allows the 1RS to issue both a notice of deficiency and a math-error notice for the same tax year without the first barring the second. I think it unlikely that cases arising from section 6037(c) — with its cross-reference incorporating math-error procedures under section 6213(b)(1) — would somehow end up being treated differently.

The Code has a somewhat similar rule in section 6512(a). That section says that a taxpayer cannot petition our Court and then seek a refund for the same tax year in district court. But there is an exception: Section 6512(a)(2) allows a taxpayer to pursue a refund "as to any amount collected in excess of an amount computed in accordance with the decision of the Tax Court which has become final." See also sec. 301.6512-1(e), Proced. Admin. Regs. If the Commissioner were to summarily assess a consistency adjustment following a final decision of the Tax Court for the same tax year (but related to other items), anything that he collected as a result of the summary assessment would fit snugly within this provision. This is especially true if one reads section 6512(a)(2) together with section 6213(b)(1)'s command that a math-error notice "shall not be considered as a notice of deficiency for the purposes * * * of section 6512(a)" — meaning that a taxpayer who is issued a deemed math-error notice may still pay and then pursue a refund in a refund court.

There are also situations where the Tax Court can become a refund court. Section 6512(a) requires a taxpayer who has a potential refund claim and who has received a notice of deficiency and who wants to contest that notice in the Tax Court to file a case here that both contests the alleged deficiency and makes the case for a refund. But that's not Winter's case — he paid nothing after the summary assessment, and doesn't allege that he overpaid before.
Judge Halpern's hypothetical consistency adjustment in a taxpayer's favor — an overlooked flowthrough charitable deduction offsetting an uncontested increase in unreported and unrelated dividend income — hardly undermines this analysis. A consistency adjustment (or a net consistency adjustment of several items) in a taxpayer's favor would not trigger an assessment, it would trigger a refund. Sec. 601.105(a), Statement of Procedural Rules. (Math errors in taxpayer's favor trigger refunds.) The prohibition on a taxpayer's use of deficiency procedures to contest such an assessment would not apply — section 6037(c)(3)'s last sentence refers only to "assessments," not all possible deemed math errors.

Section 7422(e) likewise prevents two courts from having jurisdiction over the same tax year at the same time. But in Hemmings v. Commissioner, 104 T.C. 221, 229 (1995), we said that this section "does not prohibit two actions involving the same taxable year from being litigated seriatim." Requiring the 1RS to use summary assessment to adjust the portion of Winter's tax liability arising from inconsistent reporting would square with both a plain reading of section 6037(c) and the Code's related procedural requirements. And our related caselaw agrees — we held in Trost v. Commissioner, 95 T.C. 560, 566 (1990), that res judicata does not block us from deciding an issue when a taxpayer could not have raised it in an earlier case because we lacked jurisdiction. See also Ron Lykins, 133 T.C. at 109; Vines v. Commissioner, T.C. Memo. 2009-267.

F.

The Commissioner finally argues that it would be more efficient to consolidate in one proceeding all the issues that Winter is raising. I don't necessarily disagree, but sometimes cracking one tax year into two cases is just what the Code requires. Our opinion in Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009-121, is an example. We described in Tigers Eye how Congress intentionally bifurcated penalty proceedings under TEFRA, giving us jurisdiction to decide liability for the penalties at the partnership level, and shooing partners who say they have defenses against those penalties to separate refund suits, even when we have before us a partner-level case on other items related to the same year and the same taxpayer. Sec. 6221; sec. 301.6221-1(c), Proced. Admin. Regs. And jurisdiction splits aren't limited to the partnership-partner context. See Hinck, 550 U.S. at 509 (finding "nothing tellingly awkward" about sending interest abatement and refund claims to two different courts "even if in some respects it `may not appear to be efficient`"); Ron Lykins, 133 T.C. at 109 (finding a constellation of Code sections work together to permit a taxpayer to split his claim into two Tax Court proceedings as related to tentative carryback refunds); Odend `hal v. Commissioner, 95 T.C. 617, 622 (1990) (rejecting convenience-of-the-forum argument because the language of now-repealed section 6621(c)(4) gave the Tax Court only limited jurisdiction over interest determination). This might not be efficient, but policy can't override plain language.

Although the Commissioner argues that splitting the claim would not be efficient, in the past the 1RS has noted how much more expensive it is for the Commissioner to maintain a deficiency case than to summarily assess. S. Rept. 94-938, at 375 (1976). In a deficiency case, for example, the taxpayer may get two prepayment bites at the apple — one following the notice of deficiency to establish the liability and another following a notice of determination after the Commissioner tries to collect. If the Commissioner summarily assesses, the taxpayer has to prepay to contest the liability, thus bypassing the collection trial, or alternatively will only be able to contest the collections without paving, thus bypassing the liability trial. So it's not even clear that the benefits from a consolidated trial would outweigh the efficiency of summary assessment — especially in cases like this one where the items not subject to summary assessment were small and conceded.

G.

We do sometimes depart from a literal reading of a statute when the related legislative history shows clear but contrary legislative intent. See Domulewicz, 129 T.C. at 22 (citing Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); United States v. Am. Trucking Associations, 310 U.S. 534, 543 (1940)). But in its only argument explicitly mentioning section 6037(c), the majority looks to legislative history to find support for the plain meaning and, finding none, decides Congress could not have meant what it said.

The majority contends that because Congress removed S corporations from TEFRA, it would be inconsistent with legislative history to "assume that Congress intended to eliminate S corporation items from the deficiency jurisdiction of this Court * * * because there is no provision for a separate judicial determination of the inconsistently reported item." Majority op. p. 245. The majority misreads my point — I don't suggest that we reinstitute a corporate-level proceeding in the Tax Court for S corporations. Instead, section 6037(c) penalizes taxpayers who fail to file Form 8082 by stripping them of a prepayment forum (and consequently stripping us of jurisdiction). The majority forgets that taxpayers who cannot petition our Court may still find relief by paying the disputed tax and petitioning a district court or the Court of Federal Claims — so there is a provision for a separate judicial determination of the inconsistently reported item, it's just not with us. And this scheme would be consistent with the legislative history which demonstrated Congress's desire, despite removing the entity-level proceeding, to ensure consistency among S corporations and their shareholders. See S. Rept. 104-281, at 51.

Winter might be able to petition our Court and contest his tax liability in one narrow circumstance: In Perkins v. Commissioner, 129 T.C. 58 (2007), a taxpayer who received a math-error notice didn't use the abatement procedures available to him. We held that he could challenge the underlying tax liability at his later collection due process appeal to our Court because he had had no prior opportunity to contest it. Id. at 64-67. We need not now decide Perkins's effect on Winter's case.

The majority also implies that section 6037(c) couldn't be about our jurisdiction because it doesn't use the word "jurisdiction." Majority op. p. 245. But when our jurisdiction depends on a notice of deficiency, we must look at statutes limiting the use of those notices as inherently about our jurisdiction.

We `ve been through this before. In Ewing v. Commissioner, 118 T.C. 494, 503-504 (2002), revd. 439 F.3d 1009 (9th Cir. 2006), superseded by statute, Tax Relief and Healthcare Act of 2006, Pub.L. 109-432, sec. 408, 120 Stat. 3061, as recognized in Ware v. Commissioner, T.C. Memo. 2007-112, we reasoned that we had jurisdiction over innocent-spouse cases before the 2000 amendment to section 6015(e), that that amendment and its legislative history didn't mention jurisdiction, and so concluded that we still had jurisdiction after the amendment became effective. In Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84, 100 (2008), aff'd. in part and revd. in relevant part 591 F.3d 649 (D.C. Cir. 2010), we reasoned that we had jurisdiction despite literal language to the contrary, because we needn't turn "a blind eye" to an easily answered question.

This just doesn't work out well for us. See Commissioner v. Ewing, 439 F.3d 1009, 1014 (9th Cir. 2006) ("Tax Court simply has written the language out of the statute"), revg. 118 T.C. 494 (2002) and vacating 122 T.C. 32 (2004), superseded by statute, Tax Relief and Healthcare Act of 2006, Pub.L. 109-432, sec. 408, 120 Stat. 3061, as recognized in Ware, T.C. Memo. 2007-112; Bartman v. Commissioner, 446 F.3d 785, 787 (8th Cir. 2006) (same), affg. in part and vacating in part T.C. Memo. 2004-93, superseded by statute, Tax Relief and Healthcare Act of 2006, Pub.L. 109-432, sec. 408, 120 Stat. 3061, as recognized in Ware, T.C. Memo. 2007-112; see also Petaluma FX Partners, LLC v. Commissioner, 591 F.3d at 655 ("that a determination seems obvious or easy does not expand the court's jurisdiction").

And in other cases we have found statutes not using the magic word "jurisdiction" to still limit ours. For example, in New Millennium Trading, L.L.C. v. Commissioner, 131 T.C. 275, 280 (2008), we read sections 6230 and 6221 together to mean that partners can challenge partnership-level penalties only in refund actions, though neither of these sections uses the word "jurisdiction" in the relevant provisions. And in Domulewicz, 129 T.C. at 23, we even read these provisions to defeat our supplemental jurisdiction under section 6214(a). Like section 6230, section 6037(c) limits the parties involved to nondeficiency procedures — it first says the Commissioner shall assess according to section 6213(b)(1) (which doesn't involve deficiency procedures), and then it says that a taxpayer can't resort to section 6213(b)(2) to invoke deficiency procedures, either.

To summarize, section 6037 governs the audit and litigation procedures that replaced TEFRA for S corporations. It imposes duties on both the Commissioner and the shareholder. The shareholder who wants to avoid summary assessment and keep open his door to the Tax Court has a duty to either report subchapter S items consistently or file an extra form with his return telling the Commissioner he isn't. None of our general grants of jurisdiction nullify this specific statute.

II.

If we were to respect Congress's choice of the word "shall", we would have to determine which items on Winter's return were required to be summarily assessed. Although we `ve been discussing Winter's passthrough income from BFC, the statute actually imposes a consistent reporting duty for any "subchapter S item." Sec. 6037(c)(1). Section 6037(c)(4) defines a subchapter S item as "any item of an S corporation" that the regulations say is "more appropriately determined at the corporation level than at the shareholder level." So I would look to each contested item to determine if it meets that definition. The contested items include:

•Winter's passthrough income from BFC;

•proper timing for BFC'S deduction of Winter's bonus;

•characterization and timing of Winter's bonus;

•Winter's share of BFC'S charitable contributions; and

•any related penalties.

I'll address them in order. Winter's Passthrough Income

The relevant regulation tells us that subchapter S items include "[t]he S corporation aggregate and each shareholder's share of * * * [i]tems of income, gain, loss, deduction, or credit of the corporation." Sec. 301.6245-1T(a)(1), Temporary Proced. Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30, 1987). The regulation's plain language therefore makes Winter's overall passthrough income or loss from BFC a subchapter S item. I would therefore hold that we lack jurisdiction in a deficiency case to decide the amount of Winter's passthrough income or loss from BFC.

Section 6037(c)(4) was previously codified as section 6245, but this related temporary regulation was not renumbered.

Proper Timing for BFC's Deduction of Winter's Bonus

Whether BFC should have deducted Winter's bonus in full on its 2002 return is an item of deduction of the corporation, and therefore it, too, is a subchapter S item. See id. If Winter was right and BFC was wrong, Winter's remedy was to report it correctly on his return and file a Form 8082, alerting the Commissioner to BFC's error and the inconsistency created by his correction. Winter didn't do this, so I would leave this question to a refund forum as well.

Characterization and Timing of Winter's Bonus

Winter was not only a shareholder of BFC but also an employee. When he filed his 2002 return, he reported his entire prepaid bonus as taxable employee income, which was consistent with the W-2 Builders sent to him. But now Winter claims only a portion of the bonus should be taxable in 2002 either because it was really a loan and not income (the characterization issue); or, if it was income, because he did not have unrestricted access to it and so should not be taxed on it until some later year (the timing issue).

This item isn't in the notice of deficiency, but that doesn't matter. This is an instance where Winter argues that he overpaid his 2002 taxes, and section 6512(b) generally gives us jurisdiction over such claims. But unlike the majority I would take an additional step to ensure that this general power isn't subject to a specific exception tucked into section 6037(c). If the character or timing of Winter's bonus is a subchapter S item and he did not report consistently with BFC's return, then I would hold that we don't have jurisdiction over this issue either.

The first step is to decide whether the character of the bonus (as compensation or a loan) is a subchapter S item. I look again to the regulation, which says that subchapter S items include:

(5) Items relating to the following transactions, to the extent that a determination of such items can be made from determinations that the corporation is required to make with respect to an amount, [or] the character of an amount, * * * for purposes of the corporation's books and records or for purposes of furnishing information to a shareholder.

* * * * * * *

(c) Illustrations — (1) In general. This paragraph (c) illustrates the provisions of paragraph (a)(5) of this section. * * * The critical element is that the corporation is required to make a determination with respect to a matter for the purposes stated * * *.

* * * * * * *

(3) Distributions. For purposes of its books and records, or for purposes of furnishing information to a shareholder, the S corporation must determine:

(i) The character of the amount transferred to a shareholder (for example, whether it is a dividend, compensation, loan, or repayment of a loan) * * *

[Sec. 301.6245-1T, Temporary Proced. Admin. Regs., supra.]

So the regulation says if the S corporation has to determine the character of an item for its own purposes, then it's a subchapter S item. The regulation gives us examples of what an S corporation has to decide for its own purposes — including the characterization of amounts transferred to shareholders. BFC was required to make a determination at the corporate level as to whether the payment to Winter was a loan or prepaid compensation — and it did so by treating the amount as compensation. Thus the characterization of Winter's bonus as a loan or compensation again fits within the definition of a subchapter S item. Winter thus had a duty to report this item consistently with BFC'S characterization or file a Form 8082.

But he did his duty. Winter and BFC each reported the bonus as compensation and not a loan. Although BFC didn't claim a current deduction for the entire amount of the bonus, it treated the payment as a corporation should treat a partially prepaid bonus (or so the 1RS thought when it accepted BFC's return as filed): by claiming the earned portion of the bonus as a deduction in 2002, reporting the rest as either prepaid wages or a decrease in retained earnings, and by reflecting the entire amount on Winter's W-2. Winter likewise reported the income as a cash-basis taxpayer should report a prepaid bonus — with the entire amount taxed in the year received, as reported on his W-2. Therefore, even though he now argues that he treated it incorrectly, Winter reported consistently with the way BFC did and did not lose his access to the Tax Court.

If we find Winter's bonus payment was income, we also must decide whether Winter reported the income in the appropriate year. And so again we must analyze whether Winter's timing is a subchapter S item. Our trusty regulation tells us that even factors that affect the determination of subchapter S items are subchapter S items. It says: "The term `subchapter S item `includes * * * the legal and factual determinations that underlie the determination of the existence, amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc." Sec. 301.6245-1T(b), Temporary Proced. Admin. Regs., supra (emphasis added). At least some of the legal and factual determinations we must consider in deciding when Winter's bonus was taxable to him correspond to factors dictating BFC's treatment of the payment at the S corporation level (whether he had an unrestricted right to the money in 2002, for example). The timing of Winter's payment is also a subchapter S item and section 6037(c) applies.

It may seem anomalous that the timing of an employee's income recognition is a subchapter S item and thus considered more appropriately determined at the corporate level. The regulation is quite broad, however, and the proper timing for Winter's receipt of the money hinges on its characterization. Its characterization could in turn affect BFC's treatment of the payment, which is a determination in turn to be made at the corporate level.
I also note that if Winter's timing issue is not a subchapter S item, then he didn't have a duty to report consistently and we would have jurisdiction anyway.

But again Winter's reporting was consistent with BFC'S return. Though Winter now contests it, both he (on his tax return) and BFC (in the W-2) originally reported the income as an unrestricted payment, taxable to him entirely in 2002. Therefore, Winter has met his consistent-reporting duty, and I would hold that we have jurisdiction over this issue. Winter's Share of Charitable Contributions

An S corporation can make charitable contributions, but it doesn't deduct them when calculating its income. See sec. 301.6245-1T(a)(1)(ii), Temporary Proced. Admin. Regs., supra. Instead, it notifies its shareholders of their prorata share so each may deduct his portion on their individual return, subject to each shareholder's individual limits on charitable giving. See, e.g., sec. 170(b).

On the K-1 that it sent to Winter, BFC listed $5,062 as his share of its charitable contributions. Winter did not claim this deduction on his return, and the Commissioner questioned in his pretrial brief whether Winter should now be able to.

The regulation tells us that each shareholder's share of "expenditures by the corporation not deductible in computing its taxable income (for example, charitable contributions)" is a subchapter S item. Sec. 301.6245-1T(a)(1)(ii), Temporary Proced. Admin. Regs., supra. Winter's proper share of BFC'S charitable contributions is therefore a subchapter S item, but because he neither reported that item consistently with BFC's return nor notified the Commissioner about his deviation, we should have no jurisdiction to decide this issue.

Related Penalties

The last issue we would need to resolve is whether Winter owes a penalty. The jurisdictional problem here makes this issue particularly murky. No one contests that we have jurisdiction over the interest, dividend, and gambling income that Winter left off his return and therefore we have jurisdiction over any related penalty as well, see sec. 6665(a) — absent direction to the contrary of course, see Domulewicz, 129 T.C. at 23.

If we didn't find jurisdiction over Winter's inconsistent reporting, however, we would still have to decide whether we have jurisdiction over the related penalties (whether for negligence or substantial understatement). Looking first to the Code, section 6665(a) says:

Except as otherwise provided in this title —

(1) [T]he additions to the tax, additional amounts, and penalties provided by this chapter[ ] shall be paid upon notice and demand and shall be assessed, collected, and paid in the same manner as taxes * * *.

We have interpreted this section to mean that, absent some exceptions to the general rule, an addition to tax measured by a tax deficiency is subject to deficiency procedures. See Meyer v. Commissioner, 97 T.C. 555, 560 (1991); Estate of DiRezza v. Commissioner, 78 T.C. 19, 25-27 (1982). By contrast, the Commissioner may summarily assess penalties or additions to tax measured by self-reported income on a taxpayer's return — again unless the Code says otherwise. Meyer, 97 T.C. at 559; Estate of DiRezza, 78 T.C. at 29. The Third Circuit summarized it well:

Thus, the Code logically provides that where the penalty is measured by a tax deficiency it is subject to the same procedure as the deficiency, for if the deficiency is revised by the Tax Court the penalty will be revised along with it. * * * If self-returned taxes are collected without the issuance of * * * [notices of deficiency], it follows simpliciter that none are required for delinquency penalties measured thereon. [ United States v. Erie Forge Co., 191 F.2d 627, 630-31 (3d Cir. 1951). ]

We have usually addressed this issue in the context of penalties measured by a deficiency determined by the Commissioner (which are subject to deficiency procedures) versus penalties measured by self-reported taxes (which are summarily assessed). But Winter's case is subtly different — what do we do with penalties measured by an asserted deficiency made by the Commissioner that is not subject to deficiency procedures?

In Estate of DiRezza, the taxpayer agreed to the Commissioner's adjustment but not an addition to tax measured by that adjustment. Estate of DiRezza, 78 T.C. at 21-22. The Commissioner therefore sent a notice of deficiency that asserted an addition to tax but determined no underlying deficiency. We nevertheless held that we had jurisdiction under section 6659 (a near identical predecessor to section 6665), because the addition to tax was "attributable to a deficiency." Id. at 25. We noted that "section 6659(a) sets forth the general rule that the deficiency procedures applicable to income * * * taxes are equally applicable to additions to tax." Id. at 26 (emphasis added). This made sense at the time because we (and the legislative history we reviewed) contemplated a tax world divided into only two parts: tax assessed on income self-reported on a return and tax assessed after the Commissioner sent out a notice of deficiency. Id. at 27. We didn't consider Winter's situation, where an adjustment might not be subject to deficiency procedures.

Section 6665(a) treats additions to tax and penalties identically so we compare the additions to tax in Estate of DiRezza to the penalties here. Estate of DiRezza later relies on section 6659(b) (now section 6665(b)), but this section by its terms relates only to additions to tax and so we won't discuss it here.

And it isn't surprising that we didn't discuss it — the Code sections that deny taxpayers access to deficiency procedures for such adjustments were enacted more than fourteen years after we decided Estate of DiRezza. See Taxpayer Relief Act of 1997, Pub.L. 105-34, sec. 1222(a), 111 Stat. 1008 (enacting sections 6246(c) and 6241(b)); id. sec. 1027(a), 111 Stat. 925 (enacting section 6034A(c)); SBJPA sec. 1307(c)(2), 110 Stat. 1781 (enacting section 6037(c) in 1996).

Section 6201(a)(3), allowing the Commissioner to summarily assess overstated withholdings and denying abatement procedures, was in place when we decided Estate of DiRezza. A few years before, however, we had decided that overstated withholdings aren't deficiencies under section 6211, and so are not subject to deficiency procedures. Bregin v. Commissioner, 74 T.C. 1097, 1105 (1980).

We also said in Estate of DiRezza, 78 T.C. at 29, that the legislative history showed "that Congress intended to exclude from the deficiency procedures only those additions which are attributable to the tax shown on the return." In the light of the more recent statutory requirements for the Commissioner to summarily assess certain adjustments, however, I would now find that statement to be too narrow. When we read section 6665(a) as making deficiency procedures the default option when it comes to asserting penalties, we were implicitly reading the word "deficiency" into the Code where it didn't appear. Section 6665(a) actually says only that penalties will be assessed and collected in the same manner as taxes. And where there is more than one way to assess taxes, I would hold that the Code commands the Commissioner to assess and collect any penalty in the same manner as the related tax — whether by deficiency procedures or summary assessment. I see no reason why the logic regarding penalties related to self-reported income should not extend to other taxes required to be summarily assessed.

Therefore, unless the Code says otherwise, I would hold that the jurisdiction for the penalty follows the jurisdiction for the related tax. This makes sense. For us to find negligence or substantial understatements where we had no jurisdiction over the underlying issue would require us to improperly conclude that there was an understatement in the first place. And if we sustained a negligence penalty and Winter later pursued his case in a refund forum, our opinion would be merely advisory. Further, a substantial understatement penalty is purely computational and based on the amount of the total understatement, which in my view we have no jurisdiction to determine. See Petaluma FX Partners, 591 F.3d at 655-56 (finding itself "unable to uphold" the penalty determinations in a Tax Court partnership proceeding where the penalties could not be computed without a separate partner-level proceeding). I would therefore hold that Winter's penalties relating to his inconsistent reporting, like the inconsistently reported items themselves, are not subject to deficiency procedures; and it follows that we lack jurisdiction over them. Sec. 6213; Meyer, 97 T.C. at 562.

My conclusion in this case might involve more work than the majority's rolling of all issues into a single deficiency case, but I prefer to respect the plain language of the statute. Some may also find my reading harsh — it would require S corporation shareholders who fail to notify the Commissioner that they are taking a position inconsistent with their corporations to prepay their taxes before disputing them.

But we live in a textualist world, and the text requires this result. A general grant of jurisdiction need not be specifically repealed, a limitation on jurisdiction need not be specially noted in legislative history, we need not have to discern some good policy reason or purpose in the words of the Code that — even inadvertently — limit our power in a particular case or over a particular issue or (as here) over any "adjustment required to make the treatment of the items by such shareholder consistent with the treatment of the items on the corporate return." Sec. 6037(c).

I respectfully dissent.