(D.C. Civil Action No. 70-1324) APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.
Hunter and Weis, Circuit Judges and Miller, District Judge. Weis, Circuit Judge, dissenting.
The sole issue on this appeal is the determination of the proper method by which civil tax fraud penalties are to be assessed under 26 U.S.C. § 6653. The Internal Revenue Service ("IRS") assessed a 50% fraud penalty on the difference between taxpayers' true tax liability and the tax liability shown on taxpayers' original tax returns. The district court upheld this method of computation and we affirm.
Taxpayers' returns for 1957 through 1959 were timely filed and the taxes shown thereon timely paid. When the IRS subsequently conducted routine examinations of these returns, adjustments were made resulting in the assessment of additional taxes. Subsequent to this, taxpayers filed amended returns reporting income which had not been included in the original tax returns. The IRS then began an investigation which uncovered further unreported income of taxpayers and which eventually resulted in the bringing of fraud charges against taxpayers. On this appeal taxpayers do not contest their tax liability or the finding of fraud.
Taxpayers do contend, however, that the fraud penalty should not be applied to those deficiencies assessed because of adjustments made to the original tax return at the time routine audits were conducted. The additional taxes assessed at this time resulted from adjustments to inventories and business deductions. These adjustments apparently were not the subject of the subsequent fraud investigation which was based on omitted income. Thus the taxpayers suggest that the fraud penalty should have been computed by the following formula:
50% X [correct tax -- (tax shown on original timely filed return additional tax assessed because of routine audit on original return)]
The fraud penalty was actually computed on the basis of this formula:
50% X [correct tax -- (tax shown on original timely filed return)]
Taxpayers argue that the decisional law and applicable statute supports their view that the fraud penalty should not apply to nonfraudulent deficiencies assessed as a result of routine adjustments made to their original returns. We do not agree.
Under the Internal Revenue Code of 1939, the fraud penalty provision, section 293(b), provided that "if any part of any deficiency is due to fraud. . . then 50 per centum of the total amount of the deficiency. . . shall be assessed . . . ." (Emphasis added.) "Deficiency" was defined under section 271(a) by the following formula:
deficiency = correct tax -- (tax shown on return amounts previously assessed or collected without assessment -- rebates)*fn1
Where there have been several deficiencies, this definition quite logically requires that, in computing the amount of any new deficiency, credit should be given for ...