Because Asphalt Products Co. (APC) kept its books, and prepared
its 1974 federal income tax return, on a cash receipts and
disbursement basis, its reported 1974 taxable income did not fully
reflect that its 1974 year-end inventories and accounts receivable
were substantially higher than in prior years. APC's 1974 return
also claimed a deduction for the expense of driving two trucks to
APC from their place of purchase, even though they detoured to pick
up equipment bought by APC's shareholders in their individual
capacities. After determining that APC was required to compute its
1974 income on an accrual basis and disallowing the truck
transportation deduction as a personal expense of the shareholders,
the Commissioner of Internal Revenue, pursuant to 26 U.S.C. §
6653(a)(1), added to the resulting deficiency a penalty in the
amount of 5% of the full alleged underpayment, contending that the
use of the wrong accounting method and the deduction of the truck
transportation expense constituted negligence. Although concluding
that APC's use of cash-basis accounting was nonnegligent, the Tax
Court agreed that APC had negligently deducted the truck
transportation expense, and therefore added to APC's deficiency --
almost all of which was due to the change in accounting methods --
a negligence penalty computed by reference to the full amount of
the deficiency. Affirming the finding that the truck transportation
deduction was negligent, the Court of Appeals nevertheless reversed
the imposition of the negligence penalty on the full amount of the
deficiency, concluding that the penalty "should be applied only to
that portion of the deficiency attributable to the disallowed
deduction."
Held: Section 6653(a)(1)'s plain language -- whereby,
if "any part of any underpayment" is due to negligence, the
Commissioner shall add to the tax a penalty of "5 percent of the
underpayment" -- clearly establishes that the penalty is imposed on
the entire amount of "the underpayment," not just on the "part of
[the] underpayment" attributable to negligence. This conclusion is
supported by the Government's plausible interest in
Page 482 U. S. 118
deterring negligent tax preparation, and by the statute's
explicit limitation of other penalties to the amount of a negligent
or fraudulent underpayment.
Certiorari denied in No. 86-1054. Certiorari granted in No.
86-1063; 796 F.2d 843, reversed.
PER CURIAM.
Asphalt Products Co. (APC) manufactures emulsified asphalt, a
paving material containing oil refining residues, principally for
sale to Tennessee county governments for use in highway
construction. For reasons related to the rise in oil prices
attending the 1973 Arab oil embargo, APC's 1974 year-end
inventories and accounts receivable were substantially higher than
in prior years. Because APC kept its books, and prepared its 1974
federal tax return, on a cash receipts and disbursements basis, its
reported 1974 taxable income did not fully reflect these changes.
APC's 1974 return also claimed a deduction of $1,103.04 for the
expense of transporting two trucks from their place of purchase in
Seattle to Tennessee. The trucks were driven to Tennessee by way of
California, where they picked up two trailer-mounted wastewater
treatment plants bought by APC's shareholders in their individual
capacities.
The Commissioner of Internal Revenue determined that, because of
the increases in APC's inventories and accounts receivable, the
company's traditional cash-basis bookkeeping did not "clearly
reflect income," 26 U.S.C. § 446(b), for the 1974 tax year, and APC
was therefore required to compute its 1974 income on an accrual
basis. The Commissioner also disallowed the deduction for the
expense of transporting the trucks and trailers, on the ground that
it was a personal expense of the shareholders. After several other
adjustments, the Commissioner recomputed APC's taxes to show a
deficiency of $154,332.16.
The Commissioner further contended that APC's use of the wrong
accounting method and its deduction of the truck transportation
expenses constituted negligence, and it added
Page 482 U. S. 119
to the deficiency a penalty under 26 U.S.C. § 6653(a)(1), which
then provided:
"If any part of any underpayment . . . is due to negligence or
intentional disregard of rules or regulations (but without intent
to defraud), there shall be added to the tax an amount equal to 5
percent of the underpayment."
(Section 6653 was amended in minor respects by the Tax Reform
Act of 1986, Pub.L. 99-514, § 1503, 100 Stat. 2742; unless
otherwise indicated, all further references are to the pre-1986
statute.) The penalty totaled $7,716.61 -- 5% of the full alleged
underpayment of $154,332.16.
In the Tax Court, APC stipulated that the truck transportation
expenses were not properly deductible, unsuccessfully contested the
requirement that it use accrual accounting, and successfully
contested certain other determinations, resulting in a recalculated
deficiency of $133,248.69 -- almost all of which was due to the
change in accounting methods. The Tax Court concluded that APC's
use of cash-basis accounting was nonnegligent, but affirmed the
Commissioner's finding that APC had negligently deducted the truck
transportation expenses. It thus added to APC's tax a negligence
penalty of $6,943.37, computed as before by reference to the full
amount of the deficiency (adjusted for carryback credits,
see 26 U.S.C. §§ 6211, 6653(c)(1)).
The Court of Appeals for the Sixth Circuit affirmed, over a
dissent, the Tax Court's determination that APC was required to use
accrual accounting, and unanimously (albeit with little enthusiasm)
affirmed the finding that the deduction for truck transportation
expenses was negligent. 796 F.2d 843 (1986). APC has petitioned for
certiorari on those two issues in No. 86-1054, and we deny that
petition. Accordingly, for purposes of this opinion, we accept,
without approving, the Commissioner's finding of negligence. The
Court of Appeals reversed the Tax Court's imposition of the
negligence penalty on the full amount of the deficiency, concluding
that the penalty "should be applied only to that portion of the
deficiency attributable to the disallowed deduction."
Page 482 U. S. 120
Id. at 850. The Commissioner has petitioned for
certiorari on that issue in No. 86-1053. Because this holding is in
apparent conflict with
Abrams v. United States, 449 F.2d
662 (CA2 1971), and is in obvious conflict with the plain language
of the statute, we grant certiorari in No. 86-1053, and
reverse.
Section 6653(a)(1) could not be clearer. If "any part of any
underpayment" is due to negligence, the Commissioner shall add to
the tax a penalty of "5 percent of the underpayment." It is
impossible further to expIain the statute without merely repeating
its language -- the penalty is imposed on "the underpayment," not
on the "part of [the] underpayment" attributable to negligence. By
contrast (if contrast is thought necessary), the very next
paragraph of the statute, § 6653(a)(2) (added in 1981,
see
Pub.L. 97-34, § 722(b)(1), 95 Stat. 342), limits the 50% penalty on
interest due on negligent underpayments to "the portion of the
underpayment . . . which is attributable to the [taxpayer's]
negligence." The section imposing interest penalties on fraudulent
underpayments contains the same proviso, § 6653(b)(2)(A), as does
(after the 1986 Tax Reform Act) the provision for direct penalties
on fraudulent underpayments.
See § 1503(b)(1)(A), 100
Stat. 2742 ("If any part of any underpayment . . . is due to fraud,
there shall be added to the tax . . . 75 percent of the portion of
the underpayment which is attributable to fraud"). As the Court of
Appeals for the Second Circuit held in
Abrams v. United
States:
"It is evident that it was intended that the five percent was to
be assessed not just against that segment of the deficiency due to
negligence, but against the entire amount. The language is clear,
and leads to no other interpretation."
449 F.2d at 664.
The taxpayers in
Abrams argued
"that a literal application of the statute could lead to absurd
results where a comparatively insignificant item of income is
negligently omitted,"
ibid., and the court in
Abrams expressly
reserved judgment on that situation.
Ibid. ("That case is
not before us on this
Page 482 U. S. 121
appeal, and we therefore express no opinion whatever as to its
proper disposition if it should ever arise"). The Court of Appeals
in this litigation relied on that reservation, and on the absence
of any "egregious attempts [by APC] to avoid the payment of taxes,"
796 F.2d at 849, to distinguish
Abrams, concluding that
the Commissioner's construction of the statute lets "the tail wag
the dog." 796 F.2d at 850;
ibid. (Nelson, J., concurring
in part and dissenting in part) ("Where the taxpayer is subject to
a penalty only because of the negligent omission of a comparatively
insignificant item of income, and the Commissioner also asserts
that there is a large underpayment not claimed to be due to
negligence, I agree with the court that it would be absurd to let
the Commissioner calculate the negligence penalty by applying the
statutory percentage to the sum of the negligent and non-negligent
underpayments"). This was error. Judicial perception that a
particular result would be unreasonable may enter into the
construction of ambiguous provisions, but cannot justify disregard
of what Congress has plainly and intentionally provided. Given the
Government's plausible interest in deterring negligent tax
preparation, and given the statute's explicit limitation of other
penalties to the amount of the negligent or fraudulent
underpayment, no conclusion can be drawn from the provision here at
issue except that Congress desired to impose a modest penalty (5%)
upon underpayments any part of which was attributable to negligence
of the taxpayer. It is not our assigned role to alter that
disposition.
The decision of the Court of Appeals limiting the amount of the
negligence penalty is
Reversed.
* Together with No. 86-1054,
Asphalt Products Co., Inc. v.
Commissioner of Internal Revenue, also on petition for writ of
certiorari to the same court.
JUSTICE MARSHALL, concurring in part and dissenting in part.
Once again, the Court decides a case summarily without benefit
of full briefing on the merits of the question decided. As I noted
recently,
Montana v. Hall, 481 U.
S. 400, 405-406 (1987) (dissenting from summary
disposition), this Court's
Page 482 U. S. 122
Rules governing the filing of petitions for certiorari instruct
the parties to address whether plenary consideration of the case
would be appropriate, and do not encourage detailed discussions of
the merits. In this case, adhering to the admonition in this
Court's Rule 22.2 that a response be "as short as possible,"
respondent filed a nine-page brief in opposition to the petition
for certiorari, of which only four pages dealt with the issue of
the proper construction of 26 U.S.C. § 6653(a)(1). It is, in my
view, unfair to decide a case such as this without first permitting
the litigants to brief in full the merits of the issues
decided.
The wisdom of summary disposition of this case is particularly
doubtful. The legislative history of the Tax Reform Act of 1986,
not mentioned by the Court, indicates that Congress considered
carefully the scheme for imposing negligence penalties,
see H.R.Conf.Rep. No. 99-841, pt. 2, pp. 779-782 (1986),
and expressly disapproved the decision of the Court of Appeals in
this case.
Id. at 782, n. 3. Because Congress has
definitively stated that the decision below is not to be followed
in cases arising under the 1986 Act, this case, if left
undisturbed, would have negligible precedential value. Moreover,
courts considering the issue even with regard to tax years before
1987, while not bound by the current Congress' view of the intent
of a previous Congress, would probably pay some heed to the
congressional view of the proper reading of § 6653(a)(1).*
Under the circumstances, it appears the reason for summarily
reversing the judgment of the Court of Appeals in this case is
simply that the majority perceives it to be wrong. But this Court
routinely denies petitions for certiorari seeking review of
decisions that, on the face of the petitions or the
Page 482 U. S. 123
petitions and responses, appear to be wrong. I can discern no
intelligible principle distinguishing from that large number of
cases those the Court chooses to decide without first giving the
parties the opportunity to brief the merits of the case in full,
and giving itself the opportunity to ensure that its initial
impression is borne out by more thoughtful consideration. That our
jurisdiction is discretionary should not lead us to be arbitrary in
its exercise.
I would not decide this case without first giving the parties
the opportunity to file briefs on the merits. Accordingly, I
dissent from the Court's summary disposition in No. 861053. Because
I too would deny the petition for certiorari in No. 86-1054, I
concur in that part of the Court's per curiam opinion.
* Indeed, petitioner relies on this legislative history to
support his contention that the decision of the Court of Appeals in
this case was erroneous, Pet. for Cert. 6-8, and suggests that the
Court vacate and remand the decision below for further
consideration in light of the Conference Report.
Id.at 8,
n.4.
JUSTICE BLACKMUN, concurring in part and dissenting in part.
I agree with the Court in its denial of the petition for
certiorari in No. 86-1054. I dissent from its summary reversal of
the judgment of the Sixth Circuit on the negligence penalty issue.
I do not agree that the correct result is so obvious and the Court
of Appeals so clearly in error that summary reversal is warranted.
I hope the Court's action is not due to an innate reluctance to
review a federal income tax case. After all, United States Courts
of Appeals have reached conflicting conclusions on the issue, and
income tax law often has its special vagaries. I would grant
certiorari in No. 86-1053 and give that case plenary
consideration.