Cir v. Asphalt Prods. Co., Inc., 482 U.S. 117 (1987)

Commissioner of Internal Revenue v.

Asphalt Products Co., Inc.
No. 86-1053

Decided June 1, 1987
482 U.S. 117

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Syllabus

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 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.