Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 56-54

1956-1 C.B. 654

Sec. 6653

IRS Headnote

Where delinquent returns are filed showing the correct tax liability and it is found that it was the intent of the taxpayer to evade tax by fraudulent acts, the 50 percent fraud penatly under section 293(b) of the Internal Revenue Code of 1939 shall be assessed and collected from the taxpayer.

Full Text

Rev. Rul. 56-54

Advice has been requested whether the fraud penalty under section 293(b) of the Internal Revenue Code of 1939 should be assessed against a taxpayer who has filed a delinquent return showing the correct tax liability and it is found that he intended to evade tax by fraudulent acts.

Section 293(b) of the Internal Revenue Code of 1939 provides:

If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3612(d)(2).

Section 39.271-1(a) of Regulations 118 provides that the term `deficiency' means the excess of the tax imposed by chapter one over the sum of the amount shown as the tax by the taxpayer upon his return and the amounts previously assessed (or collected without assessment) as a deficiency; but such sum shall first be reduced by the amount of rebates made. If no return is made, or if the return (except a return on Form 1040A pursuant to section 51(f) of the Code) does not show any tax, for the purposes of the definition `the amount shown as the tax by the taxpayer upon his return' shall be considered as zero.

The Tax Court of the United States interpreted section 271(a) of the Code, prior to its amendment by the Individual Income Tax Act of 1944, in the case of Maitland A. Wilson v. Commissioner , 7 T.C. 395. In that case, the taxpayer had filed a return for 1936 and paid the tax disclosed therein. Subsequently, two deficiencies were determined. The first deficiency was assessed and pain in 1939. In 1942, a deficiency notice for 1936 was mailed to the taxpayer determining a further deficiency and the fraud penalty. The penalty was based on the difference between the full tax liability for 1936 and the amount disclosed in the original return filed for that year. For 1940, the taxpayer had filed a return and thereafter filed an amended return. In 1942, a deficiency notice was mailed determining a deficiency and the fraud penalty was computed in a manner similar to that followed in connection with the year 1936. The taxpayer contended that the term `deficiency,' as used in section 293(b) of the Code referred to the tax remaining unpaid as set forth in the notice of deficiency. The court stated:

There is not the slightest indication in the history of section 271(a) of the 1932 and the 1934 Acts, in which the term `deficiency' is defined, that it was intended to change the existing scheme for imposing a fraud penalty and reduce the penalty imposed under prior laws by 50 percent of the amount of the understatement in tax which had been paid prior to the discovery of the fraud or the assertion of a penalty. The construction for which petitioner argues would assume an intent on the part of Congress to relieve from any penalty a taxpayer, guilty of fraud, who, finding the collector had discovered his fraud, quickly filed an amended return and paid the tax before the deficiency notice could be mailed.

The above interpretation of `deficiency' was repeated in the case of Aaron Hirschman et al. v. Commissioner , 12 T.C. 1223, in connection with section 271(a) of the 1939 Code.

Accordingly, it is held that the 50 percent fraud penalty should be assessed against a taxpayer if it is found that he intended to evade tax by fraudulent acts, even though he has filed delinquent returns showing the correct tax liability and paid the tax and interest.