## Facts

- Taxpayers filed timely federal income tax returns for 1957–1959 and paid the taxes reported on those original returns.
- The IRS conducted routine examinations and assessed additional taxes based on inventory and business-deduction adjustments; those adjustments were not themselves premised on fraud.
- Taxpayers later filed amended returns reporting income omitted from the original returns.
- The IRS investigated and uncovered additional unreported income, ultimately determining that fraud existed for the years at issue.
- Taxpayers sought a refund after the IRS assessed civil fraud penalties under 26 U.S.C. § 6653(b) using a computation based on the difference between the correct tax and the tax shown on the original returns.
- On appeal, taxpayers did not contest the underlying tax liabilities or the finding of fraud; they challenged only the method used to compute the fraud penalty.

## Issues

1. Under 26 U.S.C. § 6653(b), when fraud exists as to any part of an underpayment, must the 50% civil fraud penalty be computed on the entire underpayment (correct tax minus tax shown on the original return), or only on the portion of the deficiency attributable to fraud (excluding routine, nonfraud adjustments)?

## Decision

- The Third Circuit affirmed the district court’s judgment approving the IRS computation.
- The court held the 50% civil fraud penalty under § 6653(b) is computed on the entire underpayment measured by the difference between the correct tax liability and the tax shown on the original timely filed return.
- The court rejected the taxpayers’ proposed approach that would reduce the penalty base by excluding deficiency amounts attributable to routine, nonfraud audit adjustments.

## Legal Principles

- Under 26 U.S.C. § 6653(b), if any part of an underpayment is due to fraud, the statute authorizes a 50% addition calculated with reference to the underpayment as a whole.
- The relevant “underpayment” for purposes of the fraud addition is determined by comparing the correct tax liability to the amount shown on the original return, not by separating fraud-related and nonfraud-related components of the deficiency.
- Absent a statutory limitation, courts will not rewrite the fraud-penalty base to exclude otherwise valid deficiency components discovered through routine examination.

## Conclusion

The Third Circuit held that once fraud taints any part of a taxpayer’s underpayment, § 6653(b) permits the IRS to compute the 50% civil fraud penalty on the full underpayment (correct tax minus tax shown on the original return), even if part of the deficiency results from routine, nonfraud audit adjustments.


Levinson v. United States, 496 F.2d 651 (3d Cir. 1974)