(the prior years' overpayments). The taxpayer requested that the Commissioner offset the prior years' overpayments against the present years' underpayments. However, the Commissioner refunded the prior years' overpayments, including interest thereon calculated at the overpayment rate under section 6621(a)(1), to the taxpayer. The Commissioner later mailed notices of tax due, including interest calculated at the underpayment rate under section 6621(a)(2) and (c), for the present years' underpayments. The taxpayer paid the present years' underpayments, together with interest at the underpayment rate. The taxpayer then claimed that the Commissioner's failure to offset pursuant to section 6402(a) caused the taxpayer to overpay interest for years before the Court (the present years' overpayments).

The issue in Winn-Dixie Stores, Inc. was whether the Commissioner abused his authority by failing to offset the prior years' overpayments against the present years' underpayments. The Commissioner argued that pursuant to section 6512(b)(4) this Court did not have jurisdiction to decide that matter.

We agreed that pursuant to section 6512(b)(4) this Court did not have authority to restrain or review any credit or reduction made by the Commissioner under section 6402. However, we held that under the facts of Winn-Dixie Stores, Inc. v. Commissioner, 110 T.C. at 294, we were not "being asked to restrain or review a reduction of a refund under section 6402." The overpayments for prior years had been refunded in full to the taxpayer, rather than being reduced through application as a credit against another year's tax. We held that the Commissioner's determination regarding whether to offset the prior years' overpayments against the present years' underpayments affected the interest due on the present years' underpayments.3 We held that we had jurisdiction to review the taxpayer's claim of an overpayment of interest on underpayments for years before the Court and that our jurisdiction to decide the matter was not restricted under section 6512(b)(4).

3 Interest on the present years' underpayments was affected because there is no net interest due for the period of mutual indebtedness if the Commissioner exercises his authority to offset under sec. 6402(a). See sec. 6601(f). However, there is net interest due if there is no offset. Net interest results in this instance because the rate for calculating interest on overpayments is less than the rate for calculating interest on underpayments. See sec. 6621(a).

In the case before us, petitioner does not contest respondent's determination, including the proposed interest calculation on the deficiency, for the year in issue. Unlike WinnDixie Stores, Inc. v. Commissioner, supra, to the extent petitioner reported an overpayment, respondent exercised his discretion under section 6402 to offset such overpayment against petitioner's assessed liabilities for 1990 and 1991. In this regard, petitioner contends only that respondent improperly determined petitioner's liabilities for interest and penalties for 1990 and 1991 and that, as a consequence, some portion of the $10,131 overpayment that he claimed on his 1993 return is available as an offset against the agreed deficiency for 1993. However, were we to address petitioner's contention on the merits, we would effectively be reviewing the credit made by respondent under section 6402. This we may not do.4 Sec. 6512(b)(4).

To reflect our disposition of the disputed issue, as well as the parties' stipulation of settled issues,

Decision will be entered for respondent.

GIDEON L. MEDINA AND CORAZON P. MEDINA, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 18999-97.

Filed February 22, 1999.

H and W, who were both disqualified persons within the meaning of sec. 4975, I.R.C., borrowed $340,000 from the qualified pension plan of H's wholly owned corporation. H and W did not make any payments of interest or principal relating to the loan and did not file excise tax returns.

1. Held, sec. 4975, I.R.C., applies to a loan, even though such loan, pursuant to sec. 72(p), I.R.C., was treated as a distribution.

2. Held, further, H and W did not correct, within the meaning of sec. 4975, I.R.C., the prohibited transaction and, pursuant to sec. 4975(a) and (b), I.R.C., are liable for both tiers of excise taxes.

4 If petitioner has in fact overpaid his liabilities for 1990 and 1991, he may have a remedy in another forum as to those years. Thus, if applicable limitations periods remain open, petitioner may file a claim for refund for 1990 and 1991 with the Internal Revenue Service, and, if such claim is denied, petitioner may be entitled to sue for a refund in the appropriate Federal District Court or the U.S. Court of Federal Claims. See McCormick v. Commissioner, 55 T.C. 138, 142 (1970).

3. Held, further: The "amount involved", on which the sec. 4975, I.R.C., excise taxes are based, is equal to the greater of interest paid or fair market interest relating to the loan. Because H and W did not make any payments of interest, the amount involved is the fair market interest.

4. Held, further, in determining the amount involved, the fair market interest rate is 10.5 percent.

5. Held, further, H and W, pursuant to sec. 6651(a)(1), I.R.C., are liable for additions to tax for failing to file excise tax returns.

Michael E. Dumke, for petitioners.

Mark L. Hulse and Roberta M. Amos, for respondent.

OPINION

FOLEY, Judge: By notices dated June 25, 1997, respondent determined deficiencies in, and an addition to, petitioners' Federal excise taxes as follows:

Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. The issues for decision are as follows:

(1) Does section 4975 apply to a loan even though such loan, pursuant to section 72(p), was treated as a distribution? We hold that it does.

(2) Did petitioners, within the meaning of section 4975(f)(5), correct the prohibited transaction? We hold that they did not.

(3) What is the "amount involved" relating to a loan that is subject to section 4975 excise taxes? We hold that the "amount involved" is the greater of the interest paid or the fair market interest.

(4) In determining the "amount involved" relating to petitioners' loan, what is the fair market interest rate? We hold that the fair market interest rate is 10.5 percent.

(5) Are petitioners, pursuant to section 6651(a), liable for additions to tax for failing to file excise tax returns? We hold that they are.

Background

The parties submitted this case fully stipulated pursuant to Rule 122. At the time the petition was filed, petitioners resided in Niles, Michigan.

Gideon Medina was an employee, the sole shareholder, and president of Gideon L. Medina, M.D., P.C., a Michigan professional corporation (corporation). Corazon Medina was secretary of the corporation. The corporation established a qualified employees' pension plan and trust (plan), which met the requirements of section 401. During the years in issue, petitioners were participants in the plan.

On December 1, 1986, petitioners borrowed $340,000 (loan) from the plan to acquire Sunshine Villa Apartments. Petitioners executed a promissory note with the following terms: (1) Interest at the rate of 10.5 percent per annum is payable annually; (2) any unpaid interest is added to the principal amount; and (3) the entire principal amount is due 8 years from the date of the note or, if sooner, upon the sale of Sunshine Villa Apartments. On August 15, 1991, Mr. Medina executed a document providing that "Building C of

* [the

Sunshine Villa Apartments *** [is] assigned to * * plan]. *** to ensure that the loan is paid if and when the Sunshine Villa is sold." Petitioners did not file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, for any of the years in issue, nor did they make any payments to the plan pursuant to the terms of the promissory note.

Discussion

Section 4975 imposes two tiers of excise taxes on a prohibited transaction. The first tier is 5 percent of the "amount involved" relating to a prohibited transaction for each year, or part thereof, in the "taxable period". Sec. 4975(a). If the first-tier excise tax applies and the transaction is not corrected within the "taxable period", a 100-percent second-tier tax is imposed on the "amount involved" relating to the prohibited transaction. Sec. 4975(b).

I. Application of Section 4975 to a Loan Subject to
Section 72(p)

The lending of money between a plan and a disqualified person generally is a prohibited a prohibited transaction. See sec. 4975(c)(1)(B). Respondent determined that petitioners are disqualified persons who participated in a prohibited transaction (i.e., the loan) and, thus, are liable for section 4975 excise taxes. Petitioners do not contest respondent's contention that petitioners are disqualified persons. Petitioners contend, however, that they did not participate in a prohibited transaction during the years in issue (i.e., 1991 through 1997) because, pursuant to section 72(p), the loan was a taxable distribution in an earlier year (i.e., 1986). As a result, petitioners contend, section 4975 excise taxes are not applicable. Respondent contends that the loan was subject to section 4975 during the years in issue even though the loan, pursuant to section 72(p), was treated as a distribution in an earlier year.

To resolve this issue, we need not look beyond the plain and ordinary meaning of the words used in section 72(p). See United States v. Locke, 471 U.S. 84, 93 (1985); Phillips Petroleum Co. v. Commissioner, 101 T.C. 78, 97 (1993). Section 72(p)(1)(A) provides that a loan from a qualified employer