T.C. Memo. 1999-414
UNITED STATES TAX COURT
HUGH D. AND NANCY L. SIMS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8919-99. Filed December 22, 1999.
Hugh D. Sims, pro se.
Blaine C. Holiday, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: On March 19, 1999, respondent issued a
notice of final determination denying petitioners’ claim to abate
interest for the taxable year 1993. On April 19, 1999,
petitioners filed a timely petition to review respondent’s
determination. The only issue for decision is whether
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petitioners are entitled to an abatement of interest pursuant to
section 6404(e).1
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts is incorporated herein by this
reference. Petitioners resided in St. Paul, Minnesota, when the
petition in this case was filed. References to petitioner are to
Hugh D. Sims.
This case arises from the settlement of a class action
lawsuit against Northwest Airlines for alleged violations of the
Age Discrimination in Employment Act (ADEA). Petitioner, a
retired U.S. Air Force pilot, was working for a commercial air
carrier when he received an unsolicited letter from the U.S.
Equal Employment Opportunity Commission (EEOC) asking him if he
would like to participate in a class action lawsuit against
Northwest Airlines. He agreed to participate.
In the summer of 1987, during the pendency of the lawsuit,
petitioner was interviewed for employment by Northwest Airlines
and hired as an employee.
Sometime after petitioner was hired by Northwest Airlines,
the class action lawsuit was settled. Under the terms of the
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. Monetary amounts are rounded to the nearest dollar.
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settlement agreement, petitioner, in 1993, received $33,000,
which was allocated by court order as follows:
Back wages $18,505
Interest 8,327
Liquidated damages 6,168
By letter dated February 10, 1994, the supervising attorney
for the EEOC informed petitioner that the United States Court of
Federal Claims had decided an unrelated case, Bennett v. United
States, 30 Fed. Cl. 396 (1994), revd. without published opinion
60 F.3d 843 (Fed. Cir. 1995), which held that “ADEA settlement
payments for backpay and liquidated damages are not taxable.” He
enclosed a copy of the opinion as well as a copy of an IRS ruling
regarding the taxability of money received in settlement of sex
and race discrimination claims. In the letter, the attorney
advised petitioner to consult with his tax adviser “regarding the
effect of the enclosed, if any, on your recent recovery in the
subject action.”
On their 1993 Federal income tax return, petitioners
reported the backpay award of $18,505 as wages on line 7 and the
interest award of $8,327 on line 8(a). Petitioners did not
report the liquidated damage award of $6,168. Petitioners
claimed an exclusion under section 104(a)(2) of $18,505 and
attached a schedule to the return explaining that the exclusion
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of the backpay award was based on the decision in Bennett v.
United States, supra. They also attached copies of the Bennett
decision and other documents supporting the exclusion to the
return.
Prior to the expiration of the applicable period of
limitations on assessment, respondent conducted an examination of
petitioners’ 1993 Federal income tax return. On December 31,
1996, respondent issued an examination report that determined the
entire settlement award received from Northwest Airlines was
fully taxable to petitioners, citing the United States Supreme
Court’s decision in Commissioner v. Schleier, 515 U.S. 323
(1995).2 The examination report was respondent’s first written
contact with petitioners.
From the time petitioners received the examination report
until approximately February 25, 1997, petitioners considered the
report and consulted with their return preparer concerning it.
On February 25, 1997, petitioners signed Form 4549-CG consenting
to the assessment of the additional tax proposed in the
examination report and submitted it to respondent with a check in
the amount of $10,332. On February 28, 1997, respondent received
2
The examination report also pointed out that the Bennett
case on which petitioners had relied was reversed in an
unpublished per curiam decision based on the Supreme Court’s
decision in Commissioner v. Schleier, 515 U.S. 323 (1995). See
Bennett v. United States, 30 Fed. Cl. 396 (1994), revd. without
published opinion 60 F.3d 843 (Fed. Cir. 1995).
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Form 4549-CG and the check. Respondent applied the payment to
petitioners’ 1993 account, allocating $8,031 to the income tax
deficiency and $2,301 to accrued interest.
On March 5, 1997, petitioners filed a claim for refund and
request for abatement of interest assessed and paid with respect
to their 1993 income tax deficiency. In their claim, petitioners
explained that, when their 1993 return was prepared and filed,
existing legal precedent supported the position taken on their
return. Petitioners argued that it was only after the Supreme
Court decided Schleier on June 14, 1995, that the precedent on
which they reasonably relied was overruled. Since, in their
view, they complied with the law as it existed when their 1993
return was filed, petitioners asserted that the income tax
deficiency was not their fault, and they should not have to pay
interest on the deficiency for the period prior to June 14, 1995,
when Schleier was decided.
Respondent disallowed petitioners’ claim in a Notice of
Final Determination dated March 19, 1999, and this proceeding
followed.
Discussion
Section 6404(e), as in effect for 1993, authorizes
respondent to abate all or any part of an assessment of interest
on (1) any deficiency attributable in whole or in part to any
error or delay by an employee of the Internal Revenue Service,
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acting in his official capacity, in performing a ministerial act,
and (2) any tax payment to the extent that any error or delay in
the payment is attributable to the employee’s error or dilatory
conduct in performing a ministerial act.3 Under section 6404(e),
an error or delay is taken into account only if no significant
aspect of the error or delay can be attributed to the taxpayer
and only after respondent has contacted the taxpayer in writing
with respect to the deficiency or payment. See sec. 6404(e)(1);
sec. 301.6404-2T(a)(2), Temporary Proced. & Admin. Regs., 52 Fed.
Reg. 30162 (Aug. 13, 1987); see also Krugman v. Commissioner, 112
T.C. 230, 238 (1999).
We have jurisdiction to decide this case because petitioner
made a claim to abate interest under section 6404(e)(1),
respondent issued a final determination disallowing petitioners’
claim after July 30, 1996, and petitioners timely filed a
petition to review the failure to abate interest. See sec.
6404(g)(1);4 Rule 280; Krugman v. Commissioner, supra at 239.
3
In 1996, sec. 6404(e) was amended by sec. 301 of the
Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. 104-168, 110 Stat.
1452, 1457 (1996), to permit respondent to abate interest
attributable to “unreasonable” error or delay resulting from
“managerial” and “ministerial” acts. The new provision applies
to interest accruing with respect to deficiencies or payments for
tax years beginning after July 30, 1996. The amended provision
is not applicable here. See Woodral v. Commissioner, 112 T.C.
19, 25 n.8 (1999).
4
Sec. 6404(g) was added to the Code by TBOR 2 sec. 302(a),
110 Stat. 1457-1458.
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Our jurisdiction is limited, however, to deciding whether
respondent abused his discretion by refusing to abate interest.
See sec. 6404(g)(1). As we evaluate respondent’s exercise of
discretion, we are mindful that Congress intended for respondent
to abate interest under section 6404(e) “where failure to abate
interest would be widely perceived as grossly unfair”, but that
the abatement provision should not “be used routinely to avoid
payment of interest”. H. Rept. 99-426, at 844 (1985), 1986-3
C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B.
(Vol. 3) 1, 208; see also Krugman v. Commissioner, supra.
In this case, petitioners object to the assessment of
interest against them because they made a good faith effort to
comply with the law as it existed when their 1993 return was
filed. They made full disclosure of their position and the legal
and factual basis for it on their 1993 return, even attaching
copies of the case on which they relied. They contend that the
assessment of interest against them is unfair and, therefore,
should be abated.
Although we understand petitioners’ frustration and
empathize with their position, petitioners have not argued that
any employee of respondent erred in performing a ministerial act
or delayed performing a ministerial act as required by section
6404(e)(1). An examination of the facts in this case reveals
there was no such error. The term “ministerial act” is defined
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as:5
a procedural or mechanical act that does not involve
the exercise of judgment or discretion, and that occurs
during the processing of a taxpayer’s case after all
prerequisites to the act, such as conferences and
review by supervisors, have taken place. A decision
concerning the proper application of federal tax law
(or other federal or state law) is not a ministerial
act. [Sec. 301.6404-2T(b)(1), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 30162 (Aug. 13, 1987).]
The only actions on which petitioners’ claim could be based are
the decision to audit and the decision to disallow the exclusion
relying upon the Supreme Court’s decision in Commissioner v.
Schleier, 515 U.S. 323 (1995). Respondent’s decision to audit
and the timing thereof cannot be attacked using section 6404(e)
because section 6404(e) “applies only after respondent has
contacted the taxpayer in writing about the deficiency or payment
of tax.” Krugman v. Commissioner, supra at 239. Consequently,
section 6404(e) “‘does not * * * permit the abatement of interest
for the period of time between the date the taxpayer files a
return and the date the IRS commences an audit, regardless of the
length of that time period.’” Id. (quoting H. Rept. 99-426,
supra, 1986-3 C.B. (Vol. 2) at 844). Likewise, respondent’s
decision to apply Schleier to disallow petitioners’ exclusion
5
Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs.,
52 Fed. Reg. 30162 (Aug. 13, 1987), was promulgated before sec.
6404(e) was amended in 1996 and was in effect during 1993. The
final regulation contains the same definition of ministerial act
and applies to tax years beginning after July 30, 1996. See sec.
301.6404-2T, Proced. & Admin. Regs., Fed. Reg. 30162 (Aug. 13,
1987).
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under section 104 cannot be attacked using section 6404(e)
because that decision was made before respondent contacted
petitioner in writing concerning the deficiency for the first
time, see sec. 6404(e), and involved the proper application of
Federal tax law, see sec. 301.6404-2T(b)(1), Temporary Proced. &
Admin. Regs., supra. Any delay occurring after petitioners
received the examination report and prior to the payment of the
tax deficiency was due to petitioners’ understandable desire to
consult with their tax adviser regarding an appropriate response
to the report.
Petitioners’ complaint is really one against fate-–they
filed their return just before the Supreme Court provided
definitive guidance on the correct tax treatment to be accorded
damages like those awarded here. Section 6404(e) simply does not
reach this type of complaint. Since there was no erroneous or
dilatory performance of a ministerial act, respondent lacked
authority to abate interest, and, therefore, his refusal to abate
interest in this case cannot be an abuse of discretion under
section 6404(e). Accordingly, we must sustain respondent’s
determination.
To reflect the foregoing,
Decision will be entered
for respondent.