T.C. Memo. 2000-369
UNITED STATES TAX COURT
LARRY D. & GAIL SCOTT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3509-99. Filed December 7, 2000.
Larry D. & Gail Scott, pro sese.
Susan Smith Canavello, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, Judge: This case was assigned to Special Trial
Judge Lewis R. Carluzzo pursuant to section 7443A(b)(5) and Rules
180, 181, and 183.1 The Court agrees with and adopts the opinion
of the Special Trial Judge, which is set forth below.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect at the time that the petition was
filed in this case. Rule references are to the Tax Court Rules
of Practice and Procedure.
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OPINION OF THE SPECIAL TRIAL JUDGE
CARLUZZO, Special Trial Judge: On September 16, 1998,
respondent issued a notice of final determination denying
petitioners' request to abate interest on income tax deficiencies
for the years 1989 and 1990. In response to the notice,
petitioners filed a timely petition pursuant to section 6404(i).
The issue for decision is whether respondent’s failure to
abate interest assessed on petitioners’ 1989 and 1990 income tax
deficiencies was an abuse of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioners are husband and wife. At the time the petition was
filed, petitioners resided in Lucedale, Mississippi, and their
net worth did not exceed $2 million. References to petitioner
are to Larry D. Scott.
Petitioner is and was during all relevant times the sole
proprietor of a general contracting business (the business). A
portion of petitioners’ residence was used as an office in
connection with the business. During 1989 and 1990, the income
petitioner earned and the expenses he incurred in connection with
the business were reported on Schedules C, Profit or Loss From
Business (Sole Proprietorship), included with the joint Federal
income tax returns timely filed by petitioners for those years.
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The specific items reported on the Schedules C are as follows:
1989 1990
Income:
Gross receipts $459,553 $480,035
Cost of goods sold 358,976 363,056
Gross income 100,577 116,979
Deductions:
Advertising 769 1,821
Commissions and fees -0- 29,650
Car and truck expenses 15,824 -0-
Insurance 5,678 5,837
Interest (mortgage) -0- 7,540
Interest (other than mortgage) 9,101 8,135
Legal and professional 3,065 7,539
Office expenses 3,943 14,254
Rent (other business property) 1,493 -0-
Supplies 2,782 2,733
Taxes 689 790
Travel -0- 19,612
Meals and Entertainment -0- 568
Utilities 4,106 9,071
Other Expenses
“Sub” 65,565 -0-
“Bk Chg” 353 201
Total 113,368 107,751
Net profit (loss) (12,791) 9,228
On each Schedule C, petitioners responded “No” to the question
“Are you deducting expenses for the business use of your home?”,
although it appears that at least portions of certain deductions
relate to the use of petitioners’ residence in connection with
the business.
The net loss from the business is the only item taken into
account in the negative adjusted gross income reported on
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petitioners’ 1989 Federal income tax return; consequently, no
section 1 income tax liability is reported on that return. Their
1989 return also reflects a section 1401 self-employment tax of
$208.32, and an earned income credit of $222, resulting in a
refund claim for $13.68.
The net profit from the business and a $12,791 “NOL” are the
items included in the negative adjusted gross income reported on
petitioners’ 1990 Federal income tax return. As with 1989, no
section 1 income tax is listed on the return, but petitioners
reported a section 1401 self-employment tax of $1,303.87, which
is partially offset by an earned income credit of $953.
Petitioners were first contacted in writing by respondent
with respect to the examination of their 1989 and 1990 Federal
income tax returns by letter dated June 6, 1991. Revenue Agent
Judy Pearson (Ms. Pearson) conducted the examination. Ms.
Pearson met with petitioner and/or their return preparer, Carol
Reid (Ms. Reid), on several occasions and issued several
information document requests to petitioners during the course of
the examination. It appears that the examination focused
primarily upon deductions claimed on the Schedules C. Because
certain of those deductions related to payments made to
petitioners’ son, Ms. Pearson extended her examination to include
the 1989 and 1990 Federal income tax returns of petitioners’ son.
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Ms. Pearson’s examination of petitioners’ returns was
briefly interrupted for work-related training from March 16,
1992, to April 17, 1992. She also worked on other examinations
from April 17, 1992, to June 13, 1992. A closing conference with
petitioner, Ms. Reid, and petitioners’ son was held on June 17,
1992. The examination was closed with the issuance of the
revenue agent’s report, dated June 26, 1992 (RAR).
Numerous adjustments are contained in the RAR. The cost of
goods sold claimed for each year is reduced, as are a number of
deductions. Deficiencies of $14,694 and $16,083 for the years
1989 and 1990, respectively, are proposed in the RAR.
By Report Transmittal dated July 6, 1992, (the T-Letter) the
RAR was forwarded for review. In the T-Letter, Ms. Pearson
recommended that an inadequate records notice be issued to the
petitioners because petitioners’ books and records were not
sufficiently detailed. According to the T-Letter, business
expenses could not be distinguished from personal expenses
because petitioners kept business and personal records in one set
of books. The T-Letter also notes that petitioners did not
maintain a log to verify business use of an automobile.
Petitioners did not agree with the proposed adjustments to
their income tax returns and, on August 5, 1992, their authorized
representative, C. Ray Hunter (Mr. Hunter), requested a hearing
with an Appeals Officer. By letter dated September 10, 1992,
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Appeals Officer John Dennis Smith (Mr. Smith) from respondent’s
Appeals Office in Jackson, Mississippi (Appeals) advised
petitioners that he had been assigned their case. However, Mr.
Smith returned the case to the examination division on November
12, 1992, for further development.
Revenue Agent Phyllis Shearer (Ms. Shearer) was assigned to
resume the examination. She met with Mr. Hunter on December 11,
1992, and had several telephone conversations with him after
their meeting. At the conclusion of her examination, Ms. Shearer
prepared a revised revenue agent’s report (the revised RAR). In
the revised RAR deficiencies of $9,032 and $11,853 for the years
1989 and 1990, respectively, are proposed. Petitioners did not
agree with the proposed adjustments contained in the revised RAR
and requested that the case be sent back to Appeals. On March
19, 1993, Ms. Shearer returned the case to Mr. Smith. On April
8, 1993, Mr. Smith notified petitioners that the case had been
returned to him.
By letter dated April 14, 1993, Mr. Smith scheduled a June
14, 1993, conference with Mr. Hunter, but Mr. Hunter failed to
appear. Petitioners retained a different representative, Ernest
D. Kelly (Mr. Kelly), sometime thereafter. Because Mr. Kelly’s
office was in New Orleans, Louisiana, on June 25, 1993,
petitioners requested that their case be transferred to the New
Orleans Appeals Office. Respondent determined that the case did
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not meet the criteria for transfer of jurisdiction so the
transfer request was denied.
Mr. Smith met with petitioner and Mr. Kelly on August 20,
1993. At that meeting, Mr. Smith requested that petitioners
provide certain documents. Some of the requested documents were
received by Mr. Smith on September 8, 1993. Due to his inventory
of cases, Mr. Smith decided to put petitioners’ case aside until
he received the additional information requested from
petitioners. Mr. Smith did not work on petitioners’ case from
December 1, 1993, through January 10, 1994, when he either was on
leave or attending a staff meeting.
On February 26, 1994, petitioners once again requested that
their case be transferred to New Orleans, and that request was
denied. On April 26, 1994, Appeals responded to a congressional
inquiry regarding petitioners’ request to transfer jurisdiction
to the New Orleans Appeals Office. In the letter, Appeals stated
that while the agency manual sets forth “limited exceptions to
permit the transfer of jurisdiction to another appeals office”,
petitioners did not “meet the exceptions to transfer jurisdiction
to the New Orleans Appeals Office.” Appeals further noted in the
letter that petitioners had been advised of this fact on several
occasions.
Mr. Smith never received the additional information
requested from petitioners. On September 13, 1994, he advised
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petitioners by letter that there was no basis for changing the
proposed adjustments made in the revised RAR. He advised
petitioners of their options to extend the period of limitations
or litigate the matter in United States Tax Court or District
Court. The case was forwarded to the Birmingham Appeals Office
with Mr. Smith’s recommendations regarding the proposed
adjustments. On November 30, 1994, respondent issued a notice of
deficiency for the 1989 and 1990 tax years based upon the
proposed adjustments made in the revised RAR. In addition, in
the notice of deficiency, respondent determined that for each
year petitioners were liable for an accuracy-related penalty
under section 6662(a).
On February 27, 1995, a petition for the redetermination of
the deficiencies determined in the above-mentioned notice of
deficiency was timely filed, pro sese (the deficiency
proceeding). Petitioners designated New Orleans as the place of
trial in the deficiency proceeding. Initially, the deficiency
proceeding was assigned to one of respondent’s attorneys in
Birmingham, Alabama. On May 8, 1995, after the petition had been
answered, the deficiency proceeding was transferred to senior
attorney Emile L. Hebert III (Mr. Hebert), one of respondent’s
attorneys located in New Orleans.
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Mr. Hebert sent petitioners what is commonly referred to as
a "Branerton letter"2 on November 21, 1995, and received a reply
from petitioners' representative on December 5, 1995. In early
January 1996, following a formal Request for Production of
Documents, dated December 27, 1995, petitioners produced to Mr.
Hebert a number of documents, including checks, contracts,
invoices and spreadsheets used in the preparation of petitioners’
1989 and 1990 returns. In the cover letter accompanying the
documents, petitioners’ representative also represented that
information related to the car and truck expenses would be
produced the following week.
By notice dated October 5, 1995, the deficiency proceeding
was set for trial at the Trial Session of the Court scheduled to
commence in New Orleans on March 11, 1996. Prior to trial, the
parties agreed to a basis of settlement. By a stipulated
decision entered in the deficiency proceeding on April 23, 1996,
deficiencies of $5,092.68 and $7,842.13, for 1989 and 1990,
respectively, (the deficiencies) and no additions to tax under
section 6662(a) were redetermined by the Court.
In early November 1997, petitioners submitted to respondent
a Form 843, Claim for Refund and Request for Abatement, in which
petitioners requested an abatement of all of the interest that
2
See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974).
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had accrued on the deficiencies. Petitioners’ request was denied
by letter dated May 27, 1998, because, according to the letter:
There was no ministerial act delaying completion of the
case. * * * [Petitioners] did not agree at the
examination level or at the appeals level. Allowing
the * * * [petitioners] to present “new facts” in their
behalf and consider their request to have the case
transferred contributed to the span of time in
resolving their case.
Petitioners filed a protest and after reconsidering
petitioners' abatement of interest claim, on September 16, 1998,
respondent issued a Notice of Final Determination upholding the
denial of their interest abatement claim. The petition in this
case was timely filed, pro sese, on February 22, 1999.
OPINION
Subject to exceptions not relevant here, interest on a
deficiency begins to accrue on the due date of the return and
continues to accrue, compounding daily, until payment is made.
See secs. 6601(a), 6622(a).
The Commissioner has the authority to abate the assessment
of interest on a deficiency if the accrual of such interest is
attributable to an error or delay by an official or employee of
the Internal Revenue Service in performing a ministerial act.3
3
In 1996, section 6404(e) was amended under sec. 301 of the
Taxpayer Bill of Rights 2, Pub.L. 104-168, 110 Stat. 1452, 1457
(1996), to permit the Secretary to abate interest with respect to
an "unreasonable" error or delay resulting from "managerial" and
ministerial acts. This amendment, however, applies to interest
accruing with respect to deficiencies or payments for tax years
(continued...)
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See sec. 6404(e)(1). A ministerial act means a procedural or
mechanical act that does not involve the exercise of judgment or
discretion. See Lee v. Commissioner, 113 T.C. 145 (1999); sec.
301.6404-2T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163
(Aug. 13, 1987). Subject to various procedural and other
requirements set forth in the statute and not here in dispute,
the Court has jurisdiction over any action brought by a taxpayer
to determine whether the Commissioner’s failure to abate interest
was an abuse of discretion. See sec. 6404(i); Lee v.
Commissioner, supra.
In their petition, petitioners contend that they are
entitled to an abatement of interest because of “Excessive delays
by the Internal Revenue Service on assessment of [their] tax
liability.” Petitioners do not identify any specific acts on
respondent’s part that would constitute “ministerial acts”
entitling them to abatement of interest, nor is it clear from the
petition or petitioners’ presentation at trial over what specific
period of time the “excessive delays” occurred.
In their brief, petitioners appear to focus on the
examination and appeals phases of the deficiency proceeding,
which covers the 3-year span between December 6, 1991 and
3
(...continued)
beginning after July 30, 1996; therefore, the amendment is
inapplicable here. See Woodral v. Commissioner, 112 T.C. 19, 25
n.8 (1999).
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November 30, 1994. Petitioners contend that there were “grossly
unfair” delays by respondent during this time; however, the brief
does not identify any actions on respondent’s part that would
constitute “ministerial acts” during this time. It appears to us
that petitioners consider themselves entitled to the relief
sought based merely upon the time that transpired from the date
the examination began until the date the stipulated decision
document was entered by this Court. The mere passage of time,
however, in and of itself does not suggest an unreasonable delay
or error caused by a ministerial act on respondent’s part. See
Cosgriff v. Commissioner, T.C. Memo. 2000-241 (citing Lee v.
Commissioner, supra at 150).
Nevertheless, we have examined the 5-year span starting from
respondent’s first contact with petitioners regarding the
examination of their 1989 and 1990 returns on June 6, 1991,4
until the deficiency proceeding was concluded by the entry of a
stipulated decision document on April 23, 1996. In doing so, we
find no evidence of any specific ministerial act on respondent’s
part that caused an unreasonable delay in the progress of the
examination through the deficiency proceeding. The length of
4
Under section 6404(e), a taxpayer is entitled to abatement
of assessed interest on a deficiency only for any period starting
“after the Internal Revenue Service has contacted the taxpayer in
writing with respect to such deficiency”. Sec. 6404(e)(1).
Accordingly, interest accrued on petitioners’ deficiency prior to
June 6, 1991, is not abatable. See sec. 6404(e).
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time taken by the officers and employees of the Internal Revenue
Service to conduct the examination, appeals and settlement
process was not due to an error or delay in performing a
ministerial act. That being so, it follows that respondent did
not abuse his discretion in denying petitioners' claim for
abatement of interest on Federal income tax deficiencies for 1989
and 1990.
To reflect the foregoing,
Decision will be
entered for respondent.