T.C. Memo. 2001-57
UNITED STATES TAX COURT
ROBERT WISH AND ERIN WISH RIEHS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3037-99. Filed March 9, 2001.
R examined Ps’ 1981 tax return and issued a notice
of deficiency. Anticipating an assessment, Ps posted a
cash bond with R. Ps subsequently filed a refund claim
for the 1985 tax year, the proceeds of which were to be
used to offset any shortfall between the bond and the
assessment. R denied the refund claim, and the
assessment exceeded the bond. Ps then filed a claim
for an abatement of interest for the 1981 tax year. Ps
supported their abatement claim with allegations of
errors or delays occurring during the processing of
their refund claim for 1985. R denied their claim for
abatement of interest.
Held, the delay in payment of the 1981 outstanding
tax liability was not attributable to procedures
involved in the processing of the refund claim for 1985
so as to allow relief under sec. 6404(e), I.R.C., 1986.
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Joseph E. Mudd and Linas N. Udrys, for petitioners.
Gary M. Slavett, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: On August 19, 1998, respondent issued a
notice of final determination denying petitioners’ request for an
abatement of interest under section 6404(e) for their 1981 tax
year.1 The issue for decision is whether respondent abused his
discretion in failing to abate the assessment of interest.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioners resided in Laguna Hills, California.
1981 Tax Return
During 1981, petitioners invested in a partnership known as
Hillcrest Securities. Respondent examined petitioners’ 1981 tax
year, concentrating on petitioners’ tax treatment of their
partnership interest in Hillcrest Securities. On October 9,
1986, respondent issued a notice of deficiency for 1981.
1
References to sec. 6404(e) are to sec. 6404(e) before
amendment by sec. 301 of the Taxpayer Bill of Rights 2, Pub. L.
104-168, 110 Stat. 1452, 1457 (1996). Unless otherwise stated,
all other section references are to the Internal Revenue Code as
amended, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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On June 16, 1988, anticipating that respondent would assess
a deficiency for the 1981 tax year, petitioners deposited
$100,000 with respondent in the form of a bond. Petitioners
requested that respondent apply $81,092 to the deficiency and
$18,908 to penalties.
On January 28, 1991, respondent assessed the deficiency for
1981 in the amount of $81,092. Respondent also assessed a
negligence penalty in the amount of $4,055 and interest in the
amount of $116,564.26 pursuant to section 6621(c) (subsequently
repealed by the Omnibus Budget Reconciliation Act of 1989, Pub.
L. 101-239, sec. 7721(b), 103 Stat. 2106, 2399). On April 15,
1991, because the bond was insufficient to offset the deficiency,
interest, and penalty assessed, respondent mailed petitioners a
Reminder of Unpaid Tax for the 1981 tax year. The reminder
stated that petitioners had an outstanding balance of $104,512.36
with regard to the assessment for the 1981 tax year (including
additional interest).2 Petitioners expected to pay the remaining
liability from proceeds of a refund claim for the 1985 tax year.
On April 13, 1992, respondent issued a notice of intent to
levy with regard to the assessment for the 1981 tax year. In
June 1992, Mr. Wish contacted Specialist Todd Brunk of
respondent’s Problem Resolution Office to request a hold on
2
($81,092 + $4,055 + $116,564.26) - $100,000 + $2,801.10.
The $2,801.10 represented additional interest accrued from the
date of assessment to the date of the notice.
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collection based upon petitioners’ refund claim for 1985. On
June 22, 1992, Specialist Brunk accommodated petitioners and
placed a collection hold on the outstanding balance for the 1981
tax year until November 28, 1992.3 Because petitioners requested
and were granted extensions, the collection hold remained in
place until at least June 29, 1995.
1985 and 1988 Amended Tax Returns
On August 11, 1990, petitioners filed a Form 1040X, Amended
U.S. Individual Income Tax Return, for 1985 seeking a refund of
$64,408 by carrying back a $330,000 net operating loss generated
in another tax year. On August 27, 1990, respondent mailed a
notice to petitioners stating that their refund claim was
incomplete and requesting the year in which the net operating
loss allegedly was generated. In conjunction with the 1985
amended return, on October 17, 1990, petitioners filed a Form
1040X for 1988 claiming additional losses of $340,000. The
additional losses created a net operating loss for 1988 in the
amount of $336,097, of which they had carried back $330,000 to
1985. On November 8, 1990, respondent mailed petitioners a
letter stating that the Form 1040X for 1985 was being processed.
On September 5, 1991, petitioners filed a second Form 1040X for
3
Sometime after the date of assessment for the 1981 tax
year and prior to Specialist Brunk's granting Mr. Wish’s request,
petitioners’ attorney had also requested a hold on collection for
petitioners’ 1981 tax year. The IRS granted that request.
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1985 claiming a refund of only $36,408.4
Examination
On January 3, 1992, respondent advised petitioners that
their 1988 amended return and, by implication, their refund claim
for 19855 were being reviewed by Examiner Monte Kruse. Examiner
Kruse issued various information document requests (IDR's) to
petitioners, received the relevant information, and evaluated
several tax issues. On August 1, 1992, Examiner Kruse issued a
30-day letter proposing a deficiency for the 1988 tax year with
regard to various issues. In the 30-day letter, Examiner Kruse
stated that petitioners’ claim for additional losses had been
considered; however, he allowed only $3,090 of those losses.
Because Examiner Kruse proposed additional income items, the
allowed loss did not create a refund or generate net operating
losses to be carried back to 1985.
Appeals
On August 26, 1992, petitioners verbally requested that
respondent’s Appeals Office (Appeals) review the 1988 tax year.
On September 8, 1992, Examiner Kruse prepared a Special Handling
Notice to forward petitioners’ materials to Appeals. On
4
On the September 5, 1991, Form 1040X, petitioners reduced
the net operating loss carryback (from 1988) to $190,000. This
amendment created a smaller refund request.
5
References to the refund claim for 1985 are to both the
August 11, 1990, Form 1040X and the September 5, 1991, Form
1040X.
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September 22, 1992, petitioners filed a written protest and
request for Appeals to review the case. On December 3, 1992,
Appeals received the materials related to petitioners’ case. In
February or March of 1993, because Examiner Kruse had not
prepared a Revenue Agent Report (RAR), the case was sent back to
respondent’s examination division.
Second Examination
Revenue Agent Jimmy Bose was assigned to petitioners’ case.
Beginning in April 1993, Agent Bose issued IDR's to petitioners
and prepared draft RAR's. On October 8, 1993, Agent Bose
prepared a complete RAR with explanations for the 1988 tax year.
Petitioners and Agent Bose continued working toward a resolution
of the case. On December 16, 1993, Agent Bose issued another IDR
and, on July 8, 1994, issued a summons to petitioners. On August
17, 1994, Agent Bose prepared a RAR with regard to the 1985 tax
year, disallowing the net operating loss carryback from 1988 and
denying the claimed refund for 1985.
On October 19, 1994, respondent issued a notice of
deficiency to petitioners for their 1988 tax year. On
December 16, 1994, petitioners filed a petition with this Court
seeking a redetermination of the deficiency for 1988 as
determined by respondent. On January 23, 1995, respondent issued
an official notice of disallowance of the claimed refund for
1985. On March 21, 1996, the Court entered a stipulated decision
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with regard to the 1988 tax year providing for an overpayment of
$2,194.
Interest Abatement Claim for 1981
On June 27, 1996, petitioners filed a Request For Abatement
Of Interest (interest abatement claim) with respondent. In the
interest abatement claim, petitioners stated that “due to the
appearance that there was a realistic possibility of substantial
refund for 1985 with interest in an amount sufficient to pay all
of the * * * [1981] remaining liability, Problem Resolution
agreed that the case would be placed on hold.” Petitioners
asserted that the “1988 audit, however, became a substantial
comedy of delays.” Petitioners alleged that the audit of the
1988 tax year was neither performed adequately nor timely. As a
result, petitioners argued:
Had the 1988 audit been completed in a reasonable
manner, the tax refunds that would have discharged the
liability, or the lack thereof, would have * * *
adequately determined the manner in which Mr. Wish
could have and would have paid the entire liability
including interest. As of a matter of fact, as soon as
the liability was determined, Mr. Wish made a
substantial payment on the balance of the income tax
liability.
Respondent found no errors or delays to support an abatement of
interest and therefore denied petitioners’ interest abatement
claim.
OPINION
Section 6404(e)(1) provides that the Commissioner may abate
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the assessment of interest on: (1) Any deficiency attributable
to any error or delay by an officer or employee of the Internal
Revenue Service (IRS) in performing a ministerial act or (2) any
payment of any tax described in section 6212(a) to the extent
that any error or delay in such payment is attributable to such
officer or employee being erroneous or dilatory in performing a
ministerial act.6 An error or delay is taken into account only
(1) if no significant aspect of such error or delay can be
attributed to the taxpayer and (2) after the IRS has contacted
the taxpayer in writing with respect to such deficiency or
payment. See sec. 6404(e)(1).
The Treasury has interpreted a ministerial act as “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.”7 See
sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed.
6
In 1996, sec. 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 Commissioner 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 beginning after July 30, 1996; therefore, the amendment
is inapplicable to the case at bar. See Woodral v. Commissioner,
112 T.C. 19, 25 n.8 (1999).
7
The Senate Finance Committee stated that the “IRS may
define a ministerial act in regulations.” S. Rept. 99-313, at
209 (1986), 1986-3 C.B. (Vol. 3) 1, 209.
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Reg. 30162, 30163 (Aug. 13, 1987).8
This Court may order an abatement where the Commissioner’s
failure to abate interest was an abuse of discretion. See sec.
6404(i). In order to prevail, the taxpayer must demonstrate that
in not abating interest, the Commissioner exercised his
discretion arbitrarily, capriciously, or without sound basis in
fact or law. See Woodral v. Commissioner, 112 T.C. 19, 23
(1999).
In enacting section 6404(e), Congress intended for the
Commissioner to abate interest “where failure to abate interest
would be widely perceived as grossly unfair.” 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. Congress, however, did
not intend that abatement “be used routinely to avoid payment of
interest.” Id.
Petitioners argue that from January 1990 to December 16,
1994, respondent committed errors or delays while processing
their refund claim for 1985; i.e., committed errors or delays in
performing ministerial acts. Petitioners specifically complain
8
The final U.S. Treasury regulations under sec. 6404 were
issued on Dec. 18, 1998. See sec. 301.6404-2(b)(2), Proced. &
Admin. Regs., 63 Fed. Reg. 70012, 70013 (Dec. 18, 1998). The
final regulations contain the same definition of a ministerial
act as the temporary regulations. Because the final regulations,
however, incorporate amendments to sec. 6404 pursuant to the
Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1452, 1457
(1996), they are inapplicable here. See id. at 70012.
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that their 1985 and 1988 amended returns were referred for
examination on November 19, 1990, but Examiner Kruse delayed the
examination until January 3, 1992, when he first contacted
petitioners. Petitioners also argue that the period involved in
transferring petitioners’ files from Examiner Kruse’s office to
Appeals (September 23, 1992, to December 3, 1992) was excessive.
Additionally, petitioners claim that between January 1993 and
April 29, 1993, respondent was dilatory in forwarding their files
from Appeals to Agent Bose. Further, petitioners argue that from
May 1993 to October 1994, Agent Bose reaudited the amended
returns instead of simply issuing the RAR. Because petitioners
intended to apply the anticipated refund as payment for any
liabilities outstanding as to the 1981 tax year, petitioners
claim that the alleged errors or delays in the refund claim for
1985 relate to the 1981 tax year. Accordingly, petitioners
contend that they are entitled to an abatement of interest under
section 6404(e) as to the 1981 tax year.
Respondent counters that no errors or delays in performing
ministerial acts occurred during the processing of the refund
claim for 1985. Further, respondent argues that even if any such
errors or delays were committed, petitioners cannot be allowed an
abatement of interest for the 1981 tax year under section 6404(e)
with regard to such errors or delays. In other words, respondent
claims that the errors or delays were not associated with the
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processing of the 1981 tax return. See sec. 301.6404-2T(b)(1),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30162, 30163 (Aug.
13, 1987). Finally, respondent argues that the accrual of
interest during the period in issue is solely attributable to
petitioners’ decision to seek a hold (based on the claim for
refund) on collection and not to pay the outstanding tax
liability.
In the instant case, petitioners have not specifically
addressed upon which prong of section 6404(e)(1) they base their
claim. In enacting section 6404(e)(1)(A), Congress vested the
Commissioner with discretion to abate interest on any deficiency
attributable in whole or in part to an error or delay committed
by an officer or employee of the IRS in performing ministerial
acts. For example, Congress explained that “a delay in the
issuance of a statutory notice of deficiency after the IRS and
the taxpayer have completed efforts to resolve the matter could
be grounds for abatement of interest.” S. Rept. 99-313, at 209
(1986), supra at 209. Petitioners have not alleged that
respondent committed any errors or delays in determining or
assessing petitioners’ tax deficiency with regard to the 1981 tax
year.
Errors or delays in the determination or assessment of a
deficiency, however, do not constitute the sole basis for relief
under section 6404(e). Congress has also provided relief for any
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errors or delays in the payment of tax to the extent that such
errors or delays are attributable to the Commissioner being
erroneous or dilatory in performing ministerial acts. See sec.
6404(e)(1)(B); Gross v. Commissioner, T.C. Memo. 2000-44.
Petitioners claim that respondent’s untimely processing of
their refund claim for 1985 delayed the ultimate payment of their
1981 tax liability. It appears that petitioners seek an
abatement of interest pursuant to section 6404(e)(1)(B). We
therefore analyze petitioners’ claim under that provision.
Petitioners assume that the late payment of the outstanding
tax liability for 1981 and the associated accrual of interest are
attributable (within the meaning of section 6404(e)(1)(B)) to the
various steps they cite with regard to the processing of the
refund claim for 1985. We, however, cannot characterize those
steps as the cause of the delay in payment of the outstanding tax
liability for 1981. The acts described by petitioners are part
of the administrative process of resolving the refund claim for
1985 and not a direct part of the payment process for the 1981
tax year, a different tax year. The only relation between the
refund claim for 1985 and the payment of the 1981 tax liability
is that created by petitioners in deferring the payment of the
1981 tax liability on the assumption that the refund claim for
1985 would be granted. We thus do not find the requisite
connection between the alleged errors or delays in the procedures
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employed for processing the 1985 refund claim and the accrual of
interest that is the subject of petitioners’ interest abatement
claim for the 1981 tax year.9
We note that a significant aspect of the delay in the
ultimate payment of the 1981 tax liability is attributable to
petitioners. They chose to await the determination of the refund
claim for 1985, while all along requesting holds on collection.
We have considered all of the arguments raised by the
parties and to the extent not discussed herein find them to be
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.
9
This is not the case, for example, in which a claim for
refund was allowed, and, after a specific request by the taxpayer
to apply the refund to the tax year in issue, the Commissioner
failed to act on the taxpayer’s request. See Mankita v.
Commissioner, T.C. Memo. 1999-420 (in which we rejected a
taxpayer’s claim, under the facts of that case, that an abatement
of interest should have been allowed because the Commissioner had
failed to apply a refund to the tax year in issue).