T.C. Memo. 2003-67
UNITED STATES TAX COURT
ALICE M. BEAGLES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3034-02. Filed March 6, 2003.
Alice M. Beagles, pro se.
Gary M. Slavett, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: The petition in this case was filed in
response to a notice of final determination granting in part and
denying in part petitioner’s claim to abate interest on income
tax liabilities for 1983 and 1984 pursuant to section 6404(e).
After concessions, the sole issue for decision is whether the
- 2 -
failure to abate the balance of the interest was an abuse of
discretion.
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.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Pacific Palisades, California, at the time
that she filed her petition.
During 1983 and 1984, petitioner and her husband Robert
Beagles (the Beagles) were limited partners in Jackson &
Associates (Jackson). The Beagles purchased their limited
partnership interest in Jackson for $5,000 in 1983. Jackson was
a limited partner in Wilshire West Associates (Wilshire West)
during 1983 and 1984. Wilshire West was one of approximately 50
coal programs that were sponsored by Swanton Corp., a Delaware
corporation, and were structured identically as either joint
ventures or limited partnerships. Both Jackson and Wilshire West
were partnerships subject to the procedures of the Tax Equity &
Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324
(TEFRA), provisions found in Internal Revenue Code sections 6221-
6233.
- 3 -
The Beagles jointly filed Forms 1040, U.S. Individual Income
Tax Return, for 1983 and 1984. On the return for 1983,
Schedule E, Supplemental Income Schedule, the Beagles deducted a
net loss of $11,832.47 relating to Jackson. The Schedule K-1,
Partner’s Share of Income, Credits, Deductions, etc., from
Jackson for 1984, however, was not received by the Beagles until
after they had filed their return for 1984. The Schedule K-1
from Jackson to the Beagles reported an ordinary loss of $1,057
for 1984. That amount was claimed by the Beagles on a
Form 1040X, Amended U.S. Individual Income Tax Return, for 1984
filed in April 1985.
Donald J. Kuehne (Kuehne) was the tax matters partner (TMP)
for Wilshire West for 1983 and 1984. John R. Jackson was the TMP
for Jackson for 1983 and 1984. Sometime prior to December 16,
1986, the Internal Revenue Service (IRS) began an examination of
Wilshire West for 1983 under the TEFRA audit procedures, and,
sometime prior to October 1, 1987, the IRS began an examination
of Wilshire West for 1984. Forms 872-P, Consent to Extend the
Time to Assess Tax Attributable to Items of a Partnership, for
Wilshire West for 1983 and 1984 were duly executed by Kuehne for
Wilshire West.
At about the time that the Beagles invested in Jackson,
programs promoted by Norman Swanton (Swanton) were being
investigated by the IRS. Although some civil investigation of
- 4 -
these programs had commenced, this investigation was suspended
pending a criminal investigation of Swanton. Ultimately, the
Department of Justice declined prosecution.
Thirty partnerships that were involved in the Swanton
programs were formed prior to 1982, and 20, including Wilshire
West, were formed subsequent to the effective date of TEFRA.
Test cases for litigation of the Swanton coal programs in the Tax
Court were selected. In two cases docketed in 1986, trial
commenced on February 8, 1988. A second trial began in January
1992. An opinion on the merits of the Swanton coal programs for
years prior to the years in issue was filed October 27, 1993.
Both the 1988 trial and the 1992 trial involved pre-TEFRA cases.
After the 1992 trial was concluded, IRS lawyers began processing
the TEFRA cases involving the Swanton coal programs.
On August 14, 1990, the IRS sent to Wilshire West and its
TMP, Kuehne, a Notice of Final Partnership Administrative
Adjustment (FPAA). A petition was filed in response to the FPAA
by Kuehne and was docketed in the Tax Court as No. 24109-90. As
of the time of this opinion, decision still has not been entered
in the Wilshire West case because one or more of the partners has
pursued the litigation. However, on April 15, 1999, a closing
agreement was entered into on behalf of Jackson. The closing
agreement provided, in part:
(5) The portion of the taxpayer’s deficiency for
the taxable years 1983, 1984 and 1985 attributable to
- 5 -
the claimed Partnership losses is a substantial
underpayment attributable to tax motivated transactions
under Internal Revenue Code sec. 6621(c). Accordingly,
the annual rate of interest payable on the taxpayer’s
income tax for the taxable years 1983, 1984 and 1985
shall be 120 percent of the adjusted rate established
under Internal Revenue Code sec. 6621(b). The 120
percent interest rate applies to interest accruing
after December 31, 1984.
(6) The taxpayer is not liable for any additions
to tax pursuant to I.R.C. secs. 6653(a)(1), 6653(a)(2),
or 6661(a) for the portion of the taxpayer’s
deficiencies which are based on the disallowances of
the Partnership’s losses and credits in any taxable
years.
(7) The taxpayer is not liable for any other
penalties or additions to tax in any taxable year with
respect to its interest.
On March 28, 2000, the IRS mailed a letter with enclosures
to the Beagles explaining how the adjustments that were made
during the examination of Wilshire West affected their individual
tax returns for 1983 and 1984. On June 5, 2000, the IRS assessed
a deficiency of $4,432.53 for 1983 and $269.14 for 1984 against
the Beagles, resulting from the adjustments made to Wilshire West
that passed through to Jackson and then to the Beagles. The
deficiencies resulted from disallowance of losses claimed by the
Beagles from Jackson in excess of $2,500. The $2,500 amount was
allowed as a deduction in 1983 equal to one-half of the Beagles’
cash investment.
On May 28, 2000, the Beagles requested abatement of the
interest of $22,770.39 that had accrued on their tax liability
for 1983 and 1984. At that time, Robert Beagles was terminally
- 6 -
ill. On November 20, 2001, the IRS Appeals office sent to
petitioner a letter of Partial Allowance--Final Determination.
That determination stated:
Our final determination is to allow part of your
request for an abatement of interest. We can allow an
abatement for the period from May 8, 1992, to April 15,
1999.
We regret that we have to deny the balance of your
abatement of interest request for the reason(s) stated
below:
We did not find any errors or delays on our part
that merit the abatement of interest in our review
of available records and other information for the
period from April 15, 1984, to September 30, 2001.
OPINION
Section 6404(e)(1) provides, in pertinent part, that the
Commissioner may abate the assessment of interest on any
deficiency if the interest is attributable to an error or delay
by an officer or employee of the IRS (acting in his official
capacity) in performing a ministerial act. (Amendments to
section 6404(e) in 1996 do not apply to this case because they
apply only to interest accruing with respect to deficiencies or
payments for tax years beginning after July 30, 1996.) This
Court may order abatement where the Commissioner abuses his
discretion by failing to abate interest. Sec. 6404(h)(1). In
order to prevail, a taxpayer must prove that the Commissioner
exercised this discretion arbitrarily, capriciously, or without
- 7 -
sound basis in fact or law. Woodral v. Commissioner, 112 T.C.
19, 23 (1999).
In view of the partial allowance of petitioner’s claim for
abatement, it is necessary to address only those periods in which
interest accrued between April 15, 1984, and May 8, 1992, and
subsequent to April 15, 1999. An understanding of the earlier
period, however, requires an explanation of other events
occurring during the period for which abatement was allowed by
the Appeals office. The period from April 15, 1999, to
September 30, 2001, is explained by the chronology in our
findings of fact, and petitioner has not argued that unnecessary
or unexplained delay occurred during that period.
Petitioner is concerned primarily by the failure of the IRS
to notify her and her husband of the deficiencies in tax for 1983
and 1984 during the time that TEFRA proceedings were pursued
through the TMPs of Jackson and Wilshire West. In that regard,
it is necessary to understand the parameters of litigation over
Swanton coal shelter programs. Much of the background was
explained by the testimony of Moira Sullivan, an attorney for the
IRS charged with responsibility for the litigation. Documents
concerning the Swanton cases were lost as a result of the
destruction of the World Trade Center on September 11, 2001.
Other explanations are found in two opinions of this Court
rendered in Swanton coal program cases.
- 8 -
Processing of the many civil partnership cases arising out
of the coal programs in which the Beagles invested was initially
delayed during a criminal investigation of the promoter, Swanton.
As we said in Taylor v. Commissioner, 113 T.C. 206, 212 (1999),
affd. 9 Fed. Appx. 700 (9th Cir. 2001):
“It has long been the policy of the I.R.S. to defer
civil assessment and collection until the completion of
criminal proceedings.” Badaracco v. Commissioner, 693
F.2d 298, 302 (3d Cir. 1982), affd. 464 U.S. 386
(1984).
This policy is predicated on various
considerations. The often-cited reason is potential
conflict between avenues of civil and criminal
discovery if parallel civil and criminal cases proceed.
Compare Campbell v. Eastland, 307 F.2d 478 (5th Cir.
1962), with Commissioner v. Licavoli, 252 F.2d 268 (6th
Cir. 1958), affg. T.C. Memo. 1956-187. But there are
other considerations such as where a party or witness
may be put in a situation of testifying when the
testimony may be incriminating. See United States v.
Kordel, 397 U.S. 1 (1970). There is also the confusion
inherent in two cases that are proceeding concurrently.
It is for these reasons that generally the courts have
held the civil action in abeyance while the criminal
prosecution goes forth. See id. at 12 n.27; see also
United States v. Eight Thousand Eight Hundred and Fifty
Dollars ($8,850) in United States Currency, 461 U.S.
555 (1983), where the Supreme Court held that the delay
by the United States in instituting a civil forfeiture
action pending resolution of criminal charges was
reasonable.
Here, after the criminal investigation was concluded without an
indictment, trial commenced in 1988. Unfortunately, the
litigation process was disrupted because the testimony of Swanton
was stricken for violation of Rule 145, dealing with exclusion of
witnesses. See Smith v. Commissioner, 92 T.C. 1349 (1989).
- 9 -
Different test cases were agreed to and were the subject of the
trial in 1992 and an opinion was rendered in 1993 in Kelley v.
Commissioner, T.C. Memo. 1993-495. The Court found in those
cases that the taxpayers were not entitled to deductions that had
been claimed in 1979 through 1982 in relation to the Swanton coal
programs and were liable for increased interest rates under
section 6621(c) as well as for penalties for negligence.
Petitioner is concerned because she was unaware of the
litigation that was going on in this Court. Petitioner argues
that respondent’s failure to notify her about the deficiency
resulted in her incurring extraordinary interest under section
6621. Under the TEFRA procedures, however, the TMP is
responsible for giving various notices to the limited partners.
See sec. 6223(g). Section 6230(f) expressly states:
SEC. 6230(f). Failure of Tax Matters Partner,
Etc., To Fulfill Responsibility Does Not Affect
Applicability of Proceeding.--The failure of the tax
matters partner, a pass-thru partner, the
representative of a notice group, or any other
representative of a partner to provide any notice or
perform any act required under this subchapter or under
regulations prescribed under this subchapter on behalf
of such partner does not affect the applicability of
any proceeding or adjustment under this subchapter to
such partner.
Petitioner was not a person entitled to notice under any special
statutory provision. See, e.g., Taylor v. Commissioner, T.C.
Memo. 1992-219 (“pass through” partners in a partnership that is
a partner in another entity are not entitled to receive copies of
- 10 -
partnership proceeding notices from the IRS). The failure to
give such notices, therefore, is not an error requiring abatement
of interest.
Although it may provide no comfort to petitioner, the delays
experienced in processing her case were not unusual during the
period from 1984 to 1992. A large number of tax shelter cases
were filed in this Court during the late 1970s and early 1980s as
a result of tax shelter programs such as those promoted by
Swanton. The large number of cases led to specialized responses
by the IRS, by the Court, and by Congress. The response of
Congress included the increased rate of interest accruing under
former section 6621(c) applicable to deficiencies attributable to
tax-motivated transactions, as explained in H. Rept. 98-861, at
985-986 (1984), 1984-3 C.B. (Vol. 2) 239-240:
The provision is effective with respect to
interest accruing after December 31, 1984, regardless
of the date the return was filed.
The conferees note that a number of the provisions
of recent legislation have been designed, in whole or
in part, to deal with the Tax Court backlog. Examples
of these provisions are the increased damages
assessable for instituting or maintaining Tax Court
proceedings primarily for delay or that are frivolous
or groundless (sec. 6673), the adjustment of interest
rates (sec. 6621), the valuation overstatement and
substantial understatement penalties (secs. 6659 and
6661), and the tax straddle rules (secs. 1092 and
1256). * * *
The conferees believe that, with this amendment,
the Congress has given the Tax Court sufficient tools
to manage its docket, and that the responsibility for
effectively managing that docket and reducing the
- 11 -
backlog now lies with the Tax Court. The positive
response that the Court has made to several recent GAO
recommendations is encouraging and the conferees expect
the Court to implement swiftly these and other
appropriate management initiatives. The conferees also
note favorably the steps the Court has begun to take in
consolidating similar tax shelter cases and dispensing
with lengthy opinions in routine tax protestor cases.
The Court should take further action in these two
areas, as well as to assert, without hesitancy in
appropriate instances, the penalties that the Congress
has provided.
The Internal Revenue Service also has significant
responsibilities in reducing the Tax Court backlog.
The Service’s settlement policy should be fair and
flexible, and only appropriate cases should be
litigated. Although in the recent past the Service has
offered to settle many tax shelter cases by permitting
taxpayers to deduct out of pocket expenses, the Service
no longer routinely offers this as a settlement. This
is a constructive change in policy, in that a taxpayer
should not expect to be able to deduct out of pocket
expenses regardless of the circumstances of his case.
The Service should assert, without hesitancy in
appropriate circumstances, the penalties that the
Congress has provided. In particular, the negligence
and fraud penalties are not currently being applied in
a large number of cases where their application is
fully justified. The conferees note with approval the
steps the Service has recently taken to eliminate the
backlog in the Appeals Division.
The Court’s practice of selecting test cases and holding other
cases in abeyance pending the resolution of the test cases was
among the management tools adopted to deal with the large number
of cases. It was not feasible to litigate simultaneously
hundreds of cases involving substantially similar issues. Here,
respondent’s counsel turned to the group of TEFRA cases,
including petitioner’s partnership, as soon as the trial of the
Swanton test cases concluded in 1992. Prior to that time, the
- 12 -
delays are explained by the complexities and burdens of managing
the cases.
In circumstances comparable to those here, in Lee v.
Commissioner, 113 T.C. 145, 150 (1999), the Court stated:
The mere passage of time in the litigation phase
of a tax dispute does not establish error or delay by
the Commissioner in performing a ministerial act. The
length of time required to resolve the * * * case was a
result of the Government’s litigation strategy to
dispose of the criminal indictments first and the
Court’s disposition of the parties’ procedural motions.
Respondent’s decision on how to proceed in the
litigation phase of the case necessarily required the
exercise of judgment and thus cannot be a ministerial
act. We, therefore, conclude that the passage of 11
years in the litigation phase of the case at bar is not
attributable to error or delay in performing a
ministerial act. [Fn. ref. omitted.]
See also Jacobs v. Commissioner, T.C. Memo. 2000-123.
In consideration of the events that were occurring from
April 15, 1984, to trial of the Kelley cases in 1992, we cannot
conclude that the passage of time is attributable to error or
delay in performing a ministerial act. The Appeals officer’s
partial allowance of petitioner’s claim gave petitioner relief of
amounts accruing for approximately 7 years from May 1992 to April
1999. Although that result is not satisfactory to petitioner, we
have found no basis for further relief under the circumstances.
- 13 -
To reflect the foregoing,
Decision will be entered
for respondent.