Mekulsia v. Comm'r

T.C. Memo. 2003-138

UNITED STATES TAX COURT

JOHN M. MEKULSIA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10480-00. Filed May 15, 2003.

Terri A. Merriam and Wendy S. Pearson, for petitioner.

Thomas A. Dombrowski, Catherine L. Campbell, Julie L. Payne,

Thomas N. Tomashek, and Dean H. Wakayama, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge Stanley J. Goldberg pursuant to the provisions of section

7443A(b)(5) and Rules 180, 181, and 183.1 The Court agrees with

1
Unless otherwise stated, all section references are to
the Internal Revenue Code in effect at the time the petition was
(continued...)
 - 2 -

and adopts the opinion of the Special Trial Judge, which is set

forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

GOLDBERG, Special Trial Judge: On August 14, 2000,

respondent issued a notice of final determination denying

petitioner’s claim under section 6404(e) for abatement of

interest related to petitioner’s 1982 through 1987 taxable years.

Petitioner timely filed a petition with this Court under section

6404(i)2 and Rules 280 through 2843 to review respondent’s

determination.

Shortly before the scheduled trial date, respondent filed a

motion under Rule 120(a) for judgment on the pleadings. The

motion was taken under consideration, and the trial proceeded on

the merits.

The only issue for decision is whether respondent abused his

discretion in denying petitioner’s request to abate interest

1
(...continued)
filed, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
Sec. 6404(i) was redesignated sec. 6404(h) by the Victims
of Terrorism Tax Relief Act of 2001, Pub. L. 107-134, sec.
112(d)(1)(B), 115 Stat. 2435 (2002).
3
Sec. 6404(i), as cited throughout this opinion, was
originally enacted as sec. 6404(g) by the Taxpayer Bill of Rights
2 (TBOR 2), Pub. L. 104-168, sec. 302, 110 Stat. 1457 (1996).
Sec. 6404(g) was redesignated sec. 6404(i) by the Internal
Revenue Service Restructuring & Reform Act of 1998, Pub. L. 105-
206, secs. 3305(a), 3309(a), 112 Stat. 743, 745.
 - 3 -

related to the taxable years 1982 through 1987.

FINDINGS OF FACT

Some of the facts in this case have been stipulated and are

so found. The stipulation of facts and the accompanying exhibits

are incorporated herein by reference. At the time the petition

was filed, petitioner resided in Painesville, Ohio.

A. Brief Overview of the Hoyt Organization

From about 1971 through 1998, Walter J. Hoyt III (Jay Hoyt)

organized, promoted to thousands of investors, and operated as a

general partner more than 100 partnerships.4 The partnerships

were organized to own, breed, and manage cattle. Jay Hoyt was

the tax matters partner (TMP) for a majority of the partnerships

and was also an enrolled agent with the Internal Revenue Service

(IRS).

Dating back to the early 1980s, the record-keeping practices

of the Hoyt organization were very poor. During the years at

issue, often no records were kept at all. Many of the documents,

records, and tax returns the Hoyt organization prepared relating

to the cattle partnerships were inaccurate, unreliable, and in

many instances falsified. The Hoyt organization’s poor record

keeping made the IRS’s efforts to examine the partnerships

difficult.

4
For a detailed discussion of the Hoyt organization and
cattle operations see Durham Farms #1, J.V. v. Commissioner, T.C.
Memo. 2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003).
 - 4 -

After approximately 1980, the IRS regularly examined many of

the partnership returns of the numerous Hoyt investor

partnerships and the individual returns of their partners.

Believing the partnerships to be abusive tax shelters, the IRS

generally disallowed the partnership tax benefits that each

investor partnership and its respective partners claimed,

resulting in those partnerships’ and partners’ commencing

numerous cases in the Tax Court.

The Hoyt organization is no stranger to this Court. Since

1989, the Hoyt organization’s investor partnerships have been

involved in Tax Court litigation for tax years from 1977 through

1996. See Durham Farms #1, J.V. v. Commissioner, T.C. Memo.

2000-159, affd. 59 Fed. Appx. 952 (9th Cir. 2003); River City

Ranches #4, J.V. v. Commissioner, T.C. Memo. 1999-209, affd. 23

Fed. Appx. 744 (9th Cir. 2001); Shorthorn Genetic Engg. 1982-2,

Ltd. v. Commissioner, T.C. Memo. 1996-515; Bales v. Commissioner,

T.C. Memo. 1989-568.

On February 12, 2001, Jay Hoyt was convicted in the U.S.

District Court for the District of Oregon of 1 count of

conspiracy to commit fraud, 31 counts of mail fraud, 3 counts of

bankruptcy fraud, and 17 counts of money laundering. See United

States v. Barnes, No. CR 98-529-JO-04 (D. Or. Feb. 12, 2001),

affd. 47 Fed. Appx. 834 (9th Cir. 2002). He was sentenced to 235
 - 5 -

months of imprisonment and ordered to pay restitution to the

victims of his crimes.

B. Criminal Tax Investigations of Jay Hoyt

After the initial IRS examinations of the many cattle

partnerships, several criminal investigations relating to Jay

Hoyt’s activities were commenced by the IRS’s Criminal

Investigation Division (CID).

From April 23, 1984, until April 21, 1986, CID conducted an

investigation of Jay Hoyt for allegedly backdating documents to

enable 12 investor-partners to claim improper deductions and

credits. On April 21, 1986, CID referred the case to IRS

District Counsel, recommending prosecution. On July 31, 1986,

the IRS District Counsel’s Office in Sacramento, California,

referred the matter to the Department of Justice (DOJ) for

prosecution. The DOJ then forwarded the matter to the U.S.

Attorney’s Office in Sacramento for review and consideration. On

August 12, 1987, the U.S. Attorney’s Office declined to prosecute

Jay Hoyt.

On or about July 28, 1989, a member of the IRS Examination

Division team examining Hoyt partnership returns for the 1983

through 1986 taxable years recommended that the CID investigate

Jay Hoyt for allegedly making and/or assisting in fraudulent or

false tax return statements in connection with his promotion and

operation of the cattle partnerships. On October 13, 1989, the
 - 6 -

U.S. Attorney’s Office requested that the CID review certain

information and determine whether IRS special agents from the CID

should join in an ongoing grand jury investigation of Jay Hoyt

for possible violations of the internal revenue laws. On October

17, 1989, the CID accepted the Examination Division’s fraud

referral and commenced an investigation. On November 3, 1989,

the IRS Regional Counsel’s Office requested that IRS special

agents be authorized to participate in the grand jury

investigation. On October 2, 1990, the U.S. Attorney’s Office

ended the grand jury investigation of Jay Hoyt without an

indictment.

On or about August 31, 1993, the CID commenced an

investigation of Jay Hoyt for possible criminal violations of the

internal revenue laws on account of his alleged misrepresentation

of the total number and value of purported cattle that the Hoyt

cattle partnerships allegedly owned. The CID closed the

investigation on or about October 7, 1993, without a

recommendation that the IRS attempt to have Jay Hoyt prosecuted.

On or about September 8, 1995, the CID commenced an

investigation of Jay Hoyt for possible criminal violations of the

internal revenue laws relating to the alleged shortage of cattle

from the Hoyt cattle partnerships. The CID closed this

investigation on September 29, 1995, without a recommendation

that the IRS attempt to have Jay Hoyt prosecuted.
 - 7 -

On at least four separate occasions, from April 1984 through

September 1995, Jay Hoyt was under criminal investigation for

violation of the internal revenue laws. Respondent never

notified Jay Hoyt that he was under criminal investigation or

removed him as the TMP of Shorthorn Genetic Engineering 1985-1

(SGE) as a result of any of these criminal tax investigations.

C. Petitioner’s Involvement With the Hoyt Organization

Starting in 1985, petitioner began investing in cattle

partnerships promoted by the Hoyt organization. According to the

petition filed in this case, petitioner was a partner in SGE,

Timeshare Breeding Syndicate, J.V., and Timeshare Breeding

Syndicate 1987-2. As the interest of which he seeks abatement in

this case accrued on assessments of income tax against petitioner

for tax years 1982 through 1987, solely on the basis of his

participation in SGE during 1985 and 1986, our analysis is

limited to the tax implications of petitioner’s association with

the SGE partnership only.

Petitioner was a partner in SGE from 1985 through 1996. SGE

was a partnership subject to the provisions of sections 6221

through 6233.5 On SGE’s 1985 and 1986 partnership tax returns,

Jay Hoyt was designated the TMP.

5
The unified partnership audit and litigation provisions
of secs. 6221-6223 were first enacted as part of the Tax Equity
and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec.
402(a), 96 Stat. 648, and are generally applicable to partnership
taxable years beginning after Sept. 3, 1982.
 - 8 -

For the 1985 tax year, SGE issued petitioner a Schedule K-1,

Partner’s Share of Income, Credits, Deductions, etc., reporting

petitioner’s distributive share of the ordinary loss from the

partnership in the amount of $30,270 and property eligible for

investment credit in the amount of $155,760. On his 1985 Form

1040, Individual Income Tax Return, petitioner deducted from his

total income the $30,270 of ordinary loss passed through from SGE

and claimed a $729 general business credit relating to SGE.

After his 1985 income tax return was filed, petitioner filed

a Form 1045, Application for Tentative Refund, requesting a

refund of income tax for the 1982, 1983, and 1984 tax years.

Petitioner’s refund request was based on carrying back to those

tax years unused general business credits relating to his

distributive share of qualified investment property from SGE for

1985.

SGE issued petitioner a Schedule K-1 for 1986, reporting

petitioner’s distributive share of the ordinary loss from the

partnership in the amount of $36,324. On his 1986 individual tax

return, petitioner deducted from his total income the $36,324 of

ordinary loss passed through from SGE and claimed an $842 general

business credit relating to SGE that he carried forward from the

previous year.
 - 9 -

On petitioner’s 1987 individual income tax return, he

claimed a $319 general business credit relating to SGE that he

carried forward from his 1985 income tax return.

D. Respondent’s Examination of SGE for 1985 and 1986

On December 17, 1987, respondent sent a notice of beginning

of administrative proceeding (NBAP) to Jay Hoyt, the TMP of SGE.

The notice informed the TMP that respondent was beginning an

examination of SGE for the 1985 and 1986 tax years.

On July 20, 1988, respondent sent an NBAP to petitioner

notifying him that an examination was beginning on SGE for the

1985 tax year. On September 12, 1988, respondent sent petitioner

an NBAP relating to SGE for the 1986 tax year.

On February 28, 1989, an examiner with the IRS signed Form

4665, Report Transmittal, and Form 4605-A, Examination Changes--

Partnerships, Fiduciaries, Small Business Corporations, and

Domestic International Sales Corporations. Both forms related to

the IRS’s examination of SGE for the 1985 tax year.

In the Report Transmittal, the examiner discussed the

difficulties encountered in obtaining SGE’s records from the TMP.

The examiner recommended issuing a notice of final partnership

administrative adjustment (FPAA) because the lack of adequate

records did not allow respondent to perform a normal examination,

and the parties were in complete disagreement over the issues.
 - 10 -

On Form 4605-A, the examiner made examination changes to

SGE’s 1985 partnership tax return as follows: (1) An adjustment

reducing the partnership’s ordinary loss of $952,586 to zero; and

(2) an adjustment reducing the cost or other basis of qualified

investment property from $6,246,500 to zero.

On May 2, 1989, the same examiner signed Form 4665 and Form

4605-A for SGE’s 1986 tax year. The Report Transmittal for the

1986 tax year was essentially identical in all material respects

to the report completed for the previous year.

On Form 4605-A, the examiner made examination changes to

SGE’s 1986 partnership tax return as follows: (1) An adjustment

reducing the partnership’s ordinary loss of $1,856,560 to zero;

and (2) an adjustment reducing payments to individual retirement

accounts (IRA) and Keogh accounts totaling $60,000 to zero.

On June 13, 1989, respondent issued an FPAA to petitioner

and Jay Hoyt, as TMP of SGE, relating to the partnership return

filed for the 1985 tax year. In the Explanation of Adjustments

included with the FPAA, respondent adjusted the 1985 claimed

partnership expenses totaling $962,586 to zero and adjusted the

value of the qualified investment property claimed from

$6,246,500 to zero. The explanation listed 12 reasons why SGE

was “entitled to no items of ordinary loss, deduction, credit, or

other items of tax benefit.” Further, the explanation stated

that the partners of SGE were not entitled to their distributive
 - 11 -

shares of partnership items reported on the partnership return

for 1985.

On July 2, 1990, respondent issued an FPAA to petitioner and

SGE’s TMP relating to the partnership return filed for the 1986

tax year. In the Explanation of Adjustments included with the

FPAA, respondent made adjustments to SGE’s partnership return

reducing all items reported during the 1986 tax year to zero.

The following items reported on SGE’s 1986 partnership return

were reduced to zero: (1) Farm income totaling $123,434; (2)

farm deductions totaling $1,948,760; (3) guaranteed payments

totaling $31,234; (4) IRA payments totaling $52,000; (5) Keogh

payments totaling $8,000; and (6) self-employment loss totaling

$1,825,326. Again, the explanation listed the various reasons

why SGE was not entitled to the items reported and why the

partners were not entitled to their distributive shares of those

items.

E. Litigation Relating to SGE for Tax Years 1985 and 1986

On September 8, 1989, a petition was filed in the Tax Court

at docket No. 22069-89, contesting the determinations made by

respondent in the FPAA for SGE’s 1985 tax year. On October 1,

1990, a petition was filed with this Court at docket No. 21954-

90, contesting the determinations made in the FPAA for SGE’s 1986

tax year.
 - 12 -

By May 1993, the TMPs of many of the Hoyt partnerships had

filed Tax Court petitions. On May 20, 1993, respondent and Jay

Hoyt, acting as TMP, entered into a memorandum of understanding

(MOU). The MOU outlined a basis for a settlement of all

outstanding cattle partnership cases pending before the Court for

the 1980 through 1986 tax years. The MOU included a basis of

settlement for the SGE partnership with respect to its 1985 and

1986 tax years.

After memorializing the MOU, the parties were unable to

reach an agreement on settlement documents reflecting the terms

outlined in the MOU. As a result, on or about October, 14, 1994,

the parties jointly moved to consolidate several of the cattle

partnership cases, including docket Nos. 22069-89 and 21954-90,

for trial, briefing, and opinion.

On November 20, 1996, the Court issued its opinion with

respect to the consolidated cases resulting from the MOU. See

Shorthorn Genetic Engg. 1982-2, Ltd. v. Commissioner, T.C. Memo.

1996-515. The Court held that the settlement agreement reflected

in the MOU was binding on the parties. Accordingly, on November

27, 1996, the Court entered orders and decisions reflecting its

determinations with respect to the 1985 and 1986 tax years of

SGE.

On January 29, 1997, the following documents were filed in

the consolidated cases: (1) A motion for leave to file out of
 - 13 -

time a motion to vacate; (2) a motion for leave to file out of

time a motion for reconsideration of findings of fact and

opinion; and (3) a request for a rehearing. On February 4, 1997,

the Court granted both of the motions and the request.

On July 14, 1997, the Court denied (1) the motion to vacate,

(2) the motion for reconsideration of findings of fact and

opinion, and (3) the request for a rehearing.

F. Assessment of Income Tax and Computation of Interest

On February 27, 1998, respondent sent petitioner a Form

4549A-CG, Income Tax Examination Changes, for each of the tax

years 1982 through 1987. For each of those tax years, the form

and attached explanations detailed the adjustments made to

petitioner’s individual tax returns and calculated the

deficiencies in each year’s income tax. In addition, the

explanations for each year informed petitioner that respondent

had determined that a part of his underpayment of tax was

attributable to tax-motivated transactions as defined in section

6621(c).6 The 1982 through 1987 adjustments made to petitioner’s

tax returns were based on his participation in SGE during the

6
The Omnibus Budget Reconciliation Act of 1989 (OBRA),
Pub. L. 101-239, sec. 7721(b), 103 Stat. 2399, repealed sec.
6621(c). This repeal was effective for returns the due date for
which (determined without extensions) is after Dec. 31, 1989.
See OBRA sec. 7721(c), 103 Stat. 2400.
 - 14 -

1985 and 1986 tax years and the holding in Shorthorn Genetic

Engg. 1982-2, Ltd. v. Commissioner, supra.

On the basis of the disallowed tax benefits claimed by

petitioner relating to SGE, respondent assessed income tax

deficiencies against petitioner in the amounts determined for

each year in each Form 4549A-CG. The tax years, the assessment

dates, and the amounts of income tax deficiencies assessed

petitioner are as follows:

Tax Year Assessment Date Assessment Amount

1982 4-6-1998 $3,183
1983 4-6-1998 4,483
1984 4-6-1998 5,863
1985 4-6-1998 6,861
1986 4-6-1998 9,697
1987 3-30-1998 319

Respondent prepared an Interest and Penalty Detail Report

for each tax year from 1982 through 1987 based on the total

amount of income tax assessed and the applicable interest rates

determined pursuant to section 6621. Each report shows in detail

the computations used to determine the amount of interest on

petitioner’s income tax deficiencies. The tax year of each

deficiency, the dates during which the interest accrued, and the

total amount of interest calculated are as follows:

Dates Interest Accrued Total Amount
Year From To of Interest

1982 4-15-1986 3-26-2001 $12,984.50
1983 4-15-1986 3-26-2001 18,361.00
1984 4-15-1986 3-26-2001 24,013.15
1985 6-9-1986 3-26-2001 27,474.28
 - 15 -

1986 4-15-1987 3-26-2001 34,547.54
1987 4-15-1988 3-26-2001 14.91

As a result of petitioner’s making a deposit in the nature of a

cash bond in the amount of $197,000 on March 26, 2001, respondent

stopped interest from accruing on that date.

G. Petitioner’s Interest Abatement Claim

On June 3, 1998, petitioner initiated correspondence with

respondent requesting an explanation for respondent’s imposing

interest relating to a tax-motivated transaction pursuant to

section 6621(c). More specifically, petitioner wanted respondent

to provide his basis for determining that petitioner’s investment

in SGE was a tax-motivated transaction. Respondent treated this

letter as an informal claim for interest abatement.

On June 22, 1998, respondent denied petitioner’s informal

claim for abatement of interest for the 1982 through 1987 tax

years. Respondent stated that tax-motivated interest was

applicable on account of the abusive nature of the SGE

partnership. In addition, respondent determined that there was

no delay or error relating to the performance of a ministerial

act warranting abatement of interest. The correspondence from

respondent informed petitioner that he could request

reconsideration of respondent’s findings with the IRS Appeals

Office.

On July 22, 1998, petitioner appealed respondent’s denial of

the informal interest abatement claim. Specifically, petitioner
 - 16 -

requested an abatement of all the interest accrued on his

assessed income tax liabilities for tax years 1982 through 1987.

Petitioner based the request for interest abatement on his

assertion that the interest accrued because of delays caused by

employees of the IRS in performing ministerial or managerial acts

when conducting the audits of SGE. Further, petitioner argued

for abatement of the increased section 6621(c) interest because

he claimed that respondent lacked “any factual or legal predicate

for imposing tax motivated interest.”

On August 27, 1998, petitioner sent respondent a letter

supplementing his interest abatement appeal. Petitioner asserted

the same arguments as those raised in the July 22, 1998, appeal

but acknowledged that for the years prior to 1996 only delays

caused by ministerial acts were considered for interest abatement

claims.

On October 19, 1998, petitioner sent respondent another

letter further supplementing his interest abatement appeal. In

this supplement, petitioner asserted that respondent’s failure to

remove Jay Hoyt as the TMP of SGE after he was under a criminal

tax investigation was an error in performing a ministerial act

that caused delays resulting in the accrual of interest.

Petitioner based this assertion on his claim that section 6231(c)

and section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52

Fed. Reg. 6793 (Mar. 5, 1987), require the Commissioner to remove
 - 17 -

a TMP under a criminal investigation for the violation of

internal revenue laws.

On July 27, 2000, an associate chief in the Appeals Office

approved the recommendation of an Appeals officer denying

petitioner’s appeal of the denial of his informal interest

abatement claim. In Form 5402-c, Appeals Transmittal Memorandum

and Case Memo, the Appeals officer addressed each of petitioner’s

arguments and determined that interest abatement was not

warranted.

Specifically, the Appeals officer concluded that the

decision to remove a TMP under criminal investigation pursuant to

section 6231(c) and the corresponding regulation is not a

ministerial act, but rather is an act involving the

Commissioner’s judgment and discretion. On the basis of the

determination that failure to remove Jay Hoyt as the TMP was not

an error or delay in performing a ministerial act, the Appeals

officer recommended that interest not be abated. Further, the

Appeals officer addressed petitioner’s other arguments that

actions taken by respondent showed a pattern of unfair conduct

and concluded that these claims did not warrant interest

abatement.

In addition, the Appeals officer made a determination that

the increased interest rate pursuant to section 6621(c) was
 - 18 -

correctly determined because of petitioner’s involvement in a

tax-motivated transaction.

On August 14, 2000, respondent issued petitioner a final

determination letter disallowing petitioner’s request for

interest abatement for the tax years 1982 through 1987.

Respondent based the disallowance on the fact that no errors or

delays that merit interest abatement were discovered in

respondent’s review of available records and other information.

Respondent informed petitioner that he could file a Tax Court

petition for a review of respondent’s denial of interest

abatement if he disagreed with the final determination.

OPINION

A. The Commissioner’s Authority To Abate Interest

In general, interest on an underpayment of income tax begins

to accrue on the due date of the return for the tax and continues

to accrue, compounded daily, until payment is made. See secs.

6601(a), 6622(a).

Pursuant to section 6404(e)(1), as it applies in this case,

the Commissioner may abate the assessment of interest on: (1)

Any deficiency attributable to any error or delay by an officer

or employee of the 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 payment is attributable to the
 - 19 -

officer’s or employee’s being erroneous or dilatory in performing

a ministerial act.7

A ministerial error or delay by an officer or employee

(without distinction, employee) of the IRS is taken into account

only if no significant aspect of the error or delay can be

attributed to the taxpayer. Sec. 6404(e)(1). In addition, only

errors or delays occurring after the IRS has initially contacted

the taxpayer in writing with respect to the deficiency or payment

are taken into account. Id. Thus, abatement of interest for the

period between the date the tax return is filed and the date the

Commissioner commences an audit is not permitted under section

6404(e). Sims v. Commissioner, T.C. Memo. 1999-414 (citing H.

Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844).

The temporary regulations interpreting section 6404(e)

define the term “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.” Sec. 301.6404-2T(b)(1),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13,

7
Sec. 6404(e) was amended by TBOR 2 sec. 301(a)(1) and
(2), 110 Stat. 1457, to permit the Commissioner to abate interest
with respect to an “unreasonable” error or delay resulting from
“managerial” or ministerial acts. The amendment applies to
interest accruing with respect to deficiencies for taxable years
beginning after July 30, 1996. Accordingly, the amendment is
inapplicable in the present case.
 - 20 -

1987).8 “A ministerial act is a nondiscretionary procedural act

that the Commissioner is required to perform.” Camerato v.

Commissioner, T.C. Memo. 2002-28. In contrast, acts that either

are managerial or arise out of general administrative decisions

are not ministerial. Id. “Abatement is not available for

managerial acts during the tax years at question and has never

been available for actions or nonactions attributable to general

administrative decisions.” Id. Further, a decision concerning

the proper application of Federal tax law, or other applicable

Federal or State laws, is not a ministerial act. See sec.

301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., supra.

Even where errors or delays are present, the Commissioner’s

decision to abate interest remains discretionary. See sec.

6404(e)(1). When Congress enacted section 6404(e), it did not

intend the provision to be used routinely to avoid payment of

interest. Rather, Congress intended abatement of interest to be

used sparingly, only where failure to do so “would be widely

8
The final regulations under sec. 6404, as issued on Dec.
18, 1998, contain the same definition of ministerial act. See
sec. 301.6404-2(b)(2), Proced. & Admin. Regs. The final
regulations generally apply to interest accruing on deficiencies
or payments of tax described in sec. 6212(a) for taxable years
beginning after July 30, 1996. See sec. 301.6404-2(d)(1),
Proced. & Admin. Regs. Accordingly, as the final regulations are
inapplicable in the present case, sec. 301.6404-2T, Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987),
effective for taxable years beginning after Dec. 31, 1978, but
before July 30, 1996, applies. See sec. 301.6404-2T(c),
Temporary Proced. & Admin. Regs, supra.
 - 21 -

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.

B. Jurisdiction of the Tax Court

The Tax Court is a court of limited jurisdiction, and we may

exercise our jurisdiction only to the extent authorized by

Congress. Sec. 7442; Naftel v. Commissioner, 85 T.C. 527, 529

(1985). In proceedings brought by a taxpayer for a review of the

Commissioner’s denial of the taxpayer’s request to abate

interest, as in the present case, the jurisdiction of this Court

is limited solely to a determination as to whether the

Commissioner abused his discretion in declining to abate any

portion of the interest under section 6404. See sec. 6404(i);

Vanstone v. Commissioner, T.C. Memo. 2002-133.

“When reviewing the Commissioner’s determination pursuant to

section 6404, our inquiry is a factual one, and we proceed on a

case-by-case basis.” Jacobs v. Commissioner, T.C. Memo. 2000-

123. Since the Commissioner’s power to abate interest involves

the exercise of discretion, we give the Commissioner’s

determination due deference. Woodral v. Commissioner, 112 T.C.

19, 23 (1999). We review the Commissioner’s determination not to

abate interest applying an abuse of discretion standard. See

sec. 6404(i); Camerato v. Commissioner, supra.
 - 22 -

The taxpayer bears the burden of proof with respect to

establishing an abuse of discretion. Rule 142(a). In order to

prevail, the taxpayer must establish that in not abating interest

the Commissioner exercised his discretion arbitrarily,

capriciously, or without sound basis in fact or law. Lee v.

Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner,

supra at 23.

As a prerequisite to our reviewing the respondent’s actions

for an abuse of discretion, petitioner must show that the

assessment of interest is attributable to some error or delay by

an employee of the IRS in performing a ministerial act. Banat v.

Commissioner, T.C. Memo. 2000-141, affd. 5 Fed. Appx. 36 (2d Cir.

2001). In addition, petitioner must establish a correlation

between the alleged error or delay and a specific period over

which interest should be abated as a result of that error or

delay. Donovan v. Commissioner, T.C. Memo. 2000-220.

C. Whether Respondent’s Refusal To Abate Interest From December
17, 1987, to August 31, 1990, Was an Abuse of Discretion

Petitioner argues that errors and delays occurred in the

audit of SGE for the 1985 and 1986 tax years that warrant

interest abatement from December 17, 1987, until August 31, 1990.

Petitioner bases his interest abatement claim on his contentions

that: (1) Respondent had sufficient information as of the date
 - 23 -

of first contact9 to issue the FPAAs, yet delayed issuing the

FPAAs for almost 3 years; and (2) the original 1985 and 1986 tax

year audits were so replete with errors that respondent had to

completely reaudit SGE starting in August 1990.

Petitioner’s first claim alleges that through (1) document

requests in 1986 related to respondent’s trial preparation in

Bales v. Commissioner, T.C. Memo. 1989-568, and (2) respondent’s

inspection and count of the Hoyt cattle in 1985 and 1986,

respondent obtained and reviewed all the information necessary to

issue FPAAs for SGE’s 1985 and 1986 tax years by 1987.

Petitioner concludes that delays in performing a ministerial act

occurred during the audits because the 1985 and 1986 FPAAs were

issued well after 1987. However, petitioner has failed to show

that respondent’s issuance of FPAA’s after 1987 constituted delay

in the performance of a ministerial act.

It appears that petitioner considers himself entitled to the

relief sought merely because of the time that transpired from the

date the audits began until the dates the FPAAs were issued. The

mere passage of time, however, does not establish error or delay

in performing a ministerial act. Hawksley v. Commissioner, T.C.

Memo. 2000-354.

9
Respondent’s first contact with petitioner for purposes
of sec. 6404(e) was Dec. 17, 1987, the date that respondent sent
the notice of beginning of administrative proceeding (NBAP) to
the tax matters partner for the 1985 tax year.
 - 24 -

Determining the precise date on which to issue an FPAA

requires the exercise of judgment and discretion on the

Commissioner’s part. The Commissioner’s determination of when to

issue an FPAA depends on various factors, including but not

limited to: (1) The nature and persuasiveness of the evidence

gathered during the examination; (2) the level of cooperation

received from the taxpayer; (3) the legitimacy of the information

received during the examination; (4) the likelihood of obtaining

additional evidence from other sources; (5) the impact of

recently decided litigation dealing with similar issues; (6) the

impact of a criminal tax investigation involving the taxpayer;

(7) the recommendations set forth in the examiner’s Report

Transmittal; and (8) an overall evaluation of the evidence to

determine whether the record supports the adjustments.

Accordingly, respondent’s determination of when to issue the

FPAAs was not a ministerial act. See sec. 301.6404-2T(b)(1),

Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13,

1987). Respondent’s decision of how and when to work on these

cases, based on an evaluation of his entire caseload and his

workload priorities, was not a ministerial act. See Jean v.

Commissioner, T.C. Memo. 2002-256.

Contrary to petitioner’s claim that respondent had all the

records sufficient to issue the FPAAs in 1987, the facts reveal

that respondent’s difficulty in obtaining accurate records during
 - 25 -

the audits hindered the audit process. The record also

establishes that respondent believed the partnerships were

abusive tax shelters. Such delay in completing an examination

because of the difficulties in obtaining documentation or because

of the Commissioner’s suspicion of fraud does not prove that the

Commissioner was erroneous or dilatory in performing ministerial

acts. Banat v. Commissioner, supra. Accordingly, issuing the

FPAAs after 1987 was not a delay in performing a ministerial act.

Petitioner’s second claim alleges that the audits of SGE for

1985 and 1986 were so replete with errors that the audits had to

be completely redone. Petitioner asserts that four of

respondent’s agents were assigned to District Counsel in August

1990 to reaudit SGE for 1985 and 1986.

While the parties have stipulated that the four agents were

assigned to District Counsel to assist in trial preparation of

the Hoyt investor partnerships docketed Tax Court cases for the

1980 through 1986 taxable years, petitioner argues that the

agents’ work was not limited to trial preparation and appeared to

be work traditionally done at the audit stage. Petitioner

concludes that the existence of the “second” audit is “sufficient

evidence that the first audit was replete with errors.”

Petitioner’s conclusion is without merit. His argument fails to

specify an error or delay in performing a ministerial act.
 - 26 -

The entire record establishes that the four agents were

assigned to District Counsel to assist in trial preparation

relating to the Hoyt investor partnerships docketed Tax Court

cases contesting the determinations made in the FPAAs.

Petitioner has failed to show that respondent performed the

functions of traditional audit work during trial preparation. In

any event, no conclusion can be drawn from the work performed

during the trial preparation that the 1985 and 1986 SGE audits

were replete with errors because of respondent’s being erroneous

or dilatory in performing any ministerial act.

Since we have rejected both of petitioner’s claims described

above, finding that he failed to establish any error or delay by

respondent in performing a ministerial act, we hold that

respondent’s failure to abate interest from December 17, 1987,

until August 31, 1990, was not an abuse of discretion.

D. Whether Respondent’s Refusal To Abate Interest From October
17, 1989, to December 31, 1998, Was an Abuse of Discretion

Petitioner contends that interest should be abated from

October 17, 1989, until December 31, 1998, because respondent’s

failure to remove Jay Hoyt as the TMP of SGE after he was under a

criminal tax investigation was an error in performing a

ministerial act. Petitioner argues that Jay Hoyt’s removal as

TMP was required by the interrelationship of section 6231(c),

section 301.6231(c)-5T, Temporary Proced. & Admin. Regs., 52 Fed.
 - 27 -

Reg. 6793 (Mar. 5, 1987), and section 301.6231(a)(7)-1(l)(1)(iv),

Proced. & Admin. Regs.

Our understanding of petitioner’s argument is based on the

following progression: (1) Pursuant to section 6231(c)(2), the

Secretary is granted discretion by Congress to prescribe

regulations concerning the special enforcement areas enumerated

in section 6231(c)(1); (2) this discretion allows the Secretary

to promulgate regulations to determine when treating items as

partnership items will interfere with the effective and efficient

enforcement of the internal revenue laws; (3) once such a

determination is made by the Secretary, it is mandatory that a

partner’s partnership items be treated as nonpartnership items,

sec. 6231(c)(2); (4) by regulation, the Secretary has determined

that “The treatment of items as partnership items with respect to

a partner under criminal investigation for violation of the

internal revenue laws relating to income tax will interfere with

the effective and efficient enforcement of the internal revenue

laws”, sec. 301.6231(c)-5T, Temporary Proced. & Admin. Regs.,

supra; (5) the regulation requires that notice be sent to the

partner that his partnership items will be treated as

nonpartnership items, id.; and (6) therefore, at the initiation

of a criminal investigation of a TMP, it is mandatory that (a)

the partner’s partnership items become nonpartnership items, (b)

the partner be sent notice, and (c) the partner be removed as TMP
 - 28 -

pursuant to section 301.6231(a)(7)-1(l)(1)(iv), Proced. & Admin.

Regs.

While this Court and Court of Appeals for the Ninth Circuit

have interpreted the interaction of section 6231(c) and section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, in

Phillips v. Commissioner, 114 T.C. 115 (2000), affd. 272 F.3d

1172 (9th Cir. 2001), petitioner contends that his argument is

distinguishable, and, therefore, Phillips does not control. The

taxpayer in Phillips argued that section 301.6231(c)-5T,

Temporary Proced. & Admin. Regs., supra, was invalid and/or that

the Commissioner abused his discretion by not issuing the notice.

However, while acknowledging that the statute and regulation were

held valid in Phillips, petitioner argues that the regulation

contains language requiring the Commissioner to send notice at

the commencement of a criminal investigation. He asserts that

the Commissioner has no discretion in sending the notice, and

failure to do so is an error in performing a ministerial act. He

further attempts to distinguish his case from Phillips by

asserting that abuse of discretion concerning the regulation is

not an issue in the instant case.

In sum, petitioner asserts that the language of section

6231(c) and section 301.6231(c)-5T, Temporary Proced. & Admin.

Regs., supra, taken together, required respondent to notify Jay

Hoyt that his partnership items would be treated as
 - 29 -

nonpartnership items at the commencement of a criminal

investigation against him. Petitioner further asserts that since

respondent could exercise no judgment or discretion in issuing

the notice once the criminal investigation of Jay Hoyt began, the

procedure in the regulation requiring notification is a

ministerial act. Accordingly, he concludes that respondent’s

failure to send the required notification to Jay Hoyt was an

error in performing a ministerial act that contributed to the

accrual of interest.

Petitioner asserts that had respondent notified Jay Hoyt on

October 17, 1989, the date of the first criminal investigation of

Jay Hoyt after the first contact by respondent relating to the

audit of SGE,10 petitioner would have become aware of Jay Hoyt’s

fraud and could have made informed decisions about the SGE

deductions and credits he claimed. Further, petitioner claims

that respondent’s failure to send Jay Hoyt the notification

concealed Jay Hoyt’s fraud until December 31, 1998, the date

petitioner alleges that investors had sufficient information

concerning the fraud. On the basis of these claims, petitioner

requested that respondent abate interest from October 17, 1987,

until December 31, 1998. He contends that respondent’s failure

to abate interest for this period was an abuse of discretion.

10
Respondent’s first contact with petitioner for purposes
of sec. 6404(e) was Dec. 17, 1987. See supra note 9.
 - 30 -

Contrary to petitioner’s assertion that Phillips is

distinguishable from the instant case, we find that Phillips is

controlling in all pertinent respects.

Petitioner attempts to limit Phillips to a mere

determination that section 301.6231(c)-5T, Temporary Proced. &

Admin. Regs., supra, was a valid regulation. However, this Court

in Phillips v. Commissioner, supra at 129, went well beyond that

sole determination, stating:

Pursuant to the provisions of section 301.6231(c)-5T,
Temporary Proced. & Admin. Regs., supra, the
commencement of a criminal tax investigation of a
partner in a TEFRA partnership does not necessarily or
immediately interfere with the effective and efficient
enforcement of the internal revenue laws and require
the treatment of partnership items as nonpartnership
items in every situation. [Emphasis added.]

From the above language in Phillips, it is clear that section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, does not

require the Commissioner to treat partnership items as

nonpartnership items at the commencement of every criminal tax

investigation of a partner. Accordingly, the Commissioner has

discretion to determine in which instances a criminal

investigation interferes with the effective and efficient

enforcement of the internal revenue laws.

In affirming this Court in Phillips, the Court of Appeals

for the Ninth Circuit addressed the principal issue of whether a

criminal tax investigation of a TMP “does, or must, end the TMP’s

power to act for a partnership.” Phillips v. Commissioner, 272
 - 31 -

F.3d at 1173. The Court of Appeals held that pursuant to section

301.6231(c)-5T, Temporary Proced. & Admin. Regs., supra, a

criminal tax investigation of a TMP does not impose an obligation

on the Commissioner to treat partnership items as nonpartnership

items. Id. at 1176. Further, the Court of Appeals held that the

regulation in question “vests discretion in the Commissioner to

notify a partner that he or she is under criminal investigation”

and that “Until such notice is given, partnership items remain

partnership items.” Id. (emphasis added.)

In Phillips, the Tax Court and the Court of Appeals both

held that section 301.6231(c)-5T, Temporary Proced. & Admin.

Regs., supra, is not a mandatory regulation requiring the

Commissioner to act in every instance of a criminal tax

investigation, as petitioner asserts. To the contrary, the

regulation at issue vests discretion in the Commissioner to

determine if and when to notify a partner that he or she is under

criminal investigation. Phillips v. Commissioner, 114 T.C. at

129, 272 F.3d at 1176.

In the instant case, as in Phillips, respondent did not

provide Jay Hoyt with notice that he was under criminal

investigation. Contrary to petitioner’s argument, respondent

clearly had no obligation to notify Jay Hoyt of such activity.

Because the act of notifying a partner about a criminal

investigation pursuant to section 301.6231(c)-5T, Temporary
 - 32 -

Proced. & Admin. Regs., supra, involves the exercise of the

Commissioner’s discretion and is not a mandatory procedure, the

act of notification is not a ministerial act. See Camerato v.

Commissioner, T.C. Memo. 2002-28 (defining ministerial act as a

nondiscretionary procedural act); sec. 301.6404-2T(b)(1),

Temporary Proced. & Admin. Regs., supra (same). Therefore,

respondent’s failure to send Jay Hoyt notice of the criminal

investigation was not an error in performing a ministerial act.

Because there was no error in performing a ministerial act,

we hold that respondent’s failure to abate interest from October

17, 1987, until December 31, 1998, was not an abuse of

discretion.

E. Petitioner’s Claims That Respondent’s Denial of Interest
Abatement Was an Abuse of Discretion

Petitioner sets forth various assertions that respondent

failed to (1) provide discoverable documents, (2) adequately

investigate his interest abatement claim, and (3) provide a

sufficient explanation for denying the claim. Petitioner makes

these arguments in an attempt to establish that respondent’s

decision not to abate interest was an abuse of discretion.

Because we have held that petitioner failed to establish an

error or delay by an employee of the IRS in performing a

ministerial act, we reject petitioner’s arguments that the
 - 33 -

interest abatement denial was an abuse of respondent’s

discretion. See Banat v. Commissioner, T.C. Memo. 2000-141.

On the basis of the conclusions herein, respondent’s motion

for judgment on the pleadings is deemed moot.

To reflect the foregoing,

An order denying respondent’s

motion, as supplemented, will be

issued, and decision will be

entered for respondent.