T.C. Memo. 2003-217
UNITED STATES TAX COURT
WILLIAM AND PENNY LANDVOGT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12189-02. Filed July 22, 2003.
William Landvogt and Penny Landvogt, pro sese.
James E. Schacht, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: On July 3, 2002, respondent issued a notice
of final determination disallowing petitioners’ claim for
abatement of interest with respect to their 1992, 1993, and 1994
taxable years. Petitioners timely filed a petition under section
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6404(h) and Rule 280.1 The issue for decision is whether
respondent’s denial of petitioners’ claim for abatement of
interest was an abuse of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated. We incorporate the
stipulated facts into our findings by this reference.
Petitioners resided in Janesville, Wisconsin, at the time of
filing the petition. References to petitioner refer to Penny
Landvogt.
In a letter dated June 14, 1994, respondent notified
petitioners that their 1992 joint Federal income tax return had
been selected for audit. Respondent later expanded the audit to
include petitioners’ 1993 and 1994 returns. During the audit of
petitioners’ 1992, 1993, and 1994 returns, respondent’s
examination focused on whether petitioners engaged in their
horse-breeding operation for profit pursuant to section 183.
Additionally, in the June 14, 1994, letter, respondent
requested a meeting with petitioners in Janesville, Wisconsin, on
July 12, 1994, in order to review petitioners’ records. In a
reply letter dated June 21, 1994, petitioner requested that
respondent’s auditor move the audit to Madison, Wisconsin, and
enclosed a Form 2848, Power of Attorney and Declaration of
1
Unless otherwise indicated, all 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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Representative, designating Nell Ray as petitioners’
representative. Pursuant to petitioner’s request, respondent
transferred the case to the Madison, Wisconsin, office.
After receiving respondent’s letter dated September 6, 1994,
proposing a conference in Madison, Wisconsin, Ms. Ray called the
auditor, Kenneth Gernetzke, and scheduled a conference for
October 4, 1994. Subsequently, Mr. Gernetzke canceled the
October 4, 1994, conference, rescheduled the conference for
October 28, 1994, canceled the October 28, 1994, conference, and
then rescheduled the conference for November 2, 1994. Mr.
Gernetzke and Ms. Ray attended the November 2, 1994, conference.
In addition to the conference held on November 2, 1994, Ms.
Ray and Mr. Gernetzke met to review petitioners’ records on
November 7, 1994, before petitioners replaced Ms. Ray with a new
representative, Michael Ellsworth, on December 3, 1994. At this
point, Mr. Ellsworth requested time to “assemble additional
information” regarding petitioners’ case. Mr. Ellsworth and Mr.
Gernetzke eventually discussed the case over the telephone on
June 28, 1995.
In a report issued on August 28, 1995, respondent determined
that petitioners’ horse-breeding operation was not an activity
engaged in for profit and disallowed the related losses
petitioners claimed on Schedule C, Profit or Loss From Business.
The Milwaukee Appeals Office (Appeals) sent a letter to
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petitioners dated October 11, 1995, notifying petitioners that
Appeals would soon arrange a conference. On January 16, 1996,
Appeals returned petitioners’ case to the IRS Examination
Division “for further development”. On February 21, 1996,
petitioners signed Form 872, Consent to Extend the Time to Assess
Tax, extending the period of limitations for 1992 to June 30,
1997.
On April 10, 1996, Appeals Officer John M. McNamee held
telephone conferences with petitioners, Ms. Ray, and Mr.
Ellsworth and scheduled an Appeals conference for May 3, 1996, in
Milwaukee, Wisconsin. Petitioners later canceled the Appeals
conference and apparently did not reschedule. In a letter dated
May 23, 1996, Appeals Officer McNamee offered petitioners a
settlement.
On May 31, 1996, petitioners again changed representatives,
replacing Mr. Ellsworth with David Grams, an attorney. Mr. Grams
notified Appeals Officer McNamee of the change via facsimile on
June 20, 1996. On or about June 27, 1996, and July 3, 1996, Mr.
Grams and Appeals Officer McNamee engaged in telephone
conferences but did not arrive at a settlement agreement.
Subsequently, on January 31, 1997, Mr. Grams signed Form 872-A,
Special Consent to Extend the Time to Assess Tax, extending the
period of limitations indefinitely for 1992, 1993, and 1994.
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Sometime during 1996 or 1997, Appeals Officer McNamee agreed
to provide petitioners with additional time in which to
demonstrate that the horse-breeding operation could be
profitable. In a letter to petitioners dated April 10, 1998,
Appeals Officer McNamee noted that he had not received
correspondence from petitioners or their representatives for
“awhile” and drew the conclusion that the horse-breeding
operation had not met petitioners’ profitability projections.
Appeals Officer McNamee also gave petitioners 10 days to respond
to an enclosed settlement proposal, which petitioners did not
accept.
On December 7, 1998, respondent issued a notice of
deficiency to petitioners. On February 5, 1999, petitioners
filed a petition with this Court contesting the deficiencies.
Shortly thereafter, in a letter dated February 15, 1999, Mr.
Grams notified Appeals Officer McNamee that he no longer would
serve as petitioners’ representative.
Petitioners’ deficiency case was tried on December 6, 1999,
in Milwaukee, Wisconsin. This Court decided in Landvogt v.
Commissioner, T.C. Summary Opinion 2000-239, filed November 3,
2000, that petitioners did not engage in their horse-breeding
operation for profit in 1992, 1993, and 1994. On November 30,
2000, respondent sent to petitioners Respondent’s Computation for
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Entry of Decision and a proposed Decision (the Rule 155
computation).
At this time, petitioners hired Donald Bailey, a certified
public accountant, to assist them. While working on the Rule 155
computation, Mr. Bailey discovered that respondent’s
determination failed to include as Schedule A, Itemized
Deductions, property taxes formerly claimed by petitioners on
their Schedules F, Profit or Loss from Farming. Once informed of
the matter, respondent adjusted petitioners’ liabilities
accordingly.
After several sets of revisions, on February 28, 2001,
petitioners sent to respondent the Rule 155 computation and
indicated in an accompanying letter that petitioners did not
agree to the interest amounts. On March 19, 2001, respondent
submitted the Rule 155 computation to this Court,2 and, on April
13, 2001, this Court entered a decision, upholding the
deficiencies.
On July 31, 2001, respondent assessed the deficiencies and
assessed interest in the amounts of $4,557.32 for 1992, $4,775.59
for 1993, and $4,144.29 for 1994. Petitioners filed Form 843,
2
On Mar. 23, 2001, this Court issued a Notice of Filing of
Computation under Rule 155, advising petitioners to file their
notice of objection by Apr. 13, 2001. Petitioners filed
Petitioners’ Computation for Entry of Decision and Notice of
Objection to Respondent’s Proposal on Apr. 6, 2001, objecting
solely to the amount of interest shown as due.
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Claim for Refund and Request for Abatement, on September 10,
2001, requesting that respondent abate the entire amount of
interest assessed by respondent on July 31, 2001.3 In a letter
dated December 20, 2001, respondent disallowed petitioners’ claim
for interest abatement, which decision petitioners promptly
appealed in a letter to respondent dated January 7, 2002.
On July 3, 2002, respondent issued to petitioners a notice
of final determination denying their request for abatement of
interest for 1992, 1993, and 1994. In the notice of final
determination, respondent found that there were no errors or
delays during the period “from April 15, 1993 to the present”
relating to the performance of a ministerial act.
On July 19, 2002, petitioners filed a timely, but imperfect,
petition for review of respondent’s failure to abate interest.
In petitioners’ amended petition, filed on August 20, 2002,
petitioners alleged: (1) “IRS did not correctly apply the law in
regard to assessment of tax”; (2) “There was an unnecessary delay
in assessing the tax due to IRS management failures”; and (3)
“The original assessment was not correct and not corrected until
2001 by IRS attorney James Schacht”.
3
The record indicates that petitioners requested on their
Form 843 that respondent abate the deficiencies in their income
taxes together with the interest assessed by respondent on July
31, 2001.
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OPINION
Under section 6404(e)(1), the Commissioner may abate part or
all of an assessment of interest on any deficiency or payment of
income tax to the extent that any error or delay in payment is
attributable to erroneous or dilatory performance of a
ministerial act by an officer or employee of the IRS.4 A
ministerial act means a procedural or mechanical act that does
not involve the exercise of judgment or discretion and occurs
during the processing of a taxpayer’s case after all the
prerequisites to the act, such as conferences and review by
supervisors, have taken place. See Lee v. Commissioner, 113 T.C.
145 (1999); sec. 301.6404-2T(b)(1), Temporary Proced. & Admin.
Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).5 In contrast, a
decision concerning the proper application of Federal tax law, or
other applicable Federal or State laws, is not a ministerial act.
4
Sec. 6404(e) was amended by the Taxpayer Bill of Rights 2,
Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457 (1996),
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, and is inapplicable to the instant case.
5
The final regulations under sec. 6404 were issued on Dec.
18, 1998, and generally apply to interest accruing with respect
to 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. As a result, sec. 301.6404-2T,
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13,
1987), applies and is effective for interest accruing with
respect to deficiencies for those taxable years beginning after
Dec. 31, 1978, but before July 30, 1996. See id. at par. (c).
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See sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52
Fed. Reg. 30163 (Aug. 13, 1987). The mere passage of time does
not establish error or delay in performing a ministerial act.
Lee v. Commissioner, supra at 150.
When Congress enacted section 6404(e), Congress did not
intend that taxpayers use the provision to routinely avoid the
payment of interest. Rather, Congress intended abatement of
interest only where failure to do so “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. Section 6404(e) affords a taxpayer relief only
if no significant aspect of the error or delay can be attributed
to the taxpayer. In addition, interest may be abated only after
the Commissioner has contacted the taxpayer in writing about the
deficiency or payment in question.6 See sec. 6404(e).
This Court may order an abatement of interest if
respondent’s failure to abate interest was an abuse of
discretion. Sec. 6404(h). In order to prove an abuse of
discretion, petitioners must show that respondent exercised
discretion arbitrarily, capriciously, or without sound basis in
fact or law. Rule 142(a)(1); Woodral v. Commissioner, 112 T.C.
6
In this case, respondent’s first contact with petitioners
was the June 14, 1994, letter.
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19, 23 (1999). We now consider each of petitioners’ arguments in
turn.
A. Respondent’s Application of Federal Tax Law
Petitioners contend that respondent did not properly apply
“the law in regard to assessment of tax” when assessing
petitioners’ income tax liabilities and that respondent’s failure
to abate interest on this basis was an abuse of discretion.
Respondent’s decisions with respect to the application of Federal
tax law, however, are not ministerial acts. Sec. 301.6404-
2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163
(Aug. 13, 1987). Accordingly, we reject this argument.
B. Delays in the Processing of Petitioners’ Case
Petitioners also argue that respondent caused unnecessary
delays during the processing of their case by twice canceling
meetings with Ms. Ray and generally behaving in a dilatory
manner. Respondent contends that to the extent any delays
occurred, petitioners were primarily responsible and, regardless,
no delays occurred with respect to respondent’s performance of
ministerial acts.
Even assuming, as petitioners allege, that an excessive
amount of time has elapsed since the audit’s inception, the mere
passage of time does not necessarily establish that respondent
delayed in performing ministerial acts. See Lee v. Commissioner,
supra at 150; Denny’s Auto Sales, Inc. v. Commissioner, T.C.
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Memo. 2002-266. Petitioners have not identified any specific
delays attributable to respondent other than the two meeting
cancellations. On both occasions when Mr. Gernetzke decided to
cancel the meetings with Ms. Ray, he exercised judgment and
discretion and, therefore, did not perform ministerial acts. We
find no evidence supporting petitioners’ contention that
respondent’s failure to abate interest on this basis was an abuse
of discretion.
C. Accuracy of the Amount of Petitioners’ Income Tax Liabilities
According to petitioners’ third argument, respondent
inaccurately classified and evaluated information provided by
petitioners during the audit and failed to state the correct
amount of petitioners’ income tax liabilities “from the very
beginning”. Petitioners assert that these errors entitled them
to an abatement of interest, and, thus, respondent’s failure to
abate was an abuse of discretion. We disagree for the reasons
set forth below.
Contrary to petitioners’ assertions, respondent’s
classification and evaluation of information during an audit
requires judgment or discretion and is not a ministerial act.
See sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52
Fed. Reg. 30163 (Aug. 13, 1987). The remaining allegation made
by petitioners focuses on respondent’s computation of
petitioners’ income tax liabilities in the notice of deficiency.
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When computing those liabilities, respondent did not allow as
itemized deductions the property taxes originally deducted by
petitioners on their Schedules F. Even assuming that this was a
ministerial act, for purposes of interest abatement, respondent’s
error must have contributed to errors or delays in petitioners’
payment of the liabilities. See sec. 6404(e)(1); see also
Hawksley v. Commissioner, T.C. Memo. 2000-354; Douponce v.
Commissioner, T.C. Memo. 1999-398.
The record indicates that respondent’s original disallowance
of deductions for the property taxes had no effect on
petitioners’ payment of their income tax liabilities.
Petitioners have never attempted to pay any portion of the
liabilities, nor do petitioners contend that they would have paid
had they known earlier the correct amount. Moreover, once
petitioners learned of the correct total of their income tax
liabilities during discussions of the Rule 155 computation,
petitioners still made no payment attempts and even disputed the
deficiency amounts on their Form 843. Accordingly, we conclude
that any delays in petitioners’ payment of their income tax
liabilities were not attributable to any error by respondent in
performing a ministerial act and that respondent’s denial of
petitioners’ claim for abatement of interest was not an abuse of
discretion.
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To reflect the foregoing,
Decision will be entered
for respondent.