Palihnich v. Comm'r

T.C. Memo. 2003-297

UNITED STATES TAX COURT

NICHOLAS J. AND DIANE L. PALIHNICH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10591-00. Filed October 23, 2003.

Petitioners (Ps) claimed deductions relating to
White Rim, a limited partnership in which they owned an
interest in 1980-83. Respondent (R) determined that Ps
were not entitled to deduct losses from White Rim.

In 1987, Ps filed amended returns for 1981-82.
Without Ps’ knowledge, R lost those returns for almost
11 years. In March 1998, R found and processed those
amended returns. If R had timely processed those
returns, overpayments from 1985-87 and a refund from
1982 would have been available to pay Ps’ 1980 tax
liability. Ps believed in 1987 that, as a result of
tax payments they had made and carrybacks to which they
were entitled, they had paid all or substantially all
of the amounts R said Ps owed for 1980-83.

R abated interest for 1981-82 that accrued while
the returns were lost, but did not abate interest for
1980. Ps filed a claim for R to abate interest on
their income tax liability for 1980 and additional
 - 2 -

interest for 1981 resulting from R’s denial of Ps’
White Rim deductions.

Held: R’s loss of Ps’ 1981-82 amended returns
from May 1987 to March 1998 was a ministerial error for
purposes of sec. 6404(e), I.R.C.

Held, further, R’s refusal to abate interest that
accrued from May 1987 to March 1998 on Ps’ tax
liability for 1980 was an abuse of discretion.

Held, further, R’s refusal to abate interest that
accrued other than from May 1987 to March 1998 was not
an abuse of discretion.

Kenneth R. Cohen, for petitioners.

Shawna A. Early, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent issued a final determination

disallowing petitioners’ claim under section 6404(e) for

abatement of interest related to petitioners’ 1980 and 1981 tax

years. Petitioners timely filed a petition under section

6404(g)1 and Rule 280.

The issue for decision is whether respondent’s denial of

petitioners’ request to abate interest relating to petitioners’

1
This was redesignated sec. 6404(i) by the Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, secs. 3305(a), 3309(a), 112 Stat. 743, 745. Sec.
6404(i) was later redesignated sec. 6404(h) by the Victims of
Terrorism Relief Act of 2001, Pub. L. 107-134, sec. 112(d)(1)(B),
115 Stat. 2435 (2002).
 - 3 -

1980 and 1981 tax years was an abuse of discretion. Resolution

of this issue depends on resolution of the following issues:

1. Whether respondent’s loss of petitioners’ 1981-82

amended returns for almost 11 years was a ministerial act. We

hold that it was.

2. Whether respondent’s refusal to abate interest that

accrued from May 1987 to March 1998 on petitioners’ tax liability

for 1980 was an abuse of discretion. We hold that it was.

3. Whether respondent’s refusal to abate interest that

accrued other than during the time respondent lost petitioners’

1981-82 amended returns was an abuse of discretion. We hold that

it was not.

Section references are to the Internal Revenue Code as

amended. Rule references are to the Tax Court Rules of Practice

and Procedure. References to petitioner are to Nicholas J.

Palihnich.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioners and Their 1980-82 Tax Liabilities

Petitioners are married and lived in Hopkinton,

Massachusetts, when they filed the petition in this case.

1. Petitioners’ White Rim Investment and Respondent’s
Disallowance of Petitioners’ White Rim Deductions

Petitioners were limited partners in the White Rim Oil & Gas

Partnership (White Rim) in 1980-83. Petitioners deducted losses
 - 4 -

from White Rim on their 1980-83 Federal income tax returns. On

dates not stated in the record, respondent audited the returns of

White Rim and its limited partners and examined petitioners’

income tax returns for 1980-83.

On June 11, 1984, respondent sent a notice of deficiency to

petitioners in which respondent determined a $39,599 deficiency

for 1980 resulting from respondent’s disallowance of a $79,198

loss related to White Rim. Petitioners timely filed a petition

in this Court.

In 1986, petitioners received a notice of deficiency for

1981. In it, respondent determined a deficiency which resulted

from the disallowance of petitioners’ claimed losses for White

Rim. Except for petitioners’ White Rim deductions, respondent

has never questioned any item on any of petitioners’ tax returns.

2. Petitioners’ Amended Returns for 1981-82

In 1986 and 1987, respondent issued notices of tax due and

filed tax liens for petitioners’ 1981-82 tax liabilities. As a

result, petitioners decided to fully pay their White Rim tax

liabilities in 1987. To accomplish this, they planned to file

amended returns for 1981 and 1982, to refinance their home to

fully pay their 1982 tax liability, and to apply overpayments

totaling about $33,000 from 1985-87 to their 1980-83 liabilities.

Petitioners believed that, as a result of these actions, they
 - 5 -

would fully pay all tax liabilities asserted by respondent

relating to their White Rim investment.

Early in 1987, petitioners told respondent’s representatives

that petitioners planned to file 1981-82 amended returns and that

they thought that, as a result, they would owe no tax for those

years. Samuel Coleman, a certified public accountant, prepared,

and in May 1987 filed, petitioners’ amended returns for 1981 and

1982 in which they carried back net operating losses (NOLs) from

1984 and 1985 to 1981 and 1982, resulting in zero tax due for

1981 and a $2,844 refund for 1982.

Respondent’s Brookhaven Service Center lost petitioners’

1981-82 amended returns in 1987. Respondent did not process them

until March 1998.

Sometime after they filed their amended returns, petitioners

wrote to respondent seeking information about their 1981 amended

return. An employee in respondent’s office in Holtsville, New

York, wrote in reply that respondent would respond more fully in

90 days. Shortly thereafter, respondent informed petitioners

that respondent had transferred the matter to respondent’s office

in Newark, New Jersey. On June 11, 1987, petitioners wrote to

respondent at respondent’s Holtsville, New York, office seeking

information about their 1982 amended return. Respondent replied

to petitioners on September 23, 1987, stating that respondent

would respond more fully in 90 days. Respondent did not contact
 - 6 -

petitioners again about their 1981-82 amended returns until early

1998.

3. Petitioners’ Payment of Tax

In 1986-90 and 1992, respondent applied substantial

overpayments and credits from 1980, 1982, and 1985-87 to

petitioners’ tax liability for 1981. Respondent also applied the

$14,193 in withholding credits that petitioners had reported on

their 1981 return to their 1981 tax liability.

In October 1987, petitioners paid their nearly $76,000 tax

liability for 1982. They expected that, because they had claimed

NOLs on their 1981-82 amended returns and made full payment for

1982, respondent would apply overpayments and withholding credits

of about $33,000 from 1985-87 to 1980 rather than to 1981 or

1982. Petitioners believed that, after the filing of their 1981-

82 amended returns, the paying of the $76,000 liability for 1982,

and the application of overpayments to 1980, they would have

fully paid all tax liabilities asserted by respondent relating to

their White Rim investment.

Respondent sent to petitioners notices of tax lien for 1981

on April 8, 1988, and June 19, 1991, a final notice of intent to

levy for 1981 on June 22, 1992, and a certificate of release of

Federal tax lien for 1981 on August 27, 1992.

Respondent did not contact petitioners further about their

1980-83 tax years until 1997. From 1987 to 1997, petitioners
 - 7 -

continued reasonably to believe that they had paid all taxes

respondent had asserted they owed relating to their 1980-83 tax

liabilities arising from White Rim. The parties settled

petitioners’ 1980 Tax Court case on December 8, 1997. At that

time, petitioners still believed that they had fully paid the

1980 deficiency and interest thereon.

4. Respondent’s Discovery of Petitioner’s Amended Returns

On February 23, 1998, petitioners wrote to respondent

seeking information about their 1981-82 amended returns. As a

result of petitioners’ letter, respondent realized that

respondent had lost petitioners’ 1981-82 amended returns.

Respondent found and processed petitioners’ 1981-82 amended

returns in March 1998.

On April 27, 1998, we entered a decision in petitioners’

1980 case that petitioners had a deficiency in income tax of

$39,599 for 1980. On August 21, 1998, respondent issued to

petitioners a notice of tax due for 1980 showing an assessment of

additional tax of $39,599, interest of $93,172.57, an adjustment

or credit of $74,537.94, and a balance due of $58,233.63.

B. Petitioners’ Claim for Abatement of Interest

Respondent abated interest from May 1987 to March 1998 with

respect to petitioners’ 1981 and 1982 tax years. In April 1999,

petitioners filed a claim under section 6404(e) in which they

asked respondent to abate $16,512.15 of interest for 1980 and
 - 8 -

$210.98 for 1981 because respondent had lost their 1981-82

amended returns for almost 11 years. On April 13, 2000,

respondent issued a final determination denying petitioners’

interest abatement claim.

OPINION

A. Background

The Commissioner may abate interest assessed on any

deficiency or payment of tax to the extent that any error or

delay in payment of the tax is attributable to erroneous or

dilatory performance of a ministerial act by an officer or

employee of the Commissioner, and the taxpayer caused no

significant aspect of the delay. Sec. 6404(e)(1).2 We apply an

2
Sec. 6404(e)(1), as enacted in 1986 and as applicable
here, provides:

SEC. 6404(e). Assessments of Interest
Attributable to Errors and Delays by Internal Revenue
Service.--

(1) In general.--In the case of any
assessment of interest on--

(A) any deficiency
attributable in whole or in part to
any error or delay by an officer or
employee of the Internal Revenue
Service (acting in his official
capacity) in performing a
ministerial act, or

(B) any payment of any tax
described in section 6212(a) to the
extent that any delay in such
(continued...)
 - 9 -

abuse of discretion standard in reviewing the Commissioner’s

determination not to abate interest. Lee v. Commissioner, 113

T.C. 145, 149 (1999); Krugman v. Commissioner, 112 T.C. 230, 239

(1999).

B. Respondent’s Contentions

Respondent contends that: (1) Respondent’s loss of

petitioners’ 1981-82 amended returns for almost 11 years was not

a ministerial act; (2) petitioners’ delay in paying their 1980

tax was not attributable to respondent’s loss of their amended

1981-82 returns; (3) petitioners’ delay in paying their 1980 tax

was attributable to petitioners’ decision to wait for the

processing of their 1981-82 amended returns; and (4) respondent’s

2
(...continued)
payment is attributable to such
officer or employee being dilatory
in performing a ministerial act,

the Secretary may abate the assessment of all
or any part of such interest for any period.
For purposes of the preceding sentence, an
error or delay shall be taken into account
only if no significant aspect of such error
or delay can be attributed to the taxpayer
involved, and after the Internal Revenue
Service has contacted the taxpayer in writing
with respect to such deficiency or payment.

Congress amended sec. 6404(e) in 1996 to permit abatement of
interest for “unreasonable” error or delay in performing a
“managerial” or ministerial act. Taxpayer Bill of Rights 2, Pub.
L. 104-168, sec. 301, 110 Stat. 1457 (1996). This amendment
applies to interest accruing with respect to deficiencies or
payments for tax years beginning after July 30, 1996, and thus
does not apply in the instant case. See Woodral v. Commissioner,
112 T.C. 19, 25 n.8 (1999).
 - 10 -

refusal to abate $210.98 in interest for 1981 was not an abuse of

discretion because that interest did not accrue during the time

respondent lost petitioners’ 1981-82 amended returns.

C. Whether Respondent’s Loss of Petitioners’ 1981-82 Amended
Returns Was a Ministerial Act

Respondent contends that respondent’s loss of petitioners’

1981-82 amended returns was not a ministerial act. We disagree.

Respondent’s loss of petitioners’ 1981-82 amended returns

fits easily within the definition of a ministerial act contained

in Treasury regulations. Those regulations state that a

ministerial act is a procedural or mechanical act that occurs

during the processing of a taxpayer’s case that does not involve

the exercise of judgment or discretion by the Commissioner. Sec.

301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg.

30163 (Aug. 13, 1987). The Commissioner’s loss of a taxpayer’s

return is a procedural or mechanical act that does not involve

the exercise of discretion or judgment by the Commissioner. The

Commissioner’s loss of a taxpayer’s returns is similar to an

unexplained delay in transferring a file or issuing a notice of

deficiency. See, e.g., sec. 301.6404-2T(b), Examples (1) and

(2), Temporary Proced. & Admin. Regs., supra.

In contrast, the loss of a taxpayer’s return is unlike a

decision about prioritizing cases or decisions (based on workload

and limited resources) whether or when to begin an audit or

whether to send a revenue agent to training without reassigning
 - 11 -

that agent’s cases, all of which are purposeful activities by the

Commissioner. See, e.g., sec. 301.6404-2T(b)(2), Examples (3),

(4), and (5), Temporary Proced. & Admin. Regs., supra.

Respondent has identified no purpose served by losing a

taxpayer’s returns, and we know of none.

In 1996, Congress amended section 6404(e) to provide for

abatement of interest that accrues as a result of an unreasonable

error or delay in performing a ministerial or managerial act.

Sec. 6404(e)(1)(A) and (B); Taxpayer Bill of Rights 2, Pub. L.

104-168, sec. 301(a), 110 Stat. 1457 (1996). Respondent points

out that a regulation promulgated after enactment of that 1996

amendment, section 301.6404-2(b)(1), Proced. & Admin. Regs.,

provides: “Managerial act means an administrative act that

occurs during the processing of a taxpayer’s case involving the

temporary or permanent loss of records”. Respondent also points

out that section 301.6404-2(c), Example (6), Proced. & Admin.

Regs. (Example (6)), provides as follows:

Example 6. A revenue agent has completed an
examination of the income tax return of a taxpayer.
There are issues that are not agreed upon between the
taxpayer and the IRS. Before the notice of deficiency
is prepared and reviewed, a clerical employee misplaces
the taxpayer’s case file. The act of misplacing the
case file is a managerial act. The Commissioner may
(in the Commissioner’s discretion) abate interest
attributable to any unreasonable delay resulting from
the file being misplaced.

Respondent contends that Example (6) supports a holding here

that the loss of a taxpayer’s records is a managerial act. We
 - 12 -

disagree. First, we believe that the loss of a taxpayer’s return

is a ministerial act under the applicable version of section

6404(e)(1). See supra note 2. The loss of a taxpayer’s records

or returns does not require the exercise of judgment or

discretion. Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin.

Regs., supra. Second, as respondent acknowledges, Example (6)

applies only to interest accruing with respect to deficiencies

for tax years beginning after July 30, 1996. We conclude that

respondent’s loss of petitioners’ 1981-82 amended returns was a

ministerial act for purposes of section 6404(e).

D. Whether Petitioners’ Delay in Paying Their Tax for 1980 Is
Attributable to Respondent’s Loss of Petitioners’ 1981-82
Amended Returns

Respondent contends that petitioners’ delay in paying their

1980 tax from May 1987 to March 1998 is not attributable to

respondent’s loss of petitioners’ 1981-82 amended returns. We

disagree.

The term “attributable to” means due to, caused by, or

generated by. Lawinger v. Commissioner, 103 T.C. 428, 435

(1994). The record shows that petitioners’ delay in paying the

1980 tax is attributable to respondent’s loss of their 1981-82

amended returns. The NOLs claimed on petitioners’ 1981-82

amended returns plus their $76,000 payment for 1982 eliminated

their liabilities for 1981 and 1982. If those returns had been

timely processed in 1987, $33,000 in overpayments from 1985-87
 - 13 -

and a $2,844 refund for 1982 (and any interest that accrued on

the overpayments and refund) would have been available to pay

petitioners’ 1980 tax liability.

Petitioners decided to fully pay their White Rim tax

liabilities in 1987. In 1987, petitioners reasonably believed

that, after they filed their amended returns and respondent

applied overpayments to their 1980 year, they had paid amounts

substantially equal to the total tax liabilities arising from

their investment in White Rim for 1980-83, including the $39,599

deficiency respondent had determined for 1980. Petitioners’

belief on this point was reasonable as shown by the fact that, in

August 1998, after respondent processed the amended returns,

respondent applied a $74,537 credit to petitioners’ 1980 tax

year. The pendency until 1998 of petitioners’ 1980 Tax Court

case has no bearing on the interest abatement issue here because

petitioners reasonably believed that they had already paid the

tax they owed for 1980.

We conclude that respondent’s loss of petitioners’ 1981-82

amended returns from 1987 to 1998 caused them to delay paying

their 1980 tax until 1998.

The situation in this case is analogous to that in Douponce

v. Commissioner, T.C. Memo. 1999-398, where the Court held that

the Commissioner’s failure to provide a taxpayer with a correct

payoff amount was a ministerial error that warranted the
 - 14 -

abatement of interest. A ministerial error by respondent caused

both the taxpayer in Douponce and petitioners to delay paying

their tax.

Respondent contends that Douponce is distinguishable from

this case because there is no evidence that petitioners were

misled by incorrect information from respondent concerning the

correct amount of tax due for 1980. We disagree. As in

Douponce, “the only reason for the delay” in petitioners’ payment

of tax was respondent’s ministerial error; i.e., the loss of

petitioners’ amended returns for 11 years.

Respondent contends that this situation is analogous to that

in Wish v. Commissioner, T.C. Memo. 2001-57. We disagree. In

Wish, the taxpayers knew they owed tax for 1981 but resisted

collection efforts, anticipating that they would use a refund for

1985 to pay their 1981 tax. We held in Wish that the

Commissioner’s refusal to abate interest that accrued for 1981

while the taxpayers were awaiting their refund for 1985 was not

an abuse of discretion because the delay in processing the refund

did not cause the taxpayers to delay paying their 1981 tax. We

said that the taxpayer in Wish “chose to await the determination

of the refund claim for 1985, while all along requesting holds on

collection.” Here, unlike the taxpayers in Wish, petitioners

reasonably believed they had taken steps sufficient to pay their
 - 15 -

1980 tax; and here, unlike the delay in Wish, it was respondent’s

ministerial error that caused the delay.

We conclude that petitioners’ delay in paying their 1980 tax

from May 1987 to March 1998 was attributable to respondent’s loss

of their amended 1981-82 returns.

E. Whether Petitioners Significantly Contributed to the Delay

Respondent contends that petitioners significantly

contributed to the delay. We disagree.

Petitioners had no role in losing their 1981-82 amended

returns for 11 years and deserve credit for bringing to

respondent’s attention the fact that respondent had lost those

returns. Petitioners reasonably believed that they had paid

their 1980 tax and did not significantly contribute to the delay.

Petitioner credibly testified that petitioners would have paid

the 1980 tax liability earlier had they known that they still

owed tax for that year. As discussed above, the only reason for

the delay in petitioners’ payment of their tax for 1980 was

respondent’s loss of petitioners’ amended returns for 11 years.

Thus, respondent’s refusal to abate interest that accrued from

May 1987 to March 1998 on petitioners’ tax liability for 1980 was

an abuse of discretion.
 - 16 -

F. Whether Respondent’s Refusal To Abate Interest That Accrued
Other Than From May 1987 to March 1998 Was an Abuse of
Discretion

Petitioners contend that respondent’s failure to abate an

additional $210.98 for 1981 was an abuse of discretion.

Petitioners have not stated the period during which the $210.98

in interest accrued. Petitioners agree that respondent has

abated interest for 1981 from May 1987 to March 1998. The

taxpayer must establish a correlation between the alleged error

or delay by the Commissioner and a specific period for which

interest should be abated as a result of that error or delay.

Donovan v. Commissioner, T.C. Memo. 2000-220. Thus, the $210.98

in interest for 1981 does not relate to respondent’s loss of

petitioners’ 1981-82 amended returns.3

We conclude that respondent’s failure to abate $210.98 in

interest for 1981 was not an abuse of discretion.

To reflect the foregoing,

Decision will be

entered under Rule 155.

3
The $210.98 in interest for 1981 could have accrued
before petitioners filed their amended returns and thus would not
have been abated when respondent abated interest from May 1987 to
March 1998.