T.C. Memo. 2004-121
UNITED STATES TAX COURT
THOMAS FREDERICK DADIAN AND LOIS ANN DADIAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1051-02. Filed May 19, 2004.
Thomas Frederick and Lois Ann Dadian, pro sese.
Jonathan H. Sloat, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent denied petitioners’ request under
section 64041 for abatement of interest on their Federal income
tax deficiency for 1984. The issue for decision is whether
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the time the petition was
filed, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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respondent’s denial was an abuse of discretion. Because we
believe some delays were caused by the dilatory performance of
ministerial acts by respondent, we hold that it was an abuse of
discretion in part, and that petitioners are entitled to interest
abatement for the periods: (1) September 9, 1995, through March
31, 1996; and (2) April 1 through July 19, 1999.
FINDINGS OF FACT
Some of the facts are stipulated. The stipulation of facts
and the attached exhibits are incorporated herein by this
reference. At the time the petition was filed, petitioners
resided in Santa Paula, California.
On their 1984 Federal income tax return, petitioners
reported a loss on Schedule E, Supplemental Income and Loss, of
$12,750, attributable to their investment in a partnership called
South Bay Partners (South Bay). South Bay was a limited partner
in Redwood Associates (Redwood), one of 50 coal tax shelter
partnerships or joint ventures (Swanton programs) created by
Norman Swanton (Mr. Swanton).2 In 1972, Mr. Swanton cofounded
2
Redwood and 18 other Swanton programs were formed after
the enactment of the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA), Pub. L. 97-248, secs. 402-407(a), 96 Stat. 648, and
are subject to the partnership rules of TEFRA. The remaining 30
Swanton partnerships were formed before the enactment of TEFRA.
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the Swanton Corp., a Delaware corporation headquartered in New
York, which promoted the Swanton programs.3
On July 14, 1986, respondent issued a notice of beginning of
administrative proceeding (NBAP) to South Bay with respect to his
examination of Redwood under the audit procedures of the Tax
Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-
248, secs. 402-407(a), 96 Stat. 648. As a result of the
examination of the Swanton programs, respondent recommended that
the Department of Justice (DOJ) criminally prosecute Mr. Swanton.
During the criminal investigation, respondent suspended civil
action with respect to the Swanton programs. Eventually, the
period of limitations for criminal prosecution of Mr. Swanton
expired.4
On August 1, 1990, respondent issued a notice of final
partnership administrative adjustment (FPAA) to Redwood. On
October 26, 1990, Redwood filed a petition with this Court,
challenging respondent’s determinations in the FPAA.
In May 1991, Moira Sullivan (Ms. Sullivan), an Internal
Revenue Service (IRS) attorney, was assigned to work on the
3
For a more detailed discussion of the Swanton programs,
see Kelley v. Commissioner, T.C. Memo. 1993-495.
4
Respondent’s records of the Swanton programs were
destroyed in the terrorist attack on the World Trade Center on
Sept. 11, 2001. We have accepted uncontradicted testimony from
an Internal Revenue Service (IRS) attorney who worked on the
cases regarding certain details of the events surrounding the
litigation and settlement of the Swanton programs.
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Swanton programs. In September 1991, respondent and counsel
representing the TEFRA Swanton programs reached a basis of
settlement, but finalization of the settlement was deferred
pending the trial of the pre-TEFRA cases.
Two trials for the pre-TEFRA Swanton programs were conducted
in the Tax Court, one in 1989 and the other in 1992. Smith v.
Commissioner, 92 T.C. 1349 (1989); Kelley v. Commissioner, T.C.
Memo. 1993-495. Respondent filed his final brief in the pre-
TEFRA Tax Court litigation on August 14, 1992.5 Negotiations
regarding the terms of the settlement of the TEFRA Swanton
programs then restarted and continued until September 1993. The
final terms of settlement allowed the investors to deduct half
their cash investments, and subjected them to increased interest
under section 6621(c).
In late 1993, Ms. Sullivan began working on the
implementation of the basis of settlement for the TEFRA
partnerships. Although other IRS employees helped her
occasionally, Ms. Sullivan was generally the only IRS employee
assigned to the task of implementing the basis of settlement.
The settlement required her to draft closing agreements with
settlement numbers for each of the 37 Redwood partners, including
5
The Tax Court docket entry sheet for Kelley v.
Commissioner, supra, docket No. 34982-85, shows this date.
Respondent filed a notice of intent not to file a surrebuttal
brief on Sept. 30, 1992.
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South Bay. She was not required to draft closing agreements for
petitioners or for the other investors beyond the Redwood partner
level. To calculate the settlement numbers, Ms. Sullivan relied
on investment records provided by the Swanton Corp. These
records stated each partner’s cash account, which included the
cash each partner had contributed and any distributions that each
partner had received. The records also listed the tax years in
which any contributions or distributions had been made. For each
closing agreement, Ms. Sullivan had to divide the partner’s cash
account, as listed on the Swanton records, in half. The
resulting number, which represented the partner’s allowable
deduction under the settlement terms, was inserted into the
closing agreement.
Ms. Sullivan sent out closing agreements to Redwood’s
counsel and tax matters partner (TMP) in February or March 1996.
In late 1997, Redwood’s TMP notified Ms. Sullivan that the
investment amounts on which she based the Redwood calculations
were incorrect. After recalculating the Redwood numbers, Ms.
Sullivan sent the final set of closing agreements for Redwood’s
partners to Redwood’s TMP and counsel during the first quarter of
1998. South Bay’s TMP signed a closing agreement with respect to
South Bay’s tax liabilities on March 13, 1999. Respondent
countersigned the closing agreement on July 19, 1999.
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On February 9, 2000, respondent sent petitioners a letter
explaining that the examination of Redwood had been completed.
There is no evidence in the record that respondent contacted
petitioners personally before this date regarding their 1984
taxable year. With the February 9, 2000, letter, respondent also
sent petitioners Form 4549A-CG, Income Tax Examination Changes
(notice of adjustment), notifying petitioners that their 1984
taxable income had been adjusted by $10,219. The adjustment
resulted in a deficiency of $3,912 for 1984. The notice of
adjustment also stated that petitioners owed $16,390.95 of
section 6621(c) interest. Respondent assessed the deficiency and
the interest on May 29, 2000. On June 7, 2000, petitioners paid
$20,302.95 toward their assessed liabilities.6
On December 18, 2000, petitioners filed Form 843, Claim for
Refund and Request for Abatement, requesting abatement of the
interest that had accrued from 1986 to 2000. On November 29,
2001, respondent issued a notice of determination (notice) to
petitioners, denying in full their request for interest
abatement. The notice states that the Appeals officer did not
find any errors or delays on respondent’s part to merit the
abatement of interest. The notice also states that respondent
6
Although the parties have stipulated that petitioners made
a $20,302.95 payment on June 7, 2003, the Form 4340, Certificate
of Assessments Payments and Other Specified Matters, included in
the record as Exhibit 7-J shows that the payment was credited to
petitioners’ account on June 7, 2000.
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was not authorized to abate the interest that accrued before
February 9, 2000, because respondent did not notify petitioners
of the deficiency in writing before that date.
Petitioners timely filed a petition in this Court requesting
review of respondent’s determination to deny their request for
interest abatement.
OPINION
As applicable to the year in question, section 6404(e)(1)(B)
provides that the Commissioner may abate all or any part of an
assessment of interest on any payment of certain taxes to the
extent that any error or delay in such payment is attributable to
an officer or employee of the IRS “being erroneous or dilatory in
performing a ministerial act”.7 A ministerial act is 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. Lee v.
Commissioner, 113 T.C. 145, 150 (1999); see also sec. 301.6404-
2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163
(Aug. 13, 1987). Abatement is available under section 6404(e)
7
Congress amended sec. 6404(e) in 1996 to permit abatement
of interest for “unreasonable” error or delay in performing a
ministerial or “managerial” act. Taxpayer Bill of Rights 2, Pub.
L. 104-168, sec. 301(a), 110 Stat. 1457 (1996). That standard
applies only to tax years beginning after July 30, 1996, and thus
does not apply in the present case. Id. sec. 301(c).
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only for periods after the IRS has contacted the taxpayer in
writing with respect to the deficiency or payment. Sec.
6404(e)(1).
This Court may order abatement of interest only when the
Commissioner has abused his discretion in denying a taxpayer’s
request to abate interest. Sec. 6404(h). To show an abuse of
discretion, a taxpayer must prove that the Commissioner exercised
this discretion arbitrarily, capriciously, or without sound basis
in fact or law. Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
The Appeals officer denied petitioners’ request for
abatement in part because the IRS did not notify them of the
Redwood audit until February 9, 2000, when the notice of
adjustment was sent. Section 6404(e) limits the Commissioner’s
authority to abate interest to periods after which the IRS has
contacted the taxpayer in writing about the deficiency or
payment.
TEFRA requires the Commissioner to notify certain partners
of the beginning and ending of a partnership audit. Sec.
6223(a). The Commissioner is not required to give notice to a
partner if the partnership has more than 100 partners, and the
partner has less than a 1-percent profits interest. Sec.
6223(b)(1). In the case of an indirect partner owning an
interest in the partnership through a pass-thru entity that would
otherwise be entitled to notice, the Commissioner is required to
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give notice to such partner, in lieu of the pass-thru entity, if
the indirect partner’s name, address, and profits interest is
provided. Sec. 6223(c)(3). To trigger the Commissioner’s duty
to notify under section 6223(a), the names, addresses, and
profits interests of partners and indirect partners must be
provided to the IRS in one of two ways. They must be furnished
either on the tax return of the partnership being audited, or in
a letter to the IRS that fulfills the requirements of section
301.6223(c)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.
6784 (Mar. 5, 1987). Sec. 6223(c). The IRS may use other
information that is available to it; however, it is not required
to “search its records” to obtain information not provided under
section 6223(c). Sec. 301.6223(c)-1T(f), Temporary Proced. &
Admin. Regs., supra.8
In this case, the IRS was required to, and did, notify South
Bay of the Redwood audit. Sec. 6223(a). Redwood’s partnership
return would have indicated South Bay’s name, address, and
profits interest, and would also have indicated that Redwood had
only 37 partners. There is no evidence in the record that the
Redwood partnership return would have named South Bay’s partners.
Although the IRS could have discovered that information using its
own records, in this case it chose not to. As a result,
8
The temporary regulations were in effect for the year in
issue; the Commissioner published final regulations effective
Oct. 4, 2001. Sec. 301.6223(c)-1(g), Proced. & Admin. Regs.
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petitioners were not entitled to receive personal notification by
the IRS of the Redwood audit.
Instead, South Bay’s TMP was required to notify petitioners
of the partnership level proceedings. Sec. 6223(g) and (h)(2).
The Appeals officer concluded that because petitioners were
not entitled to personal notification until the notice of
adjustment was sent, they were not entitled to interest abatement
under section 6404(e) before that date. However, the date the
NBAP was sent to South Bay should be considered the date of
respondent’s first written contact with petitioners for purposes
of section 6404(e). See Mekulsia v. Commissioner, T.C. Memo.
2003-138. In this case, the Appeals officer did not apply this
requirement correctly. Consequently, we will look to the
specifics of petitioners’ case in order to decide whether they
are entitled to abatement of interest.
Petitioners argue that respondent abused his discretion in
denying their request for interest abatement for the period July
14, 1986, through February 9, 2000. The table below describes
the time line in which the relevant events occurred.
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Activity Date
Petitioners file their 1984 Apr. 15, 1985
return
Pre-TEFRA test cases begin in 1989
Tax Court
Ms. Sullivan is assigned to May 1991
Swanton programs
Tentative basis of settlement Sept. 1991
is reached for TEFRA
Swanton programs
Respondent files last brief in Aug. 14, 1992
pre-TEFRA Swanton Tax Court
litigation
Final agreement on terms of Sept. 1993
settlement is reached
Ms. Sullivan sends closing February/March 1996
agreements to Redwood
Redwood’s TMP and counsel End of 1997
inform Ms. Sullivan that
the computations for
Redwood were based on
incorrect investment
numbers
Ms. Sullivan sends revised First quarter 1998
closing agreements to
Redwood
South Bay’s TMP signs closing Mar. 13, 1999
agreement
Respondent countersigns South July 19, 1999
Bay closing agreement
Respondent issues notice of Feb. 9, 2000
adjustment to petitioners
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A. July 14, 1986, Through May 8, 1992
We held in Beagles v. Commissioner, T.C. Memo. 2003-67, that
the Commissioner was not erroneous or dilatory in performing a
ministerial act with respect to the Swanton programs between April
15, 1984, and May 8, 1992. We will briefly describe the events
that support this holding.
Respondent suspended his activity on the Swanton programs
from April 1984 until the period of limitations for criminal
prosecution of Mr. Swanton expired, because Mr. Swanton was being
criminally investigated by the DOJ. We have previously held that
the delay of a civil matter until resolution of related criminal
proceedings is reasonable. Taylor v. Commissioner, 113 T.C. 206,
212 (1999), affd. 9 Fed. Appx. 700 (9th Cir. 2001). After the
criminal investigation of Mr. Swanton ended, litigation in this
Court for the pre-TEFRA Swanton programs continued until September
1992. See Smith v. Commissioner, 92 T.C. 1349 (1989); Kelley v.
Commissioner, T.C. Memo. 1993-495. The mere passing of time
during the litigation phase of a dispute does not establish an
error or delay by the Commissioner in performing a ministerial
act. Lee v. Commissioner, 113 T.C. at 150. We therefore
conclude, as this Court did in Beagles v. Commissioner, supra,
that it was not an abuse of discretion for respondent to deny
petitioners’ request for abatement of interest for the period July
14, 1986, through May 8, 1992.
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Beagles v. Commissioner, supra, does not provide us with
guidance for periods after May 8, 1992, because in that case the
Commissioner granted interest abatement to the taxpayer for the
period May 8, 1992, through April 15, 1999. We review the events
that occurred after May 8, 1992, to determine whether respondent
abused his discretion.
B. May 9, 1992, Through September 1993
From May 9 to August 14, 1992, respondent was involved in
litigation before this Court concerning the pre-TEFRA Swanton
programs. In accordance with our holding above, it was not an
abuse of discretion for respondent to deny interest abatement for
that period. See Lee v. Commissioner, supra.
After the completion of the pre-TEFRA Tax Court litigation,
Ms. Sullivan negotiated with counsel for the TEFRA Swanton
programs regarding the final terms of settlement until September
1993. The TEFRA Swanton settlement work was added to Ms.
Sullivan’s normal caseload. According to her testimony, because
she was not assisted by any other attorney, she could not finalize
the terms of settlement while briefing the pre-TEFRA cases. The
settlements could have been completed more quickly if more than
one person had regularly been working on them. Arguably,
respondent made a managerial error when he assigned only one
employee to handle the settlement of all of the TEFRA
partnerships. This managerial decision contributed to the delay
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in the resolution of petitioners’ case after the overall
settlement was reached.
Under current law, section 6404(e) would authorize abatement
of interest during periods in which the settlement of the Redwood
case was set aside as a result of managerial errors. However, the
language added to section 6404(e) permitting the abatement of
interest for unreasonable errors or delays in performing
managerial acts applies only to tax years beginning after July 30,
1996, and thus does not apply in the present case. Taxpayer Bill
of Rights 2, Pub. L. 104-168, sec. 301(c), 110 Stat. 1452, 1457
(1996).
For tax years prior to 1996, section 6404(e) allows interest
abatement only for errors or delays by an officer or employee of
the IRS in performing ministerial acts. Respondent’s decision to
assign only one attorney to the Swanton TEFRA cases was not a
ministerial act, because the decision required discretion and
judgment. See Mekulsia v. Commissioner, T.C. Memo. 2003-138;
Beagles v. Commissioner, supra; Jacobs v. Commissioner, T.C. Memo.
2000-123; sec. 301.6404-2T(b)(2), Examples (4) and (5), Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987). The
settlement negotiations that lasted until September 1993 also were
not ministerial. So, through September 1993, the delay was not
due to a ministerial act. However, further analysis is necessary
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in order to determine whether any ministerial errors by respondent
contributed to the subsequent delays in petitioners’ case.
C. October 1993 Through March 1996
After the terms of the settlement were resolved, respondent
had to identify each of the 37 Redwood partners, determine each
partner’s cash account, and divide each cash account in half to
arrive at the allowable deduction for each partner. All of this
information was available to Ms. Sullivan on the records provided
by the Swanton Corp. The determination of the allowable amounts
did not involve any tax computation; it simply involved taking
one-half of each partner’s cash account. The closing agreement
language had previously been agreed upon, and, therefore, the
preparation of each closing agreement was a matter of inserting
the amount allowable as a deduction. We therefore conclude that
Ms. Sullivan’s remaining tasks were ministerial acts. See, e.g.,
sec. 301.6404-2T(b)(2), Example (2), Temporary Proced. & Admin.
Regs., supra.
Given the number of investors involved in the settlement,
there were many closing agreements that needed to be prepared, but
the South Bay closing agreement was not sent to Redwood until
February or March 1996, a period of 2-1/2 years after the terms of
settlement were agreed on.
This Court recently held that it was not a ministerial error
for respondent to send out closing agreements to a similar Swanton
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partnership as late as September 9, 1995. Deverna v.
Commissioner, T.C. Memo. 2004-80. In Deverna, we recognized that
because there were many Swanton investors, 2 years from the time
of settlement was an acceptable delay. Nevertheless, to prepare
closing agreements, Ms. Sullivan was ultimately just taking
numbers from records that were available to her. The South Bay
closing agreement was sent to Redwood in February or March 1996.
Respondent has not adequately explained the additional 6-month
delay in sending out South Bay’s closing agreement. Ms.
Sullivan’s only explanation of the delay was that the Swanton
investors were numerous. Without a more specific explanation of
the events that caused the additional 6-month delay past the time
the closing agreements were sent out in Deverna, abatement of
interest is appropriate for this additional 6-month period.
Therefore, it was an abuse of discretion to deny abatement of
interest for the period September 9, 1995, through March 31, 1996.
D. April 1, 1996, Through March 31, 1998
Ms. Sullivan sent the closing agreements to Redwood by March
31, 1996. Sometime at the end of 1997, Redwood’s TMP informed Ms.
Sullivan that the computations she had done for Redwood were based
on incorrect investment figures. Ms. Sullivan testified that she
based her calculations on records that the Swanton Corp. kept for
all the Swanton programs. Redwood’s investment schedule differed
from those of the other Swanton programs. The Swanton records do
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not reflect the difference, and this error in the records caused
Ms. Sullivan’s initial calculations to be inaccurate. She sent
the next set of closing agreements to Redwood in the first quarter
of 1998. The delay caused by the miscalculations was the result
of a mutual mistake, not of a unilateral ministerial error by
respondent. Therefore, petitioners are not entitled to interest
abatement for the period April 1, 1996, through the time
respondent sent the next set of closing agreements.
Redwood’s TMP notified Ms. Sullivan of the error in “late
1997”. Ms. Sullivan sent out the revised closing agreements in
the first quarter of 1998. Petitioners have not established
specific days or even months during which these events occurred.
Without more details, we cannot measure the time that passed
between late 1997 and the date that the new closing agreements
were sent out with any degree of exactness. Although it is
unfortunate that 2 years were lost because of the mistake in
computations, we cannot find that petitioners are entitled to
interest abatement for the period April 1, 1996, through March 31,
1998, because the use of the wrong data was not solely
respondent’s error.
E. April 1, 1998, Through July 19, 1999
After the revised closing agreements were sent to Redwood in
the first quarter of 1998, it took approximately 1 year for South
Bay’s TMP to sign South Bay’s closing agreement, on March 13,
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1999. During this period, the delay appears to be the
responsibility of South Bay’s TMP. Nothing in the record
indicates otherwise. Therefore, petitioners are not entitled to
abatement of interest for the period April 1, 1998, through March
13, 1999.
After South Bay’s TMP signed the closing agreement and sent
it back to respondent, respondent was required to countersign the
closing agreement. The testimony concerning respondent’s receipt
of the executed closing agreement is speculative. Taking into
account the date of execution, respondent likely received the
signed closing agreement by the end of March. See Goettee v.
Commissioner, T.C. Memo. 2003-43. Respondent drafted the closing
agreements, which were very similar to those used in all the
Swanton program settlements. Respondent’s countersignature did
not require discretion and consequently was a ministerial act.
See id. Respondent countersigned South Bay’s closing agreement on
July 19, 1999, 4 months after South Bay signed it. Respondent has
not adequately explained the specific events that occurred during
that period to cause the delay, or why abatement of interest for
that period was denied. See, e.g., Jacobs v. Commissioner, T.C.
Memo. 2000-123. In light of the facts of this case, we believe 3-
1/2 months was an unreasonable delay. Petitioners are entitled to
interest abatement for respondent’s delay in countersigning the
closing agreement, for the period April 1 through July 19, 1999.
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F. July 20, 1999, Through February 9, 2000
After the South Bay closing agreement was countersigned,
respondent adjusted petitioners’ 1984 return according to the
terms of the closing agreement and, on February 9, 2000, issued
petitioners the notice of adjustment. Respondent followed regular
IRS procedures in the processing of petitioners’ notice of
adjustment. Petitioners have not shown that respondent was
dilatory in performing a ministerial act during this period. We
hold that it was not an abuse of discretion for respondent to deny
petitioners’ request for interest abatement for the period July
20, 1999, through February 9, 2000.
Decision will be entered
under Rule 155.