William F. Urbano and Flota L. Urbano v. Commissioner

122 T.C. No. 22

UNITED STATES TAX COURT

WILLIAM F. URBANO AND FLOTA L. URBANO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14466-02L. Filed June 10, 2004.

Following R’s audit of Ps’ 1993 through 1996
Federal income tax returns, R’s revenue agent (A)
prepared a Form 4549-CG, Income Tax Examination
Changes, that listed $7,556.09 as the total amount of
Federal income taxes, penalties, and interest Ps owed
for those years. Ps signed the form, consenting to R’s
immediate assessment and collection of the $7,556.09
and waiving their right to challenge in this Court the
findings of A contained in that form, and delivered the
signed form to A with a check for the stated amount.
Subsequently, R determined that A had understated the
interest due for 1993 by prematurely taking into
account net operating loss (NOL) carrybacks to that
year in disregard of sec. 6601(d)(1), I.R.C.
R determined that Ps were liable for recalculated
interest of $39,558.63 for 1993, instead of $1,548.23
as originally calculated by A, and filed a notice of
Federal tax lien to secure Ps’ payment of $31,455.49 of
that interest considered by R still to be owed for 1993
as of the time of the lien’s filing. At the hearing
 - 2 -

held under sec. 6320(b), I.R.C., Ps challenged the
existence and amount of the interest underlying the
lien and, alternatively, requested an abatement of
interest under sec. 6404(a)(1) and (e)(1), I.R.C. R’s
Office of Appeals (O) upheld R’s recalculation of the
interest as correct and sustained R’s filing of the
lien as proper.
Held: Ps’ waiver in the Form 4549-CG does not
preclude Ps from challenging in this proceeding the
existence and amount of interest underlying the lien.
Held, further, under sec. 6330(c)(2)(B) and (d),
I.R.C., as made applicable by sec. 6320(c), I.R.C.,
this Court has jurisdiction to decide Ps’ alternative
claims that (1) R’s recalculation of interest for 1993
was incorrect and (2) R is precluded from collecting
the amount reflected in the recalculation.
Held, further, Ps’ interest for 1993 must be
computed by taking their NOL carrybacks into account at
the times set forth in sec. 6601(d)(1), I.R.C. The
fact that A listed in the Form 4549-CG a lower amount
of interest for 1993 and that Ps paid that lower amount
does not preclude R from now collecting the proper
amount of interest.
Held, further, Ps do not qualify for an abatement
of interest under sec. 6404(a)(1) or (e)(1), I.R.C.

William F. Urbano and Flota L. Urbano, pro sese.

Karen Nicholson Sommers, for respondent.

OPINION

LARO, Judge: This case is before the Court for decision

without trial. See Rule 122.1 Petitioners petitioned the Court

under section 6330(d)(1), as made applicable by section 6320(c),

1
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the applicable versions of the Internal Revenue Code.
 - 3 -

to review the determination of respondent’s Office of Appeals

(Appeals) sustaining respondent’s filing of a notice of Federal

tax lien (NFTL). Respondent filed the NFTL to secure the payment

of $31,455.49 shown in his records to be due from petitioners as

of March 25, 2002, with respect to their 1993 Federal income tax.

The $31,455.49 is all attributable to interest (disputed

interest) that respondent assessed on April 27, 1998.

Respondent’s records show that petitioners’ liability for 1993

has increased to $43,818.27 as of August 6, 2002, to reflect

(1) fees and collection costs of $16 which respondent recorded on

April 15, 2002, and (2) unassessed accrued interest of

$12,346.78.

Petitioners argue that they are not liable for the disputed

interest because they promptly paid respondent the $7,556.09 for

Federal income taxes, penalties, and interest that the revenue

agent who audited their 1993 through 1996 Federal income tax

returns had agreed with them was their total Federal income tax

liability for those years. The revenue agent had set forth the

$7,556.09 on a Form 4549-CG, Income Tax Examination Changes,

which petitioners promptly signed and returned to the revenue

agent with their payment. Respondent’s service center in Fresno,

California (service center), later concluded that the revenue

agent had understated the amount of interest petitioners owed by
 - 4 -

prematurely taking into account net operating loss (NOL)

carrybacks to 1993 in disregard of section 6601(d)(1).

We decide first whether petitioners may challenge in this

proceeding the existence and amount of the disputed interest.

We hold they may. We decide second whether we are empowered to

decide petitioners’ alternative claims that (1) the service

center’s recalculation of interest for 1993 was incorrect and

(2) respondent is precluded from collecting the amount reflected

in the recalculation. We hold we are. We decide third whether

the amount of the disputed interest, without consideration of any

abatement thereof, equals as of the time of the lien the amount

then sought by respondent. We hold it does. We decide fourth

whether any of the disputed interest qualifies for abatement

under section 6404(a)(1) or (e)(1). We hold it does not.

Background

The facts in this background section are obtained from the

parties’ stipulation of facts, the exhibits submitted therewith,

and the pleadings. Petitioners resided in Monarch Beach,

California, when their petition was filed.

Petitioners’ 1993 Federal income tax return reported for

that year that petitioners had negative total income of $113,381,

negative taxable income of $175,161, and Federal income tax of

zero. The return reported that the computation of total income

included interest income of $11,558, capital losses totaling
 - 5 -

$2,657, deductible rental and partnership losses totaling

$25,000, and NOL carryovers totaling $97,282.2 The return also

reported that petitioners had sold their home during 1993 at a

gain of $904,596 and that they planned on replacing the home

within the applicable period of section 1034. On or about June

4, 1996, petitioners amended their 1993 return primarily to

recognize $630,764 of the gain realized on the sale of their home

and to offset that gain by $604,345 of NOLs inclusive of (1) the

previously mentioned $97,282, (2) $25,000 reportedly from 1993,

(3) $171,055 reportedly from 1994, and (4) $311,008 reportedly

from 1995. The amended return reported that petitioners’ Federal

income tax liability for 1993 continued to be zero.

Respondent’s revenue agent audited petitioners’ 1993 through

1996 Federal income tax returns and concluded his audit on or

about February 3, 1998, with the issuance of a letter to

petitioners’ representative, Sam Bellavia, C.P.A. (Bellavia).

That letter was accompanied by a Form 4549-CG (with supporting

schedules) completed by the revenue agent as to his audit of

petitioners’ 1993 through 1996 tax returns. The letter and the

Form 4549-CG (inclusive of the supporting schedules) informed

Bellavia of the revenue agent’s adjustments to petitioners’ 1993

through 1996 tax returns and the revenue agent’s conclusion that

2
Of the $97,282, $38,891 was from 1990, $25,000 was from
1991, and $33,391 was from 1992.
 - 6 -

those adjustments resulted in the following additional tax,

penalties, and interest:

1993 1995

Alternative minimum tax $3,221.00 $1,510.00
Sec. 6662 accuracy-related penalty 644.20 302.00
Interest computed until Mar. 5, 1998 1,548.23 330.66
5,413.43 2,142.66

As to 1993, the revenue agent listed on the Form 4549-CG and the

supporting schedules that he had determined the following

adjustments as increases or decreases to the taxable income

petitioners reported on their 1993 return:

Capital gain $630,764
Sec. 465 limited at risk 6,880
Itemized deductions 1,983
NOL carryback from 1994 (166,364)
NOL carryback from 1996 (301,269)
171,994

The revenue agent’s letter to Bellavia advised Bellavia to

discuss the adjustments with petitioners and, if acceptable to

them, to have them sign and date the Form 4549-CG and return it

to the revenue agent. The letter stated that “It would be

appreciated if they [petitioners] would remit the balance due of

$7,556.09 [$5,413.43 + $2,142.66] at that time.” On March 3,

1998, petitioners signed the Form 4549-CG and returned it to the

revenue agent with a check for $7,556.09. The Form 4549-CG

stated immediately above their signatures:

Consent to Assessment and Collection –- I do not
wish to exercise my appeal rights with the Internal
Revenue Service or to contest in United States Tax
Court the findings in this report. Therefore, I give
 - 7 -

my consent to the immediate assessment and collection
of any increase in tax and penalties, and accept any
decrease in tax and penalties shown above, plus
additional interest as provided by law. It is
understood that this report is subject to acceptance by
the District Director.

Subsequently, respondent transferred the case to the service

center for assessment. Following its review of the Form 4549-CG

and supporting schedules, the service center concluded that the

revenue agent had understated the amount of interest due for 1993

by prematurely netting the NOL carrybacks from 1994 and 1996

against the adjustments for 1993. The service center determined

that the deficiency and related interest for 1993 were $130,926

and $39,558.63, respectively.

On March 20, 2002, respondent filed the NFTL to secure the

payment of the disputed interest of $31,455.49 shown in his

records still to be due from petitioners as of March 25, 2002,

with respect to their 1993 Federal income tax.3 Respondent had

assessed all of this interest on April 27, 1998. Petitioners

requested a hearing under section 6320(b) as to this filing, and

Appeals later held that hearing with Bellavia. At the hearing,

petitioners challenged the existence and amount of the interest

3
The reduction in interest from $39,558.63 to $31,455.49
was attributable to (1) $1,548.23 of interest that was included
in petitioners’ payment of $7,556.09, (2) $15.89 of overpayment
credits that were applied from 1995 and 1998, and (3) $6,539.02
of interest abated on May 4, 1998, in connection with
respondent’s same-day tax abatement of $79,726 from the 1996 NOL
carryback. (Respondent on Apr. 27, 1998, had abated $47,979 of
tax for the 1994 NOL carryback.)
 - 8 -

underlying the lien and sought an abatement of interest under

section 6404(a)(1) and (e)(1). Appeals concluded that the

interest underlying the lien was calculated correctly. Appeals,

without giving any consideration to petitioners’ request for an

abatement of interest, also concluded that the interest as

calculated was due and, accordingly, that the lien was proper.

Appeals noted in the notice of determination that petitioners

agreed with the revenue agent’s adjustments to their 1993 income

as originally reported, that these adjustments (exclusive of the

NOL carrybacks) resulted in a $130,926 deficiency for 1993, and

that the revenue agent had improperly applied the NOL carrybacks

in his calculation of statutory interest for 1993. In connection

with the hearing, Appeals delivered to Bellavia a statement

detailing respondent’s computation of the disputed interest and a

copy of section 6601(d)(1), the relevant statutory provision.

Discussion

We start our analysis with a discussion of our jurisdiction

to decide this case. Whether we have jurisdiction over the

subject matter of a case is an issue that either party thereto,

or this or an appellate court sua sponte, may raise at any time.

The failure to question our jurisdiction is not a waiver of the

right to do so, for if we lack jurisdiction over an issue, we do

not have the power to decide it. Ins. Corp. of Ireland, Ltd. v.

Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982); David
 - 9 -

Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269-270

(2000), affd. 22 Fed. Appx. 837 (9th Cir. 2001).

The Internal Revenue Code provides for our jurisdiction, and

we may exercise our jurisdiction only to the extent authorized by

Congress. Neilson v. Commissioner, 94 T.C. 1, 9 (1990); Naftel

v. Commissioner, 85 T.C. 527, 529 (1985); see also sec. 7442.

Here, the relevant jurisdictional provision is found in section

6330(d)(1), by cross-reference from section 6320(c). Sections

6320(c) and 6330(d)(1) entitle taxpayers such as petitioners

whose property is subject to a Federal tax lien to appeal a

determination made by Appeals sustaining the propriety of that

lien. Section 6330(d)(1)(A) provides that the appeal shall be

“to the Tax Court (and the Tax Court shall have jurisdiction with

respect to such matter)”. Section 6330(d)(1)(B) provides that

the appeal shall be to a Federal District Court “if the Tax Court

does not have jurisdiction of the underlying tax liability”.

We have previously construed section 6330(d)(1) as granting

us jurisdiction over a lien case brought under section 6320 when

it involves a type of tax that we normally consider in a

deficiency case, even if the lien case does not involve a

deficiency in that type of tax. See Montgomery v. Commissioner,

122 T.C. 1 (2004). While the type of tax here is Federal income

tax, a tax that we normally consider in a deficiency case,

petitioners do not dispute their liability for the Federal income
 - 10 -

tax respondent determined for 1993. Petitioners dispute only

respondent’s assessment of the statutory interest related to the

tax. Respondent computed that interest under section 6601.

We generally lack jurisdiction over issues concerning

interest computed under section 6601. Med James, Inc. v.

Commissioner, 121 T.C. 147, 151 (2003). We have jurisdiction to

redetermine such interest primarily in two types of situations.

First, section 7481(c) authorizes the Court to redetermine an

overpayment of interest if a taxpayer timely petitions the Court

to do so. Id. at 151-153. Second, section 6404(h) authorizes

the Court to review for an abuse of discretion the Commissioner’s

refusal to abate interest under section 6404. Woodral v.

Commissioner, 112 T.C. 19, 22-23 (1999). As relevant herein,

section 6404(e)(1) gives the Commissioner the discretion to abate

the assessment of interest on: (1) Any deficiency attributable

to any error or delay by an officer or employee of the Internal

Revenue Service 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

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

a ministerial act.4 In addition, section 6404(a)(1) gives the

4
Sec. 6404(e) was amended by sec. 301(a)(1) and (2) of the
Taxpayer Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1457
(1996), to permit the Commissioner to abate interest with respect
to an unreasonable error or delay resulting from managerial or
(continued...)
 - 11 -

Commissioner the discretion “to abate the unpaid portion of the

assessment of any tax or any liability in respect thereof” that

is excessive in amount. As one limitation to the latter

provision, section 6404(b) provides that a taxpayer may not file

a claim for abatement “in respect of an assessment of any

[income, estate, or gift] tax imposed under subtitle A or B”.

Petitioners’ representative at the administrative hearing

was not an attorney, and they are appearing before this Court pro

sese. We understand them to have asserted at the administrative

hearing that they are not liable for the disputed interest

because: (1) The revenue agent forgave that interest in

settlement of their case and (2) respondent assessed that

interest without notifying them beforehand. We also understand

them to have asserted at the administrative hearing that, if they

are liable for the disputed interest, respondent should have

abated this interest under section 6404(a)(1) as inequitable and

unjust, or under section 6404(e)(1) as attributable to an error

or delay by the Internal Revenue Service in performing a

ministerial act. We understand petitioners to be making here

allegations similar to those that they made at the administrative

hearing. We conclude that petitioners’ petition to this Court is

4
(...continued)
ministerial acts. That amendment does not apply here in that it
is effective for interest accruing on deficiencies for taxable
years beginning after July 30, 1996. Id.
 - 12 -

in part a request under section 6404(e)(1) for an abatement of

interest. Thus, given that we have jurisdiction to review a

taxpayer’s claim for any abatement of interest under section

6404, Woodral v. Commissioner, supra at 22-23, we hold that we

have jurisdiction in the instant case to review the determination

of Appeals as to petitioners’ underlying tax liability consisting

of the disputed interest, see Katz v. Commissioner, 115 T.C. 329,

340-341 (2000). We note in this regard that petitioners have

never received a notice of deficiency for 1993, nor have they

otherwise had a previous opportunity to challenge the disputed

interest.

Respondent argues that petitioners may not in this

proceeding challenge their underlying tax liability consisting of

the disputed interest. According to respondent, petitioners

waived their right to challenge this liability when they signed

Form 4959-CG. We disagree. The Form 4549-CG petitioners signed

states that they were waiving their right to contest in this

Court the findings set forth in that form. We read nothing in

the Form 4549-CG signed by petitioners that precludes them from

challenging in this proceeding respondent’s finding made after

the execution of Form 4549-CG that petitioners are liable for the

disputed interest of $39,558.63. Although the $39,558.63 was

“interest as provided by law”, it was not among the findings set
 - 13 -

forth on the form. To the contrary, $1,548.23 of interest was

listed on Form 4549-CG as due for 1993.

Respondent relies erroneously on Aguirre v. Commissioner,

117 T.C. 324 (2001). There, the taxpayers petitioned this Court

under section 6330(d)(1) requesting solely that we redetermine

their tax liability. The taxpayers had previously signed a Form

4549, Income Tax Examination Changes, waiving their right to

contest in this Court the Commissioner’s finding of that

liability. We held that the taxpayers were precluded from

challenging this finding by virtue of their waiver. Id. at 327.

Here, by contrast, the disputed interest was not a finding

included within the Form 4549-CG petitioners signed. The

disputed interest was not even known by either them or respondent

to have existed at that time.

We turn to the service center’s recalculation of the

disputed interest underlying the lien. Neither party has

challenged our jurisdiction to decide petitioners’ claim that the

amount of that interest is not the correct amount of interest

that accrued on petitioners’ deficiency for 1993. Nor has either

party challenged our jurisdiction to decide petitioners’ claim

that, if it is the proper amount, then respondent has compromised

that amount to the lesser amount of interest already paid by

petitioners for 1993. Still, we believe that it is incumbent

upon us to discuss our jurisdiction as to both of these matters.
 - 14 -

Petitioners are through their petition invoking the

jurisdiction that Congress provided to us in section 6330(d) as

made applicable by section 6320(c). Pursuant to section 6330(d),

we are empowered to redetermine the amount of an underlying tax

liability whenever that liability is properly at issue and is for

the type of tax that we normally consider in a deficiency

proceeding. Landry v. Commissioner, 116 T.C. 60, 62 (2001); see

also sec. 6330(c)(2)(B). Here, the type of “tax” at issue is

interest for which the parties, in part, dispute the

appropriateness of an abatement under section 6404(e).

The fact that we are not specifically authorized by section

6404(h) to redetermine interest, but are specifically empowered

only to decide the appropriateness of an abatement thereunder,

does not mean that we also lack jurisdiction under section

6330(d) to make such a redetermination in a lien proceeding such

as this. We have held that our jurisdiction under section

6330(d) allows us in a lien or levy proceeding to redetermine an

underlying tax liability that is entirely self-assessed, although

the liability is not a deficiency. Montgomery v. Commissioner,

122 T.C. 1 (2004); cf. sec. 6213(a). We do not read section 6330

as empowering us to decide only whether petitioners are entitled

to an abatement of interest, thus remitting them to a Federal

District Court lawsuit if they wish to challenge their interest

liability on another ground. Added expense would be borne by
 - 15 -

petitioners and respondent alike in connection with such a

subsequent lawsuit in a Federal District Court, and it would be

an inefficient use of the judiciary’s limited resources to

require that petitioners’ liability for interest be tried in two

courts instead of one.

Where as here the existence and amount of an underlying tax

liability is properly at issue in an appeal brought under section

6330(d)(1), we review the taxpayer’s liability de novo. Sego v.

Commissioner, 114 T.C. 604, 610 (2000). Petitioners do not in

their papers include any calculation of disputed interest but

simply set forth two reasons in support of their claim that their

interest liability is now zero. Petitioners argue first that the

Form 4549-CG conclusively determined their 1993 liability for

Federal income tax, inclusive of penalty and interest, and that

respondent is now barred from making any additional assessment

for that year. Petitioners argue second that the assessment for

the disputed interest is invalid in that they were not informed

about that interest before the assessment was made.

We disagree with both of petitioners’ arguments. As to the

first argument, it is firmly established that section 7121 sets

forth the exclusive means by which an agreement between the

Commissioner and a taxpayer concerning the latter’s tax liability

may be accorded finality. E.g., Hudock v. Commissioner, 65 T.C.

351, 362 (1975). Section 7121 authorizes the Commissioner to
 - 16 -

enter into a written agreement with any person with respect to

any tax for any taxable period and provides that such an

agreement shall be final and conclusive if approved by the

Secretary. See sec. 7121(a) and (b); see also sec.

7701(a)(11)(B). Section 301.7121-1(d), Proced. & Admin. Regs.,

provides that all such agreements shall be executed on forms

prescribed by the Internal Revenue Service. The Commissioner has

prescribed for this purpose two forms; namely, Form 866,

Agreement as to Final Determination of Tax Liability, and Form

906, Closing Agreement. Form 866 is used to determine

conclusively a taxpayer’s total tax liability for a taxable

period. Form 906 is used if an agreement relates to one or more

separate items affecting the tax liability of a taxpayer. Sec.

601.202(b), Statement of Procedural Rules.

Petitioners did not execute either a Form 866 or a Form 906.

They executed Form 4549-CG. Form 4549-CG is not an agreement

entered into under section 7121. See Hudock v. Commissioner,

supra at 362-363. Nor does the Form 4549-CG at hand contain any

language purporting to be respondent’s agreement concerning any

or all of petitioners’ 1993 liability for tax, penalty, or

interest. In fact, the Form 4549-CG petitioners signed does not

constitute an agreement by respondent to anything at all; it

merely reflects petitioners’ consent to respondent’s immediate

assessment and collection of the taxes, penalties, and interest
 - 17 -

included therein. Although we understand petitioners to contend

credibly that they believed that they were entering into an

agreement to settle their 1993 liability when they executed the

Form 4549-CG, such a unilateral belief on their part does not

satisfy the requirements of section 7121. Nor were the

requirements of that section met simply because respondent

accepted petitioners’ check in the amount listed on Form 4549-CG

as the total tax, penalties, and interest for 1993 and the other

3 years under audit. See Parks v. Commissioner, 33 T.C. 298

(1959); see also Bowling v. United States, 510 F.2d 112 (5th Cir.

1975); United States v. Hardy, 299 F.2d 600 (4th Cir. 1962).

We also disagree with petitioners’ second argument, that the

assessment for the disputed interest is invalid in that they were

not informed about that interest before it was assessed.

Petitioners concede that the assessment was timely; we find no

provision in the Internal Revenue Code that would require any

such prior notification.

Interest on a Federal income tax liability generally begins

to accrue from the last date prescribed for payment of that tax

and continues to accrue, compounding daily, until payment is

made. See secs. 6601(a), 6622. In the case of an income tax

deficiency that is later reduced or eliminated by a carryback of

an NOL, section 6601(d)(1) authorizes the Commissioner to collect

deficiency interest from taxpayers such as petitioners whose
 - 18 -

deficiencies are eliminated by NOL carrybacks. Section

6601(d)(1), which codifies the principle announced in Manning v.

Seeley Tube & Box Co., 338 U.S. 561 (1950), that a taxpayer is

liable for interest on a deficiency until the deficiency is paid

or otherwise abated, provides that a reduction in tax by reason

of a carryback of an NOL does not affect the computation of

statutory interest due for the period ending with the filing date

for the taxable year in which the NOL arose.

The revenue agent did not apply section 6601(d)(1) in his

computation of the disputed interest. The service center did.

In accordance with the mandate of section 6601(d)(1), the service

center computed petitioners’ interest for 1993 by treating the

carrybacks from 1994 and 1996 as if they had arisen on April 15,

1995 and 1997, respectively. We have reviewed the specifics of

the service center’s computation, and we agree with that

computation. Thus, absent an abatement of any or all of the

disputed interest, petitioners are liable for the amount of

interest determined by the service center.

Respondent argues that petitioners do not qualify for an

abatement of interest under section 6404. We agree. Petitioners

do not qualify for an abatement of interest under section

6404(a)(1), given that this case is one “in respect of an

assessment of * * * [income] tax imposed under subtitle A”.

See sec. 6404(b); see also Melin v. Commissioner, 54 F.3d 432
 - 19 -

(7th Cir. 1995); Bax v. Commissioner, 13 F.3d 54, 58 (2d Cir.

1993); Asciutto v. Commissioner, T.C. Memo. 1992-564, affd. per

order 26 F.3d 108 (9th Cir. 1994). Petitioners also do not

qualify for an abatement of interest under the applicable version

of section 6404(e)(1). Such an abatement requires the occurrence

of a “ministerial act”, and the revenue agent’s disregard of

section 6601(d)(1) results not from a ministerial act but from a

misapplication of Federal tax law. See sec. 301.6404-4(b)(1) and

(2), Proced. & Admin. Regs.

In sum, we hold for respondent as to all of the substantive

matters in dispute. In so doing, we have considered all

arguments made by the parties and have found those arguments not

discussed herein to be irrelevant and/or without merit.

Accordingly,

Decision will be

entered for respondent.