T.C. Memo. 2004-139
UNITED STATES TAX COURT
ROBERT B. KEMP, JR., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5330-02. Filed June 10, 2004.
John P. Konvalinka, for petitioner.
Monica D. Armstrong, for respondent.
MEMORANDUM OPINION
GALE, Judge: Respondent issued a notice of final
determination denying petitioner’s claim for an abatement of
interest on his 1989 and 1990 Federal income tax liabilities.
Petitioner timely filed a petition for review with this Court
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pursuant to section 6404(h).1 The issue for decision is whether
respondent abused his discretion in failing to abate interest on
petitioner’s Federal income tax liabilities for 1989 and 1990.
We hold that he did not.
Background
The parties submitted this case fully stipulated pursuant to
Rule 122. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing of
the petition, petitioner resided in Hixson, Tennessee.
In June 1994, petitioner was informed by letter that his
1992 Federal income tax return had been selected for examination.
The letter also requested certain documents, including
petitioner’s 1991 and 1993 Federal income tax returns. Later
that month, petitioner had lengthy meetings with the revenue
agent who was conducting the examination. The revenue agent went
on maternity leave 2 months later.
In September 1994, petitioner filed amended Federal income
tax returns for 1991, 1992, and 1993, reporting additional
taxable income of $173,817, $191,595, and $63,628, respectively.
1
Unless otherwise indicated, all section references are to
the applicable provision of the Internal Revenue Code for the
periods involved, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
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On or about February 21, 1995, petitioner filed an amended
Federal income tax return for 1990, reporting additional taxable
income of $134,859.
Petitioner paid all of the additional tax due and accrued
interest with respect to the foregoing amended returns.
At some point between June 1994 and April 1995, petitioner’s
1993 taxable year was added to the examination covering 1992. In
April 1995, petitioner’s examination was assigned to a new
revenue agent, who discussed the examination of 1992 and 1993 on
two occasions with petitioner’s representative. No additional
information was obtained from petitioner by respondent after
August 10, 1995.
On or about August 25, 1995, the revenue agent examining
petitioner’s returns initiated a civil fraud referral for 1992
and 1993, and on September 12, 1995, the agent issued a 30-day
letter to petitioner proposing civil fraud penalties for those 2
years.
On September 20, 1995, a special agent from respondent’s
Criminal Investigation Division met with the revenue agent
conducting petitioner’s 1992 and 1993 examination regarding
petitioner’s case, and all civil action concerning those years
ceased. On December 15, 1995, the special agent issued a
memorandum to respondent’s Examination Division advising it to
suspend or not initiate any civil action against petitioner for
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individual income tax returns for the years 1989 through 1993, on
account of a grand jury investigation of alleged violations of
section 7206(1). The memorandum further ordered the transfer of
all original returns and administrative files for the foregoing
years.
On April 9, 1996, a Federal grand jury returned a 15-count
indictment against petitioner, including 4 counts of alleged
violation of section 7206(1) for taxable years 1989 through 1992,
and various nontax criminal violations.
Sometime in July or August 1996, petitioner filed an amended
Federal income tax return for 1989, reporting additional taxable
income of $128,265 and additional tax due of $37,876.2
Petitioner paid the resulting additional tax due and accrued
interest.
Petitioner’s criminal trial commenced on September 10, 1996.
On September 13, 1996, a jury found petitioner guilty of
violating section 7206(1) for each of the taxable years 1989
through 1992. Petitioner was acquitted of all nontax charges.
Petitioner filed a timely appeal.
2
The parties stipulated that the amended return for 1989
was filed in April 1996 reporting additional taxable income of
$102,506. However, the actual amended return in evidence
indicates the time and amount described above. This discrepancy
does not, in any event, affect the analysis or the result in this
case.
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On December 29, 1997, respondent issued a notice of
deficiency to petitioner determining fraud penalties under
section 6663 for 1992 and 1993. Petitioner filed a timely
petition in this Court, seeking a redetermination of the fraud
penalties for 1992 and 1993.
On July 6, 1998, petitioner’s conviction was affirmed by the
Court of Appeals for the Sixth Circuit.
On or about August 3, 1998, petitioner received a letter
from respondent stating in part: “Thank you for your inquiry of
June 05, 1998. We have resolved your problem with your 1989 tax
return. Please disregard the prior request.”
By memorandum dated March 3, 1999, District Counsel of
respondent advised respondent’s Examination Division that the
criminal proceedings against petitioner were concluded.
In connection with the proceedings in this Court concerning
a redetermination of the 1992 and 1993 fraud penalties,
petitioner and respondent became involved in a dispute over
discovery and a continuance of the trial. On July 16, 1999,
petitioner requested a continuance, which was granted on July 20,
1999. On July 19, 1999, the revenue agent who conducted the
examination of petitioner’s 1992 and 1993 taxable years met with
respondent’s counsel at the U.S. attorney’s office to review the
record in petitioner’s criminal case. At that time, upon a
review of the criminal case record and the administrative file,
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the decision was made to assert civil fraud penalties against
petitioner for 1989, 1990, and 1991.
On October 4, 1999, respondent issued a notice of deficiency
to petitioner determining fraud penalties under section 6663 for
1989, 1990, and 1991. Petitioner sought a redetermination in
this Court only with respect to the fraud penalty for 1991.
The fraud penalties for 1989 and 1990 were assessed on April
19, 2000, and petitioner paid them on October 17, 2000. On
October 20, 2000, petitioner filed a Claim for Refund and Request
for Abatement of Penalty and Interest with respect to 1989 and
1990. On September 6, 2001, respondent sent petitioner a letter
advising him of a preliminary determination to deny his claim for
abatement of interest, with an “explanation” of the reasons for
the denial attached. The attached explanation stated in part:
Your claim for abatement of interest cannot be allowed
since there were no errors or delays in performing a
ministerial act. For instance, the agent taking
maternity leave * * * is not a ministerial act, nor is
the delay caused by the investigation, the appeal
process, or the court proceedings.
Petitioner administratively appealed this determination, and on
January 11, 2002, respondent issued a notice of final
determination to petitioner denying his request for abatement of
interest for 1989 and 1990 and giving the following reason:
“There was no error or delay relating to the performance of a
ministerial act in processing the examination of your return.”
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Discussion
Interest on a Federal income tax liability, including a
fraud penalty, generally begins to accrue on the due date of the
return. Secs. 6601(a), (e)(2)(B), 6622.
The Commissioner has authority to abate an assessment of
interest on a deficiency or payment of income tax if the accrual
of such interest is attributable to an error or delay by an
officer or employee of the Internal Revenue Service in performing
a ministerial act. Sec. 6404(e)(1).3 A ministerial act means a
procedural or mechanical act that does not involve the exercise
of judgment. Lee v. Commissioner, 113 T.C. 145, 149-150 (1999);
sec. 301.6404-2T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.
30163 (Aug. 13, 1987). Any such error or delay shall be taken
into account “only * * * after the Internal Revenue Service has
contacted the taxpayer in writing with respect to * * * [the]
deficiency or payment” on which the interest has accrued. Sec.
6404(e)(1). Finally, the legislative history indicates that
Congress did not intend the abatement authority to be used
routinely to avoid payment of interest; rather, Congress intended
the provision to be used in instances “where failure to abate
3
Sec. 6404(e) was amended by the Taxpayer Bill of Rights 2,
Pub. L. 104-168, sec. 301, 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 is effective for interest accruing with respect to
deficiencies or payments for tax years beginning after July 30,
1996, and is therefore inapplicable here.
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interest would be widely perceived as grossly unfair.” S. Rept.
99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208; H. Rept. 99-
426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844. We have
jurisdiction to order an abatement of interest where the
Commissioner’s failure to do so is an abuse of discretion. Sec.
6404(i)(1).4
Petitioner seeks an abatement of all interest accrued with
respect to the fraud penalties for 1989 and 1990, in effect
claiming that the abatement should cover the entire period back
to the due date of the returns for those years. Invoking section
301.6404-2T, Example (2), Temporary Proced. & Admin. Regs.,
supra,5 petitioner contends that respondent’s October 4, 1999
issuance of the notice of deficiency determining the 1989 and
1990 fraud penalties was a ministerial act that was improperly
delayed, since respondent possessed all information and had
completed all consultations with respect to these penalties by
August 1995. Further, petitioner argues, the imposition of
interest in these circumstances would be “widely perceived as
grossly unfair” because respondent delayed asserting the 1989 and
1990 fraud penalties as a “litigation tactic” in the proceedings
4
In 2002, sec. 6404(i) was redesignated sec. 6404(h).
Victims of Terrorism Tax Relief Act of 2001, Pub. L. 107-134,
sec. 112(d)(1)(B), 115 Stat. 2434 (2002).
5
For taxable years beginning after July 30, 1996, this
regulation has been amended and made final. See sec. 301.6404-
2(d), Proced. & Admin. Regs.
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before this Court involving a redetermination of the fraud
penalties determined for 1992 and 1993.
Respondent counters that there was no ministerial delay in
connection with the October 1999 determination of the fraud
penalties for 1989 and 1990 because respondent was restricted
from examining petitioner’s 1989 and 1990 amended returns,
because of the criminal prosecution of petitioner covering those
years, until the March 3, 1999 memorandum of District Counsel
advising respondent’s Examination Division of the conclusion of
the criminal proceedings. Respondent further argues that, in any
event, respondent’s first contact in writing with petitioner
regarding the 1989 and 1990 fraud penalties was the October 4,
1999 notice of deficiency.
We find untenable petitioner’s argument that any delay
beyond August 1995 in issuing a notice of deficiency determining
the 1989 and 1990 fraud penalties constituted a delay or error in
the performance of a ministerial act.6 Petitioner contends that
all information had been provided to respondent, and all
consultations completed, with respect to the 1989 and 1990 fraud
6
Other than his bald claim that all interest should be
abated, petitioner offers no argument in support of the
proposition that an abatement back to the due dates of his 1989
and 1990 returns should occur. We accordingly consider only the
earliest claim for which petitioner offers any support; namely,
that interest should be abated starting in August 1995 because
respondent should have issued a notice of deficiency concerning
the 1989 and 1990 fraud penalties at that time.
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penalties by August 1995. In so contending, petitioner claims to
fall within section 301.6404-2T, Example (2), Temporary Proced. &
Admin. Regs., supra.7 The example provides that, where an
examination of a taxpayer’s return has revealed a deficiency, the
issuance of a notice of deficiency is a ministerial act “After
the taxpayer and the Internal Revenue Service have identified all
agreed and unagreed issues, the notice has been prepared and
reviewed (including review by District Counsel, if necessary) and
any other relevant prerequisites have been completed”. Id.
Petitioner’s 1989 amended return, reporting the previously
unreported income upon which the fraud penalty was based, had not
even been submitted to respondent in August 1995. It was not
submitted until July or August 1996, by which time civil action
for the years 1989 through 1993 had been suspended.
While petitioner’s amended return for 1990 had been
submitted in February 1995, before the suspension of civil
action, petitioner has not shown that a notice of deficiency for
1990 had been prepared or reviewed, or that all other relevant
prerequisites for its issuance had been completed, before the
suspension of civil action in December 1995. Once civil action
was suspended to facilitate development of the criminal case
against petitioner, the delay in taking actions in the civil
cases for 1989 and 1990, including any delay in issuing a notice
7
See supra note 5.
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of deficiency, during the period in which the criminal case was
pending, was not a delay in the performance of a ministerial act.
See Taylor v. Commissioner, 113 T.C. 206, 213 (1999), affd. 9
Fed. Appx. 700 (9th Cir. 2001). The decision to defer civil
proceedings until resolution of the criminal aspects of a case is
an exercise of judgment, not a ministerial act. Id. Thus, there
was no delay in the performance of a ministerial act with respect
to the fraud penalties for 1989 and 1990 through the period that
petitioner’s criminal case was pending; that is, from the
cessation of civil action in December 1995 until the July 6, 1998
affirmance of petitioner’s conviction became final.
As for the period between the time that petitioner’s
conviction became final and the October 4, 1999 issuance of the
notice of deficiency determining the 1989 and 1990 fraud
penalties, petitioner points to no specific ministerial act that
was improperly delayed, other than the issuance of the notice
itself. As with the period preceding cessation of civil action,
however, petitioner has not shown that all of the necessary
review and exercise of judgment that underlay the decision to
assert fraud had been completed at this time. In this regard,
petitioner’s convictions under section 7206(1) for 1989 and 1990
had no preclusive effect with respect to whether he committed
civil fraud in those years. See Wright v. Commissioner, 84 T.C.
636 (1985). Thus, a decision to assert civil fraud required an
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assessment of the supporting evidence. Moreover, while
petitioner’s 1992 and 1993 taxable years had been the subject of
an examination that proposed civil fraud penalties before the
cessation of civil action, the 1989 and 1990 taxable years had
not, insofar as the record discloses. Thus, the decision to
assert fraud in the October 1999 notice necessarily involved a
review of the evidence of fraud and the exercise of judgment, the
antithesis of a ministerial act.8
Accordingly, we conclude that petitioner has failed to
demonstrate any error or delay in the performance of a
ministerial act before the issuance of the October 4, 1999 notice
of deficiency.9
8
As for petitioner’s contention that respondent’s decision
to assert fraud for 1989 and 1990 was a “litigation tactic” that,
if allowed to give rise to interest, “would be widely perceived
as grossly unfair”, we note that petitioner did not even attempt
to dispute the fraud penalties in this Court. In any event,
perceptions of gross unfairness come into play only once an error
or delay in the performance of a ministerial act has been
established.
9
In light of our conclusion that petitioner has failed to
identify any ministerial error or delay prior to the issuance of
the Oct. 4, 1999 notice of deficiency, we need not decide whether
the Aug. 3, 1998 letter petitioner received from respondent was a
contact in writing with respect to 1989 for purposes of sec.
6404(e)(1). Moreover, petitioner has not alleged, nor is there
any evidence, that any contact in writing with respect to the
deficiencies for 1989 or 1990 occurred in connection with the
development of the criminal action against petitioner. We
accordingly express no view concerning whether a written contact
in connection with a criminal referral may constitute a contact
in writing for purposes of sec. 6404(e)(1).
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Petitioner has identified no ministerial error or delay
after the October 4, 1999 issuance of the notice of deficiency,
and we find none. After issuance of the notice determining the
fraud penalties for 1989, 1990, and 1991, petitioner failed to
petition this Court with respect to the fraud penalties for 1989
and 1990 determined in the notice. The penalties were assessed
107 days after the expiration of the period for filing a Tax
Court petition, on April 19, 2000, and were paid on October 17,
2000.
Petitioner advances one additional basis for finding an
abuse of discretion by respondent. Relying on Jacobs v.
Commissioner, T.C. Memo. 2000-123, petitioner claims that
respondent abused his discretion by failing to disclose the basis
for his decision to reject petitioner’s claim for abatement of
interest. Petitioner’s reliance on Jacobs is misplaced. In that
case, the Commissioner had given no explanation of his decision
not to abate interest, other than a conclusory statement that
there were no errors or delays that warranted abatement. Here,
while the explanation given in the notice of final determination
is likewise conclusory, respondent offered a more detailed
statement of his reasons in the written explanation accompanying
the preliminary determination to deny abatement. The reasons
therein given, to the effect that the delay attributable to the
investigation of petitioner’s case and the criminal proceedings
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did not constitute a delay in the performance of a ministerial
act, comport with our conclusion that no ministerial delay
occurred in these circumstances. Moreover, the parties’
stipulations and the accompanying exhibits demonstrate that
respondent’s issuance of the notice of deficiency in question was
not a dilatory ministerial act, as petitioner claims. In sum,
petitioner has not shown any abuse of discretion on the ground
that respondent failed to provide reasons for his decision not to
abate.
We have considered all other contentions raised by
petitioner and conclude that they lack merit.
For the foregoing reasons, respondent’s refusal to abate any
interest with respect to petitioner’s 1989 and 1990 deficiencies
was not an abuse of discretion. To reflect the foregoing,
Decision will be entered for
respondent.