T.C. Memo. 2006-201
UNITED STATES TAX COURT
ORLANDO J. AND CHRISTINA E. GUERRERO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7046-05. Filed September 20, 2006.
Orlando J. and Christina E. Guerrero, pro sese.
Frederick J. Lockhart, Jr., for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: On October 19, 2004, respondent issued a
notice of final determination disallowing petitioners’ claim for
abatement of interest accrued and assessed with respect to
petitioners’ unpaid Federal income tax liability for 2000.
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Petitioners timely filed a petition under section 6404(h)1
contesting respondent’s determination. The only issue for
decision is whether respondent’s denial of petitioners’ claim for
abatement of all interest accrued and assessed with respect to
their 2000 tax liability was an abuse of discretion.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts is incorporated herein by this
reference. Petitioners resided in Centennial, Colorado, when the
petition in this case was filed.
During 2000 petitioners withdrew a total of $175,450.31 from
two retirement plans: $42,790.81 from a pension plan, and
$132,659.50 from a section 401(k) retirement plan, both
maintained for the benefit of Mrs. Guerrero. At the time
petitioners withdrew the funds, Mrs. Guerrero had yet to retire,
nor was she otherwise eligible to permanently withdraw funds from
either plan without incurring a 10-percent additional tax for
premature pension plan distributions pursuant to section 72(t).
Petitioners did not roll the withdrawn funds into an individual
retirement account (IRA) within 60 days of the withdrawal dates.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
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Instead petitioners used a portion of the withdrawn funds to
purchase a new home in Denver, Colorado, and invested the
remainder in the stock market.
Petitioners received a Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., for each of the withdrawals. Both
Forms 1099-R listed the amount of the gross distribution in box 1
as the taxable amount in box 2a. The “Total distribution” box in
2b was checked, and the “Taxable amount not determined” box was
left blank on both Forms 1099-R.
Petitioners filed a joint individual income tax return for
2000. They reported total pension and annuity distributions of
$175,450, but they only reported $89,743 of that amount as
taxable income.2 Petitioners also claimed an IRA deduction of
$34,233 and a refund of $11,586. Petitioners testified that they
had attached a note to their 2000 return requesting that the
Internal Revenue Service (IRS) review their return, correct any
reporting errors, and recalculate their tax liability as
necessary.3
2
Although the parties stipulated that petitioners reported
$89,289 as the amount of taxable income, petitioners’ tax return
shows this amount to be $89,743.
3
As of the date of trial, respondent had not located the
note, and petitioners did not retain a copy of it.
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On May 24, 2001, respondent sent a letter to petitioners
requesting an explanation of the IRA deduction. In an undated
response Mr. Guerrero conceded that the IRA deduction was
erroneous, and he asked the IRS to recalculate petitioners’ 2000
income tax liability. The IRS did so and sent petitioners a
notice dated July 23, 2001, advising them of their corrected
income tax liability based on petitioners’ concession. According
to the notice petitioners had overpaid their corrected income tax
liability for 2000 by $737.46, which the IRS refunded to them.
Less than a year later, on April 22, 2002, respondent issued
to petitioners a CP-2000 Notice proposing further changes to
their 2000 return. As reflected on the notice, respondent
increased petitioners’ taxable pension and annuity income by
$85,706, the amount petitioners had asserted was not taxable on
their original 2000 return. The CP-2000 also made a
computational adjustment decreasing petitioners’ personal
exemptions, determined that petitioners owed additional income
tax of $39,988, proposed a 10-percent early withdrawal penalty
pursuant to section 72(t) of $8,571 and an accuracy-related
penalty pursuant to section 6662(a) of $7,998, and determined
that petitioners were liable for interest accrued through May 22,
2002, pursuant to section 6601, of $3,735.
On July 15, 2002, respondent issued to petitioners a notice
of deficiency for 2000. Petitioners did not petition the Tax
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Court in response to the notice of deficiency. On December 16,
2002, respondent assessed the income tax deficiency, penalties,
and interest against petitioners (the unpaid tax liability).
On March 27, 2003, respondent mailed notices of intention to
levy to petitioners. In June 2003, petitioners filed an offer-
in-compromise with respect to the unpaid tax liability based on
doubt as to liability. On November 12, 2003, respondent
terminated his consideration of petitioners’ offer-in-compromise
because petitioners did not submit information that had been
requested 3 months earlier.
On May 21, 2004, respondent levied upon Mr. Guerrero’s wages
to satisfy the unpaid tax liability. That same day Mr. Guerrero
met with Mr. Quinones, an IRS collection agent. Mr. Guerrero
gave Mr. Quinones a check for $40,000 in part payment of
petitioners’ unpaid tax liability in exchange for a release of
the levy and a commitment to enter into a payment plan for the
unpaid balance. Mr. Quinones accepted the payment, released the
levy, and created a payment plan for petitioners that required
them to pay $115 per month.
On June 6, 2004, petitioners requested help from the IRS
Taxpayer Advocate’s Office with respect to the abatement of
assessed penalties and interest. On July 7, 2004, the taxpayer
advocate forwarded a Form 843, Claim for Refund and Request for
Abatement, to the IRS on petitioners’ behalf. In the Form 843
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petitioners requested that respondent abate the accuracy-related
penalty and all interest accrued on their 2000 tax liability.
Respondent subsequently abated the accuracy-related penalty and
an addition to tax for failure to pay that had been assessed on
September 27, 2004, but denied petitioners’ request for interest
abatement. The request was denied on the ground that the record
did not disclose any unreasonable error or delay in performance
of a ministerial or managerial act by an officer or employee of
the IRS. On October 19, 2004, respondent issued a notice of
final determination to petitioners.
On April 13, 2005, petitioners’ imperfect petition seeking
review of respondent’s determination not to abate interest under
section 6404 was filed. Because the petition did not meet the
requirements of Rule 281(b), we ordered petitioners to file a
proper amended petition by June 2, 2005. On June 1, 2005,
petitioners’ amended petition was filed.
OPINION
Under section 6404(e)(1) the Commissioner may abate part or
all of an assessment of interest on any deficiency or payment of
income tax to the extent that any unreasonable error or delay in
payment is attributable to erroneous or dilatory performance of a
ministerial or managerial act by an officer or employee of the
IRS. A ministerial act means a procedural or mechanical act that
does not involve the exercise of judgment or discretion and
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occurs during the processing of a taxpayer’s case after all the
prerequisites to the act, such as conferences and review by
supervisors, have taken place. See Lee v. Commissioner, 113 T.C.
145, 150 (1999); sec. 301.6404-2(b)(2), Proced. & Admin. Regs.
The mere passage of time does not establish error or delay in
performing a ministerial act. See Cosgriff v. Commissioner, T.C.
Memo. 2000-241 (citing Lee v. Commissioner, supra at 150). A
managerial act means an administrative act that involves a
temporary or permanent loss of records or the exercise of
judgment or discretion relating to personnel management during
the processing of a taxpayer’s case. Sec. 301.6404-2(b)(1),
Proced. & Admin. Regs. In contrast, a decision concerning the
proper application of Federal tax law, or other applicable
Federal or State laws, is not a ministerial or managerial act.
See sec. 301.6404-2(b), Proced. & Admin. Regs.
When Congress enacted section 6404(e), it did not intend the
provision to be used routinely to avoid payment of interest.
Rather, Congress intended abatement of interest only where
failure to do so “would be widely perceived as grossly unfair.”
H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S.
Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.
Section 6404(e) affords a taxpayer relief only if no significant
aspect of the error or delay can be attributed to the taxpayer
and only after the Commissioner has contacted the taxpayer in
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writing about the deficiency or payment in question. See H.
Rept. 99-426, supra at 844, 1986-3 C.B. (Vol. 2) at 844 (“This
provision does not therefore permit the abatement of interest for
the period of time between the date the taxpayer files a return
and the date the IRS commences an audit, regardless of the length
of that time period.”).
The Commissioner’s authority to abate an assessment of
interest involves the exercise of discretion, and we must give
due deference to the Commissioner’s discretion. Woodral v.
Commissioner, 112 T.C. 19, 23 (1999); Mailman v. Commissioner, 91
T.C. 1079, 1082 (1988). In order to prevail petitioner must
prove that the Commissioner abused his discretion by exercising
it arbitrarily, capriciously, or without sound basis in fact or
law. Woodral v. Commissioner, supra at 23; Mailman v.
Commissioner, supra at 1084; see also sec. 6404(h)(1); Rule
142(a). We have jurisdiction to decide whether the Commissioner
abused his discretion under section 6404(h)(1).
At trial petitioners disputed all interest accrued on their
2000 tax liability. Section 6404(e) requires a direct link
between the error or delay and the specific time period during
which interest accrued. See Braun v. Commissioner, T.C. Memo.
2005-221. A request demanding abatement of all interest charged
does not satisfy the required link; it merely represents a
request for exemption from interest. Id.; see also Donovan v.
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Commissioner, T.C. Memo. 2000-220. Such a broad claim extends
beyond the intention of the statute. See H. Rept. 99-426, supra
at 844, 1986-3 C.B. (Vol. 2) at 844; S. Rept. 99-313, supra at
208, 1986-3 C.B. (Vol. 3) at 208. Respondent’s failure to abate
interest based on petitioners’ blanket request was not an abuse
of discretion. See Donovan v. Commissioner, supra.
In their posttrial memorandum petitioners argue that
interest should be abated because they requested the Secretary to
recalculate their income tax liability for 2000, and the
Secretary had all required Forms 1099 and other information to do
so accurately and promptly. Petitioners contend that the act of
processing their 2000 return accurately was a ministerial act.
We disagree. The processing and evaluation of their income tax
return required the application of Federal tax laws, which was
not a ministerial or managerial act.
In this case respondent did not learn that petitioners’ IRA
deduction was erroneous until after he had contacted petitioners
and requested information concerning the deduction. After
petitioners conceded the deduction was erroneous, respondent
promptly recalculated petitioners’ 2000 income tax liability and
notified them of the results. Less than 1 year later, respondent
again contacted petitioners regarding their failure to treat the
entire amount of the retirement distributions as taxable income.
Again respondent acted promptly to determine petitioners’ correct
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income tax liability, and he issued a notice of deficiency
reflecting his determination before the period of limitations for
assessment provided by the Internal Revenue Code had expired.
Each of these adjustments required respondent to apply Federal
income tax law to facts that petitioners provided. None of
respondent’s adjustments to petitioners’ 2000 return constituted
a ministerial or managerial act within the meaning of section
6404(e).
In this case it was petitioners’ own mistakes that caused
the delay in correctly calculating petitioners’ 2000 income tax
liability. Section 6404(e) permits an abatement of interest only
when the interest is not attributable to error or delay by the
taxpayers. Moreover, most of petitioners’ argument is directed
to respondent’s perceived delay in identifying petitioners’
mistakes and correcting them. However, section 6404(e) does not
authorize the abatement of interest from the due date of the
return until the Commissioner contacts a taxpayer in writing with
respect to the deficiency. In this case respondent did not
contact petitioner in writing with respect to the 2000 income tax
deficiency until April 22, 2002. Respondent’s failure to abate
interest from the date petitioners’ return was filed to April 22,
2002, was not, and under section 6404(e) cannot be, an abuse of
discretion. See sec. 6404(e); Donovan v. Commissioner, supra; H.
Rept. 99-246, supra at 844, 1986-3 C.B. (Vol. 2) at 844.
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Petitioners also argue that their incorrect reporting was
attributable, in part, to erroneous advice they received from
respondent’s agent.4 However, such advice, whether accurate or
not, contains the legal or administrative judgment of the person
giving the advice and is not a ministerial or managerial act.
See Crawford v. Commissioner, T.C. Memo. 2002-10; sec. 301.6404-
2(b), Proced. & Admin. Regs. Respondent did not abuse his
discretion by refusing to abate interest arguably attributable to
his agent’s erroneous advice.
Petitioners do not persuade us that respondent abused his
discretion in refusing to abate interest after April 22, 2002,
when respondent sent petitioners his proposed changes to their
2000 return. Petitioners simply argue that had respondent acted
more promptly in assessing their correct 2000 income tax
liability, petitioners would have paid it earlier, and, as a
result, they would not have incurred interest charges.
Abatement of interest is not appropriate simply because a
taxpayer might have made a tax payment sooner. See Braun v.
Commissioner, T.C. Memo. 2005-221. Respondent had determined
4
Petitioners claim that one of respondent’s employees
informed petitioners over the telephone that they would not incur
the 10-percent early withdrawal penalty pursuant to sec. 72(t) on
the funds used to build their house, nor would they have to
report those funds as taxable income. However, the record
suggests that petitioners may not have given the employee
complete and accurate factual information regarding the house
they were building or the source of the funds.
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that petitioners owed approximately $40,000 of additional tax as
a result of their underreporting of Mrs. Guerrero’s retirement
plan distributions. Petitioners presented no evidence that they
would have paid their additional tax liability sooner if
respondent had notified them of it earlier. In fact the record
demonstrates the contrary. Petitioners received a notice of
deficiency dated July 15, 2002, but they did not make any
substantial payment toward the deficiency until respondent levied
upon Mr. Guerrero’s wages in May 2004.
A careful review of the record in this case fails to
disclose any erroneous or dilatory performance of a ministerial
or managerial act by an officer or employee of respondent with
respect to petitioners’ 2000 return. Consequently, we hold that
respondent’s determination denying petitioners’ claim for
abatement of all interest accrued with respect to petitioners’
2000 income tax deficiency was not an abuse of discretion.
To reflect all of the above,
Decision will be entered
for respondent.