T.C. Memo. 2006-207
UNITED STATES TAX COURT
JOSEPH AND THERESA MOMOT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2506-05. Filed September 26, 2006.
Ps requested R to abate assessments of interest on
deficiencies arising from Ps’ investment in a tax
shelter partnership. R issued a notice of final
determination denying Ps’ abatement claim. Ps filed a
petition for review of R’s failure to abate interest.
Held: R’s failure to abate interest was not an
abuse of discretion under sec. 6404(e)(1), I.R.C.
Joseph and Theresa Momot, pro sese.
George W. Bezold, for respondent.
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MEMORANDUM OPINION
NIMS, Judge: This matter is before the Court on
respondent’s motion for summary judgment (respondent’s motion)
pursuant to Rule 121. Unless otherwise indicated, all section
references are to sections of the Internal Revenue Code in effect
for the years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. In their amended
petition, petitioners seek the Court’s “Review of [respondent’s]
Failure to Abate Interest Under Code Section 6404.” The amended
petition was filed in response to a letter to petitioners dated
January 18, 2005, entitled Full Disclosure - Final Determination,
in which petitioners were advised that the final determination of
the Internal Revenue Service (IRS) was to deny their request for
an abatement of interest.
Petitioners resided in Wisconsin when they filed their
petition.
Background
Petitioners are pro se and, from the nature of their
filings, are unfamiliar with the procedures of this Court and
have had difficulty in applying its Rules. Petitioners’ filings
consist of four brief documents: (1) A letter dated January 24,
2005, requesting a petition for review of “Failure to Abate
Interest Under Internal Revenue Code Section 6404"; (2) a letter
dated February 9, 2005, in which petitioners requested “a
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petition application, for a review of Failure to Abate Interest”,
which the Court filed on February 10, 2005, as “Amendment to
Petition”; (3) a letter dated March 19, 2005, entitled “Amended
Petition for Review of Failure to Abate Interest Under Code
Section 6404"; and (4) a one paragraph “Notice of Objection” to
respondent’s motion.
Relevant facts that do not appear to be in dispute are
reflected in the pleadings, respondent’s motion, the affidavit of
respondent’s counsel, and the exhibits attached thereto. For
additional background information (since it relates to this
case), reference is made to our Memorandum Opinion in Alhouse v.
Commissioner, T.C. Memo. 1991-652, affd. sub nom. Bergford v.
Commissioner, 12 F.3d 166 (9th Cir. 1993). In the absence of a
comprehensive statement of facts to support respondent’s motion,
the facts contained in the following summary are gleaned from the
above sources, and also from settlement documents filed at
Crystal Star Eagle v. Commissioner, docket No. 16434-96 (Dec. 7,
2001), which also relates to this case.
Petitioners were investors in an entity called Crystal Star
Eagle in 1985 and 1986. The entity’s investors were advised by
the promoters that they would have the legal status of tenants in
common, which permitted the direct deduction of entity items such
as certain losses, as well as depreciation, interest, and
management expenses, attributable to the entity’s activities.
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Initially, respondent separately examined the individual
returns of an indeterminate number of the entity’s 78 investors,
of which audits petitioners presumably had no knowledge, given
their representation to the IRS Service Center Interest Abatement
Coordinator that they first became aware in October 2002 that
their entity deductions were being disallowed.
Respondent determined deficiencies against the audited
putative partners, on the basis of the sham transaction doctrine.
Five individual petitions to this Court ensued, encompassing
various taxable years from 1982 to 1985. See Alhouse v.
Commissioner, supra. Our decision in Alhouse analyzed the nature
of the business relationship governing the investors vis-a-vis
the managerial agent administering the various computer equipment
transactions. We construed the investment interests as
comprising the formation of a partnership, not a tenancy in
common, for tax purposes, pursuant to the regulatory guidelines
and caselaw principles underlying section 7701(a)(2). Id. (The
aforementioned entity will hereinafter be referred to as the
Partnership.) Jurisdiction to adjudicate each investor’s
partnership-related deficiencies on an individual basis was,
therefore, lacking, as dictated by the so-called TEFRA unified
audit and litigation procedures, set forth in sections 6221
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through 6223 (enacted as part of the Tax Equity & Fiscal
Responsibility Act of 1982, Pub. L. 97-248, sec. 402(a), 96 Stat.
648). Id.
On December 18, 1995, respondent issued Forms 870-P(AD),
Settlement Agreement for Partnership Adjustments, covering tax
years 1985 and 1986, to at least two Partnership investors. The
proffered settlement packages proposed a diminution of the
partners’ allocable deficiencies in the amount of one-half of
their respective cash contributions, as well as the elimination
of all applicable penalties; interest charges were to be
expressly preserved. Petitioners were not informed of the
settlement offers extended at that time or of the prior
litigation.
On March 5, 1996, respondent issued notices of final
partnership administrative adjustment (FPAA) for 1985 and 1986 to
Claude B. Amarnick, reasserting respondent’s determination that
the Partnership was orchestrated as a tax shelter contrivance,
and disallowing all losses and deductions. The Estate of Mr.
Amarnick (in its capacity as a partner other than the tax matters
partner (TMP)) petitioned for readjustment of the partnership
items. William A. Tauskey, Sr., in concert with several other
partners also in receipt of the FPAA notices, intervened in the
proceeding on October 3, 1996. Prior to his death during the
pendency of the TEFRA litigation, Mr. Tauskey was serving as the
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Partnership’s TMP, pursuant to respondent’s appointment under
section 6231(a)(7). Neither Mr. Tauskey nor respondent furnished
a copy of the FPAAs or otherwise provided notice of the
partnership action to petitioners.
The partnership action was settled on April 25, 2000. The
settlement, predicated on the stipulation of the partnership
transactions as being devoid of economic substance and a bona
fide profit motive, partially disallowed the partnership loss and
deduction items for 1985, and denied the entirety of the
partnership losses and deductions for 1986. The TMP, James A.
Grever (appointed to succeed the deceased Mr. Tauskey) was an
individual investor, unaffiliated with the Partnership’s
originator or managerial agents, and, therefore, could not
ascertain the identities of the remaining partners not
participating in the partnership action. Respondent compiled a
schedule of the known nonparticipating partners, which included
petitioners and their contact information. On October 20, 2000,
the Court granted Mr. Grever’s motion for an order directing
service of any notice of settlement on the aforementioned
nonparticipating partners, and providing Mr. Grever contingent
relief from any liability otherwise occasioned by his relying
solely on respondent’s schedule in the discharge of the notice
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obligations imposed on the TMP pursuant to Rule 248. A decision
reflecting the terms of the settlement was entered on December 7,
2001.
Petitioners’ deficiencies for 1985 and 1986 consequent to
the settlement were assessed on November 18, 2002, and December
2, 2002, respectively. Computed to the dates of assessment,
accrued interest on the 1985 deficiency totaled $6,051.89;
accrued interest on the 1986 deficiency totaled $25,137.28.
Petitioners remitted in full the underlying deficiencies for 1985
and 1986, but as of the date this case was submitted petitioners
had not paid any accrued interest.
Petitioners’ request for abatement of interest under section
6404(e), submitted on February 4, 2003, appealed to the equities
of their predicament, adducing that they remained uninformed of
the partnership action and settlement resolution throughout the
course of the proceedings, and that they were blindsided by their
liability and the extent of the attendant interest accumulation
when the assessments were ultimately effected in late 2002.
Petitioners contended that, as unsophisticated investors, they
were oblivious to the Partnership’s structure and operation and
had no forewarning that it was devised as a tax shelter vehicle.
They claimed to have been unwittingly bamboozled by
misrepresentations of the Partnership’s organizers and marketers
and duplicitous prospectus documentation. Petitioners claimed
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that their financial circumstances would cause them to sustain
significant economic hardship if the interest were not abated.
Respondent summarily denied petitioners’ abatement request
on March 17, 2003. In their administrative appeal, submitted on
April 7, 2003, and supplemented by written correspondence on
January 11, 2004, petitioners asserted their entitlement to a
partial abatement in an unspecified amount, reiterating equitable
considerations along the same vein as the aforementioned fairness
arguments. Respondent rejected petitioners’ appeal in a final
determination on January 18, 2005, citing the protracted
partnership litigation as the predominant factor contributing to
the delay.
On January 18, 2005, respondent sent petitioners a letter
entitled Full Disallowance - Final Determination, which reads in
part as follows:
Dear Mr. & Mrs. Momot:
This letter is to inform you that we are disallowing
your request for an abatement of interest. We call
this decision a determination. This letter is our
final determination for purposes of Internal Revenue
Code Section 6404.
We regret that our final determination is to deny your
request for an abatement of interest. We had to deny
your request for the following reason(s):
• After review of available records and other
information, we did not find any unreasonable
errors or delays on our part that merit the
abatement of interest for tax years 1985 and 1986.
(See Form 843, Claim). The time it took for the
Tax Court Decision against Crystal Star Eagle with
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whom you invested, which resulted in the
disallowance of the partnership deductions you
took, and the fact that you were not notified
during Tax Court proceedings with the partnership,
a separate entity, is not a Ministerial Act.
Discussion
Section 6404(e)(1) provides, in pertinent part, that
respondent may abate the assessment of interest on any deficiency
attributable to an error or delay by an officer or employee of
the IRS in performing a ministerial act. (Amendments to section
6404(e), enacted in 1996, expanded the scope of the IRS’s
discretionary authority to abate interest attributable to
“unreasonable” errors or delays resulting from the performance of
“managerial” acts. Because these amendments are not effective on
a retroactive basis for tax years beginning before August 1,
1996, they do not apply to the instant case.)
A ministerial act denotes a procedural or mechanical act.
Sec. 301.6404-2T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.
30163 (Aug. 13, 1987). The exercise of judgment or discretion,
such as respondent’s deliberation concerning the proper
application of Federal tax law or other law, is not a ministerial
act. Id. (“Ministerial act” is likewise construed in the final
version of the regulations to section 6404, which are effective
for tax years beginning after July 30, 1996. See sec. 301.6404-
2(b)(2), Proced. & Admin. Regs.)
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Congress intended section 6404(e) to be availed of where the
disallowance of a taxpayer’s request for abatement “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) was not
conceived of as an expedient to “routinely * * * avoid payment of
interest”. Id.
Our jurisdiction to order an abatement of interest is
circumscribed to those instances where respondent’s failure to do
so is an abuse of discretion. Sec. 6404(h)(1). Our review of
respondent’s determination, to which we accord due deference, is
oriented to the particular facts presented by each case. Jacobs
v. Commissioner, T.C. Memo. 2000-123. For the reasons discussed
below, respondent’s failure to abate the assessment of interest
on petitioners’ deficiencies was not arbitrary, capricious, or
without sound basis in fact or law. See Woodral v. Commissioner,
112 T.C. 19, 23 (1999).
Generally, the mere passage of time during the litigation
phase of a tax dispute does not establish error or delay by
respondent in performing a ministerial act. Lee v. Commissioner,
113 T.C. 145, 150 (1999). During the late 1970s and throughout
the 1980s, the proliferation of abusive tax shelters generated a
myriad of tax shelter cases. See Beagles v. Commissioner, T.C.
Memo. 2003-67. The delay in assessment of petitioners’ 1985 and
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1986 deficiencies and concomitant interest accrual, though, was
occasioned by the promotion of the partnership interests as co-
ownership interests and was not manifestly attributable to
administrative nonfeasance.
The initial partnership action was not amenable to the
jurisdiction of this Court due to respondent’s inadvertent
noncompliance with the TEFRA procedures, Alhouse v. Commissioner,
T.C. Memo. 1991-652, which would not have occurred had the
Partnership been properly characterized as such. The
unsuccessful appeal of that case by the taxpayers involved and
decided by the Court of Appeals for the Ninth Circuit, prolonged
its duration by close to 2 years. The eventual issuance of the
FPAAs was deferred for an additional two plus years because
respondent elected to pursue settlement agreements with some but
not all individual partners. Respondent’s strategic decision to
induce settlements with certain individual members of the
investment group, however, is a matter wholly within his
discretion and does not constitute a ministerial act,
particularly since the TMP and remaining partners were not
readily identifiable. Dadian v. Commissioner, T.C. Memo. 2004-
121.
Additionally, the TEFRA action might have been settled more
expeditiously than the four plus years it took to conclude, but
for the reluctance of the participating partners in that case to
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abide by the decision in Alhouse v. Commissioner, supra. The
participating partners persistently attempted to resuscitate a
challenge to the Partnership’s tax classification status, as
documented in a series of motions submitted during the pendency
of the TEFRA case.
Finally, because the various TMPs throughout the TEFRA
proceeding were investors similarly situated to petitioners, who
were not privy to the Partnership’s operation and subscription
information, notice to the nonparticipating partners was
apparently not feasible until respondent procured the
identification list. Even if the failure to inform petitioners
of the partnership proceedings constituted a dereliction of the
obligations of the TMP, the notice responsibilities under the
TEFRA procedures are allocated to the TMP, and not the IRS. See
sec. 6223(g). The nonperformance of the requisite TEFRA notice
function by a TMP is not an IRS error requiring the abatement of
interest. See Jaffe v. Commissioner, T.C. Memo. 2004-122; Fargo
v. Commissioner, T.C. Memo. 2004-13.
To reflect the foregoing,
An appropriate Order and
Decision will be entered
granting Respondent’s Motion.