Kimball v. Comm'r

T.C. Memo. 2008-78

UNITED STATES TAX COURT

FRANK B. KIMBALL AND ELAINE E. KIMBALL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10960-06L. Filed April 1, 2008.

Robert E. Kovacevich, for petitioners.

Catherine L. Campbell, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HAINES, Judge: Petitioners filed a petition with this Court

in response to a Notice of Determination Concerning Collection

Action(s) Under Sections 6320 and/or 6330 (notice of

determination) for 1984.1 Pursuant to section 6330(d),

1
Unless otherwise indicated, all section references are to
(continued...)
 - 2 -

petitioners seek review of respondent’s determination. The

issues for decision are: (1) Whether respondent provided the

requisite notices of the administrative and judicial proceedings

with respect to petitioners’ income tax liability for 1984; (2)

whether petitioners are liable for the increased rate of interest

on tax-motivated transactions under section 6621(c);2 (3) whether

respondent abused his discretion in failing to abate interest

under section 6404(e); and (4) whether petitioners are liable for

the addition to tax under section 6651(a)(3).

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.3

1
(...continued)
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
2
Before the Tax Reform Act of 1986, Pub. L. 99-514, sec.
1511(a), 100 Stat. 2744, subsec. (c) of sec. 6621 was designated
subsec. (d). The additional interest applies only after Dec. 31,
1984. Sec. 6621(c) was repealed as of Dec. 31, 1989, by the
Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec.
7721(b), 103 Stat. 2399.
3
Respondent reserved relevancy and materiality objections
to par. 41 of the stipulation of facts. Fed. R. Evid. 402
provides the general rule that all relevant evidence is
admissible, while evidence which is not relevant is not
admissible. Fed. R. Evid. 401 defines relevant evidence as
“evidence having any tendency to make the existence of any fact
that is of consequence to the determination of the action more
probable or less probable than it would be without the evidence”.
(continued...)
 - 3 -

Petitioners resided in Idaho when they filed their petition.

In 1984, petitioner Frank B. Kimball (Mr. Kimball) became a

partner in Desert Flame Growers (DFG), a partnership whose tax

matters partner was Frederick H. Behrens (Mr. Behrens).

DFG issued petitioners Schedule K-1, Partner’s Share of

Income, Credits, Deductions, etc., for 1984.4 The Schedule K-1

reflected petitioners’ shares of DFG’s losses from “qualified

investment expenses”. Petitioners’ 1984 Federal income tax

return reported total partnership losses from DFG of $52,500.

Respondent received the return on June 27, 1985.

On April 10, 1991, respondent issued DFG a notice of final

partnership administrative adjustment (FPAA) for its 1984 and

1985 tax years. This FPAA was mailed to petitioners on May 13,

1991.

3
(...continued)
We find that the stipulation meets the threshold definition of
relevant evidence and is admissible. The Court will give the
stipulation only such consideration as is warranted by its
pertinence to the Court’s analysis of petitioners’ case.

Petitioners objected to several of the stipulations on the
basis of relevancy and authenticity. These contested
stipulations have had no impact on our ultimate findings of fact
or on the outcome of this case.
4
The Schedule K-1 for 1984 was issued to Mr. Kimball.
However, petitioners jointly filed their Federal income tax
returns for all relevant years. The notice of determination was
also jointly addressed to petitioners. To avoid confusion, we
will address the schedules, returns, and forms as if they were
issued jointly to petitioners.
 - 4 -

On July 10, 1991, Chester Boggs, a participating partner in

DFG, filed a petition for review with the Tax Court in response

to the FPAA. Desert Flame Growers v. Commissioner, docket No.

15052-91 (the DFG case).

On November 24, 1998, we entered an order in Agri-Cal

Venture Associates v. Commissioner, docket No. 12530-90, and

related listed cases, including the DFG case, requiring

respondent to provide written notification to all tax matters

partners under Rule 248(c)(2)(C). On December 21, 1998,

respondent provided the notice required by this order to Mr.

Behrens.

On October 4, 1999, the DFG case was called from the

calendar for trial. On November 17, 1999, the Court entered an

order holding that partners who did not appear at that trial were

withdrawn from the Court’s records as participating partners. As

a result, the only remaining participating partners under Rule

247(b) were the tax matters partners.

On July 19, 2001, this Court granted respondent’s motion for

entry of decision pursuant to Rule 248(b) relating to tax years

1984 and 1985 in Coachella Fruit Growers v. Commissioner, docket

No. 12531-90 (including the DFG case). The motion states, at

paragraph 9, that each partner of a partnership at issue who

meets the interest requirements of section 6226(d) is deemed to

be a party to the partnership proceeding and bound by the
 - 5 -

decision. On the same day, this Court entered a decision in the

DFG case for tax years 1984 and 1985. The decision reduced DFG’s

1984 Farming Expenses from $2,681,388 to $1,526,923 and its

liabilities from $2,145,111 to $443,382. In relevant part the

decision stated that (i) the adjustments to DFG’s income and

expenses were attributable to transactions which lacked economic

substance under section 6621(c)(3)(A)(v), (ii) $1,701,729 of

DFG’s reported liabilities lacked economic substance, and (iii)

the assessment of any deficiencies in income tax attributable to

the adjustments to DFG’s partnership items for tax years 1984 and

1985 is not barred by the statute of limitations provisions of

section 6229.

On August 10, 2001, Mr. Behrens mailed a letter to

petitioners and other “limited partners” of DFG that explained

the decision under Rule 248(b) and advised that no partner

objected to the settlement. The letter also informed petitioners

of a previous letter sent April 30, 2001, that detailed the terms

of the pending settlement. Finally, the letter explained that

petitioners should expect to receive a bill from respondent

within 9 months of October 17, 2001, when the decision would

become final.

On July 25, 2002, respondent sent petitioners a Form 4549A-

CG, Income Tax Examination Changes, reflecting changes made for
 - 6 -

petitioners’ 1984 tax year resulting from the orders and

decisions entered pursuant to the DFG case.

On August 19, 2002, respondent assessed a deficiency in

petitioners’ income tax of $8,927 and sent petitioners a demand

for payment. Respondent also determined that for 1984

petitioners were liable for additional interest on tax-motivated

transactions under section 6621(c), IRC 1986.

On February 23, 2004, respondent assessed for 1984 an

addition to tax of $1,562 under section 6651(a)(3) for failure to

timely pay.

On March 7, 2005, respondent issued petitioners a Final

Notice--Notice of Intent to Levy and Notice of Your Rights to a

Hearing.

On April 5, 2005, petitioners submitted a Form 12153,

Request for a Collection Due Process (CDP) or Equivalent Hearing.

Petitioners claimed that they had received improper notice

regarding the deficiency and that respondent erred in determining

the interest and addition to tax.

On June 6, 2005, respondent processed a check from

petitioners in the amount of $8,927 in payment of the additional

assessment of income tax for 1984. Petitioners sent a letter

with the check explaining that the addition to tax and interest

were not paid because they were contested.
 - 7 -

On May 11, 2006, respondent issued petitioners a notice of

determination. Respondent determined that petitioners had not

established that an error or delay occurred in the performance of

a ministerial act by respondent under section 6404(e)(1) and that

the terms of settlement in the DFG case included the assessment

of tax-motivated interest under section 6621(c). Respondent also

determined that he complied with all requirements to provide

notice to petitioners. In response to this notice, petitioners

filed their petition with this Court on June 12, 2006. A trial

was held on June 4, 2007 in Spokane, Washington.

OPINION

I. Standard of Review

To determine the correct standard of review in a case

instituted under sections 6320 and 6330 where the taxpayers

contest the underlying tax liability, the Court must first

decide whether the taxpayers’ underlying tax liability is

properly at issue. Sego v. Commissioner, 114 T.C. 604, 610

(2000); Goza v. Commissioner, 114 T.C. 176, 181-182 (2000). The

term “underlying tax liability” under section 6330(c)(2)(B)

includes amounts self-assessed under section 6201(a), together

with penalties and interest. Sec. 6201(a)(1); Montgomery v.

Commissioner, 122 T.C. 1, 9 (2004); sec. 301.6203-1, Proced. &

Admin. Regs.
 - 8 -

The amount of the underlying tax liability may be placed at

issue if the taxpayer did not receive a statutory notice of

deficiency or otherwise have an opportunity to dispute the tax

liability. Sec. 6330(c)(2)(B); see Behling v. Commissioner, 118

T.C. 572, 576-577 (2002). Petitioners were not issued a notice

of deficiency for the section 6621(c) increased interest and the

section 6651(a)(3) addition to tax and did not have a prior

opportunity to dispute their underlying tax liability for 1984.

Therefore the proper standard of review for respondent’s

determination of petitioners’ underlying tax liability is de

novo. See Sego v. Commissioner, supra at 609-610.

II. Requisite Notice

Petitioners argue that they should not be liable for the

increased interest and the addition to tax because respondent did

not provide adequate notice of their income tax deficiency and

because they were not informed about proceedings in the DFG case.

We disagree.

Under section 6226(c) and Rule 247(a), every partner of a

partnership involved in a readjustment action is deemed to be a

party to that action and may as a rule participate in the

litigation. Chef’s Choice Produce, Ltd. v. Commissioner, 95 T.C.

388 (1990). As partners of DFG during 1984, petitioners were

parties to the partnership-level proceeding in the DFG case. See
 - 9 -

sec. 6226(c). The record indicates that respondent complied with

all of his notice requirements in the DFG case.

Under Rule 248(b), Mr. Behrens was required to mail

petitioners the motion for entry of decision. Petitioners had 60

days from the filing of the motion for entry of decision on April

16, 2001, to object to the motion. It is unclear whether Mr.

Behrens sent petitioners the motion in time for them to object.

However, petitioners’ receipt of Mr. Behrens letter dated

August 10, 2001, indicates that petitioners were notified of the

settlement in time to appeal. Petitioners had 90 days from the

date the decision was entered pursuant to respondent’s motion on

July 19, 2001, to file an appeal, but they failed to do so.

Even if Mr. Behrens had failed to alert petitioners to the

proceedings in the DFG case, the Court would reject their

argument here. The failure of the tax matters partner to provide

any notice or perform any act required on behalf of a partner

under subchapter C of the Code, Tax Treatment of Partnership

Items, does not affect the applicability of any proceeding or

adjustment under subchapter C to that partner. Sec. 6230(f).

Respondent provided adequate notice to Mr. Behrens in the DFG

case, and petitioners may not challenge their underlying

liability on the grounds that the notice they were provided by

Mr. Behrens in the DFG case was inadequate. See Hudspath v.
 - 10 -

Commissioner, T.C. Memo. 2005-83, affd. 177 Fed. Appx. 326 (4th

Cir. 2006).

III. Interest on Tax-Motivated Transactions

Respondent determined that petitioners were liable for

section 6621(c) interest. Respondent did not issue a notice of

deficiency because he treated the interest as a computational

matter. Petitioners have not previously had the opportunity to

dispute their liability for section 6621(c) interest. Therefore,

section 6330(c)(2)(B) does not bar review of petitioners’

underlying tax liability as it relates to section 6621(c)

interest.

Section 6621(c) applies an increased rate of interest on

substantial underpayments of tax resulting from tax-motivated

transactions. For purposes of section 6621(c), a “substantial

underpayment attributable to tax motivated transactions” means

any underpayment of tax attributable to one or more tax-motivated

transactions if the amount of the underpayment exceeds $1,000.

Sec. 6621(c)(2). Tax-motivated transactions include any

valuation overstatements within the meaning of former section

6659(c) or any sham or fraudulent transaction. Sec.

6621(c)(3)(A)(i), (v).

A. Tax Court Jurisdiction Generally

The Tax Court is a court of limited jurisdiction, and we may

exercise our jurisdiction only to the extent authorized by
 - 11 -

Congress. Sec. 7442; Moore v. Commissioner, 114 T.C. 171, 175

(2000); Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

Although neither party has contested our jurisdiction,

jurisdiction may not be conferred upon the Court by agreement of

the parties. See Clark v. Commissioner, 125 T.C. 108, 109

(2005); Neely v. Commissioner, 115 T.C. 287, 291 (2000); Naftel

v. Commissioner, supra at 530. Whether the Court has

jurisdiction to decide an issue is a matter that this Court or a

Court of Appeals may decide at any time. Clark v. Commissioner,

supra at 109; Raymond v. Commissioner, 119 T.C. 191, 193 (2002).

However, River City Ranches #1 Ltd. v. Commissioner, 401 F.3d

1136 (9th Cir. 2005), affg. in part and revg. in part T.C. Memo.

2003-150, indicates that our jurisdiction to determine

petitioners’ liability for section 6621(c) interest in this

partner-level proceeding may be limited.

B. Partnership Items Versus Affected Items and the Court’s
Jurisdiction To Determine the Character of a
Partnership’s Transactions

Congress enacted the partnership audit and litigation

procedures to provide a method to uniformly adjust items of

partnership income, loss, deduction, or credit that would affect

each partner. See Tax Equity and Fiscal Responsibility Act of

1982, Pub. L. 97-248, sec. 402(a), 96 Stat. 648. The statute

makes a distinction between partnership items and nonpartnership

items, or “affected items”. The tax treatment of partnership
 - 12 -

items may be determined only in a partnership-level proceeding,

while the tax treatment of affected items may be determined only

in a partner-level proceeding. See sec. 6221; Affiliated Equip.

Leasing II v. Commissioner, 97 T.C. 575, 576 (1991); Sparks v.

Commissioner, 87 T.C. 1279, 1284 (1986); Maxwell v. Commissioner,

87 T.C. 783, 789 (1986). This Court has previously held that

section 6621(c) interest is an affected item which may require

findings of fact peculiar to a particular partner and as such

cannot be determined in a partnership-level proceeding.5 See,

e.g., Affiliated Equip. Leasing II v. Commissioner, supra at 578-

579; N.C.F. Energy Partners v. Commissioner, 89 T.C. 741, 745-746

(1987).

In River City Ranches #1 Ltd. v. Commissioner, T.C. Memo.

2003-150, a partnership-level proceeding involving Hoyt sheep

breeding partnerships, the taxpayers argued that the Tax Court

has jurisdiction over section 6621(c) interest at the partnership

level. Citing Affiliated Equip. Leasing II and N.C.F. Energy

Partners, the Tax Court concluded that it lacked jurisdiction to

5
The Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. 105-
34, sec. 1238(b)(1), 111 Stat. 1026, amended sec. 6226(f) and
expanded this Court’s jurisdiction in partnership-level
proceedings to include the applicability of “any penalty,
addition to tax, or additional amount” related to the adjustment
of a partnership item. This amendment to sec. 6226(f) is
effective only for partnership taxable years ending after Aug. 5,
1997, and does not apply to the years at issue in the instant
case. TRA 1997 sec. 1238(c), 111 Stat. 1027.
 - 13 -

decide the applicability of section 6621(c) interest in a

partnership-level proceeding.6

The U.S. Court of Appeals for the Ninth Circuit reversed the

Tax Court on the section 6621(c) interest issue. River City

Ranches #1 Ltd. v. Commissioner, 401 F.3d at 1143-1144. The

Court of Appeals stated:

A partnership’s tax items, which determine the
partners’ taxes, are litigated in partnership
proceedings--not in the individual partners’ cases. 26
U.S.C. § 6221 * * *.

The nature of the partnerships’ transactions
[i.e., whether the transactions were tax motivated] is
a “partnership item” * * *. As a “partnership item,”
the character of the partnerships’ transactions is
within the Tax Court’s scope of review.

The Tax Court erred in holding that it had no
jurisdiction to make findings concerning the character
of the partnerships’ transactions, for purposes of the
26 U.S.C. § 6621 penalty-interest provisions.
Accordingly, we remand for the court to make such
findings. [Emphasis added.]

Petitioners resided in Idaho when they filed their petition,

and, absent stipulation to the contrary, appeal of this case

would be to the Court of Appeals for the Ninth Circuit. Because

that Court of Appeals has held that, for purposes of the section

6621 increased interest provisions the character of a

partnership’s transactions is a partnership item, we will treat

6
Like the instant case, River City Ranches #1 Ltd. v.
Commissioner, T.C. Memo. 2003-150, affd. in part and revd. in
part 401 F.3d 1136 (9th Cir. 2005), involved tax years ending on
or before Aug. 5, 1997. Thus, the expanded jurisdiction under
TRA 1997 did not apply. See TRA 1997 sec. 1238(c).
 - 14 -

DFG’s transactions as if they were partnership items for purposes

of determining our jurisdiction in this case. See id.; Golsen v.

Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th

Cir. 1971).

C. Character of DFG’s Transactions and the Statute of
Limitations

Section 6621(c) interest has both a partnership item

component to be determined at the partnership level and affected

item components to be determined at the partner level. Ertz v.

Commissioner, T.C. Memo. 2007-15; see also River City Ranches #1

Ltd. v. Commissioner, 401 F.3d at 1144. The partnership item

component is the character of the partnership’s transactions;

i.e., whether the transactions were tax motivated. See River

City Ranches #1 Ltd. v. Commissioner, 401 F.3d at 1144. The

affected item components are the amount of the partner’s

underpayment of tax attributable to the partnership’s tax-

motivated transactions and whether that underpayment is

substantial. See sec. 6621(c)(2).

The determination that DFG’s transactions were tax motivated

is a prerequisite to determining petitioners’ liability for

section 6621(c) interest. Respondent asks us to use the decision

of the Tax Court in the DFG case to determine that DFG’s

transactions were tax motivated.

Petitioners argue that respondent was required to show tax

motivation under the tests of section 6621(c)(3)(B) in Form
 - 15 -

4549A-CG.7 Petitioners also contend that the statute of

limitations provisions under section 6229 bar respondent from

raising the tax motivation issue and assessing section 6621(c)

interest in the instant case.

Respondent’s theory is more persuasive. In the DFG case we

found that DFG’s transactions “lacked economic substance” under

section 6621(c)(3)(A)(v). Because they lacked economic

substance, they also constituted tax-motivated transactions under

section 6621(c)(3). Unlike Ertz, where the partnership-level

proceeding failed to determine whether the partnership’s

transactions were tax motivated, the DFG case determined DFG’s

transactions were tax motivated.

Because DFG’s transactions were tax motivated, it falls

within our jurisdiction to determine whether the affected item

components of section 6621(c) are all present. See River City

Ranches #1 Ltd. v. Commissioner, 401 F.3d at 1144; Ertz v.

Commissioner, supra. The record indicates that all of

petitioners’ underpayment was attributable to DFG’s tax-motivated

transactions. Likewise, this underpayment was substantial

because it was greater than $1,000. See sec. 6621(c)(2). Thus,

respondent properly assessed section 6621(c) interest.

7
Petitioners allege that respondent was required to show
the ratio of petitioners’ tax benefits to cash invested and the
methods used to promote DFG’s transactions under sec.
6621(c)(3)(B) in order to assess an interest penalty. As
explained below, petitioners are mistaken.
 - 16 -

Petitioners’ reliance on section 6621(c)(3)(B)(i) is

misplaced. Section 6621(c)(3)(B) distinguishes “other types of

transactions” that may also be treated as tax motivated. Because

we found in the DFG case that DFG engaged in tax-motivated

transactions under section 6621(c)(3)(A)(v), a provision

encompassing “any sham or fraudulent transaction”, there is no

need for us to make a finding of tax motivation under section

6621(c)(3)(B)(i). For purposes of section 6621(c)(3)(A)(v), a

transaction devoid of economic substance is considered a sham

transaction. E.g., Friendship Dairies, Inc. v. Commissioner, 90

T.C. 1054, 1068 (1988). Respondent was under no obligation to

list on Form 4549A-CG the facts explaining why DFG’s transactions

were tax motivated.

Petitioners are also unable to find refuge under the statute

of limitations. As stated supra p. 5, the issue of whether the

period of limitations on assessment had expired was determined in

respondent’s favor in the partnership-level proceeding of the DFG

case. See Genesis Oil & Gas v. Commissioner, 93 T.C. 562, 566

(1989). Additionally, the limitations period on the

computational adjustment of petitioners’ income had not expired

because the tax was timely assessed after the decision in the DFG

case became final. See sec. 6229(d).

Ultimately, because DFG engaged in tax-motivated

transactions and petitioners’ underpayment is both attributable
 - 17 -

to those transactions and substantial, petitioners are liable for

the additional 20-percent interest imposed under section 6621(c).

IV. Interest Abatement

Petitioners claim that respondent abused his discretion in

failing to abate interest under section 6404(e). Section

6404(e)(1) provides that the Commissioner may abate

the assessment of interest on payment of tax to the extent a

delay in payment is attributable to any error or delay by an

officer or employee of the Internal Revenue Service in performing

a ministerial act.8 Section 301.6404-2(b)(2), Proced. & Admin.

Regs., defines a “ministerial act” as:

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. A decision
concerning the proper application of federal tax law
(or other federal or state law) is not a ministerial
act.

The Court may order abatement if the Commissioner abuses his

discretion by failing to abate interest. Sec. 6404(h)(1).9

8
The Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. 104-168,
sec. 301(a), 110 Stat. 1457 (1996), amended sec. 6404(e) to
permit abatement of interest for “unreasonable” error and delay
in the performance of a “ministerial or managerial” act. The
amendments to sec. 6404(e) apply to interest accruing with
respect to deficiencies or payments for taxable years beginning
after July 30, 1996. See TBOR 2 sec. 301(c), 110 Stat. 1457.
Thus, the amendments do not apply to the instant case. See
Woodral v. Commissioner, 112 T.C. 19, 25 n.8 (1999).
9
Formerly sec. 6404(g), applicable to requests for
(continued...)
 - 18 -

Section 6404(e) requires petitioners not only to identify an

error or delay caused by a ministerial act on respondent’s part,

but also to identify a specific period over which interest should

be abated as a result of the error or delay. See Krugman v.

Commissioner, 112 T.C. 230, 237-240 (1999); Donovan v.

Commissioner, T.C. Memo. 2000-220.

Petitioners have not identified, and the record contains no

evidence that respondent committed, any erroneous or dilatory

acts requiring abatement of interest. The extensive examination

of a partnership which results in delays in the processing of the

cases of individual taxpayers who invested in the partnership is

not considered a ministerial act. Lee v. Commissioner, 113 T.C.

145, 150-151 (1999). Thus, the Court concludes respondent's

decision not to abate interest is not an abuse of discretion.

V. Addition to Tax

Section 6651(a)(3) imposes an addition to tax for

failure to pay any amount in respect of any tax required to be

shown on a return which is not so shown, within 21 calendar days

from the date of notice and demand for payment. The addition to

tax under section 6651(a)(3) is 0.5 percent of tax if the failure

to pay is for not more than 1 month, with an additional 0.5

percent for each additional month or fraction thereof during

9
(...continued)
abatement after July 30, 1996. TBOR 2 sec. 302, 110 Stat. 1457.
 - 19 -

which such failure to pay continues, not to exceed 25 percent in

the aggregate. The failure to pay penalty thus may continue to

accrue for up to 50 months, until payment. The addition to tax

is imposed unless the taxpayer establishes that the failure was

due to reasonable cause and not willful neglect. Reese v.

Commissioner, T.C. Memo. 2006-21, affd. 201 Fed. Appx. 961 (4th

Cir. 2006).

Petitioners argue that the section 6651(a)(3) addition to

tax cannot be applied because they did not receive a notice of

deficiency with respect to their 1984 return. Petitioners are

mistaken. Section 6651(a)(3) additions are attributable to

amounts that have already been assessed but remain unpaid, and

therefore the Commissioner may collect such additions by notice

and demand without assessment and without recourse to the

deficiency procedures. Reese v. Commissioner, supra.

The record indicates that the tax due for 1984 was assessed

after notice and demand on August 19, 2002, and was not paid

until June 6, 2005. Petitioners have alleged no reasonable cause

for their failure to pay during this period. Thus, petitioners

are liable for the addition to tax under section 6651(a)(3).

VI. Conclusion

We find that respondent complied with all of his

requirements to provide notice under the law and therefore did

not abuse his discretion in proceeding with the levy action.
 - 20 -

Further, because DFG engaged in tax-motivated transactions, we

have the jurisdiction to find that petitioners’ underpayment is

both attributable to those transactions and substantial. Thus,

we hold that petitioners are liable for the interest penalty

under section 6621(c). Finally, we hold that respondent’s

refusal to abate the interest penalty was not an abuse of

discretion, and petitioners are also subject to the addition to

tax under section 6651(a)(3).

In reaching our holdings herein, we have considered all

arguments made, and, to the extent not mentioned above, we find

them to be moot, irrelevant, or without merit.

To reflect the foregoing,

Decision will be entered

for respondent.