T.C. Memo. 2008-126
UNITED STATES TAX COURT
JAMES A. MATTHEWS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
SUPERIOR PRODUCTS SALES, INC. v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 19277-05, 19278-05. Filed May 5, 2008.
Harris H. Barnes, III, for petitioners.
John F. Driscoll, for respondent.
MEMORANDUM OPINION
WELLS, Judge: These consolidated cases, hereinafter
referred to as the instant case, are presently before the Court
- 2 -
on cross-motions for summary judgment pursuant to Rule 121.1 The
instant case arises from petitions for judicial review of failure
to abate interest under section 6404 and Rule 280. The principal
issue for decision is whether respondent’s disallowance of
interest abatement as to each petitioner represents an abuse of
discretion.
Background
The record consists primarily of the parties’ pleadings;
their respective cross-motions for summary judgment; various
responses, declarations, and memoranda in support of or
opposition to the motions, as applicable; and the transcript of a
hearing held on the motions. Additionally, at the hearing the
parties filed a stipulation of facts and accompanying exhibits
for purposes of deciding the instant motions. The stipulations
of fact are incorporated in this opinion by reference.
Petitioner James A. Matthews (Mr. Matthews) resided in
Mississippi, at the time of filing the petition. Petitioner
Superior Products Sales, Inc. (Superior), is a corporation formed
under the laws of Mississippi having an address in Tupelo,
Mississippi, at the time of filing the petition herein.
For all tax periods ending in 1990 through 1996,
Mr. Matthews was the majority shareholder and controlling officer
1
Unless otherwise indicated, section and Code references
are to the Internal Revenue Code of 1986, as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
- 3 -
of Superior, a C corporation under the Code. Superior is a
manufacturing enterprise engaged in the fabrication of
polyurethane foam and related products for use in furniture.
During the early to mid 1990s, Mount Vernon Foam Sales, Inc.
(Mount Vernon), was a customer of Superior. Superior filed Forms
1120, U.S. Corporation Income Tax Return, for the taxable years
ended March 31, 1994 (TYE 1994), and March 31, 1995 (TYE 1995),
on or about December 19, 1994, and December 18, 1995,
respectively. Mr. Matthews filed Forms 1040, U.S. Individual
Income Tax Return, for the taxable years 1990 and 1992 through
1995 on April 15 of each of the succeeding years. Mr. Matthews
likewise filed a Form 1040 for the taxable year 1996, but the
record is ambiguous as to whether that return was filed on April
15 or August 18, 1997.
Superior’s TYE 1994 was selected by the Internal Revenue
Service (IRS) for civil examination. On July 9, 1996, the
revenue agent assigned to conduct the examination sent to
Superior an initial appointment letter scheduling a meeting for
July 22, 1996. That meeting was conducted as scheduled, and the
revenue agent thereafter engaged in review of corporate records
and additional discussions with representatives throughout August
and September 1996. In early October 1996, the examination was
expanded to include Superior’s TYE 1995, and on October 4, 1996,
written notice to that effect was sent to Superior. The revenue
- 4 -
agent also began at that time to explore the possibility of
extending the examination to include Mr. Matthews’s 1994 and 1995
taxable years. After additional research, the revenue agent on
January 28, 1997, first contacted Mr. Matthews in writing
regarding examination of his 1994 and 1995 tax years, scheduling
an initial appointment for February 19, 1997, and requesting that
various documents be produced.
During February 1997 the revenue agent conducted interviews
and discussions with appropriate third parties, including
representatives of Mount Vernon. During late February 1997, the
IRS Examination Division formally made a referral for additional
investigation to the IRS Criminal Investigation Division with
respect to Superior’s TYE 1994 and TYE 1995 and Mr. Matthews’s
1994 and 1995 tax years. The referral report cited unreported
cash sales to Mount Vernon from which Mr. Matthews diverted the
funds for personal use.
The IRS Criminal Investigation Division accepted the
referral, and a special agent from that division was assigned to
conduct the investigation. In accordance with IRS administrative
procedures, the civil examination activity was generally
suspended because of the criminal referral, although a revenue
agent continued to provide a minor amount of supportive
administrative activity in coordination with the special agent.
During its course, the criminal investigation was expanded to
- 5 -
include Superior’s taxable year ended March 31, 1996 (TYE 1996),
and Mr. Matthews’s 1996 taxable year.
Criminal prosecution referrals were made by the IRS to the
U.S. Department of Justice during late August or early September
of 2001. The IRS recommended the prosecution of multiple counts
under section 7206(1) and (2), as well as 18 U.S.C. section 371,
arising from the preparation and filing of Superior’s corporate
income tax returns for TYE 1995 and TYE 1996. On February 1,
2002, a waiver of indictment and a criminal information were
filed against Mr. Matthews in the U.S. District Court for the
Northern District of Mississippi in connection with his
involvement in the preparation and filing of Superior’s corporate
income tax returns for TYE 1995 and TYE 1996.
During February 2002 Mr. Matthews pleaded guilty to one
count charging him with violation of section 7206(1) in regard to
filing Superior’s income tax return for TYE 1995. The criminal
fraud charge was premised on the unreported cash sales by
Superior to Mount Vernon. Mr. Matthews’s sentencing was
scheduled for May 2002. During February 2002 Mr. Matthews also
expressed a desire to resolve before his scheduled sentencing
certain civil aspects arising from the criminal prosecution. In
response to Mr. Matthews’s expressed wishes, an assigned IRS
- 6 -
revenue agent was authorized to work with Superior and Mr.
Matthews in an attempt to resolve relevant civil aspects relating
to the taxable years of each ending in 1994 through 1996, even
though the criminal aspects of those years were not yet formally
resolved.
On March 1, 2002, the revenue agent met with representatives
for petitioners and provided them with an information document
request (IDR) asking for additional information necessary to
conduct the examination. The IDR set a response date of
March 18, 2002. On or about April 23, 2002, the revenue agent
formally requested approval from appropriate IRS Examination
Division personnel to expand the examination to include
Superior’s taxable years ending March 31, 1991 through 1993
(TYE 1991, TYE 1992, and TYE 1993, respectively), and Mr.
Matthews’s 1990 through 1993 taxable years. On the basis of
information developed by the revenue agent, the extension was
approved.
On April 29, 2002, the revenue agent faxed to petitioners’
representatives proposed computations reflecting the impact of
pertinent unreported income on Superior’s TYE 1991 through 1996.
Contemporaneously, the revenue agent discussed with the
representatives the fact that the unreported income amounts would
flow through to Mr. Matthews as dividends. The facsimile
transmission was the first written contact by the IRS with either
- 7 -
Superior or Mr. Matthews that dealt with their 1990 through 1993
periods. In response, petitioners’ representatives called on
May 3, 2003, to advise the revenue agent that petitioners
disagreed with certain of the computations, did not wish to
discuss years prior to 1994, and would not be providing any
further information. Similarly, on May 23, 2002, the
representatives advised the revenue agent that no further
information would be provided in compliance with IDRs.
During the week of May 23, 2002, the revenue agent made
several telephone calls to petitioners’ representatives in an
attempt to arrange a meeting that was eventually held on May 31,
2002. At that time, the revenue agent served a summons or
summonses for additional information with a response date of
June 19, 2002. Petitioners responded to the summons(es) with a
letter dated June 28, 2002, communicating an intent to supply
only a portion of the materials requested and claiming that a
significant percentage were protected by privilege doctrines or
were no longer available.
Meanwhile, Mr. Matthews was sentenced on May 8, 2002. By
letter dated May 28, 2002, the U.S. Department of Justice advised
the IRS that it was closing its files on the criminal aspects of
the Superior and Matthews cases.
Throughout July and August 2002 the revenue agent and
representatives of petitioners continued to communicate with
- 8 -
respect to the summoned information and possible enforcement.
On August 26, 2002, the revenue agent received a letter dated
August 22, 2002, from petitioners’ counsel indicating that
petitioners had supplied all that they were able or willing to
produce and suggesting that the revenue agent prepare and provide
computations based upon the available information. The parties
would then be in a position to determine whether any agreement
could be reached as to acceptable amounts of tax liabilities
owed. By facsimile transmittal dated August 28, 2002, the
revenue agent responded with a letter and computations reflecting
liabilities for Mr. Matthews for years 1990 through 1996.
During September and October 2002 the revenue agent had frequent
and ongoing communications with representatives of petitioners,
seeking to arrive at appropriate tax computation figures for both
Superior and Mr. Matthews that would be acceptable to all
parties. These communications included additional records
petitioners provided.
Under cover of a November 15, 2002, letter, and with the
understanding that the enclosed computations were acceptable to
all parties, the revenue agent provided to petitioners proposed
final examination reports for all years under audit; i.e.,
Superior’s TYE 1991 through 1996 and Mr. Matthews’s tax years
1990 through 1996. On December 2, 2002, petitioners executed and
the IRS received Forms 870, Waiver of Restrictions on Assessment
- 9 -
and Collection and Acceptance of Overassessment, with respect to
each of the taxable years covered by the final examination
reports.
On January 13, 2003, the IRS received from Mr. Matthews a
check for $3,815,655.89. By letter dated January 14, 2003, to
Mr. Matthews and his representatives the IRS confirmed receipt of
the funds and stated: “The check was applied to Mr. James
Matthews, Sr. individual tax liability for tax years 1990 to 1996
inclusive.” The remittance paid in full Mr. Matthews’s account
balances, including tax, penalties, and interest, for 1990 and
1992 through 1996. Superior’s account for TYE 1995 had been paid
in full by an advance payment on April 30, 2002. The record does
not reflect any payments with respect to Superior’s liabilities
for TYE 1994, and the present status of that account is unclear.
On or about May 19, 2004, Mr. Matthews filed with the IRS a
separate Form 843, Claim for Refund and Request for Abatement,
with respect to each of his taxable years 1990 and 1992 through
1996. The Forms 843 sought abatement of interest under section
6404(e)(1) for the subject years. Superior likewise filed a
separate Form 843 requesting abatement of interest for TYE 1994
and TYE 1995.
The IRS, by letter dated July 20, 2004, disallowed
Superior’s claims for abatement. Superior responded in August of
2004 with a request for reconsideration by the IRS Office of
- 10 -
Appeals. Regarding Mr. Matthews’s claims, the IRS on December 9,
2004, sent a tentative disallowance, and Mr. Matthews in late
December submitted a letter treated as a request for
reconsideration.
Both petitioners’ cases were assigned to an Appeals officer
during January 2005, at which time the officer sent each
petitioner an initial letter. After research and review of
relevant files and legal authority, the Appeals officer on
May 25, 2005, sent to petitioners’ representative a letter
scheduling a joint conference for June 15, 2005, and asking that
an explanation of the legal authority for petitioners’ claims be
provided before the meeting. The conference was rescheduled for
June 16, 2005, at the request of petitioners’ representative, and
so held, but neither an explanation of legal authority nor
further factual information was provided to the Appeals officer.
On August 26, 2005, the Appeals officer advised petitioners’
counsel by telephone that, on the existing record, he intended to
disallow the claims for abatement in their entirety. A Full
Disallowance-Final Determination was issued to each petitioner on
September 14, 2005, on the grounds that no error or delay merited
abatement of interest. The petitions in the instant case were
thereafter timely filed on October 13, 2005, and the instant
cross-motions for summary judgment followed.
- 11 -
Discussion
I. General Rules
A. Summary Judgment
Rule 121(a) allows a party to move “for a summary
adjudication in the moving party’s favor upon all or any part of
the legal issues in controversy.” Rule 121(b) directs that a
decision on such a motion shall be rendered “if the pleadings,
answers to interrogatories, depositions, admissions, and any
other acceptable materials, together with the affidavits, if any,
show that there is no genuine issue as to any material fact and
that a decision may be rendered as a matter of law.”
The moving party bears the burden of demonstrating that no
genuine issue of material fact exists and that he or she is
entitled to judgment as a matter of law. Sundstrand Corp. v.
Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th
Cir. 1994). Facts are viewed in the light most favorable to the
nonmoving party. Id. However, where a motion for summary
judgment has been properly made and supported by the moving
party, the opposing party may not rest upon mere allegations or
denials contained in that party’s pleadings but must by
affidavits or otherwise set forth specific facts showing that
there is a genuine issue for trial. Rule 121(d).2
2
Petitioners have filed respective motions for leave to
file motion to shift the burden of proof to respondent and have
(continued...)
- 12 -
B. Section 6404
Section 6404(e), as in effect for the years in issue,
provided in relevant part as follows:
SEC. 6404(e). Assessments of Interest
Attributable to Errors and Delays by Internal Revenue
Service.--
(1) In general.-- In the case of any
assessment of interest on--
(A) any deficiency attributable in whole
or in part to any error or delay by an
officer or employee of the Internal Revenue
Service (acting in his official capacity) in
performing a ministerial act, or
(B) any payment of any tax described in
section 6212(a) to the extent that any error
or delay in such payment is attributable to
such an officer or employee being erroneous
or dilatory in performing a ministerial act,
the Secretary may abate the assessment of all or
any part of such interest for any period. For
purposes of the preceding sentence, an error or
delay shall be taken into account only if no
significant aspect of such error or delay can be
attributed to the taxpayer involved, and after the
Internal Revenue Service has contacted the
taxpayer in writing with respect to such
deficiency or payment.[3]
2
(...continued)
lodged corresponding motions to shift the burden. At the
hearing, however, the parties concurred with the Court that those
motions would need to be reached only if a material fact or facts
remaining in question precluded disposition by summary judgment.
Given the Court’s conclusions below, the motions for leave will
be denied as moot.
3
Sec. 6404(e) was amended in 1996 by the Taxpayer Bill of
Rights 2, Pub. L. 104-168, sec. 301, 110 Stat. 1457 (1996), to
permit abatement with respect to “unreasonable” error or delay in
(continued...)
- 13 -
For purposes of section 6404(e), a “ministerial act” is
defined 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.” Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin.
Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).4 Furthermore, “A
decision concerning the proper application of federal tax law (or
other federal or state law) is not a ministerial act.” Id.
Section 6404(h)(1) provides the Tax Court with jurisdiction
to review denials of requests for abatement of interest under an
abuse of discretion standard.5 Action constitutes an abuse of
3
(...continued)
performing a “ministerial or managerial” act. The amendment is
effective for tax years beginning after July 30, 1996, and is
thus inapplicable to the cases at bar. See Woodral v.
Commissioner, 112 T.C. 19, 25 n.8 (1999).
4
Temporary regulations are entitled to the same weight and
binding effect as final regulations. Peterson Marital Trust v.
Commissioner, 102 T.C. 790, 797 (1994), affd. 78 F.3d 795 (2d
Cir. 1996). Final regulations were promulgated under sec. 6404
after the years in issue and contain a definition of “ministerial
act” that does not differ from that set forth in the temporary
regulations. Sec. 301.6404-2(b)(2), Proced. & Admin. Regs.
5
The provision for Tax Court review of interest abatement
determinations was enacted as sec. 6404(g). Taxpayer Bill of
Rights 2 (TBOR 2), sec. 302(a), 110 Stat. 1457 (1996). The
provision was then redesignated after the years in issue, first
as sec. 6404(i) by the Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, secs. 3305(a), 3309(a), 112
Stat. 743, 745, and then as sec. 6404(h) by the Victims of
Terrorism Tax Relief Act of 2001, Pub. L. 107-134, sec.
(continued...)
- 14 -
discretion where arbitrary, capricious, or without sound basis in
fact or law. Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Congress originally intended by section 6404(e) to sanction
abatement of interest only where failure to do so “would be
widely perceived as grossly unfair”, not to provide a remedy
enabling taxpayers “routinely to avoid payment of interest”.
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.
II. Positions of the Parties
Respondent’s motion for summary judgment, arguing that
petitioners are not entitled to abatement of interest with
respect to any of the tax years in issue, is premised on three
principal considerations: (1) Section 6404(e) as a matter of law
precludes abatement for any period before the IRS first contacted
the taxpayer in writing with respect to the underlying deficiency
or payment of tax; (2) judicial precedent establishes that
abatement under section 6404(e) is not available for the period
during which a civil examination is suspended for a criminal
fraud investigation; and (3) the record reveals no error or delay
in performing a ministerial act during any of the remaining
periods.
5
(...continued)
112(d)(1)(B), 115 Stat. 2435 (2002). The provision as enacted
and redesignated applies to requests for abatement after July 30,
1996. TBOR 2 sec. 302(b), 110 Stat. 1458. To avoid confusion,
references herein will be to the current designation.
- 15 -
For purposes of the cross-motions for summary judgment,
petitioners advance a primary and an alternative position. As
reflected in petitioners’ computations, the primary argument
maintains that interest should be abated for the entire period
from the filing of the underlying return until at least December
5, 2002. The alternative argument, offered in acknowledgment of
precedent pertaining to criminal investigations, seeks abatement
for the period just described, less the interest accruing from
March 1, 1997, through May 28, 2002. In making their arguments,
petitioners contend that an overarching “grossly unfair” standard
should trump period limitations that might otherwise derive from
statutory language and interpretive jurisprudence. Petitioners
then claim that they should be deemed to have made a sufficient
showing of error or delay by the IRS in performing a ministerial
act because the IRS failed to keep an adequate record of
administrative activity, in violation of IRS Internal Revenue
Manual directives, throughout the processing of petitioners’
cases.
- 16 -
III. Analysis
A. Years Before the Court
As noted supra, the jurisdiction of the Tax Court in
interest abatement cases is premised on section 6404(h). Section
6404(h)(1) authorizes the Court to determine whether a failure to
abate interest was an abuse of discretion where: (1) The
Commissioner has mailed to the taxpayer a notice of final
determination not to abate interest; (2) the taxpayer files a
petition for review within 180 days of the mailing of the notice;
and (3) the taxpayer meets the income limitations provided in
section 7430(c)(4)(A)(ii).6 See also Rule 280(b).
With respect to Mr. Matthews, the record reflects that he
submitted to the IRS requests for abatement for the taxable years
1990, 1992, 1993, 1994, 1995, and 1996. The notice of final
determination issued to Mr. Matthews likewise denied abatement
explicitly for the 1990 and 1992 through 1996 periods. However,
in petitioners’ computations for purposes of the pending cross-
motions, interest accruing with respect to Mr. Matthews’s taxable
year 1991 is included. Because the record establishes no basis
upon which the Court may exercise jurisdiction over any claims
6
Petitioners have asserted that they satisfy the income
limitations imposed by sec. 7430(c)(4)(A)(ii), and respondent has
not challenged those assertions. The Court therefore will not
further address the requirement under sec. 7430(c)(4)(A)(ii).
- 17 -
pertaining to 1991, the Court may not consider or direct
abatement for that year.
Similarly, as to Superior, the record contains Forms 843
submitted to the IRS seeking interest abatement for TYE 1994 and
TYE 1995. The notice of final determination issued to Superior
specifically addresses disallowance for TYE 1994 and TYE 1995.
Consistently, that notice was attached to the petition at docket
No. 19278-05. However, petitioners’ computations include
interest accruing with respect to Superior’s TYE 1991, TYE 1992,
TYE 1993, TYE 1994, and TYE 1995. Absent any indication that a
final determination has been issued or petitioned for Superior’s
TYE 1991, TYE 1992, or TYE 1993, the Court is constrained to
conclude that interest pertaining to those periods should not be
considered or allowed. Having clarified the tax years properly
before us, we turn to our review of those years and to the issue
of whether respondent’s denial of interest abatement with respect
to the years in issue constitutes an abuse of discretion.
B. Abatement for Periods Before First Contact
As quoted in full supra, the flush language of section
6404(e)(1) expressly limits the periods for which abatement under
that provision is available, stating that “an error or delay
shall be taken into account only * * * after the Internal Revenue
Service has contacted the taxpayer in writing with respect to
such deficiency or payment.” The foregoing restriction has been
- 18 -
the subject of repeated judicial interpretation and, without
exception, applied in instances where taxpayers have sought
abatement for the period preceding notification from the IRS.
E.g., Krugman v. Commissioner, 112 T.C. 230, 239 (1999); Hawksley
v. Commissioner, T.C. Memo. 2000-354; Banat v. Commissioner, T.C.
Memo. 2000-141, affd. 5 Fed. Appx. 36 (2d Cir. 2001); Nerad v.
Commissioner, T.C. Memo. 1999-376. We have explained the
rationale for the statutory limit as follows:
Petitioner’s argument that the IRS failed to
examine his return promptly in light of the statement
on the return is without merit. We have previously
held that this Court is not at liberty to modify a
period of time prescribed by a statute of limitations
in which the Commissioner is authorized to act. See
Foster v. Commissioner, 80 T.C. 34, 229 (1983), affd.
in part and vacated in part on another issue 756 F.2d
1430 (9th Cir. 1985); Saigh v. Commissioner, 36 T.C.
395, 424-425 (1961). Section 6501 expressly defines
the period that respondent is authorized to assess
deficiencies against taxpayers. * * * The timeliness
of respondent’s examination is not an error for
purposes of section 6404(e). [Nerad v. Commissioner,
supra.]
Moreover, congressional pronouncements and action both at
the time of enactment of section 6404(e) and upon amendment of
section 6404 after the years in issue strongly buttress adherence
to the plain meaning of the text. Legislative history
accompanying the 1986 enactment of section 6404(e) notes
specifically that section 6404(e)(1) “does not therefore permit
the abatement of interest for the period between the date the
taxpayer files a return and the date the IRS commences an audit,
- 19 -
regardless of the length of that time period.” 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.
We also note that Congress amended section 6404 with the
addition of subsection (g) in 1998, thereby providing for a
suspension of interest where the Secretary fails to notify a
taxpayer of liability within a stated period (18 months under the
original version of section 6404(g)) from the later of the filing
or the due date of the corresponding return. Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3305, 112 Stat. 743. Although the provision is effective
only for tax years ending after July 22, 1998, id., and is thus
inapplicable here, it is relevant to the extent that its
enactment suggests the absence of an existing remedy under
section 6404(e)(1) in analogous circumstances.
Petitioners acknowledge the timing restrictions in the flush
language of section 6404(e)(1), as well as the judicial and
legislative authorities described supra. Petitioners contend,
nonetheless, that the apparent strict interpretation signaled by
the statute must be balanced against, and moderated by, the
statement contained in the legislative history and often repeated
in caselaw that Congress did “not intend that this provision be
used routinely to avoid payment of interest; rather it intends
that the provision be utilized in instances where failure to
- 20 -
abate interest would be widely perceived as grossly unfair.” 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. Petitioners
maintain that, taking into account both clauses of the foregoing
statement:
it is obvious that a “grossly unfair” standard must be
considered in evaluating each unique set of facts and
circumstances. In other words, the statute should be
interpreted based on strict construction of the
language regarding dates, amounts, etc.; however, this
strict interpretation is limited to producing an
equitable result that is not “grossly unfair.”
Petitioners contend that the “notion of limiting strict
construction of I.R.C. § 6404 with a subjective equitable
standard (‘grossly unfair’) is also reflected in an evolving
policy trend of both the IRS and Congress.” In support of their
contentions, petitioners cite various revenue procedures and
statutory enactments (including section 6404(g)).
Petitioners argue that for certain of the years in issue 8
to 10 years passed before the receipt of any notice that the IRS
was considering audits of the underlying returns, concluding:
In the present matter, the assessment of compound
interest for such a long period of time outside the
normal statute of limitations; and without providing
reasonable notice to the taxpayer from the onset of the
investigation, clearly defeats any notion of fair play
and runs contrary to the evolving policy demonstrated
by the IRS and Congress. Such “grossly unfair” acts
are the limiting standard to which Congress was clearly
referring in H. Rept. 99-426, at 844 (1985).
Furthermore, this case far exceeds the scope of
“routine” in consideration of the abatement of
interest. Not only does this matter involve
- 21 -
significant dollar amounts, but it also contains
elements of criminal and civil fraud.
The present case sets forth unique circumstances
where, in lieu of the trend enhancing the taxpayer’s
ability to eliminate and/or minimize interest charges,
upholding the interest charges against the taxpayer
would produce a result that is “grossly unfair” and in
direct conflict with the application of the statute as
intended by Congress. * * *
We disagree for several reasons. First are the fundamental
and closely related tenets of statutory construction that (1) a
statute is to be interpreted so as to give effect to its plain
and ordinary meaning unless to do so would produce an absurd or
futile result, and (2) a statute clear and unambiguous on its
face must be regarded as conclusive absent an unequivocal
expression of legislative intent to the contrary. E.g., Am.
Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982); United States
v. Am. Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940);
Fla. Hosp. Trust Fund v. Commissioner, 103 T.C. 140, 152 (1994),
affd. 71 F.3d 808 (11th Cir. 1996). In the instant case, the
text in issue is a brief statement of temporal limitation, a
relatively routine feature of many taxing statutes. We are hard
pressed to see any absurdity, futility, or ambiguity that would
permit the text of the statute to be overridden by legislative
history, especially by the legislative expression on which
petitioners rely, which falls far short of an unequivocal
repudiation of the statutory language. Rather, we believe that
the two would appear to reflect a harmony of purpose.
- 22 -
Although petitioners attempt to characterize the “grossly
unfair” clause as a liberalization, the restrictive nature of the
language would seem more rationally to be interpreted as
reiterating the general narrowness of the relief afforded by the
statute. In the legislative history, the “grossly unfair” clause
is followed immediately by statements reprising specific limits
imposed by section 6404(e)(1) on the period for which relief may
be available, including the rule of IRS contact. 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. Likewise, the
clause is immediately preceded by the statement cautioning
against routine use to avoid payment. In that configuration, we
find it particularly difficult to read the “grossly unfair”
clause in the legislative history as an exception arising from
the midst of what is otherwise a description of the narrowness of
the remedy.
Furthermore, even if the Court were willing to accept a
“grossly unfair” exception, the facts of the instant case would
fail to support its application. Stated simply, petitioners seek
equitable relief, whereas the instant case is tainted by
Mr. Matthews’s criminal conviction for tax fraud. As the Supreme
Court has observed in the context of the unlimited statute of
limitations for assessment in the case of a fraudulent return:
We do not find petitioners’ complaint of “unfair
treatment” persuasive. Petitioners claim that it is
- 23 -
unfair “to forever suspend a Sword of Damocles over a
taxpayer who at one time may have filed a fraudulent
return, but who has subsequently recanted and filed an
amended return providing the Government with all the
information necessary to properly assess the tax.” * *
* But it seems to us that a taxpayer who has filed a
fraudulent return with intent to evade tax hardly is in
a position to complain of the fairness of a rule that
facilitates the Commissioner’s collection of the tax
due. A taxpayer who has been the subject of a tax
fraud investigation is not likely to be surprised when
a notice of deficiency arrives, even if it does not
arrive promptly after he files an amended return.
[Badaracco v. Commissioner, 464 U.S. 386, 400 (1984).]
Petitioners in the instant case are essentially seeking to
be placed in the position they would have occupied had they filed
and paid timely. We will not permit such a result under the
facts. With respect to each of the tax years in issue,
petitioners are not entitled to abatement of interest for any
period before the first written IRS contact regarding liabilities
for that year. The parties stipulated the dates of first contact
as follows:
Superior TYE 1994 July 9, 1996
TYE 1995 Oct. 4, 1996
Mr. Matthews 1990 Apr. 29, 2002
1992 Apr. 29, 2002
1993 Apr. 29, 2002
1994 Jan. 28, 1997
1995 Jan. 28, 1997
Concerning Mr. Matthews’s 1996 taxable year, the parties
stipulated that no written document was sent before the beginning
of the criminal investigation.
- 24 -
C. Abatement During Criminal Investigation
As stipulated by the parties, the relevant criminal
investigation pertaining to Superior and Mr. Matthews was ongoing
from late February 1997 until May 28, 2002. The subject of
interest abatement vis-a-vis criminal investigations has been
addressed in previous litigation. Courts have long recognized
the general policy within the IRS to suspend resolution of a
civil examination pending completion of a criminal examination,
as well as the realities that may necessitate such an approach.
See, e.g., Badaracco v. Commissioner, supra at 399; United States
v. LaSalle Natl. Bank, 437 U.S. 298, 308-313 (1978). In the
words of the Supreme Court: “As a practical matter, therefore,
the Commissioner frequently is forced to place a civil audit in
abeyance when a criminal prosecution is recommended.” Badaracco
v. Commissioner, supra at 399.
This Court has noted that while a tax fraud investigation
comprises both civil and criminal aspects, the criminal aspects
dominate insofar as the investigation is controlled by the IRS
Criminal Investigation Division. Taylor v. Commissioner 113 T.C.
206, 211-212 (1999), affd. 9 Fed. Appx. 700 (9th Cir. 2001);
Gorgie v. Commissioner, T.C. Memo. 2000-80. Such a policy is
intended to avoid the conflicts between civil and criminal
discovery rules, the issues related to witness testimony and
self-incrimination, and the problems of inherent confusion that
- 25 -
could result if civil and criminal proceedings were allowed to
take place concurrently. Taylor v. Commissioner, supra at 212.
Consequently, civil assessment and collection are typically
deferred. Id.
In the context of a specific case, the foregoing and related
considerations must be weighed and applied by the IRS in deciding
how to proceed. Id. at 212-213. As a result, this Court has
held: “The timing of the decision to defer the civil proceedings
until resolution of the criminal aspects does not detract from
the fact that the exercise of judgment is required in making such
a decision.” Id. at 213. The decision therefore is “not a
ministerial act.” Id.; Hanks v. Commissioner, T.C. Memo. 2001-
319; Gorgie v. Commissioner, supra.
Petitioners acknowledge and do not appear to raise any
direct challenge of the above rule. They posit, however, “that
while the decision to suspend civil activity in itself may not be
a ministerial duty, actions prior to and subsequent to the making
of the actual decision may be defined as ministerial.” We
disagree with their argument as applied to the circumstances of
this case. See Gorgie v. Commissioner, supra (“The time spent
investigating whether to impose civil or criminal fraud
penalties, regardless of petitioners’ guilt or innocence, is not
a ground under section 6404(e) that would allow respondent to
abate interest.”).
- 26 -
We conclude that petitioners are not entitled to interest
abatement for the period of the criminal investigation.
Additionally, in the light of the parties’ stipulations and the
circumstances discussed infra, we find it unnecessary to
determine whether the period of suspension should be considered
to end on May 28, 2002, when the U.S. Department of Justice
formally closed the files on its criminal case or at the earlier
time in February 2002 when the IRS resumed civil examination
activity at petitioners’ express request.
D. Abatement for Periods From July 1996 to February 1997
and From February to November 2002
There remain two periods during which some or all of the tax
years in issue were being examined for civil purposes. Those
timeframes will be evaluated in turn for the existence of
ministerial error or delay. As a threshold matter, however, we
will address the primary argument advanced by petitioners in
connection with the concept of ministerial error or delay.
Petitioners quote extensively from provisions of the
Internal Revenue Manual, contending throughout their submissions
on this point that “The IRS, according to the Internal Revenue
Manual, is mandated to keep copious records of all action taken
by the Service on each case.” Petitioners express their position
as follows:
The Examining Officer’s Activity Records on the
Petitioner show that the IRS has produced a number of
records that are vague, uninformative, and fail to
- 27 -
comply with it [sic] own practice and procedures. Due
to the IRS’s failure to provide detailed records as
required by its own practice and procedures, Petitioner
claims that it is entitled, as a matter of law, to have
such acts deemed favorably to the Petitioner, and
regarded by the Court as being ministerial in nature.
The Court should further determine that it is, in fact,
the IRS’s duty to keep copious records of all action
taken by the Service, its examiners, or others
responsible for activity on the case; and that the
Service is in violation of such a ministerial duty in
this case. In the present case, the IRS violated its
own manual.
Initially, we note the well-settled principle that the
Internal Revenue Manual does not have the force of law, is not
binding on the IRS, and confers no rights on taxpayers. E.g.,
Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg.
T.C. Memo. 2004-13; Carlson v. United States, 126 F.3d 915, 922
(7th Cir. 1997); Tavano v. Commissioner, 986 F.2d 1389, 1390
(11th Cir. 1993), affg. T.C. Memo. 1991-237; Marks v.
Commissioner, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991), affg. T.C.
Memo. 1989-575. Moreover, even if some duty of documentation
incumbent upon the IRS could be inferred from the Internal
Revenue Manual or other pertinent law, petitioners’ contentions
as applied to the instant case fail in the circumstances.
In support of their argument petitioners enumerate seven
periods (many overlapping) as to which they claim that particular
IRS records, or the IRS records generally, are deficient.
According to petitioners, the cited periods and/or records
reflect no activity, state only “worked on case”, or otherwise
- 28 -
reveal no activity of significance. However, six of the seven
identified periods transpired entirely within the period of the
criminal investigation. The sole remaining complaint is raised
with respect to entries from January 28, 1997, through
December 2, 2002, in a specific record of the examining revenue
agent. That record likewise is without significant relevance as
it is merely a correspondence log and full activity for relevant
times is recounted in other records of the revenue agent.
Accordingly, even petitioners’ argument fails.
1. Period From July 1996 to Late February 1997
The first written contact with respect to any of the tax
years in issue was the appointment letter concerning Superior’s
TYE 1994 sent on July 9, 1996. Superior’s TYE 1995 was added to
the audit, and the first notice thereof was provided on
October 4, 1996. Similarly, Mr. Matthews’s 1994 and 1995 taxable
years were added, with written notice sent on January 28, 1997.
Examination of the revenue agent’s activity records from
July 1996 through mid-February 1997 reveals consistent and
ongoing substantive work on the cases, including interviews,
courthouse research, review of returns and taxpayer or third-
party records, and analysis. By the second week of February, the
emphasis had shifted to coordination and preparation of the fraud
referral, but nowhere do the records reflect any serious breaks
in activity. We perceive nothing in the processing of
- 29 -
petitioners’ cases before the commencement of the criminal
investigation that would suggest ministerial errors or delays.
2. Period From February to Mid-November 2002
Civil examination of petitioners’ returns resumed in
February of 2002, and proposed final examination reports setting
forth balances due for each of the years in issue were provided
to petitioners on November 15, 2002. IRS records for the
intervening period reflect consistent and ongoing examination
activity. Regular communication occurred between the revenue
agent and petitioners’ representatives, including repeated
requests by the revenue agent for information. Additionally, by
written contact on April 29, 2002, a date falling within this
period, Mr. Matthews’s 1990, 1992, and 1993 taxable years were
added to the audit. Notably, petitioners initially declined to
provide certain information requested, forcing the IRS to pursue
summons procedures. Furthermore, even when petitioners began to
work more cooperatively with the revenue agent in the fall of
2002, information was typically not provided by promised
deadlines, necessitating considerable followup by the revenue
agent.
Once negotiations between the parties concerning the
relevant computations were completed, the revenue agent prepared
and provided the final examination reports within 2 days. From
that point, petitioners were solely responsible for terminating
- 30 -
the accrual of interest by remitting payment. On the record we
find no ministerial errors or delays affecting the period from
February through mid-November 2002.
E. Conclusion
In accordance with governing law and the complete records in
the instant case, we conclude that respondent committed no abuse
of discretion in determining that petitioners were not entitled
to abatement of interest pursuant to section 6404(e)(1) with
respect to any of the years in issue. Respondent’s motions for
summary judgment will be granted, and petitioners’ cross-motions
will be denied.
The Court has considered all other arguments made by the
parties and, to the extent not specifically addressed herein, has
concluded that they are irrelevant, moot, or without merit. To
reflect the foregoing,
Appropriate orders and
decisions for respondent will
be entered.