T.C. Memo. 2009-24
UNITED STATES TAX COURT
RONALD D. AND ANN S. YOUNG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17563-07. Filed February 4, 2009.
Ps requested an abatement of interest on Federal income
tax deficiencies for the taxable years 1997 through 2000. R
determined that Ps were not entitled to an abatement of
interest.
Held: R’s determination was not an abuse of discretion.
Ronald D. and Ann S. Young, pro sese.
Jonathan J. Ono, for respondent.
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MEMORANDUM OPINION
WHERRY, Judge: Respondent determined that petitioners are
not entitled to an abatement of interest on Federal income tax
deficiencies for their 1997, 1998, 1999, and 2000 tax years. The
issue for decision is whether respondent’s refusal to abate
interest was an abuse of discretion.
Background
This case was submitted fully stipulated pursuant to Rule
122 of the Court’s Rules of Practice and Procedure. The
stipulation of the parties, with accompanying exhibits, is
incorporated herein by this reference. Petitioners filed timely
joint Forms 1040, U.S. Individual Income Tax Return, for their
1997, 1998, 1999, and 2000 tax years.
From 1997 through 2000 Mr. Young worked on Johnston Island
for Washington Group International, formerly known as Raytheon
Demilitarization Co. (Raytheon). During those years he received
wages from Raytheon of $82,939, $77,012, $79,108, and $83,422,
respectively. On their joint returns, petitioners reported
receiving those amounts as wage income but excluded them from
gross income, citing section 1.931-1, Income Tax Regs.
Respondent subsequently determined that, pursuant to section
931,1 petitioners were not entitled to exclude any portion of Mr.
1
All section references are to the Internal Revenue Code of
(continued...)
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Young’s Raytheon wages. Respondent issued a notice of deficiency
for petitioners’ 1997 tax year and a notice of deficiency for
petitioners’ 1998, 1999, and 2000 tax years. Petitioners timely
petitioned this Court to redetermine the deficiencies. Those
petitions were docketed at docket Nos. 8295-01 and 10376-03. In
both cases the parties executed stipulated decisions that upheld
respondent’s adjustments pursuant to section 931 and held that
petitioners were liable for the asserted income tax deficiencies
in all 4 years.
Thereafter, respondent assessed the income tax deficiencies
for those years along with related interest. Petitioners filed
administrative requests for abatement of the related interest,
which respondent’s Appeals Office ultimately disallowed in full
for all 4 years.
On August 7, 2007, petitioners timely petitioned the Court
to review respondent’s refusal to abate interest. They resided
in Florida when they filed their petition. In the petition
petitioners argue that
The action of the Commissioner to continue the
publication of Treasury Regulation 1.931-1 following
the enactment of the Tax Reform Act of 1986 until April
6, 2005, a period of almost twenty years, constitutes
an error and delay in the performance of his/her
managerial or ministerial duty, mandated by statute,
entitling petitioners to the abatement of interest on
1
(...continued)
1986, as amended.
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the deficiencies resulting therefrom, during the period
of the Commissioner’s failure to act.
Petitioners had an opportunity to file a brief but did not do so.
Some additional background is necessary to fully understand
petitioners’ argument. Before 1986, section 931 permitted U.S.
citizens “to exclude income derived from sources within
possessions of the United States, except for Puerto Rico, the
U.S. Virgin Islands, or Guam, if certain conditions were
satisfied.” See Specking v. Commissioner, 117 T.C. 95, 102
(2001), affd. sub nom. Haessly v. Commissioner, 68 Fed. Appx. 44
(9th Cir. 2003), affd. sub nom. Umbach v. Commissioner, 357 F.3d
1108 (10th Cir. 2003). Johnston Island was not specifically
mentioned in section 931; however, section 1.931-1(a)(1), Income
Tax Regs., defined “possession of the United States” to include
Johnston Island. See Specking v. Commissioner, supra at 103.
In 1986, section 931 was amended by the Tax Reform Act of
1986, Pub. L. 99-514, sec. 1272(a), 100 Stat. 2593. As amended,
section 931 permits bona fide residents of Guam, American Samoa,
and the Northern Mariana Islands to exclude income derived from
within any of those three specified possessions. See Specking v.
Commissioner, supra at 110. Despite the statutory amendment,
section 1.931-1(a)(1), Income Tax Regs., continued to refer to
Johnston Island until it was amended in April 2005. See T.D.
9194, 2005-1 C.B. 1016 (revising section 1.931-1, Income Tax
Regs., and adding section 1.931-1T, Temporary Income Tax Regs.,
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promulgated under amended section 931); see also Smith v.
Commissioner, T.C. Memo. 2006-51 n.8.
Like petitioners, a number of other taxpayers relied on
section 1.931-1(a)(1), Income Tax Regs., to exclude Johnston
Island income even after section 931 was amended. See, e.g.,
Farrell v. United States, 313 F.3d 1214, 1215 (9th Cir. 2002);
Specking v. Commissioner, supra; Smith v. Commissioner, supra;
Taibo v. Commissioner, T.C. Memo. 2004-196. In cases before this
Court we have determined that those taxpayers were not justified
in doing so because section 931 controlled and because section
1.931-1(a)(1), Income Tax Regs., had been rendered obsolete in
light of the amendment to section 931. See Specking v.
Commissioner, supra at 110-111; Jones v. Commissioner, T.C. Memo.
2003-14. We noted that the failure to amend the regulation
sooner did not suggest that taxpayers were still permitted to
exclude Johnston Island income: “‘The Treasury’s relaxed
approach to amending its regulations to track Code changes is
well documented. * * * The absence of any amendment * * * is more
likely a reflection of the Treasury’s inattention than any
affirmative intention on its part to say anything at all.’”
Specking v. Commissioner, supra at 111 (quoting United Dominion
Indus., Inc., v. United States, 532 U.S. 822, 836-837 (2001)).
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Discussion
Under section 6601(a), interest on a Federal income tax
liability generally accrues at the rate specified by section 6621
from the last date prescribed for payment until the date on which
the tax is paid. If there is an “unreasonable error or delay by
an officer or employee of the Internal Revenue Service (acting in
his official capacity) in performing a ministerial or managerial
act,” the Secretary may abate all or any part of the interest
that accrues because of the error or delay. Sec. 6404(e)(1). An
error or delay will be taken into account only if no significant
aspect of it is attributable to the taxpayer involved and it
occurs after the Internal Revenue Service (IRS) has contacted the
taxpayer, in writing, with respect to the deficiency or payment
of tax on which the interest is accruing. Id.; sec. 301.6404-
2(a)(2), Proced. & Admin. Regs.
Even when there is an unreasonable error or delay with
respect to a managerial or ministerial act, the Secretary has
discretion to decide whether to abate interest. Sec. 6404(e);
see Grandelli v. Commissioner, T.C. Memo. 2008-55. We have
jurisdiction under section 6404(h) to determine whether the
Secretary’s decision not to abate interest was an abuse of
discretion. In such cases the taxpayer bears the burden of
proving that the Commissioner exercised this discretion
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arbitrarily, capriciously, or without sound basis in fact or law.
See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Petitioners have conceded that they could not exclude Mr.
Young’s Johnston Island income and that they are liable for
income tax deficiencies for 1997, 1998, 1999, and 2000. Citing
section 6404(e), however, they argue that the failure to promptly
amend section 1.931-1, Income Tax Regs., after the statutory
amendment was an unreasonable error or delay in performing a
managerial or ministerial act. They argue further that that
error or delay led them to exclude Mr. Young’s Johnston Island
income on their 1997 through 2000 returns, which ultimately
resulted in the deficiencies and the interest on those
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deficiencies.2 Accordingly, they assert that the Secretary
should abate the interest on those deficiencies.
Petitioners’ argument is unpersuasive for two reasons.
First, for petitioners to prevail, we would have to determine
that the delay in amending section 1.931-1, Income Tax Regs., was
an unreasonable error or delay by an IRS officer or employee.
Petitioners have not provided evidence that the error or delay in
performing that act was attributable to an IRS officer or
employee. The process of amending a regulation is extensive and
involves multiple layers of analysis, review, and approval within
both the IRS and the Treasury Department. See, e.g., sec.
601.601(a), Statement of Procedural Rules; Internal Revenue
2
As we have seen, taxpayers who excluded Johnston Island
income after the statutory amendment have not been successful
using this type of cause-and-effect argument--based on their
reliance on the Secretary’s delay in amending the regulation--to
avoid liability for income tax deficiencies. See, e.g., Specking
v. Commissioner, 117 T.C. 95, 110-111 (2001), affd. sub nom.
Haessly v. Commissioner, 68 Fed. Appx. 44 (9th Cir. 2003), affd.
sub nom. Umbach v. Commissioner, 357 F.3d 1108 (10th Cir. 2003);
Smith v. Commissioner, T.C. Memo. 2006-51.
The argument has been used successfully, however, to avoid
liability for the sec. 6662(a) accuracy-related penalty. See
Taibo v. Commissioner, T.C. Memo. 2004-196 (holding that a
taxpayer who relied on sec. 1.931-1, Income Tax Regs., had a
reasonable basis for excluding Johnston Island income earned in
2000). But see Smith v. Commissioner, T.C. Memo. 2006-51
(concluding that taxpayer did not have reasonable basis where he
relied on sec. 1.931-1, Income Tax Regs., as to income earned in
2001, after courts had rejected that argument); Hautzinger v.
Commissioner, T.C. Memo. 2003-236 (upholding a penalty even as to
income earned in 1998 before the courts had addressed the
validity of sec. 1.931-1, Income Tax Regs.).
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Manual (IRM) pt. 32.1.1 et seq. (Aug. 11, 2004) (Chief Counsel
Regulation Handbook).3 Notably, both the IRS Commissioner and an
Assistant Treasury Secretary must approve and sign final
regulations. See sec. 601.601(a), Statement of Procedural Rules;
IRM pt. 32.1.6, 32.1.8 (Aug. 11, 2004). Because there is no
indication that the delay in amending section 1.931-1, Income Tax
Regs., was attributable to IRS officers or employees as opposed
to Treasury Department officials or employees, interest abatement
under section 6404(e) is not appropriate.
Second, even if the delay in amending section 1.931-1,
Income Tax Regs., was an unreasonable error or delay by an IRS
officer or employee in performing a managerial or ministerial
act, petitioners would still not prevail. They argue that they
should not have to pay any interest on their income tax
deficiencies because those deficiencies were caused by the delay
in amending the regulation. Based on that argument, petitioners
have not shown the “requisite correlation between an error or
delay attributable to the Commissioner and a specific period of
3
See also Swallows Holding, Ltd. v. Commissioner, 126 T.C.
96, 177 (2006) (Holmes, J., dissenting) (“The IRS and Treasury
use the same regulation-writing process for both general and
specific authority regulations, subjecting both to the same
painstaking review under the IRS’s ‘Regulation Drafting
Handbook,’ I.R.M. 32.1.5. Both types [general a.k.a.
interpretive regulations and specific authority a.k.a.
legislative regulations] are issued as Treasury decisions, and
both are signed by an Assistant Treasury Secretary and the IRS
Commissioner.”), vacated and remanded 515 F.3d 162 (3d Cir.
2008).
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time” during which interest should be abated. Braun v.
Commissioner, T.C. Memo. 2005-221; see Guerrero v. Commissioner,
T.C. Memo. 2006-201 (“A request demanding abatement of all
interest charged does not satisfy the required link; it merely
represents a request for exemption from interest.”).
Moreover, under section 6404(e), respondent could not abate
the interest that accrued on petitioners’ deficiencies during the
period from when interest began to accrue to when petitioners
received written notice of the deficiencies. In determining
whether to abate interest that accrued after written notice was
received, respondent could only consider whether the continued
failure to amend section 1.931-1, Income Tax Regs., after such
notice was received resulted in any additional interest charges.
Petitioners have not shown that any such additional interest
accrued or that they would have paid their tax liabilities
earlier had the regulation been amended during the prosecution of
their cases before the IRS.4 See Guerrero v. Commissioner, supra
4
We note that the statutory notice of deficiency for
petitioners’ 1997 tax year was issued on Apr. 6, 2001, which was
after the U.S. District Court for the District of Hawaii held
that sec. 931 and sec. 1.931-1, Income Tax Regs., did not permit
taxpayers to exclude income earned on Johnston Island in 1994,
1995, and 1996. Farrell v. United States, 87 AFTR 2d 2001-1159,
2001-1 USTC par. 50,279 (D. Haw. 2001), affd. 313 F.3d 1214 (9th
Cir. 2002). The notice of deficiency for petitioners’ 1998,
1999, and 2000 tax years was issued on Apr. 5, 2002, which was
after this Court reached the same conclusion in Specking v.
Commissioner, supra. Accordingly, even though sec. 1.931-1,
Income Tax Regs., was not amended until 2005, petitioners had at
least some notice at a relatively early stage that the regulation
(continued...)
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(“Abatement of interest is not appropriate simply because a
taxpayer might have made a tax payment sooner.”); Braun v.
Commissioner, supra (holding that interest abatement was not
warranted under section 6404(e) where the taxpayer had not
demonstrated that he and his wife would have paid their tax
liabilities earlier but for the Commissioner’s actions).
In any event, the failure to timely amend section 1.931-1,
Income Tax Regs., is not the type of error--such as the failure
to send a notice of deficiency or a notice and demand for
payment, for example--that would have affected the timely
prosecution of petitioners’ cases before the IRS or prevented the
prompt resolution of those cases, resulting in additional
interest charges.
For these reasons, abatement of interest under section
6404(e) is not appropriate, and respondent’s refusal to abate
interest was not an abuse of discretion. The Court has
considered all of petitioners’ contentions, arguments, requests,
and statements. To the extent not discussed herein, we conclude
that they are meritless, moot, or irrelevant.
4
(...continued)
did not support their position because it was in conflict with
the amended statute and therefore obsolete.
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To reflect the foregoing,
Decision will be entered
for respondent.