T.C. Memo. 2009-216
UNITED STATES TAX COURT
RALPH D. YEOMANS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14635-07. Filed September 17, 2009.
P was liable for a Federal income tax deficiency for
his 1982 tax year and paid that deficiency on Mar. 13, 2007.
He requested an abatement of all interest that accrued on
the deficiency from Apr. 15, 1983, to Dec. 1, 2006. R
determined that P was not entitled to interest abatement. R
now concedes that P is entitled to interest abatement for
the period from Apr. 13, 2005, to Mar. 13, 2007.
Held: R’s determination that P was not entitled to
interest abatement for the period before Apr. 13, 2005, was
not an abuse of discretion.
Ralph D. Yeomans, pro se.
Michael W. Tan, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: Respondent determined a Federal income tax
deficiency for petitioner’s 1982 tax year. Petitioner paid the
deficiency on March 13, 2007, along with interest that had
accrued on the deficiency since April 15, 1983. In 2006
petitioner requested that respondent abate the interest that had
accrued from April 15, 1983, to December 1, 2006. Respondent
denied the request but now concedes that petitioner is entitled
to abatement for the period from April 13, 2005, to March 13,
2007.1 The issue for decision is whether it was an abuse of
discretion for respondent to refuse to abate the interest that
had accrued on petitioner’s deficiency before April 13, 2005. We
hold that it was not.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts and accompanying exhibits are hereby incorporated by this
1
On Apr. 13, 2005, respondent received from petitioner a
timely request for a collection due process hearing with respect
to petitioner’s 1978 and 1981 tax years. Respondent received
another such request with respect to petitioner’s 1982 tax year
on July 15, 2005. Respondent concedes that the revenue officer
assigned to petitioner’s case made an erroneous entry pertaining
to the hearing requests in petitioner’s case history and that as
a result petitioner’s case was not forwarded to respondent’s
Appeals Office for a collection due process hearing. Respondent
further concedes that the failure to forward the case was an
error in performing a ministerial act for purposes of sec.
6404(e). All section references are to the Internal Revenue Code
of 1986, as amended and in effect for the year at issue.
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reference into our findings. Petitioner resided in California
when he filed his petition.
In 1977 petitioner invested $25,000 in Lyric Leasing
Associates (Lyric Leasing), one of many partnerships syndicated
by Klineman Associates, Inc. (KAI). Like other KAI partnerships,
Lyric Leasing reported losses in its early years and phantom
income in its later years. As a partner, petitioner reported his
distributive share of Lyric Leasing’s losses and income on his
personal Forms 1040, U.S. Individual Income Tax Return.
In or around 1980 respondent grew suspicious of the losses
and began auditing KAI partnerships, including Lyric Leasing.
Respondent was particularly concerned with, and sought to
disallow, the losses Lyric Leasing reported in 1977, 1978, 1980,
1981, and 1982, shares of which petitioner claimed on his own
returns for at least 4 of those years. Petitioner agreed to
extend the period of limitations during which respondent could
assess tax against him for those years.
Kent M. Klineman, Lyric Leasing’s general partner, advised
petitioner by letter dated May 30, 1984, that if respondent
disallowed those losses he could be eligible for a refund of the
taxes he paid on Lyric Leasing’s phantom income in subsequent
years. Mr. Klineman suggested that petitioner file protective
claims for refund in case respondent’s audit continued beyond the
deadline for filing refund claims. Petitioner, however, does not
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appear to have filed any of the suggested protective refund
claims.
In 1983 Mr. Klineman informed petitioner that the audits of
KAI partnerships syndicated before 1976 would be resolved by a
test case in the Tax Court involving Wyatt Leasing Associates and
investors named Pearlstein, Pearlstein v. Commissioner, docket
Nos. 5551-81 and 5552-81. The audits of KAI partnerships
syndicated after 1975, including Lyric Leasing, would be held in
abeyance pending the resolution of Pearlstein.
In 1988, while Pearlstein was still pending, respondent’s
Appeals Office submitted a settlement offer to petitioner.
Petitioner did not respond to the offer.
On November 16, 1989, the Tax Court issued an opinion in
Pearlstein v. Commissioner, T.C. Memo. 1989-621. Mr. Klineman
then informed petitioner that a Tax Court case called Thornock v.
Commissioner, docket No. 29123-86, would resolve the audits of
KAI partnerships syndicated after 1975, including Lyric Leasing.
On March 19, 1990, the Tax Court ruled against the taxpayer
in Thornock v. Commissioner, 94 T.C. 439 (1990). Soon thereafter
respondent issued statutory notices of deficiency for
petitioner’s 1977, 1978, 1981, and 1982 tax years. Petitioner’s
attorney, Stephen D. Gardner, on July 12, 1980, timely petitioned
the Tax Court on behalf of petitioner with respect to those years
(docket No. 15665-90).
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On August 9, 1991, respondent submitted a revised settlement
offer to petitioner’s attorney. With respect to phantom income
the offer provided that “Eighty-five percent (85%) of phantom
income which was included in the taxpayer’s gross income as
ordinary income and which does not represent actual cash or
property received by the taxpayer may be eliminated from gross
income in the taxable year reported.” In an October 14, 1991,
letter petitioner informed Mr. Gardner that he would accept the
offer if respondent agreed to several additional conditions.
Respondent later sent Mr. Gardner a proposed Form 906,
Closing Agreement On Final Determination Covering Specific
Matters, which Mr. Gardner forwarded to petitioner on August 26,
1992. On the issue of phantom income the closing agreement
provided as follows:
(9) That any income in excess of the 15% of the
phantom income required to be included in the
taxpayers’ gross income with respect to the partnership
which was included in the taxpayers’ gross income as
ordinary income and which does not represent actual
cash or property received by the taxpayers (i.e.,
phantom income) may be eliminated in the taxable year
reported, if the statute of limitations remains open,
or will be treated as a deduction from ordinary income
in the latest taxable year, prior to the signing of
this agreement, for which a Federal income tax return
has not been filed, determined as of the date the
taxpayer(s) herein sign this closing agreement.
Petitioner did not immediately take action with respect to the
closing agreement.
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On November 12, 1992, Mr. Klineman notified petitioner that
Thornock v. Commissioner, supra, had not been appealed because of
“personal considerations relating exclusively to Mr. Thornock”
but that the U.S. Courts of Appeals for the Second and Sixth
Circuits were split on the issue decided in that case. See
Waters v. Commissioner, 978 F.2d 1310 (2d Cir. 1992), affg. T.C.
Memo. 1991-462; Emershaw v. Commissioner, 949 F.2d 841 (6th Cir.
1991), affg. T.C. Memo. 1990-246. Mr. Klineman indicated that he
had rejected respondent’s partnership-level settlement offer for
KAI partnerships syndicated after 1975 and that respondent had
subsequently begun to make settlement offers to individual
partners.
On February 16, 1993, Mr. Gardner’s office warned petitioner
that respondent would consider him to have “reconsidered” and
“rejected the settlement” offer made in August 1991 if he did not
execute and submit respondent’s proposed closing agreement. Mr.
Gardner’s office also informed petitioner that “In order to
comply with the Government’s deadline, we must receive proper
authorization [to execute the closing agreement and other
documents on petitioner’s behalf] by April 1, 1993.”
In an April 8, 1993, letter petitioner authorized Mr.
Gardner to execute the necessary documents on his behalf and
included deficiency calculations to support his settlement
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position. The letter also indicated that the final resolution of
his case should provide that
eighty-five percent (85%) of phantom income which was
included in the taxpayer’s gross income as ordinary
income and which does not represent actual cash or
property received by the taxpayer may be eliminated
from gross income in the taxable year reported. Any
excess will be carried over as a deduction in the next
year, and any other subsequent year, if necessary.
Mr. Gardner’s office informed petitioner in an October 4, 1993,
letter as follows: “You are deemed to have rejected the Thornock
offer (cash + 15%). In addition, your ‘authorization’ to settle,
aside from being a week late, contained deficiency numbers far
different from those provided by District Counsel.”
Over 4 years later, in a January 23, 1998, letter, Mr.
Gardner’s office informed petitioner that the Tax Court had ruled
against the taxpayer in Whitmire v. Commissioner, 109 T.C. 266
(1997), affd. 178 F.3d 1050 (9th Cir. 1999). Mr. Gardner and
respondent had agreed that Whitmire would resolve one of the
issues involved in petitioner’s case. The letter advised that,
in light of Whitmire, petitioner’s chances for a successful
outcome were increasingly dim:
Ultimately, the decision as to whether or not to settle
is your own. Obviously, you have the right not to
accept a settlement at this time, instead pinning your
hopes on a successful appeal in Whitmire. The odds of
a successful appeal given the current case law,
however, are not encouraging.
On May 6, 1998, Mr. Gardner’s office forwarded petitioner
another proposed closing agreement from respondent. Sometime in
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1999 respondent informed Mr. Gardner that petitioner’s signed
decision documents and closing agreements had not been received.
Respondent further advised that, if petitioner did not sign and
return these documents to settle the case in time for them to be
received by respondent within 60 days, respondent would ask the
Court to dispose of it in accordance with Whitmire v.
Commissioner, supra, and Thornock v. Commissioner, 94 T.C. 439
(1990). Respondent warned that if the Court disposed of
petitioner’s case in that manner, he might not be entitled to
eliminate any phantom income attributable to Lyric Leasing. Mr.
Gardner’s office relayed respondent’s warning to petitioner in a
letter petitioner received--according to his hand-written note--
on June 17, 1999.
On February 23, 2000, petitioner executed respondent’s
proposed closing agreement. Under the closing agreement some of
the losses petitioner claimed in his 1977, 1978, 1981, and 1982
tax years were disallowed but petitioner was allowed to eliminate
phantom income “in the taxable year reported, if the statute of
limitations remains open” or to deduct it “from ordinary income
in the latest taxable year, prior to the signing of this
agreement, for which a Federal income tax return has not been
filed”. On March 29, 2000, the Tax Court entered a stipulated
decision in petitioner’s original Tax Court case (docket No.
15665-90).
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Despite the terms of the closing agreement petitioner did
not claim any of the phantom income as a deduction on his 1999
Federal income tax return as the closing agreement permitted him
to do. Instead, on or around September 13, 2000, petitioner
engaged a certified public accountant, Heinz Hercher, to prepare
amended returns for his 1977 through 1988 tax years.
In a September 13, 2000, engagement letter Mr. Hercher
advised petitioner that “the work you are asking me to do may not
be the appropriate procedure to follow” and that “I can give no
assurances that any of the amended returns to be prepared will be
accepted as I have serious questions about the statute of
limitations on these years.” In addition Mr. Hercher observed as
follows: “The files contain a Protective Claim filed on a form
1040-X in August 1984. The Protective claim is for items related
to Lyric Leasing. I do not know if this claim was actually
filed, nor if filed, was done properly in order to extend the
statute.” On October 11, 2000, petitioner sent respondent the
amended returns that Mr. Hercher prepared for tax years 1977
through 1988.
In a December 22, 2000, letter respondent notified
petitioner in regard to the closing agreement that “you are
entitled to a deduction of $0 on your 1999, return.” Respondent
indicated that the “Gain reported in barred statute years” was
zero for 1979, 1980, 1983, 1984, 1985, and 1986. The letter also
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stated the following: “If you disagree with the amount of the
deduction as determined by us and you wish to have it corrected,
please send in copies of original returns, amended returns and
related K-1s within 10 days from the date of this letter.” There
is no indication that petitioner responded to the December 22,
2000, letter.
In a February 5, 2001, letter respondent informed petitioner
that his amended returns for tax years 1978 through 1988 could
not be processed. Respondent explained that (1) tax years 1978,
1981, and 1982 had been decided by the Tax Court; (2) before the
amended tax returns were filed “the statute of limitations for
refund (IRC 6511)” had expired for 1979, 1984, and 1988; (3) “the
statute of limitations for assessment” had expired for 1985 and
1987; and (4) petitioner had not requested tax adjustments for
1980, 1983, and 1986.
Petitioner responded on February 12, 2001. He asserted that
“As the case was being decided in the courts between Lyric
Leasing Associated * * * and the Internal Revenue Service for
over 20 years, the statute of limitations for all the years from
1977 through 1988 remained open.” He further stated:
On October 11, 2000 we sent a copy of the Closing
Agreement and all amended returns for the years 1977
through 1988 which we signed on February 23, 2000 with
the understanding that the statute of limitations would
remain open for the above years, otherwise we would
have contested the agreement without signing it.
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Respondent replied with a March 13, 2001, letter reiterating
respondent’s position on the tax years in question and indicating
that, pursuant to the closing agreement, any phantom income
should have been treated as a deduction “in the latest taxable
year prior to signing the agreement which had not yet been filed
at the time of the agreement (probably your 1999 tax return).”
On August 15, 2000, respondent sent petitioner notices of
balance due for tax years 1978, 1981, and 1982. On September 4,
2000, respondent sent petitioner a letter indicating that he was
due a refund of $766.97 for 1977. Respondent sent petitioner
subsequent bills for his 1978, 1981, and 1982 tax liabilities on
October 30, 2000, February 26, 2001, August 4, 2003, and
August 9, 2004.
On April 23, 2005, respondent referred the matter to a
revenue officer to collect the outstanding tax liabilities for
1978, 1981, and 1982. Petitioner eventually paid the outstanding
tax liabilities on March 13, 2007.
On or around August 1, 2006, before paying the liabilities,
petitioner requested that respondent abate the interest that had
accrued on his 1982 deficiency from April 15, 1983, to December
1, 2006. Respondent rejected that request on December 15, 2006.
On February 1, 2007, respondent issued a final determination
denying petitioner’s request for interest abatement with respect
to his 1982 tax year. Respondent explained that abatement was
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not warranted because “There was no error or delay relating to
the performance of a ministerial act by an employee of the
Internal Revenue Service.”
Petitioner, on July 23, 2007, filed a timely petition with
the Tax Court with respect to respondent’s February 1, 2007,
determination letter. In the petition, petitioner states:
I would like the IRS to honor the agreement/contract
that they entered into with my wife and I. This
contract has not been fully executed as the IRS has
taken their share plus interest without consideration.
A contract is not valid unless both sides give up
something. My wife and I are the only side that has
given up anything. We were not allowed to have the
taxes paid returned on the phantom income for the years
of 1981-1988 plus accrued interest, therefore the
contract has never been fully executed and this matter
has been going on for 25 years. The interest accrued
that the IRS took from us is very nearly the same
amount that I stand to recover if I am allowed my
consideration offered by the IRS in the agreement. By
doing so, the contract will have honored and this
matter will be finished.
OPINION
Interest on a Federal income tax deficiency 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.
Sec. 6601(a). Under section 6404(e)(1) the Secretary may abate
all or any part of that interest to the extent it accrued because
of “any error or delay by an officer or employee of the Internal
Revenue Service (acting in his official capacity) in performing a
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ministerial act”.2 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. Sec. 6404(e)(1); sec. 301.6404-2T(a)(2), Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).
Even when there is an error or delay with respect to a
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 what is now
designated section 6404(h) to determine whether the Secretary’s
2
Sec. 6404(e)(1) applies to interest accruing with respect
to deficiencies or payments for tax years beginning after Dec.
31, 1978. Tax Reform Act of 1986, Pub. L. 99-514, sec. 1563(b),
100 Stat. 2762; see Coco v. Commissioner, T.C. Memo. 2001-80. In
1996 Congress amended sec. 6404(e)(1) to refer to “unreasonable”
errors or delays and “ministerial or managerial” acts. Taxpayer
Bill of Rights 2 (TBOR 2), Pub. L. 104-168, sec. 301(a), 110
Stat. 1457 (1996); see Hinck v. United States, 550 U.S. 501, 505
n.1 (2007). Those amendments apply only to interest accruing
with respect to deficiencies for tax years beginning after July
30, 1996. TBOR 2 sec. 301(c), 110 Stat. 1457; Hinck v. Unites
States, supra at 505 n.1. Because this case involves interest
accruing with respect to a deficiency for petitioner’s 1982 tax
year, sec. 6404(e)(1) applies but the amendments made to that
section in 1996 do not.
A ministerial act is a procedural or mechanical act that
does not involve the exercise of judgment or discretion and
occurs during the processing of a taxpayer’s case after all the
prerequisites to the act, such as conferences and review by
supervisors, have taken place. See Lee v. Commissioner, 113 T.C.
145, 149-150 (1999); sec. 301.6404-2T(b)(1), Temporary Proced. &
Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).
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decision not to abate interest was an abuse of discretion.3 The
taxpayer bears the burden of proving that the Secretary acted
arbitrarily, capriciously, or without sound basis in fact or law.
See Woodral v. Commissioner, 112 T.C. 19, 23 (1999). To meet
this burden the taxpayer must establish (1) an error or delay by
the IRS in performing a ministerial act, (2) a correlation
between any such error or delay and a specific period of delay in
payment, and (3) that the taxpayer would have paid the deficiency
earlier but for the error or delay. See Sher v. Commissioner,
T.C. Memo. 2009-86.
It is clear from his petition and briefs that petitioner is
not particularly interested in interest abatement. His focus
lies, as it has for nearly three decades, on recovering the tax
he paid on Lyric Leasing’s phantom income in the years following
1982--the tax year at issue in this case. Having missed his
opportunity to recover any portion of that tax, petitioner’s long
and somewhat quixotic pursuit has led him here.
3
The Court was granted this jurisdiction in 1996 as part of
TBOR 2 sec. 302(a), 110 Stat. 1457. Sec. 6404(h) applies to
requests for interest abatement submitted after July 30, 1996,
regardless of the tax year involved. TBOR 2 sec. 302(b), 110
Stat. 1458; Hinck v. United States, supra at 504-505. Although
the exact date of petitioner’s request for interest abatement is
unclear, there is no dispute that it was submitted after July 30,
1996. In addition the parties do not dispute that petitioner
satisfies the requirements of sec. 7430(c)(4)(A)(ii).
Accordingly we have jurisdiction to review respondent’s
determination not to abate interest.
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His primary argument is as follows: (1) He accepted
respondent’s August 9, 1991, settlement offer, (2) that offer
allowed him to file amended Federal income tax returns for the
years in which he reported Lyric Leasing’s phantom income, (3)
respondent breached the settlement agreement by rejecting the
amended returns he submitted on October 11, 2000, and (4) the
Court should order respondent to honor the settlement agreement
and reexamine his amended returns. As a second-best alternative
petitioner requests abatement of interest because the amount of
interest he paid is nearly the same as the amount of tax he paid
on phantom income.4
In his brief petitioner alludes to section 6404(e)(1) by
alleging that respondent committed a number of errors, such as
(1) breaching the 1991 settlement agreement by refusing to accept
his amended returns in October 2000; (2) adding language to the
closing agreement forwarded to petitioner on August 26, 1992,
which was not included in the August 9, 1991, settlement offer,
prohibiting petitioner from eliminating phantom income in the
year reported if the period of limitations was closed; (3)
4
Petitioner requested an abatement of all the interest that
accrued with respect to his 1982 deficiency. We have held that
such a request does not establish the necessary correlation
between an error or delay by the Internal Revenue Service and a
specific period of delay in payment by the taxpayer. 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.”).
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refusing to acknowledge that he filed a protective refund claim
in 1984, and (4) preventing petitioner from deducting a portion
of the tax he paid on Lyric Leasing’s phantom income on his 1999
income tax return, as advised by respondent’s December 22, 2000,
letter. At no time, however, does petitioner attempt to explain
why or whether any of these alleged errors forced him to delay
paying his 1982 income tax deficiency until March 13, 2007. Nor
does petitioner assert that he would have paid the deficiency
sooner if not for the alleged errors.
As we explained to petitioner at trial, our jurisdiction in
this case is limited to the issue of interest abatement with
respect to petitioner’s 1982 income tax deficiency. We do not
have jurisdiction to order respondent to review petitioner’s
amended returns or to refund the tax he may have paid on phantom
income in the 1980s. Moreover, we are not a court of equity and
cannot ignore the law to achieve an equitable end. See
Scarangella v. Commissioner, T.C. Memo. 1969-13 (“But, as
appealing as his cause may be, this is not a court of equity. We
have no equity powers and we cannot grant relief on such
grounds.”), affd. per curiam 418 F.2d 228 (3d Cir. 1969). At
best petitioner may be entitled to recover a portion of the
interest he paid on his 1982 deficiency. To do so, however, he
must establish that respondent abused his discretion by refusing
to abate interest. Petitioner has not met his burden.
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First, some of the errors alleged by petitioner do not
appear to be errors. For example, respondent could not have
breached a 1991 settlement agreement with petitioner because no
such agreement was ever reached. Instead, petitioner hedged his
bets. By proposing new terms petitioner rejected respondent’s
August 9, 1991, settlement offer and made a counteroffer. See
Steffler v. Commissioner, T.C. Memo. 1995-271 (“Mutual assent is
a prerequisite to the formation of a contract. * * * Expression
of assent that changes the terms of the offer in any material
respect is not an acceptance, but may be operative as a
counteroffer. * * * A counteroffer terminates the power of
acceptance of the original offer.”).
Moreover, petitioner never executed a closing agreement with
respect to that offer. Although petitioner is correct that
closing agreements are not necessary to settle a case once it is
docketed in the Tax Court, we have held that closing agreements
are necessary when, as here, the settlement offer provides that a
closing agreement will be executed. See Cinema ‘85 v.
Commissioner, T.C. Memo. 1998-213. Finally, because petitioner
never assented to either the August 9, 1991, settlement offer or
the related closing agreement, his argument that respondent erred
by adding language to the closing agreement carries little
persuasive weight.
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Second, and more importantly, petitioner has failed to
establish, or even suggest, that any errors respondent may have
committed are related to a specific period of delay in
petitioner’s payment of his 1982 deficiency or that petitioner
would have paid his deficiency earlier if not for any such
errors. We are left to speculate why petitioner waited until
March 13, 2007, to pay his 1982 Federal income tax deficiency.
Petitioner was ostensibly withholding payment until respondent
refunded the tax he paid on Lyric Leasing’s phantom income during
the 1980s--a condition precedent imposed not by the Federal tax
laws but by petitioner himself. If this is the case, then
petitioner’s delay in payment was of his own volition and not the
consequence of any error committed by respondent.5 While it is
possible that petitioner might have paid his 1982 deficiency
sooner had respondent promptly refunded the tax he paid on
phantom income, this misses the point. Even if respondent had
erred by not providing a prompt refund--an assertion that is
wholly unsupported by the record before us--petitioner cannot
establish entitlement to interest abatement simply because he
chose to withhold payment pending a refund.
5
Although respondent’s Dec. 22, 2000, letter indicating
petitioner was “entitled to a deduction of $0 on your 1999,
return” does appear to be confusing and perhaps misleading, if a
settlement were to occur, petitioner has not explained how the
letter is related to his delay in payment. We are skeptical that
there is any relationship, particularly given the fact that
petitioner never attempted on his 1999 Form 1040 to claim a
deduction of the tax he paid on phantom income.
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For these reasons, despite the underlying fact that
petitioner has paid tax on phantom income which has an element of
unfairness, petitioner has failed to prove that respondent’s
refusal to abate interest was an abuse of discretion. If this
was a de novo proceeding, and had the statute not specified an
abuse of discretion standard, this Court might have been more
generous, but by law that is not the standard of review to be
employed here.
The Court has considered all of petitioner’s contentions,
arguments, requests, and statements. To the extent not discussed
herein, we conclude that they are meritless, moot, or irrelevant.
To reflect the foregoing,
Decision will be entered
for respondent.