Thursday, July 26, 2007

Tax Attorney: Interest Abatement not abuse of discretion

Ralph Howell v. Commissioner, Dkt. No. 13117-05 , TC Memo. 2007-204, July 25, 2007.

[Code Sec. 6404]

The IRS's denial of a taxpayer's interest abatement request was not an abuse of discretion because none of the errors or delays he complained of were ministerial acts under Code Sec. 6404. The taxpayer had requested an abatement of interest that had accrued while the IRS conducted a criminal investigation of several tax-shelter partnerships in which he had invested. Although the IRS included erroneous information regarding the status of the investigation in a letter to the taxpayer, that did not contribute to the accrual of interest. Moreover, the IRS was not collaterally estopped by the case of another investor (Beall v. U.S., 2006-2 USTC ¶50,615) from denying it lost some of the records it had confiscated, and that others were returned in disarray, because that issue was not litigated in Beall. --CCH.


VASQUEZ, Judge: Petitioner submitted to the Internal Revenue Service (IRS) a request for abatement of interest relating to his 1984, 1985, and 1986 income tax liabilities. Respondent denied the request. The issue for our determination is whether respondent abused his discretion under section 6404 by failing to abate assessments of interest relating to petitioner's 1984, 1985, and 1986 taxable years.1



I. Section 6404(e)

Pursuant to section 6404(e)(1) as it applies in this case, the Commissioner may abate the assessment of interest in two situations: (1) When a deficiency is attributable to an error or delay by an officer or employee of the IRS in performing a ministerial act, or (2) when interest is assessed on any payment of certain taxes (including income tax) to the extent that an error or delay in such payment is attributable to an officer or employee of the IRS being erroneous or dilatory in performing a ministerial act.5 An error or delay by an officer or employee of the IRS 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 IRS has contacted the taxpayer in writing with respect to such deficiency or payment. Id.

A "ministerial act" is 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).6 A decision concerning the proper application of Federal tax law (or other Federal or state law) is not a ministerial act. Id.

Even where errors or delays are present, the Commissioner's decision to abate interest remains discretionary. See sec. 6404(e)(1); Mekulsia v. Commissioner, T.C. Memo. 2003-138, affd. 389 F.3d 601 (6th Cir. 2004). When Congress enacted section 6404(e), it did not intend the provision to be used routinely to avoid payment of interest. Rather, Congress intended abatement of interest to be used only where failure to do so "would be widely perceived as grossly unfair." H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.

II. Standard of Review and Burden of Proof

When reviewing the Commissioner's determination not to abate interest, we apply an abuse of discretion standard. See sec. 6404; Camerato v. Commissioner, T.C. Memo. 2002-28. The taxpayer bears the burden of proof with respect to establishing an abuse of discretion. See Rule 142(a). In order to prevail, the taxpayer must establish that in not abating interest the Commissioner exercised his discretion arbitrarily, capriciously, or without sound basis in fact or law. Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

III. Analysis

Petitioner alleges that respondent engaged in several forms of ministerial error or delay.

Petitioner first alleges that during respondent's criminal investigation of AMCOR respondent "was in full possession of the records necessary to issue a tax deficiency, but failed to do so."

Regardless of whether respondent possessed the records required to determine petitioner's deficiencies during respondent's criminal investigation of AMCOR, the long and winding procedural history of the AMCOR audit and litigation prevented respondent from making that determination for several years. Pursuant to section 6221, the proper tax treatment of petitioner's AMCOR-related items was required to be determined at the partnership level. Pursuant to section 6225(a), respondent was prohibited from assessing or collecting petitioner's deficiencies until the decisions in the AMCOR partnership cases in this Court became final. As noted supra, that did not occur until October 17, 2001, long after respondent returned the AMCOR records in 1993. Petitioner has therefore failed to establish that respondent's delay in assessing petitioner's deficiencies until the close of AMCOR-related partnership litigation constitutes error or delay in performing a ministerial act.7

Petitioner also alleges that the imposition of interest is grossly unfair because the amounts of interest assessed now greatly exceed the amounts of the deficiencies. As we have noted on several occasions, the mere passage of time does not establish error or delay in performing a ministerial act. Lee v. Commissioner, supra at 151; Mekulsia v. Commissioner, supra; Hawksley v. Commissioner, T.C. Memo. 2000-354; Cosgriff v. Commissioner, T.C. Memo. 2000-241.

Petitioner further alleges that the information regarding the examination status of Agri-Venture Fund contained in respondent's letter of January 20, 1997, was erroneous and its inclusion constituted ministerial error.8

In order to qualify for relief pursuant to section 6404(e), a taxpayer must demonstrate a direct link between the error or delay and a specific period during which interest accrued. Guerrero v. Commissioner, T.C. Memo. 2006-201; Braun v. Commissioner, T.C. Memo. 2005-221. Respondent's error has not been shown to have caused the accrual of any interest. Although the case of Agri-Venture Fund may not have been "in Appeals" when respondent issued the letter of January 20, 1997, the case was before this Court when the letter was issued. As the letter correctly noted, the period of limitations on assessment of deficiencies in petitioner's taxes was consequently suspended. See sec. 6229(d)(1). Petitioner has not shown that respondent's letter of January 20, 1997, caused any accrual of interest that is attributable to error or delay in performing a ministerial act.

Petitioner further contends that the error contained in respondent's letter of January 20, 1997, provides an independent basis for the abatement of interest pursuant to section 6404(f). Generally speaking, section 6404(f) allows for the abatement of penalties and additions to tax, and not of assessments of interest.9 See sec. 301.6404-3(c)(2), Proced. & Admin. Regs. Petitioner's argument regarding section 6404(f) is therefore unfounded.

Finally, petitioner argues that respondent lost some of the documents that respondent seized in March of 1989 from AMCOR's office and that respondent returned other documents in a state of disarray. Petitioner appears to argue that respondent is collaterally estopped from denying such facts pursuant to statements in the U.S. Court of Appeals for the Fifth Circuit's opinion in the case of another AMCOR investor, Beall v. United States, 467 F.3d 864 (5th Cir. 2006) affg. 335 F. Supp. 2d 743, (E.D. Tex. 2004).10 The relevant portion of the Court of Appeals' opinion reads as follows: "The IRS did not return the partnerships' books and records until 1993, and when the IRS did return them, some had been lost and the remainder were in disarray." Id. at 866.

The doctrine of issue preclusion, or collateral estoppel, provides that once an issue of fact or law is "'actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.'" Monahan v. Commissioner, 109 T.C. 235, 240 (1997) (quoting Montana v. United States, 440 U.S. 147, 153 (1979)). The following five conditions must be satisfied before application of issue preclusion in the context of a factual dispute: (1) The issue in the second suit must be identical in all respects with the one decided in the first suit; (2) there must be a final judgment rendered by a court of competent jurisdiction; (3) collateral estoppel may be invoked against parties and their privies to the prior judgment; (4) the parties must actually have litigated the issues and the resolution of these issues must have been essential to the prior decision; and (5) the controlling facts and applicable legal rules must remain unchanged from those in the prior litigation. Peck v. Commissioner, 90 T.C. 162, 166-167 (1988), affd. 904 F.2d 525 (9th Cir. 1990).

The statement in the Court of Appeals' opinion in Beall does not establish that respondent failed to return documents or that respondent returned other documents in disarray. First, petitioner was not a party to the dispute in Beall . Second, as respondent correctly notes, the Court of Appeals' opinion in Beall related to the review of a District Court's decision to grant a motion of respondent's that was treated as a motion to dismiss for failure to state a claim upon which relief could be granted pursuant to rule 12(b)(6) of the Federal Rules of Civil Procedure. Pursuant to that rule:

"a claim may be dismissed when a plaintiff fails to allege any set of facts in support of his claim which would entitle him to relief," and "the court accepts as true the well-pled factual allegations in the complaint, and construes them in the light most favorable to the plaintiff."

Beall v. United States, 335 F. Supp. 2d at 747 (quoting Taylor v. Books A Million, Inc., 296 F.3d 376, 378 (5th Cir. 2002)) (internal citations removed). Applying this standard, both the District Court and the Court of Appeals were required to accept the plaintiffs' factual allegations as true regardless of their veracity. Consequently, the question of whether respondent's agents or employees lost some documents and returned others in disarray was not actually litigated in Beall, and collateral estoppel does not apply to the factual assumptions in Beall. The parties have not stipulated the relevant factual assumptions in Beall. Petitioner has therefore not established that respondent lost some AMCOR records and returned others in disarray in pursuit of respondent's criminal investigation of AMCOR.

We conclude that respondent's denial of petitioner's request for interest abatement was not arbitrary, capricious, or without sound basis in fact or law. In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.

To reflect the foregoing,

Decision will be entered for respondent.

1 All section references are to the Internal Revenue Code in effect for the years in issue unless otherwise indicated, and all Rule references are to the Tax Court Rules of Practice and Procedure.

2 After receiving an extension of time to file, petitioner timely filed his 1984 return. Petitioner filed his 1985 and 1986 returns a few days after the end of extension periods respondent granted.

3 For some of the history of AMCOR and the investigation into its operations, see, for example, Crop Associates-1986 v. Commissioner, T.C. Memo. 2000-216.

4 The parties did not submit a copy of respondent's Jan. 17, 2003, letter disallowing petitioner's request for interest abatement with regard to his 1986 deficiency, but the parties stipulated that the contents of that letter were identical in all respects to the letters disallowing petitioner's requests for interest abatement with regard to his 1984 and 1985 deficiencies.

5 In 1996, sec. 6404(e) was amended by the Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1457, to permit the Commissioner to abate the assessment of interest attributable to IRS errors or delays in performing both managerial and ministerial acts. The amendment applies to interest accruing with respect to deficiencies for taxable years beginning after July 30, 1996, and therefore does not apply to the matter before us.

6 Final regulations under sec. 6404 were issued on Dec. 18, 1998, and contain the same definition of a ministerial act as do the temporary regulations. See sec. 301.6404-2(b)(2), Proced. & Admin. Regs. The final regulations generally apply to interest accruing on deficiencies or payments of tax described in sec. 6212(a) for taxable years beginning after July 30, 1996, and do not apply to the years at issue in this case. See sec. 301.6404-2(d)(1), Proced. & Admin. Regs.

7 In Crop Associates-1986 v. Commissioner, supra, in answer to the TMP's allegations that respondent had delayed the litigation of AMCOR partnership cases, we concluded that "Blame (if any) for the time it took to proceed to the present posture cannot be laid only at the feet of respondent." Indeed, it appears that the litigation was protracted by, among other things, sundry claims advanced on behalf of the AMCOR partnerships, none of which was deemed persuasive. See Crop Associates-1986 v. Commissioner, 113 T.C. 198 (1999); Agri-Cal Venture Associates v. Commissioner, T.C. Memo. 2000-271; Crop Associates-1986 v. Commissioner, T.C. Memo. 2000-216.

8 In his second amended petition, petitioner alleges that an additional letter from respondent dated June 27, 2000, contained similar erroneous information. Petitioner attached a copy of that letter to his second amended petition, but no copy of the letter was entered into evidence. Documentary material attached to a petition is not evidence. Greengard v. Commissioner, 29 F.2d 502 (7th Cir. 1928), affg. 8 B.T.A. 734 (1927); Pallottini v. Commissioner, T.C. Memo. 1986-530. Moreover, in a fully stipulated case such as the matter before us, we consider those matters not contained in the stipulations to be without support in the record. Miyamoto v. Commissioner, T.C. Memo. 1986-313. We therefore do not consider the contents of the letter attached to petitioner's second amended petition. We note, however, that consideration of the letter would not alter our conclusions in the matter before us.

9 Sec. 6404(f) does allow for abatement of interest imposed with respect to any penalty or addition to tax. See sec. 301.6404-3(c)(2), Proced. & Admin. Regs. Such interest is not at issue in the matter before us.

10 Petitioner does not appear to request that the Court take judicial notice of the "facts" in Beall v. United States, 467 F.3d 864 (5th Cir. 2006). We note, however, that taking judicial notice would be inappropriate in this matter. See Abelein v. Commissioner, T.C. Memo. 2007-24.

Alvin S. Brown, Esq.
Tax Attorney

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