Luther H. Allcorn, III v. Commissioner, 139 T.C. No. 4, Code
Sec(s) 6212; 6404; 6602; 7405.
LUTHER HERBERT ALLCORN, III, Petitioner v. COMMISSIONER OF
INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s):
6212; 6404; 6602; 7405
Docket: Docket
No. 4775-11.
Date Issued:
08/9/2012
HEADNOTE
XX.
Reference(s): Code Sec. 6212; Code Sec. 6404; Code Sec.
6602; Code Sec. 7405
Syllabus
Official Tax Court Syllabus
P timely filed his 2008 Form 1040, U.S. Individual Income
Tax Return, after previously filing a Form 1040-ES, Estimated Tax, and paying
$4,000 in estimated taxes. On his Form 1040, P mistakenly added the $4,000
estimated tax payment to the income tax withheld reported on line 62 instead of
the estimated tax payments reported on line 63. That mistake contributed to R's
issuance of a refund to P on May 11, 2009. R later realized that P had reported
the $4,000 estimated tax payment on line 62, and R subsequently informed P that
he owed $4,000 plus a penalty and interest. P filed a request for abatement,
and R granted P's request to abate the penalty but denied P's request to abate
the interest.
Held : Even though the refund was recoverable by assessment
and levy procedures, the refund also would have been recoverable by filing a civil
suit pursuant to I.R.C. sec. 7405 and was therefore an erroneous refund under
I.R.C. sec. 6602.
Held, further, because the refund constituted an erroneous
refund under I.R.C. sec. 6602, it was also an erroneous refund pursuant to
I.R.C. sec. 6404(e)(2).
Held , further, even though interest abatement was not
mandatory pursuant to I.R.C. sec. 6404(e)(2) because P's mistake contributed to
causing the erroneous refund, R still had the authority to abate the interest
with respect to the erroneous refund.
Held , further, R did not abuse his discretion by denying
P's request to abate the interest on the erroneous refund.
Counsel
Luther Herbert Allcorn III, pro se.
Beth A. Nunnink, for respondent.
OPINION
WELLS, Judge: This case is before the Court on the parties'
cross-motions for summary judgment pursuant to Rule 121. 1 We must decide
whether respondent abused his discretion when he determined not to abate the
interest with respect to an erroneous refund issued to petitioner.
Background
Some of the facts and certain exhibits have been stipulated.
The remaining facts set forth below are based upon examination of the
pleadings, moving papers, responses, and attachments. At the time he filed his
petition, petitioner resided in Tennessee.
Petitioner timely filed his 2008 Form 1040, U.S. Individual
Income Tax Return. Petitioner previously had submitted a Form 1040-ES,
Estimated Tax, and he had paid $4,000 in estimated tax. Petitioner was unsure
where to report his $4,000 estimated tax payment on his Form 1040, and he added
it to the total in “Line 62, Federal income tax withheld from Forms W-2 and
1099.” Petitioner did not report any amount on “Line 63, 2008 estimated tax
payments and amount applied from 2007 return.” He did not put the amount from
his Form 1040-ES on line 63 because line 63 did not refer to the Form 1040-ES.
With his tax return, petitioner submitted a Form W-2, Wage
and Tax Statement, reporting Federal income tax withheld of $24,106.75. Petitioner
also submitted two Forms 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting
Federal income tax withheld of $2,395.80 and $738.23. The sum of the Federal
income tax withholdings reported on those forms was $27,241. However, because
he also included the $4,000 estimated tax payment on line 62, the total he
reported on that line was $31,241. Petitioner reported $31,241 in total
payments on “Line 71, Add lines 62 through 70. These are your total payments.”
Petitioner included a note with his Form W-2 that stated: “Additional $4000 was
sent with Form 1040-ES.” On his Form 1040, petitioner reported that he was due
a refund of $857.
In a letter dated May 11, 2009, respondent informed
petitioner that he was due a refund of $5,179.52. The letter contained a tax
statement which reported that petitioner had total tax withheld of $31,241 and
estimated tax payments of $4,000 for total payments of $35,241. The remainder
of the refund due to petitioner was the result of an error he had made when he
calculated his tax on qualified dividends. However, the May 11, 2009, letter
did not mention that error and did not otherwise explain how respondent
calculated the refund due to petitioner. On or about May 11, 2009, petitioner
received a refund of $5,179.52. Of that amount, petitioner was not entitled to
$4,000 (petitioner's excess refund 2 ) because that amount reflected
respondent's double counting of his estimated tax payments.
In a letter dated August 30, 2010, respondent informed
petitioner that he owed $4,514.19. The letter explained: “We changed your 2008
account to correct your total federal income tax withheld.” In addition to
reducing the amount of Federal income tax withheld by $4,000, respondent also
added a late payment penalty of $300 and interest of $214.19. Apparently
confused by the August 30, 2010, letter, petitioner called respondent's office
and received an explanation of how respondent had calculated petitioner's tax
liability. After the telephone conversation with respondent's office, he agreed
that he owed $4,000, but he disputed the penalty and interest. On or about
September 1, 2010, petitioner submitted Form 843, Claim for Refund and Request
for Abatement. Respondent received petitioner's Form 843 and payment of $4,000
on September 3, 2010.
In a letter dated January 28, 2011, respondent granted
petitioner's request to abate the penalty but denied petitioner's request to
abate the interest. The letter explained: “Since the tax information shown on
your original return was incorrect or incomplete, this is considered a
contributing factor in the issuance of the refund, and therefore does not
qualify for the removal of the interest charge under the Tax Reform Act of
1986.” Petitioner timely filed a petition with respect to respondent's
determination not to abate interest.
Discussion
Rule 121(a) provides that either party may move for summary
judgment upon all or any part of the legal issues in controversy. Summary
judgment may be granted only if no genuine issue exists as to any material fact
and the issues presented by the motion may be decided as a matter of law. See
Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd,
17 F.3d 965 [73 AFTR 2d 94-1198] (7th Cir. 1994). The parties have filed
cross-motions for summary judgment, and we agree that there are no genuine
issues of material fact and that the case may be decided as a matter of law.
The Commissioner has the authority to abate, in whole or in
part, an assessment of interest on: (1) a deficiency if the accrual of such
interest is attributable to an error or delay by an officer or employee of the
Internal Revenue Service (IRS), acting in an official capacity, in performing a
ministerial or managerial act; or (2) 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 officer's or employee's being erroneous or dilatory in
performing a ministerial or managerial act. Sec. 6404(e)(1). An error or delay
by the Commissioner can be taken into account only: (1) if it occurs after the
Commissioner has contacted the taxpayer in writing with respect to the
deficiency or payment of tax; and (2) if no significant aspect of the error or
delay is attributable to the taxpayer. Id.; Krugman v. Commissioner, 112 T.C.
230, 239 (1999). Additionally, the Commissioner must abate the assessment of
interest on an erroneous refund of $50,000 or less unless the erroneous refund
was caused by the taxpayer. Sec. 6404(e)(2).
The periods during which interest may be abated under
section 6404(e)(1) and (2) are different, but those periods may overlap.
Section 6404(e)(1) applies to abate interest attributable to an error or delay
by the IRS in performing a ministerial or managerial act during the period
after the IRS has contacted the taxpayer in writing with respect to the
deficiency or payment. In contrast, interest abatement pursuant to section
6404(e)(2) applies to the period before a demand for payment has been made.
However, both section 6404(e)(1) and (2) may apply to the abatement of interest
for the period between when the taxpayer is first contacted in writing
regarding the deficiency or payment and the date a demand for payment is made.
For example, as contemplated in the legislative history and by examples in the
regulations, the period pursuant to section 6404(e)(1) may begin when the IRS
commences an audit. See H.R. Rept. No. 99-426, at 844 (1985), 1986-3 C.B. (Vol.
2) 1, 844; sec. 301.6404-2(c), Examples (1), (4), (5), (6), Proced. &
Admin. Regs. That period would begin before a demand for repayment has been
made, and either section 6404(e)(1) or (2) could apply to abate the interest
assessed during that time.
This Court may order an abatement of interest only if we
conclude that the Commissioner abused his discretion in failing to do so. Sec.
6404(h). In order to demonstrate an abuse of discretion, a taxpayer must prove
that the Commissioner exercised his discretion arbitrarily, capriciously, or
without sound basis in fact or law. Rule 142(a); Lee v. Commissioner, 113 T.C.
145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). Congress did
not intend for section 6404(e) to be used routinely to avoid the payment of
interest; rather, Congress intended abatement of interest only where the
failure to do so “would be widely perceived as grossly unfair.” H.R. Rept. No.
99-426, supra at 844, 1986-3 C.B. (Vol. 2) at 844; S. Rept. No. 99-313, at 208
(1986), 1986-3 C.B. (Vol. 3) 1, 208.
Respondent contends that petitioner's excess refund was
caused by petitioner's own mistake and that respondent is not at fault in any
way. In contrast, petitioner contends that he is not at fault in any way and
that the error is entirely respondent's. Insofar as petitioner erred by
reporting his estimated tax payments on line 62 instead of line 63 of his Form
1040, he contends that the Form 1040 is unclear. Petitioner further contends
that respondent should have been able to figure out that petitioner reported
his estimated tax payments on line 62 because the sum of the Federal income tax
withheld on his Forms 1099-R and W-2 was $4,000 less than that reported on line
62. Additionally, petitioner contends that respondent ignored the note he
included with his Form W-2 that explained that the additional $4,000 had been
paid with his Form 1040-ES. Respondent contends that petitioner's note was
ambiguous. Although neither party is willing to admit to making an error, it is
clear to us that both parties made errors. Accordingly, we examine the statute
to decide whether, on the basis of the facts and the errors committed by both
parties, respondent abused his discretion in denying petitioner's request for
abatement of interest.
As a preliminary matter, we must decide whether section
6404(e)(1) or (2) applies to the facts of the instant case. Respondent contends
that section 6404(e)(1) applies. Section 6404(e)(1) provides:
SEC. 6404(e). Abatement of Interest Attributable to
Unreasonable 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 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, or (B)
any payment of any tax described in section 6212(a) to the extent that any
unreasonable error or delay in such payment is attributable to such officer or
employee being erroneous or dilatory in performing a ministerial or managerial
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. Respondent's motion does not state whether respondent considers
subparagraph (A) or (B) applicable to the excess refund. Additionally, although
it is unclear from respondent's motion, we assume that respondent considers
that the period during which abatement of interest may have been available to
petitioner began when the IRS contacted him with the May 11, 2009, letter. We
further assume that respondent considers that letter to constitute the contact
in writing with respect to a deficiency or payment that is required by section
6404(e)(1) before a taxpayer becomes eligible for abatement of interest. 3
In contrast, petitioner appears to seek an abatement of
interest pursuant to section 6404(e)(2), which concerns the abatement of
interest with respect to an erroneous refund. Unlike the discretionary interest
abatement provision of section 6404(e)(1), interest abatement pursuant to
section 6404(e)(2) is mandatory unless one of two exceptions applies. Section
6404(e)(2) provides:
The Secretary shall abate the assessment of all interest on
any erroneous refund under section 6602 until the date demand for repayment is
made, unless—
(A) the taxpayer (or a related party) has in any way caused
such erroneous refund, or
(B) such erroneous refund exceeds $50,000. Respondent
contends that section 6404(e)(2) does not apply because, according to
respondent, the instant case does not involve a dispute over an erroneous
refund under section 6602 but rather an assessment of overstated withholding.
Section 6602 provides: “Any portion of an internal revenue
tax (or any interest, assessable penalty, additional amount, or addition to
tax) which has been erroneously refunded, and which is recoverable by suit
pursuant to section 7405, shall bear interest at the underpayment rate
established under section 6621 from the date of the payment of the refund.”
Section 7405 concerns actions for recovery of erroneous refunds, and section
7405(b) provides: “Any portion of a tax imposed by this title which has been
erroneously refunded (if such refund would not be considered as erroneous under
section 6514 [ 4]) may be recovered by civil action brought in the name of the
United States.” Respondent contends that petitioner's excess refund is not an
erroneous refund recoverable by suit under section 6602 but, instead, an
assessment of overstated withholding made pursuant to section 6201(a)(3).
One distinction between an erroneous refund and a deficiency
or payment with respect to taxes described in section 6212(a) is the manner by
which the Commissioner is able to recover the amount owed from the taxpayer. In
the case of a deficiency or payment with respect to taxes described in section
6212(a), the Commissioner may seek to recover from the taxpayer by pursuing
assessment and levy procedures. In contrast, in the case of an erroneous refund,
the Commissioner may seek to recover from the taxpayer by filing a civil suit
pursuant to section 7405. Oftentimes, an erroneous refund may also result in a
tax liability, in which case, the Commissioner has the option to recover the
amount of the taxpayer's liability by civil suit or through the assessment and
levy procedures. 5 See United States v. Frontone, 383 F.3d 656, 661 [94 AFTR 2d
2004-5853] (7th Cir. 2004); Brookhurst, Inc. v. United States, 931 F.2d 554,
555-557 [67 AFTR 2d 91-1012] (9th Cir. 1991); Beer v. Commissioner, 733 F.2d
435 [53 AFTR 2d 84-1464] (6th Cir. 1984), aff'g T.C. Memo. 1982-735 [¶82,735 PH
Memo TC]; Warner v. Commissioner, 526 F.2d 1 [36 AFTR 2d 75-6351] (9th Cir.
1975), aff'g T.C. Memo. 1974-243 [¶74,243 PH Memo TC]; United States v. C &
R Invs., Inc., 404 F.2d 314 [23 AFTR 2d 69-677] (10th Cir. 1968).
For an amount paid to a taxpayer by the IRS to constitute an
erroneous refund pursuant to section 6602, it is not necessary that the
Commissioner have sought to recover it via a refund suit; it is sufficient that
it be “ecoverable by suit pursuant to r section 7405”. (Emphasis added.)
Respondent does not contest that a refund was issued to petitioner or that a
refund should not have been issued. In effect, respondent has conceded that an
erroneous refund occurred. Had petitioner refused to pay over the amount owed,
respondent would have had the authority to pursue recovery by filing a civil
suit to recover petitioner's excess refund. However, respondent contends that,
because petitioner's excess refund was also recoverable by assessment, section
6404(e)(2) does not apply.
Respondent's contention is at odds with a straightforward
reading of the statute and with the legislative history. For some erroneous
refunds, both section 6404(e)(1) and (2) may apply. The legislative history of
section 6404(e) shows that Congress contemplated that both paragraphs (1) and
(2) might apply: It refers to “overstated refunds”, which could only occur in
instances where an erroneous refund creates a tax liability. See H.R. Rept. No.
99-426, supra at 845, 1986-3 C.B. (Vol. 2) at 845; S. Rept. No. 99-313, supra
at 209, 1986-3 C.B. (Vol. 3) at 209; H.R. Conf. Rept. No. 99-841 (Vol. II), at
II-811, 1986-3 C.B. (Vol. 4) 1, 811. Indeed, the House report includes an
example explaining that such an overstated refund might occur “by overstating a
claim for a refund on a tax return.” H.R. Rept. No. 99-426, supra at 845.
Respondent contends that petitioner's situation is analogous
to that of the taxpayer in Baral v. Commissioner, T.C. Memo. 2009-113 [TC Memo
2009-113], where we concluded that section 6404(e)(2) did not apply. We
disagree. In Baral, the taxpayer incorrectly computed the taxable portion of
his Social Security benefits and therefore reported a higher income tax
liability with respect to those benefits. The Commissioner noticed the
taxpayer's mistake and corrected it, issuing the taxpayer a refund. However,
the Commissioner later discovered that the taxpayer had failed to report his
pension income and therefore was liable for tax on that unreported income, and
the Commissioner subsequently issued a notice of deficiency. The unreported
income in Baral “was wholly unrelated to the prior adjustment”. We held that
section 6404(e)(1), and not section 6404(e)(2), applied to govern the
taxpayer's eligibility for abatement of interest on her deficiency inBaral.
In contrast, the instant case is distinguishable fromBaral
because petitioner's overstated withholding is directly related to the prior
adjustment. Indeed, on line 71 of his Form 1040, petitioner reported the
correct amount of total payments. Petitioner's mistake was adding his estimated
tax to his withholding amount on line 62 instead of entering it on line 63. Had
respondent considered the entirety of petitioner's return at the same time, no
adjustments would have been necessary. Instead, respondent apparently
considered the amount petitioner reported on line 63, i.e., zero, approximately
15 months before respondent considered the amount petitioner reported on line
62.
Petitioner contends that respondent should have noticed the
mistake he made because he included with his Forms W-2 and 1099-R a note
stating that the additional $4,000 was submitted with his Form 1040-ES.
Respondent contends that he cannot be expected to read all of the notes sent by
taxpayers. However, respondent's contention is at odds with the Internal
Revenue Manual, which instructs: “Examine all attachments to the return” and
“all taxpayer-initiated correspondence must be responded to within 30 days.” 6
Internal Revenue Manual pt. 3.11.3.3.7 (Jan. 1, 2008). Respondent further
contends that petitioner's note is ambiguous, and we agree, but the note could
have alerted respondent of the need to verify the payments in both lines 62 and
63.
On the basis of the foregoing, we conclude that both section
6404(e)(1) and (2) may apply to petitioner's excess refund. However, as
explained above, the period for which a taxpayer may be entitled to an
abatement of interest is different under section 6404(e)(1) and (2). Pursuant
to section 6404(e)(1), the period begins only “after the Internal Revenue
Service has contacted the taxpayer in writing with respect to such deficiency
or payment.” See Krugman v. Commissioner 112 T.C. , at 239; Harbaugh v.
Commissioner, T.C. Memo. 2003-316 [TC Memo 2003-316]; Donovan v. Commissioner,
T.C. Memo. 2000-220 [TC Memo 2000-220]. Pursuant to section 6404(e)(2), the
period begins with the issuance of an erroneous refund and continues until a
demand for repayment is made. Because petitioner promptly paid upon receiving a
demand for repayment and because, as explained above, respondent appears to
have taken the position that he contacted petitioner in writing with respect to
the deficiency or payment with the May 11, 2009, letter, the period during
which interest abatement may be available is the same pursuant to both section
6404(e)(1) and (2).
As relevant here, section 6404(e)(2) requires that the
Commissioner abate interest unless the taxpayer “in any way caused such
erroneous refund”. (Emphasis added.) From the wording of the statute, it
appears that Congress intended that mandatory interest abatement apply only in
a narrow range of circumstances where the erroneous refund was caused entirely
by the Commissioner's own error. The statute suggests that, in a situation
where the taxpayer contributed in even the smallest degree to the issuance of
the erroneous refund, mandatory interest abatement does not apply. Nonetheless,
courts that have considered the application of section 6404(e)(2) to situations
in which the taxpayer may have contributed in some small way to the issuance of
the erroneous refund appear to have taken a more flexible approach to the
statute. In Converse v. United States, 839 F. Supp. 1274, 1278 [72 AFTR 2d
93-5972] (N.D. Ohio 1993), the District Court ordered the Government to abate
interest on an erroneous refund pursuant to section 6404(e)(2) despite the
court's finding that the taxpayers' actions helped cause the erroneous refund.
The court stated:
Although the
taxpayers arguably "caused such erroneous refund" by
their improper
filing of claims and by failing to draw the executed
Form
870-AD to the
attention of the IRS agent processing the claim, this
Court also
finds that the failure of the IRS to properly search its own
records to
ascertain the existence of any impediment to the claim
(such as a Form
870-AD) helped to cause the erroneous refund.
Therefore, the
Court finds that the Government must abate any interest
until * * *
the date when demand for repayment was officially made.
Id. Similarly, in
Lindstedt v. United States, 78 A.F.T.R.2d (RIA) 96-6211,
96-2
U.S. Tax Cas. (CCH)
para. 50,488 (Fed. Cl. 1996), the Court of Federal Claims,
citing Converse, held
that it was immaterial whether the taxpayer may have
added
confusion by failing
to file a quarterly return because the Government
clearly made
an error in its
handling of the taxpayer's return. Accordingly, inLindstedt,
the
Court of Federal Claims ordered the Government to abate any
interest assessed before its demand for repayment. 7
However, the courts in Lindstedt and Converse did not
explain how their conclusions were consistent with a statute that limits
mandatory abatement to situations in which taxpayers did not cause the
erroneous refund “in any way”. Upon further analysis, we consider those
conclusions to be consistent with section 6404(e)(2) because, although the
statute does not explicitly state so, we conclude, for the reasons explained
below, that the Commissioner has the authority to abate interest with respect
to erroneous refunds even when he is not required to.
As a preliminary matter, we conclude that the Commissioner
is authorized to abate interest on erroneous refunds even when he is not
required to do so because any other result would be inconsistent with section
6404(e)(1). For instance, some erroneous refunds will also result in
deficiencies, and, for those deficiencies, the Commissioner is authorized by
section 6404(e)(1) to abate interest on a deficiency caused by an error or
delay “if no significant aspect of such error or delay can be attributed to the
taxpayer”. That limitation authorizes abatement even if the taxpayer is
somewhat at fault for the error or delay, as long as the taxpayer's fault is
not a significant aspect of the error or delay. Consequently, the section
6404(e)(1) limitation is not as restrictive as the limitation under section
6404(e)(2), which reserves mandatory abatement for those situations where the
taxpayer has not “in any way caused” the error. If a taxpayer committed some
minor fault that contributed to the Commissioner's issuance of an erroneous
refund but that was nonetheless overwhelmingly the Commissioner's error, and,
if that refund resulted in a deficiency, the Commissioner clearly would be
authorized to abate interest pursuant to section 6404(e)(1) for the period
after the Commissioner contacted the taxpayer in writing. However, if section
6404(e)(2) is read to restrict abatements on erroneous refunds to only those
situations where the taxpayer did not cause the erroneous refund “in any way”,
then the taxpayer would be ineligible for abatement pursuant to section
6404(e)(2). Because that result seems incongruous, we conclude that the “in any
way caused” limitation under section 6404(e)(2) applies only to the mandatory
nature of section 6404(e)(2) and does not restrict the Commissioner's authority
to abate interest with respect to erroneous refunds.
Secondly, such a reading is more consistent with the
congressional intent manifest in the legislative history of section 6404(e).
The House report provides the following explanation for the amendment to
section 6404:
Present Law
Under present law, the IRS does not generally have the
authority to abate interest charges where the additional interest has been
caused by IRS errors and delays. This results from the IRS's long-established
position that once tax liability is established, the amount of interest is
merely a mathematical computation based on the rate of interest and due date of
the return. Consequently, the interest portion of the amount owed to the
Government cannot be reduced unless the underlying deficiency is reduced. The
IRS does, however, have the authority to abate interest resulting from a
mathematical error of an IRS employee who assists taxpayers in preparing their
income tax returns (sec. 6404(d)).
Reasons for Change
In some cases, the IRS has admitted that its own errors or
delays have caused taxpayers to incur additional interest charges. This may
even occur after the underlying tax liability has been correctly adjusted by
the IRS or admitted by the taxpayer. The committee believes that where an IRS
official acting in his official capacity fails to perform a ministerial act,
such as issuing either a statutory notice of deficiency or notice and demand
for payment after all procedural and substantive preliminaries have been
completed, authority should be available for the IRS to abate the interest
independent of the underlying tax liability. The committee is especially
concerned about IRS errors that cause taxpayers to receive much larger refunds
than they are entitled to. H.R. Rept. No. 99-426, supra at 844, 1986-3 C.B.
(Vol 2) at 844. As the House report makes clear, Congress intended that section
6404(e) would give the IRS the authority to abate interest. Because Congress
was especially concerned about IRS errors that caused taxpayers to receive much
larger refunds than those to which they were entitled, Congress elected to make
interest abatement with respect to such refunds mandatory unless the refunds
were over a certain size or unless the taxpayer “in any way caused” the
erroneous refund. However, Congress did not intend that the mandatory abatement
provision limit the authority of the IRS to abate interest. Indeed, the basic
purpose of adding section 6404(e) was to give the IRS discretion to abate
interest in appropriate situations. Reading section 6404(e)(2) to limit the
Commissioner's authority to abate interest would be inconsistent with that
purpose.
On the basis of the foregoing, we conclude that section
6404(e)(2) does not limit the Commissioner's authority to abate interest. 8
Accordingly, although we conclude that petitioner contributed to the cause of
petitioner's excess refund when he reported his estimated tax payment on the
wrong line, we conclude that
For refunds greater than $50,000, the abatement of interest
under IRC 6404(e)(2) is not required, but may be allowed on a case by case
basis. The IRS has the discretionary authority to abate interest on erroneous
refunds that exceed $50,000. IRS employees should consider the following facts
and circumstances when determining whether or not to abate interest due to an
erroneous refund: Did the taxpayer cause or contribute to the error or delay?
Did the taxpayer fail to return the erroneous refund for a significant period
of time after discovery of the error or after the taxpayer reasonably should
have discovered the error? Did the taxpayer return the erroneous refund before
the IRS notified the taxpayer of the error? Is the taxpayer sophisticated in
tax or business matters? respondent still had the authority to abate the
interest on that erroneous refund. Consequently, we now consider whether
respondent abused his discretion in declining to abate the interest on
petitioner's excess refund pursuant to section 6404(e)(1) or (2).
When we review the Commissioner's actions under an abuse of
discretion standard, we do not substitute our judgment for that of the
Commissioner. See Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff'd, 469
F.3d 27 [98 AFTR 2d 2006-7853] (1st Cir. 2006). Rather, we consider whether the
Commissioner has exercised his discretion arbitrarily, capriciously, or without
sound basis in fact or law. See Lee v. Commissioner, 113 T.C. at 149; Woodral
v. Commissioner, 112 T.C. at 23.
In respondent's January 28, 2011, letter denying petitioner's
request to abate the interest on petitioner's excess refund, respondent
explained that, because an error on petitioner's return contributed to the
issuance of the refund, petitioner did not qualify for interest abatement. We
cannot conclude that it was an abuse of discretion for respondent to decline to
abate interest because of petitioner's mistake on his Form 1040. That
determination is consistent with the limitations regarding taxpayer fault in
both section 6404(e)(1) and (2). Additionally, we note that petitioner should
have been aware that respondent had issued an erroneous refund when he received
a much larger refund than he expected because the May 11, 2009, letter and tax
statement explained that respondent had changed the amount of estimated tax reported
on petitioner's return. That explanation should have alerted petitioner to
respondent's error and prompted petitioner to contact respondent to inquire
about the refund, as petitioner did when he received respondent's August 30,
2010, letter telling petitioner that he owed money. 9 On the basis of the
foregoing, we conclude that respondent did not abuse his discretion when he
denied petitioner's request for abatement of interest with respect to the
erroneous refund.
In reaching these holdings, we have considered all the
parties' arguments, and, to the extent not addressed herein, we conclude that
they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order and decision will be entered.
1
Unless otherwise
indicated, section references are to the Internal Revenue Code of 1986, as
amended, and Rule references are to the Tax Court Rules of Practice and
Procedure.
2
We refer to this
amount as petitioner's excess refund to avoid confusion with the term
“erroneous refund” used in sec. 6404(e)(2), as discussed below.
3
We treat this as a
concession by respondent and do not decide whether the May 11, 2009, letter
constituted a contact in writing with respect to a deficiency or payment
pursuant to sec. 6404(e)(1). If it did not constitute such a contact in
writing, the interest abatement period pursuant to sec. 6404(e)(1) could not
have begun, if at all, until the next time respondent contacted petitioner in
writing, i.e., when the demand for repayment was made. Because petitioner
promptly paid, no amount of interest would be eligible for abatement pursuant
to sec. 6404(e)(1).
4
Sec. 6514 concerns
refunds made after the expiration of the period of limitation for filing refund
claims. The recovery of such refunds is governed by sec. 7405(a).
5
Not all erroneous
refunds will result in tax liabilities. If, for instance, a taxpayer who earned
no income and therefore owed no taxes received an erroneous refund, the
Commissioner's only option for recovery would be a civil suit. See United
States v. Frontone, 383 F.3d 656, 660-661 (7th Cir. 2004). The Commissioner may
use the assessment procedures to collect an erroneous refund only if the refund
gives rise to a tax liability. See id. at 659-661; cf. Interlake Corp. v.
Commissioner, 112 T.C. 103, 110 (1999) (holding that the Commissioner may not
use deficiency procedures to collect an erroneous refund that does not give
rise to a deficiency); Lesinski v. Commissioner, T.C. Memo. 1997-234 (same).
6
We are not
suggesting that petitioner's note required a response; rather, we note that the
Internal Revenue Manual instructs that any attachment to a return that could be
considered correspondence should receive a prompt reply. That instruction, and
the instruction to examine all attachments, are at odds with respondent's
suggestion that it is acceptable for IRS employees to overlook or discard notes
attached to returns.
7
In contrast to
Converse v. United States, 839 F. Supp. 1274, 1278 [72 AFTR 2d 93-5972] (N.D.
Ohio 1993), and Lindstedt v. United States, 78 A.F.T.R.2d (RIA) 96-6211, 96-2
U.S. Tax Cas. (CCH) para. 50,488 (Fed. Cl. 1996), we concluded in Pettyjohn v.
Commissioner, T.C. Memo. 2001-227 [TC Memo 2001-227], that the taxpayer was
ineligible for a refund pursuant to sec. 6404(e)(2) because she caused the
Commissioner to issue refunds when she repeatedly claimed overpayments of
income tax.
8
This conclusion is
also consistent with the conclusion reached by the Commissioner in Internal
Revenue Manual pt. 20.2.7.5 (Mar. 9, 2010), which states:
For refunds greater than $50,000, the abatement of interest
under IRC 6404(e)(2) is not required, but may be allowed on a case by case
basis. The IRS has the discretionary authority to abate interest on erroneous
refunds that exceed $50,000. IRS employees should consider the following facts
and circumstances when determining whether or not to abate interest due to an
erroneous refund:
Did the taxpayer cause or contribute to the error or delay?
Did the taxpayer fail to return the erroneous refund for a
significant period of time after discovery of the error or after the taxpayer
reasonably should have discovered the error?
Did the taxpayer return the erroneous refund before the IRS
notified the taxpayer of the error?
Is the taxpayer sophisticated in tax or business matters?
9
Indeed, the May 11,
2009, letter included a contact number and stated: “If you think we made a
mistake, please call us at the number listed above.”
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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