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Marcia Allen Broughton, for petitioners.
Julia L. Wahl, for respondent.
MEMORANDUM OPINION
DAWSON, Judge: This case was assigned to
Special Trial Judge Daniel J.
Dinan pursuant to the provisions of section 7443A(b)(5)and Rules
180, 181,
and 183. (NOTE 1) The Court agrees with and adopts the opinion of
the
Special Trial Judge, which is set forth below.
OPINION OF THE SPECIAL TRIAL JUDGE
DINAN, Special Trial Judge: Respondent
determined that petitioners are
not entitled to an abatement of interest on Federal income taxes for
the
period January 1, 1992, through November 5, 1998, relating to
their 1983
through 1986 and 1988 through 1991 taxable years. The only issue for
decision is whether respondent abused his discretion in failing
to abate
the assessment of interest.
BACKGROUND
Some of the facts have been stipulated and are
so found. The
stipulations of fact and the attached exhibits are incorporated
herein by
this reference. On the date the petition was filed in this case,
petitioners resided in Vero Beach, Florida, and neither petitioner
had an
individual net worth exceeding $2 million.
In the years 1983 through 1985, petitioners
invested a total of
$150,000 in a limited partnership known as Green Leasing Associates.
Green
Leasing was organized and marketed by Kent Klineman or an
affiliated
entity and by CIGNA Securities, a division of Connecticut General
Life
Insurance Co. Green Leasing was one of four partnerships which
made up
another partnership known as Madison Leasing. These partnerships had
over
100 partners in total. Petitioners were notified by respondent on
May 9,
1988, that an examination of Green Leasing was underway with respect
to
taxable year 1984.
From August 1990 through November 1991,
petitioners received several
items of correspondence from CIGNA explaining the status of
respondent’s
ongoing examination of Green Leasing and the other partnerships.
This
correspondence incorporated analysis by the accounting firm Coopers
&
Lybrand. The first letter petitioners received, dated August 22,
1990,
described a “worst case” outcome to settlement negotiations. The
letter
specifically stated that negotiations were ongoing and that
petitioners
should not expect any eventual settlement offer to contain the same
terms.
Petitioners filed amended Federal income tax
returns for the taxable
years 1983 through 1987 in December 1990 and for the taxable
years 1988
and 1989 in January 1991. They paid the additional tax and interest
shown
thereon at the time they filed the amended returns. The IRS
processed the
amended returns reporting tax due (1983 through 1985) and assessed
the
reported tax. The IRS did not process those showing refunds (1986
through
1989) because of the unresolved issues relating to Madison Leasing.
Petitioners filed the amended returns partially in response to
this
Court’s opinion in Thornock v. Commissioner, 94 T.C. 439 (1990).
The correspondence from CIGNA which petitioners
received after filing
the amended returns contained information regarding the ongoing
negotiations. In addition, the correspondence contained language
implying
that a settlement was currently available, and that individual
partners
had begun entering into final settlements with the IRS. One such
letter,
dated August 19, 1991, stated:
The number of inquiries [directed
to the IRS regarding settlement,
sent pursuant to an earlier letter
from CIGNA] has prompted the IRS
to request that we clarify what * *
* [the partners] view as the
limitations of their involvement in
individual cases. Essentially,
investors are requested to contact
the IRS by mail only after they
have made the decision to pursue the
proposed settlement. * * * Those
who do not have a docketed case may
either wait for the local IRS
Service Center to contact them with
the settlement offer, or simply
file amended tax returns which
reflect the terms of the settlement *
* * .
However, the letters also stated that the IRS was dealing first with
those
cases which had been docketed in this Court, followed by those
which had
not (those involving later tax years). As of October 29, 1991,
investors
were informed that settlement offers for nondocketed cases
“should be
communicated within the next few months.” Petitioners did not have
a case
docketed in this Court. Because no offer had been made directly
to
petitioners by the IRS, petitioners’ accountant, William J. Quinn
II,
wrote to the IRS on December 3, 1991, and again on January 22,
1992,
requesting a copy of the settlement offer which he had learned about
through the correspondence from CIGNA. Petitioners received no
immediate
response. A letter dated May 7, 1992, from Coopers & Lybrand to
a CIGNA
vice president states that settlements were still being entered
into
between the IRS and taxpayers with docketed cases.
The IRS revenue agent assigned to audit Madison
Leasing for the taxable
years 1983 through 1987 completed his examination with respect to
the
first year on March 29, 1988, and with respect to the final year on
April
2, 1991. On January 28, 1993, a proposed notice of final
partnership
administrative adjustment (FPAA) pertaining to Madison Leasing for
taxable
years 1983 through 1987 was completed and submitted for approval
to IRS
Regional Counsel. The finalized FPAA was issued on April 26, 1993.
On July
19, 1993, a petition was filed in this Court seeking review of
respondent’s determinations made in the FPAA. A decision was
entered in
that case by the Court upon respondent’s motion on July 28,
2000.
The Madison Leasing examination was assigned to
Appeals officer Marco
Minervini in October 1993. At that time, Mr. Minervini was
instructed to
offer a settlement to the partners of four partnerships making up
Madison
Leasing, including Green Leasing. In addition to Madison Leasing,
Mr.
Minervini was working on other Klineman-related partnerships
which
altogether comprised more than 1,000 individual partners. Over the
ensuing
months, Mr. Minervini worked on the settlement package fairly
steadily,
coordinating with IRS officials and counsel and with representatives
of
the partnerships. He was instructed to begin extending the
settlement
offer to individual partners in August 1995.
Petitioners--along with other partners of Green
Leasing--were sent a
letter from the IRS dated November 30, 1995, extending the final
settlement offer. Petitioners accepted this offer by letter dated
January
24, 1996. The IRS then sent petitioners an initial proposed
closing
agreement on August 2, 1996, incorporating the terms of the
settlement
offer. A revised closing agreement--resulting from changes made
because of
taxpayer inquiries--followed from the IRS on November 19, 1996. This
revised agreement was executed by petitioners on December 5,
1996, and for
respondent on May 9, 1997. Thereafter, also in May 1997, the IRS in
New
York transmitted the executed closing agreement to the Atlanta
Service
Center--the IRS service center covering petitioners at that
time--for
determination of petitioners’ tax liabilities resulting from
the execution
of the agreement.
After the closing agreement was transmitted to
Atlanta, negotiations
began between the IRS and petitioners. The IRS sent petitioners
initial
calculations of their tax liabilities on or around August 13, 1997.
Thereafter, petitioners’ accountant sent the IRS his own
proposals,
questions, and objections to the changes being asserted with respect
to
most of the taxable years under examination. The correct tax
liabilities
for all of the years were contained in final determinations sent on
or
before October 19, 1998. Although the terms of the settlement
remained
substantially the same as those communicated to petitioners in 1991,
the
overall correct tax liability was in an amount greater than Mr.
Quinn had
anticipated on the basis of his understanding of those terms at that
time.
Before resolution of the issues with respect to
all the years involved
in the settlement, the IRS began to collect assessed tax
liabilities. On
January 21, 1998, the IRS levied upon petitioners’ bank account in
connection with taxable years 1985, 1986, 1988, and 1989. The
levy was not
for the correct amounts of tax ultimately determined for those
years. On
August 31, 1998, the IRS notified petitioners that it intended to
levy to
collect tax owed for 1991. The amount stated in this notice also was
not
the amount ultimately determined to be due for that year.
Petitioners requested an abatement of interest
accruing from January 1,
1992, through November 5, 1998, with respect to underlying
deficiencies
for tax years 1983 through 1986 and 1988 through 1991. (NOTE 2)
Respondent made a final determination that petitioners were not
entitled
to the abatement of interest, providing the following rationale:
We did not find
any errors or delays relating to the performance
of ministerial acts, which merit
abatement of interest for the period
from January 1, 1992 to October 14,
1998. A ministerial act, as
defined in the Code and Regulations,
is a procedural or mechanical
act that occurs during the
processing of a taxpayer’s case and does
not involve the exercise of judgement
or discretion.
DISCUSSION
Pursuant to section 6404(e)(1), as it applies
in this case, the
Commissioner may abate the assessment of interest on: (1) Any
deficiency
attributable to any error or delay by an officer or employee of
the
Internal Revenue Service (IRS) in performing a ministerial 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 or
employee
being erroneous or dilatory in performing a ministerial act. An
error or
delay is taken into account only (1) if no significant aspect of
such
error or delay can be attributed to the taxpayer, and (2) after
the IRS
has contacted the taxpayer in writing with respect to such
deficiency or
payment. Sec. 6404(e)(1).
In 1996, section 6404(e) was amended by section
301(a) of the Taxpayer
Bill of Rights 2, Pub. L. 104-168, 110 Stat. 1457 (1996), to permit
the
Commissioner to abate interest with respect to “unreasonable”
errors or
delays resulting from “managerial” acts as well as from
ministerial acts.
This amendment applies to interest accruing with respect to
deficiencies
or payments for tax years beginning after July 30, 1996. Id. sec.
301(c);
Woodral v. Commissioner, 112 T.C. 19, 25 n.8 (1999). The
amendment is
therefore inapplicable in this case. Petitioners assume in their
brief
that the amendment permits abatement for managerial acts which
occur after
July 30, 1996. This assumption is incorrect: the triggering date for
the
applicability of the amendment is the taxable year of the
underlying
deficiency or payment, not the date of the managerial act.
The Department of the Treasury has interpreted a
ministerial act as “a
procedural or mechanical act that does not involve the exercise
of
judgment or discretion, and that occurs during the processing of a
taxpayer’s case after all prerequisites to the act, such as
conferences
and review by supervisors, have taken place.” Sec.
301.6404-2T(b)(1),
Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug.
13, 1987).
(NOTE 3)
Even where errors or delays are present, the
decision to abate interest
remains discretionary. Sec. 6404(e)(1). This Court may order an
abatement
only where the Commissioner’s failure to abate interest was an
abuse of
that discretion. Sec. 6404(i)(1). The Commissioner’s exercise
of
discretion is entitled to due deference; in order to prevail, the
taxpayer
must demonstrate that in not abating interest, the Commissioner
exercised
his discretion arbitrarily, capriciously, or without sound basis in
fact
or law. Woodral v. Commissioner, supra at 23.
We note at the outset that petitioners’
arguments are fundamentally
flawed because they fail to assert any correlation between an error
or
delay in the performance of a ministerial act by respondent and a
specific
period of time over which interest should be abated as a result of
that
error or delay. Such a correlation is required for abatement
under section
6404(e). Donovan v. Commissioner, T.C. Memo. 2000-220. It is clear
from
the record that petitioners are seeking an abatement of interest
not
because of any specific ministerial act, but merely because they are
dissatisfied with the amount of time it took to resolve their
case. In
fact, petitioners stated in the abatement request submitted to the
IRS
that they chose January 1, 1992, as the beginning date for
abatement
because petitioners found that the 3 years and 7 months prior to
that date
was a “reasonable time” for audit and settlement.
Petitioners’ primary argument is that
respondent abused his discretion
because he failed to adequately explain his use of discretion in the
final
determination or during trial. Petitioners rely heavily upon the
case of
Jacobs v. Commissioner, T.C. Memo. 2000-123, in this argument.
Specifically, petitioners emphasize our holding with respect to
the
Commissioner’s refusal to abate interest for portions of the
period
September 1987 through November 17, 1991. This was a period for
which the
record provided few details concerning the actions of the IRS.
Furthermore, the final determination letters issued to the
taxpayers had
cursorily concluded: “We did not find any errors or delays that
merit
abatement of interest in our review of available records and
other
information”. Noting that the Commissioner is best able to know
what
actions were taken by IRS officers and employees, we concluded
that in
regard to those specific periods for which he failed to explain the
basis
of his refusal to abate interest, the refusal was an abuse of
discretion.
We agree with petitioners that, as was the case
in Jacobs, the language
in the determination letter was rather cursory and possibly left out
many
details concerning respondent’s inquiry and decision not to
abate the
interest. (NOTE 4) However, unlike the situation in Jacobs, we need
not merely speculate what happened during the relevant period
between
January 1, 1992, and November 5, 1998. The record sufficiently
supports
respondent’s determination that there were no ministerial acts
which
caused errors or delays. The record reflects steady progress in
petitioners’ case from audit through final settlement.
Petitioners argue that respondent abused his
discretion because he has
failed to show that the length of time it took to settle
petitioners’ case
was due to anything but ministerial errors or delays. Petitioners
again
rely on Jacobs in this argument, contending that respondent has
failed to
show that an IRS employee exercised judgment or discretion in (a)
responding to partners’ requests for settlement, and (b)
prioritizing or
organizing the related partnership cases.
Although petitioners requested from respondent
an abatement of interest
accruing from January 1, 1992, through November 5, 1998, the only
specific
subset of time in respect of which petitioners request in their
brief that
we find an abuse of discretion was the period “from 1990 through
1993". We
assume petitioners are referring to the period from April 2,
1991, through
January 28, 1993. The IRS auditor completed his work with respect to
Madison Leasing on April 2, 1991, but the proposed FPAA for
Madison
Leasing was not submitted for approval until January 28, 1993.
Initially,
we note that we cannot find an abuse of discretion in
respondent’s failure
to abate interest for any period before January 1, 1992, because
petitioners did not request that respondent exercise his
discretion and
abate interest accruing before that date. As for the remainder of
this
period, it is clear from the letters which petitioners received
from CIGNA
that during this time the IRS was working on resolving cases
involving
Madison Leasing and the related partnerships. The letters, which
petitioners were receiving at least as late as October 29, 1991,
indicate
that current progress was being made toward settling docketed
cases and
beginning work on settlements for nondocketed cases. In addition,
the May
7, 1992, letter from Coopers & Lybrand to CIGNA indicates
progress on the
settlements was ongoing. Thus, even for this period the evidence in
the
record shows continuing progress.
Finally, petitioners point to three specific
causes of delay, though
without correlating the causes with any specific timeframe for
abatement.
First, petitioners argue that delays were caused by the IRS’s
refusal to
provide the settlement offer when petitioners initially requested
it. As
noted above, a “ministerial act” must involve an act “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., supra. It
is clear
that a decision to not extend a settlement offer to petitioners
at a
particular stage of an ongoing examination involving the returns of
as
many as 100 partners was not a ministerial act. The IRS was far
from
completing the prerequisite acts in late 1991 and early 1992 when
petitioners requested a settlement.
Second, petitioners argue that delays were
caused by respondent’s
failure to process the amended returns which showed refunds. There
was no
ministerial error in this situation either, because employees of
the IRS
exercised discretion in not processing all of petitioners’ amended
returns: They assessed the taxes shown as due on the returns, see
sec.
6201(a)(1), and they did not process those returns showing refunds
because
the taxable years in issue were subject to an ongoing examination
at the
partnership level.
Finally, petitioners argue that delays were caused
by respondent’s
failure to use the most current and accurate information in
making final
settlement calculations. Petitioners argue that this failure was due
to
(a) an IRS employee, Marilyn Parsonson, writing reports
indicating the
amount of tax due on the basis of what she knew to be incomplete
information regarding the taxable year 1983, and (b) IRS
employees’ not
using the information provided on the unprocessed amended returns.
It is
clear from the record that, although Ms. Parsonson was initially
unable to
obtain the information from IRS records, she used information later
obtained from petitioners or their accountant in making her
settlement
computations. As for the amended returns, we have already noted that
the
delay in processing them was not due to any error or delay in
performing a
ministerial act, but to the ongoing partnership examination.
Accordingly, we find no abuse of discretion in
respondent’s failure to
abate interest in this case.
To reflect the foregoing,
Decision
will be entered
for
respondent.
NOTES
- Unless otherwise indicated, section references are to the
Internal Revenue Code as amended, and Rule references are to the
Tax Court Rules of Practice and Procedure.
- This was an amended request for abatement. According to the
stipulation of facts, petitioners filed an initial request that
differed from the amended request. The former is not in the
record, and it is unclear what the exact differences are.
Respondent’s final determination appears to relate to the
terms of the amended request, and petitioners refer to the same
in their petition.
- The final regulations under sec. 6404 contain the same
definition of a ministerial act as the temporary regulations.
Sec. 301.6404-2(b)(2), Proced. & Admin. Regs. However, the
final regulations do not apply in this case because they apply
only to interest accruing with respect to deficiencies or
payments for taxable years beginning after July 30, 1996. Id.
par. (d).
- The language was more informative in that the
determination letter in the present case specifically stated
that no errors or delays relating to the performance of
“ministerial acts” could be found for the period in
question, and it proceeded to define the term “ministerial
act” in accordance with the applicable regulation.
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