Allcorn v. Commissioner

LUTHER HERBERT ALLCORN, III, PETITIONER v.

COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 4775–11. Filed August 9, 2012.

P timely filed his 2008 Form 1040, U.S. Individual Income

Tax Return, after previously filing a Form 1040–ES, Esti-

mated Tax, and paying $4,000 in estimated taxes. On his

Form 1040, P mistakenly added the $4,000 estimated tax pay-

ment to the income tax withheld reported on line 62 instead

of the estimated tax payments reported on line 63. That mis-

take contributed to R’s issuance of a refund to P on May 11,

2009. R later realized that P had reported the $4,000 esti-

mated 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 pursu-

ant 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.

Luther Herbert Allcorn III, pro se.

Beth A. Nunnink, for respondent.

53

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54 139 UNITED STATES TAX COURT REPORTS (53)

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 stipu-

lated. 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 with-

held 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.

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.

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(53) ALLCORN v. COMMISSIONER 55

In a letter dated May 11, 2009, respondent informed peti-

tioner that he was due a refund of $5,179.52. The letter con-

tained 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, peti-

tioner received a refund of $5,179.52. Of that amount, peti-

tioner 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 expla-

nation 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, peti-

tioner 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 peti-

tioner’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.

2 We refer to this amount as petitioner’s excess refund to avoid confusion with the term ‘‘erro-

neous refund’’ used in sec. 6404(e)(2), as discussed below.

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56 139 UNITED STATES TAX COURT REPORTS (53)

Discussion

Rule 121(a) provides that either party may move for sum-

mary 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 (7th Cir. 1994). The par-

ties 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 ministe-

rial 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 min-

isterial 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 attrib-

utable 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 attrib-

utable to an error or delay by the IRS in performing a min-

isterial or managerial act during the period after the IRS has

contacted the taxpayer in writing with respect to the defi-

ciency 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

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(53) ALLCORN v. COMMISSIONER 57

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), Exam-

ples (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 Commis-

sioner 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. Commis-

sioner, 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 esti-

mated 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 pay-

ments 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 con-

tends 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

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58 139 UNITED STATES TAX COURT REPORTS (53)

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 UNREASON-

ABLE 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 unreason-

able 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 attrib-

utable to such officer or employee being erroneous or dilatory in per-

forming 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 con-

siders 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 con-

siders 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

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 pur-

suant 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).

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(53) ALLCORN v. COMMISSIONER 59

abatement of interest with respect to an erroneous refund.

Unlike the discretionary interest abatement provision of sec-

tion 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 erro-

neous 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 sec-

tion 6514 [4]) may be recovered by civil action brought in the

name of the United States.’’ Respondent contends that peti-

tioner’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 defi-

ciency 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 Commis-

sioner may seek to recover from the taxpayer by filing a civil

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).

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60 139 UNITED STATES TAX COURT REPORTS (53)

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 (7th Cir. 2004); Brookhurst, Inc. v. United

States, 931 F.2d 554, 555–557 (9th Cir. 1991); Beer v.

Commissioner, 733 F.2d 435 (6th Cir. 1984), aff ’g T.C. Memo.

1982–735; Warner v. Commissioner, 526 F.2d 1 (9th Cir.

1975), aff ’g T.C. Memo. 1974–243; United States v. C & R

Invs., Inc., 404 F.2d 314 (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 nec-

essary that the Commissioner have sought to recover it via

a refund suit; it is sufficient that it be ‘‘recoverable by suit

pursuant to 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

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).

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(53) ALLCORN v. COMMISSIONER 61

(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 analo-

gous to that of the taxpayer in Baral v. Commissioner, T.C.

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 tax-

payer’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 there-

fore 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 in Baral.

In contrast, the instant case is distinguishable from Baral

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, approxi-

mately 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 tax-

payers. However, respondent’s contention is at odds with the

Internal Revenue Manual, which instructs: ‘‘Examine all

attachments to the return’’ and ‘‘all taxpayer-initiated cor-

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62 139 UNITED STATES TAX COURT REPORTS (53)

respondence 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 sec-

tion 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 dif-

ferent 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; Donovan v. Commissioner, T.C. 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 posi-

tion 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. None-

theless, 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 erro-

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.

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(53) ALLCORN v. COMMISSIONER 63

neous refund appear to have taken a more flexible approach

to the statute. In Converse v. United States, 839 F. Supp.

1274, 1278 (N.D. Ohio 1993), the District Court ordered the

Government to abate interest on an erroneous refund pursu-

ant 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 tax-

payer’s return. Accordingly, in Lindstedt, the Court of Fed-

eral 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 tax-

payers 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 rea-

sons 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 Commis-

sioner is authorized to abate interest on erroneous refunds

even when he is not required to do so because any other

7 In contrast to Converse v. United States, 839 F. Supp. 1274, 1278 (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, that the tax-

payer was ineligible for a refund pursuant to sec. 6404(e)(2) because she caused the Commis-

sioner to issue refunds when she repeatedly claimed overpayments of income tax.

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64 139 UNITED STATES TAX COURT REPORTS (53)

result would be inconsistent with section 6404(e)(1). For

instance, some erroneous refunds will also result in defi-

ciencies, and, for those deficiencies, the Commissioner is

authorized by section 6404(e)(1) to abate interest on a defi-

ciency 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 tax-

payer’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 Commis-

sioner’s issuance of an erroneous refund but that was none-

theless overwhelmingly the Commissioner’s error, and, if

that refund resulted in a deficiency, the Commissioner

clearly would be authorized to abate interest pursuant to sec-

tion 6404(e)(1) for the period after the Commissioner con-

tacted 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 erro-

neous refund ‘‘in any way’’, then the taxpayer would be ineli-

gible 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 sec-

tion 6404(e). The House report provides the following expla-

nation 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

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(53) ALLCORN v. COMMISSIONER 65

a mathematical error of an IRS employee who assists taxpayers in pre-

paring 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 com-

pleted, authority should be available for the IRS to abate the interest inde-

pendent of the underlying tax liability. The committee is especially con-

cerned 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 erro-

neous 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 incon-

sistent 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 peti-

8 This conclusion is also consistent with the conclusion reached by the Commissioner in Inter-

nal 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 re-

quired, 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 dis-

covery 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

Continued

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66 139 UNITED STATES TAX COURT REPORTS (53)

tioner contributed to the cause of petitioner’s excess refund

when he reported his estimated tax payment on the wrong

line, we conclude that 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 judg-

ment for that of the Commissioner. See Murphy v. Commis-

sioner, 125 T.C. 301, 320 (2005), aff ’d, 469 F.3d 27 (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 peti-

tioner’s request to abate the interest on petitioner’s excess

refund, respondent explained that, because an error on peti-

tioner’s return contributed to the issuance of the refund, peti-

tioner did not qualify for interest abatement. We cannot con-

clude 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 erro-

neous 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 esti-

mated 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 peti-

tioner’s request for abatement of interest with respect to the

erroneous refund.

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.’’

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(53) ALLCORN v. COMMISSIONER 67

In reaching these holdings, we have considered all the par-

ties’ 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.

f

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