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T.C. Memo. 2003-43
UNITED STATES TAX COURT
JOHN G. GOETTEE, JR. AND MARIAN GOETTEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26591-96.
Filed February 25, 2003.
Ps claimed investment credits and losses arising
out of a partnership in which they held a limited
interest. By notice of deficiency, R disallowed these
claimed credits and losses. R extended a uniform
settlement offer to all taxpayers, including Ps,
involved in similar partnerships. Ps promptly
communicated to R their acceptance of the offer, but R
did not send to Ps a proposed decision document for
about 11 months. When Ps received this document, they
promptly executed and returned it to R, but R did not
sign it for about 5 months. After entry of decision, R
assessed (1) the deficiencies and additions as
determined in the decision document, plus interest
thereon, and (2) accrued, but unassessed interest on
previously assessed deficiencies. Ps paid the
deficiencies and additions, and requested an abatement
of interest. R initially disallowed Ps abatement
request in full; Ps appealed. On appeal, R issued a
notice of determination allowing a partial abatement.
Ps then paid the remaining assessed interest
liabilities.
- 2 1. Held: R’s failure to abate interest for any
disputed period through Jan. 24, 1995, and any disputed
period from Apr. 25, 1995, onward was not an abuse of
discretion, because the delays that Ps identify are not
attributable to R’s error or delay in performing a
ministerial act. R’s failure to abate interest for the
period Jan. 25 through Apr. 24, 1995, was an abuse of
discretion because it was attributable to an
unjustified delay in R’s official performing a
ministerial act. Sec. 6404(e), I.R.C. 1986.
2. Held, further, R has conceded errors in
computing amounts of interest; in the exercise of our
overpayment jurisdiction R is sustained as to each of
the disputed unconceded items. See sec. 6404(h)(2)(B),
I.R.C. 1986.
During the course of Ps’ efforts to persuade R to
abate the interest, in response to R’s agent’s
suggestion, Ps made an offer in compromise of $40,000
to settle about $120,000 of interest on 4 years of
income tax liabilities. Later, again at R’s agent’s
suggestion, Ps withdrew their offer in compromise. A
few months later, R returned Ps’ $40,000 without
interest.
3. Held, further, on this record we shall not
direct R to abate any interest, nor shall we require
recomputation of interest on account of the $40,000.
Matthew J. McCann, for petitioners.
Elizabeth S. Henn and William J. Gregg, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHABOT, Judge:
Respondent issued a notice of determination
partially disallowing petitioners’ claim to abate interest with
respect to underpayments for 1978, 1979, 1981, 1982, and 1983.
- 3 Petitioners petitioned the Court under section 64041 to review
this abatement disallowance as to all 5 years.
We granted
respondent’s motion for partial summary judgment that respondent
does not have authority to abate interest as to 1978.
Commissioner, T.C. Memo. 1997-454.
to 1983.
Goettee v.
Petitioners have conceded as
As a result, only 1979, 1981, and 1982 remain before
the Court in the instant case.
1
The petition refers to sec. 6406, but it is evident that
sec. 6404 is the intended authority.
Unless otherwise indicated, all section, subchapter,
chapter, and subtitle references are to sections, subchapters,
chapters, and subtitles of the Internal Revenue Code of 1954 for
the underpayment years in issue. References to sec. 6404 are to
that section of the Internal Revenue Code of 1986 as in effect
for proceedings commenced at the time the petition in the instant
case was filed.
- 4 After concessions by both sides,2 there are two categories
of issues for decision, as follows:
(1)
Whether respondent’s failure to abate interest for
certain time periods constitutes an abuse of discretion.
(2)
Whether respondent’s interest computations are
correct.
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and
the stipulated exhibits are incorporated herein by this
reference.
When the petition was filed in the instant case,
petitioners, John G. Goettee, Jr. (hereinafter sometimes referred
to as John), and Marian Goettee (hereinafter sometimes referred
2
As noted supra, petitioners concede as to interest on
underpayments for 1983.
Respondent concedes that respondent underabated the amount
of interest for the period Oct. 4, 1995, through Sept. 20, 1996.
The parties agree that there remain overassessments for 1981
and 1982. Respondent contends that insufficient interest was
assessed as to underpayments for 1979, but concedes that no
additional amounts of interest are to be assessed against
petitioners.
Other concessions are discussed infra in connection with the
issues to which the specific concessions relate.
Respondent concedes that a Rule 155 computation will be
necessary.
Unless indicated otherwise, all Rule References are to the
Tax Court Rules of Practice and Procedure.
- 5 to as Marian), husband and wife, resided in New Windsor,
Maryland; their collective net worth did not exceed $2 million.
At all relevant times, John was self-employed as a dentist,
and Marian was employed as the office administrator for John’s
dental practice.
Marian is also a licensed and certified speech
and language pathologist.
Petitioners filed joint Federal income tax returns for 1979,
1981, and 1982.
They
made their tax returns on the basis of the
calendar year.
Petitioners paid the entire amount of the tax
liabilities shown on each of their tax returns for 1979, 1981,
and 1982 before the respective tax return was required to be
filed.
In particular, petitioners’ 1979 tax return was filed on
or before April 15, 1980, and the $19,821.50 liability shown
thereon was paid in full by a combination of withheld taxes
($1,135.20), estimated tax payments ($18,000), and payment with
the tax return ($686.30).
Petitioners’ 1981 tax return was filed
on or before April 15, 1982, and the $6,277 liability shown
thereon was paid in full by a combination of withheld taxes
($1,135.20), estimated tax payments ($11,500), and other
refundable credits ($1,095).
On June 7, 1982, respondent
refunded the $7,453.20 overpayment claimed on the 1981 tax
return.
Respondent did not pay interest on this refund for 1981.
Petitioners’ 1982 tax return was filed on or before April 15,
1983, and the $4,919 liability shown thereon was paid in full by
- 6 a combination of withheld taxes ($1,868), estimated tax payments
($17,000), and other refundable credits ($500).
On June 13,
1983, respondent refunded to petitioners $14,851.79, consisting
of $14,549 plus interest thereon (for the period Apr. 15 through
June 1, 1983) in the amount of $302.79 for 1982.
A.
The Transaction
On the recommendation of John’s father, an accountant and
tax attorney, John3 acquired a limited partnership interest in
The Thompson Equipment Associates partnership (hereinafter
sometimes referred to as TEA) during September 1981.
John
acquired the interest in TEA in exchange for a $12,500 check and
a $12,500 promissory note which matured on February 15, 1982.
Marian issued a check on February 10, 1982, that paid the
promissory note in full.
Petitioners claimed flowthrough losses from TEA on their tax
returns for 1981, 1982, and 1983.
Petitioners carried back
“credits/losses” from 1981 to 1978 and 1979.
As a result of the
“credits/losses” carried back from 1981 to 1979, on June 28,
1982, respondent refunded to petitioners $10,375.38, consisting
of $9,568 plus interest thereon (for the period Jan. 1 through
3
The parties have stipulated that (1) John acquired the
partnership interest, and (2) both petitioners were limited
partners. The parties have not reconciled the two stipulations.
It does not appear to matter to the instant case whether Marian
also was a limited partner in Thompson Equipment Associates. For
convenience, we refer to John as the limited partner.
- 7 June 16, 1982) in the amount of $807.38.
Respondent did not
credit petitioners’ 1979 account with interest for the period
June 16 through June 28, 1982.
On June 13, 1983, when respondent
refunded to petitioners the overpayment petitioners claimed on
their 1982 tax return, respondent did not credit petitioners’
1982 account with interest for the period June 1 through June 13,
1983.
B.
The Tax Court Proceeding and Surrounding Circumstances
On October 15, 1986, respondent sent to petitioners a notice
of deficiency, in which respondent made adjustments on account of
TEA items and determined deficiencies and additions to tax as
shown in table 1.
Table 1
Additions to Tax
Sec.
6653(a)(2)
Year
Deficiency
Sec.
6653(a)(1)
1978
1979
1981
1982
$14,607
8,208
9,537
8,129
$730
410
477
406
–-1
2
1
50 percent of the interest due on $9,537.
2
50 percent of the interest due on $8,129.
Sec.
6659
$4,382
2,462
2,861
2,439
Respondent also determined that petitioners’ deficiencies
are subject to an increased rate of interest under section
- 8 6621(c) (hereinafter sometimes referred to as the section 6621(c)
rate).4
On November 3, 1986, petitioners filed a petition with this
Court seeking a redetermination of their tax liabilities for
1978, 1979, 1981, and 1982.
John R. Shematz (hereinafter
sometimes referred to as Shematz), who was in business with
John’s father, signed the petition and initially represented
petitioners in this Court.
Petitioners’ case was assigned to a group of cases
collectively referred to as the Barrister Books project
(hereinafter sometimes referred to as Barrister).
partnerships started to be formed in 1981.
The Barrister
Andrew M. Winkler
(hereinafter sometimes referred to as Winkler) served as lead
counsel for the Commissioner in the Barrister cases.
Sometime
around 1986, the Commissioner extended a uniform settlement offer
to any Barrister investor.
The Commissioner withdrew the offer
on or about May 16, 1989.
4
The notice of deficiency refers to sec. 6621(d). Sec.
6621(d) was redesignated as sec. 6621(c) by sec. 1511(c)(1)((A)
of the Tax Reform Act of 1986 (TRA 1986), Pub. L. 99-514, 100
Stat. 2085, 2744. We shall refer to this section as sec.
6621(c).
Secs. 6653(a), 6659, and 6621(c) were repealed by sec. 7721
of the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989),
Pub. L. 101-239, 103 Stat. 2106, 2399, for tax returns due after
Dec. 31, 1989. The substance of former secs. 6653(a) and 6659
now appears in sec. 6662. These repeals and revisions do not
affect petitioners’ liabilities for the years involved in the
notice of deficiency on which table 1 is based.
- 9 Another tax case project, the Bromwell Book project
(hereinafter sometimes referred to as Bromwell), was active at
the same time as Barrister.
The Bromwell partnerships started to
be formed in 1978 or 1979.
Winkler served as the Commissioner’s
lead counsel for Bromwell; he considered Bromwell to be a
predecessor of Barrister.
For the years before the enactment of the so-called
“partnership litigation” provisions in the Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA 1982), Pub. L. 97-248, 96 Stat.
324,5 efforts were made to (1) group related partnership cases,
(2) designate one or more cases in a group as “lead cases”, and
(3) try to have the parties in other cases in the related
partnership group agree to be bound by the outcome of the lead
cases.
On January 2, 1986, Special Trial Judge Pate issued a
Memorandum Sur Order which, the parties have stipulated,
established Leger v. Commissioner, docket No. 18640-84, as “a
test case with regard to all of the Bromwell Book cases.”
5
Sec. 402 of TEFRA 1982 provides for the unified audit and
litigation procedures of subch. C of ch. 63 (secs. 6221 et seq.)
(the “TEFRA provisions”). Under the TEFRA provisions, if the
dispute arises from a “partnership item” (as defined by sec.
6231(a)(3)), then the dispute is resolved at the partnership
level. Sec. 6221; see Maxwell v. Commissioner, 87 T.C. 783, 787788 (1986) (explaining the effect of the TEFRA provisions). The
TEFRA provisions generally apply to partnership taxable years
beginning after Sept. 3, 1982. TEFRA 1982 sec. 407, 96 Stat. at
670.
- 10 On September 22, 1986, Shematz notified petitioners that
respondent intended to seek continuances in the Bromwell cases
pending resolution of Leger v. Commissioner, supra, and that the
decision in Leger v. Commissioner, supra, was likely to be
appealed and would thus delay the outcome of their case for
several years.
On March 18, 1987, we filed our opinion in Leger v.
Commissioner, T.C. Memo. 1987-146, affd. without published
opinion 860 F.2d 435 (5th Cir. 1988), wherein we sustained the
Commissioner’s determinations that the taxpayers were not
entitled to claim their distributive share of the partnership
investment credit and losses, because the partnership was not
engaged in for-profit activities under section 183.
On May 15, 1987, petitioners’ case was assigned to Special
Trial Judge Pate for trial or other disposition.
On March 20, 1989, Special Trial Judge Pate invited Winkler
and the Barrister cases taxpayers or their counsel (including
petitioners’ case) to a pretrial conference scheduled for June
16, 1989, in order to consider and decide a number of procedural
matters, including “The choice of lead cases (a maximum of
four)”.
Winkler determined that, if the Tax Court was going to try a
Barrister case, then the Commissioner and the taxpayers should
follow the Tax Court’s opinion, rather than the Commissioner’s
- 11 settlement package.
As a result, the uniform settlement package
was withdrawn a month before the scheduled pretrial conference.
At the June 16, 1989, pretrial conference, representatives
of the promoters for the Barrister partnerships suggested that it
would be better to have a promoter-funded TEFRA partnership case
as a lead Barrister case.
that approach.
Special Trial Judge Pate agreed with
That pretrial conference did not result in the
selection of a Barrister lead case.
During September 1989, Barrister Equipment Assocs. Series
#115 v. Commissioner, docket No. 23263-89 (hereinafter sometimes
referred to as Series 115) was selected as the lead case for
Barrister.
Series 115 involved 1983 and 1984; it was a TEFRA
partnership case.
In late 1989, the Court was informally advised that Shematz
had died.
Thereafter, petitioners proceeded pro se.
On October 20, 1989, a motion was filed in Series 115 to
reassign that case from Special Trial Judge Pate to a
Presidentially appointed Judge of this Court.
The motion was
based on contentions that assignment of that case to a Special
Trial Judge was not authorized by statute and that it violated
the United States Constitution.
The motion also requested that,
if the Court denied the motion, then the Court should stay the
case and certify the issue for interlocutory appellate review
pursuant to section 7482(a)(2).
- 12 On April 9, 1990, we filed our unanimous Court-reviewed
opinion in First Western Govt. Securities v. Commissioner, 94
T.C. 549 (1990), in which we denied an identical motion filed by
the taxpayers in those consolidated cases.
We certified those
cases for interlocutory appellate review.
Id. at 564-565, 569.
We held those cases, and others such as Series 115, in abeyance
pending appellate resolution of the issue.
Our opinion in First
Western Govt. Securities v. Commissioner, supra, was affirmed sub
nom. Samuels, Kramer & Co. v. Commissioner, 930 F.2d 975 (2d Cir.
1991).
The issue finally was resolved in Freytag v.
Commissioner, 501 U.S. 868 (1991).
On July 15, 1991, Series 115 was assigned to Special Trial
Judge Pate.
Series 115 was tried and submitted to Special Trial
Judge Pate on January 15, 1993.
In the spring of 1993, after the trial in Series 115, the
Commissioner renewed the earlier settlement offer in the
Barrister cases.
Winkler decided to renew the settlement offer
because he anticipated many problems in the pre-TEFRA Barrister
cases which would require a lot of time to resolve.
Some of the
problems Winkler anticipated included the presence of carrybacks
and mispostings to accounts.
The settlement offer also was
renewed to (1) give Winkler and his colleagues work while they
were awaiting an opinion in the Series 115 case, and (2) reduce
the inventory of Barrister cases.
- 13 The task of processing the settlement of the Barrister cases
fell to Winkler and an Appeals officer in respondent’s
Louisville, Kentucky, office, hereinafter sometimes referred to
as the Louisville office.
Elmer Craig (hereinafter sometimes
referred to as Craig) succeeded Charles Bower as the Appeals
officer who shared with Winkler the responsibility of processing
the Barrister cases.
The settlement offer was communicated to investors in
Barrister partnerships by letter (hereinafter sometimes referred
to as settlement letters).
The settlement offer was intended to
be made available to every investor in a Barrister partnership.
However, Winkler decided to send only a few settlement letters at
any given time because he thought that he and Craig (the only
ones working on the settlements at this point) would not have
been able to process the settlement offer in a timely manner if
it was made simultaneously available to every investor in a
Barrister partnership.
Also, the death and relocation of some of
the Barrister taxpayers or their representatives made it
difficult for Winkler to communicate the settlement offer to some
of the Barrister taxpayers.
Winkler and Craig generally processed the Barrister cases in
taxpayer alphabetical sequence.
They deviated from this system
if, for example, the person who represented a Barrister taxpayer
whose surname began with the letter A also represented other
- 14 Barrister taxpayers whose surnames began with letters other than
A.
In these circumstances, Winkler and Craig processed all of
the cases with common representation at the same time.
Another
category of deviations from strict alphabetical sequence involved
taxpayers or their representatives who telephoned Winkler or
Craig, described their circumstances, and indicated their
agreement with the proposed settlement.
Petitioners’ case did
not fall into either of the foregoing categories of cases in
which respondent deviated from strict alphabetical sequence.
In the spring of 1993, the Commissioner’s Appeals Office in
Cincinnati, Ohio (hereinafter sometimes referred to as the
Cincinnati office), learned of the Barrister case settlements
that Winkler and Craig were processing.
At that time, Appeals
officers in the Cincinnati office had caseloads of about 50-60
cases, which was about half of their normal caseloads.
The chief
of the Cincinnati office, the associate chief (Paul R. Becker,
hereinafter sometimes referred to as Becker), and Appeals Officer
Fran Rowland (hereinafter sometimes referred to as Rowland) went
to the Louisville office to discuss with Winkler and Craig the
possibility of the Cincinnati office processing some of the
Barrister case settlements.
By the end of the meeting, it was
decided that the Cincinnati office would take some 200 of the
pre-TEFRA Barrister cases.
Winkler remained responsible for
executing Tax Court decision documents on behalf of the
- 15 Commissioner in Barrister cases.
The Louisville office retained
some of the pre-TEFRA Barrister cases which involved multiple tax
shelters.
The Cincinnati office picked up the cases from the
Louisville office in June of 1993.
The number of cases transferred to the Cincinnati office,
coupled with their complexity, created the need for Craig to
conduct an all-day training session about how to process the
settlement of these cases.
Employees in the Cincinnati office
who were to process the Barrister cases traveled to the
Louisville office to attend this session.
The need for a
training session to become able to settle a case was not typical.
About July of 1993, the Barrister cases were assigned to
Rowland and two other Appeals officers.
About 75 cases were
assigned to Rowland, about 75 to another Appeals officer, and
about 50 to the remaining Appeals officer.
Petitioners’ case was
among those assigned to Rowland.
Appeals officers in the Cincinnati office managed multiple
priorities while they processed the settlement of the Barrister
cases.
Cases nearing the end of the limitations period, and Tax
Court cases calendared for trial in Cincinnati and Columbus,
Ohio, were given a higher priority than the Barrister cases.
Rowland typically did all of the service center claim cases-these, too, were given a higher priority than the Barrister
cases.
- 16 C.
The Settlement Process - Generally
Although Rowland’s caseload was about half of her normal
caseload in the spring of 1993, her caseload had returned to
normal, about 100-120 cases, about the same time the Barrister
cases were assigned to her.
Because of the increase in her
workload, Rowland did not send any settlement letters to any
Barrister taxpayers until about September of 1993.
Rowland sent settlement letters in groups of 10 to 15.
The
settlement letters (1) stated the terms of the settlement offer,
(2) asked the recipients to submit to Rowland copies of their
canceled checks (hereinafter sometimes referred to as
verification information) within 10 days so that she could verify
the recipients’ actual cash investment in the partnership, and
(3) stated that upon receipt of the verification information,
Rowland would send to the Barrister taxpayer computations which
showed the tax effects of the settlement offer to that taxpayer.
The settlement letters generated a significant and generally
prompt response from many of the Barrister taxpayers.
More than
half of the Barrister taxpayers who responded to the settlement
offer submitted their verification information within the
requested 10 days.
Rowland also received numerous phone calls
regarding the settlement offer, many of which concerned the
amount of interest that would be assessed.
- 17 The Cincinnati office usually processed the Barrister case
responses on a first in, first out basis.
Consistent with this
policy, Barrister taxpayers who responded after the 10-day period
were still permitted to avail themselves of the settlement offer,
but their cases were processed after the cases for which
verification information had already been provided.
After receiving the verification information in a case,
Rowland’s first step was to compare that information to the
amounts claimed on that taxpayer’s tax return.
The second step
was to determine whether that taxpayer was involved in any other
tax shelter activities for the relevant pre-TEFRA years and, if
so, then whether adjustments had been made regarding those other
tax shelter activities.
Many Barrister taxpayers were also
involved in other tax shelters.
If the taxpayer was involved in
other tax shelters, then Rowland usually had to make phone calls
to other Internal Revenue Service Centers to find out the status
of the Commissioner’s actions regarding those other tax shelters.
The third step in the settlement process required Rowland to
input the taxpayer’s information into a computer which would
enable her to (1) generate a Form 5278 (Statement of Income Tax
Changes), (2) complete the requisite number of Form(s) 3623
(Statements of Account), and (3) draft the proposed decision
document, hereinafter collectively referred to as the settlement
documents.
Rowland had to personally prepare the tax deficiency
- 18 computations for each affected year, including in most cases
carryback years.
The settlement documents showed not only the
deficiency amounts, but also the balances due.
However, the
settlement documents did not show the amount of interest due.
Rowland then sent the settlement documents to the taxpayer.
The
taxpayer was instructed that, if the taxpayer approved, then the
taxpayer was instructed to sign the proposed decision document
and return it to Rowland within 30 days.
Many people called to find out the amount of interest they
would have to pay.
Rowland and the other Appeals officers
typically told those people that a “ballpark figure” would be
three or four times the deficiency due.
If the people wanted
more precise information, then Rowland and the other Appeals
officers had a support office prepare computations, which then
were forwarded to those who inquired.
Generally, the people who
inquired about interest did not return the decision document
until they received the requested information.
For about the first 6 months that the Cincinnati office
processed Barrister cases, Rowland and the other Appeals officers
sent the proposed decision documents to Winkler and Craig for
their approval before sending them to the Barrister taxpayers.
The Cincinnati and Louisville offices were in frequent contact
about drafts of the proposed decision documents during this time
because many of the proposed decision documents were incorrect in
- 19 some respect.
Once the Cincinnati office became more proficient
at drafting the proposed decision documents, proposed decision
documents were sent to Barrister taxpayers without first
obtaining the approval of either Winkler or Craig.
Normally, an Appeals officer in the Cincinnati office
working on a Barrister case required about 26 calendar days to
(1) verify the amount of the taxpayer’s cash investment, (2)
determine whether the taxpayer was involved in another tax
shelter, (3) input the taxpayer’s information into the computer,
(4) prepare the settlement documents, and (5) mail the settlement
documents to the taxpayer.
If a taxpayer accepted the settlement offer and returned the
signed decision document, then Rowland prepared and submitted to
Becker an appeals transmittal and case memorandum for his
approval.
If Becker approved, then he signed the appeals
transmittal and case memorandum and transmitted the settlement
documents to Winkler.
Winkler then reviewed the format and
contents of the decision documents, signed them, and forwarded
them to the Court for entry of decision.
It ordinarily took
Winkler less than 1 hour to review and sign an average decision
document that did not have any problems.
However, Winkler gave
priority to working on cases calendared for trial by the Court.
- 20 D.
The Settlement Process - Petitioners’ Case
On November 24, 1993, Rowland sent to petitioners the
following settlement letter.
Dear Mr. and Mrs. Goettee:
This case has been referred to us by District Counsel in
Louisville, Kentucky, to offer you a settlement in your tax
shelter dispute concerning Thompson Equipment Associates.
Please consider this settlement in view of the Tax Court
decisions in Thomas J. Leger, T.C. Memo. 1987-146, Harris
Cashman, T.C. Memo. 1989-533, and Marvin Chupack, T.C. Memo.
1989-548.
The terms in offer of settlement are:
1. 50% of cash investment is allowed as a loss in 1981;
2. no investment tax credit (ITC) is allowed;
3. no other loss, deduction, or credit will be allowed;
4. no negligence penalty under Section 6653(a) will be
applied;
5. the overvaluation penalty, Section 6659, will be 20%
of the ITC used;
6. no understatement penalty under Section 6661 will
apply;
7. tax motivated interest under Section 6621(c) will
apply to the entire deficiency.
There is no documentation in the file which substantiates
your actual cash investment in this tax shelter. Please
forward copies of your cancelled checks verifying your cash
investment, within the next ten days. After this
verification is received, you will receive the computations
of the settlement offer, showing the tax effects if you
accept the offer.
Please contact me if you have any questions or concerns.
return envelope is provided for your convenience.
This was the first time petitioners received a settlement
offer from the Internal Revenue Service.
A
- 21 On December 2, 1993, John’s father, who was petitioners’
then representative,6 sent petitioners’ verification information
to Rowland.
At some point, Rowland examined petitioners’
verification information and concluded that the amounts therein
matched the amounts claimed on petitioners’ relevant tax returns.
At some time between October 1 and October 15, 1994, Rowland
determined whether petitioners were involved in a tax shelter
other than TEA, and concluded that she did not need any further
information from petitioners to compute their tax liability.
At some time between October 15 and October 21, 1994,
Rowland entered petitioners’ information into her computer.
Rowland printed petitioners’ Form 5278 on October 21, 1994.
On
October 26, 1994, Rowland mailed the settlement documents
(together with a Form 3610 (Audit Statement)) to petitioners.
Petitioners signed the decision document on November 25, 1994,
and mailed it to Rowland on December 14, 1994.
Petitioners
enclosed the following letter to Rowland with their signed
decision document:
6
The parties have stipulated that John’s father was
petitioners’ “representative” at the time of this letter. The
parties also have stipulated that petitioners “proceeded pro se”
in this Court after Shematz’s death, in 1989. We gather from
this that John’s father represented petitioners before the
Internal Revenue Service, but not before this Court.
- 22 Dear Ms. Rowland:
We have attempted, without success, to reach you by
telephone. We have signed the enclosed papers concerning
the settlement of the case with Barrister Books, but are
very confused about the figures that are on the enclosed
statements. When we made the original investment,
everything was legal, had been checked by the IRS and
attorneys and was approved as a valid investment. Now, the
tables have really turned! The last correspondence that we
had from you was in November, 1993, and it has taken a year
to respond to us. At that time we had forwarded to you
copies of checks, etc. that proved when we entered this
partnership. Why has it taken so long? Also, why has it
taken nearly 14 years to bring this case to this point? It
hardly seems fair to us that we should be penalized for
something that was legal in the first place, and then, 14
years later, becomes a tax problem and we are the ones that
bear the brunt of it.
We would appreciate any answers that you could give us.
On December 23, 1994, Rowland prepared, signed, and sent to
Becker an appeals transmittal and case memorandum which outlined
the terms of the settlement of petitioners’ case.
On January 13, 1995, Becker signed and approved the appeals
transmittal and case memorandum.
That same day, Becker wrote to
petitioners as follows:
Dear Mr. & Mrs. Goettee:
The proposed settlement you reached with the Appeals
Officer, as reflected in the stipulation-decision document,
has been approved. We have forwarded the stipulation you
signed to District Counsel for filing with the United States
Tax Court.
The Tax Court will notify you of entry of the stipulation.
If there is any amount due as a result of this settlement,
you will be billed by the service center.
- 23 Becker then delivered petitioners’ proposed decision document to
the records office of the Cincinnati office, which had 5 days to
send the proposed decision document to Winkler.
During 1993 and 1994, Winkler processed the settlement of
about 800 to 900 TEFRA Barrister cases.
In addition to working
on the Barrister and Bromwell cases, Winkler also worked on some
general litigation cases, provided large case audit assistance,
assisted in the audit of “large taxpayers”, and worked on an
occasionally active large estate tax case.
Winkler signed petitioners’ decision document on April 25,
1995, and then forwarded it to the Court for entry of decision.
On May 2, 1995, the Court entered decision in petitioners’ case.
The relevant parts of the decision are set forth in table 2.
Table 2
Year
Deficiency
1978
1979
1981
1982
$14,606.59
8,207.59
1,144.00
4,298.00
Additions to Tax
Sec.
Sec.
6653(a)(1)
6653(a)(2)
-----
-----
Sec.
6659
$2,921.32
1,641.52
227.00
--
The decision further provides that the entire deficiencies
for 1978, 1979, 1981, and 1982 were subject to the section
6621(c) rate.
The Court served a copy of the decision on respondent’s
National Office, which received it on May 2, 1995.
The copy was
received in the Louisville office on May 8, 1995.
On June 1,
- 24 1995, the Louisville office sent the administrative file and a
copy of the decision document to the Cincinnati office.
The
Cincinnati office received this material on June 5, 1995.
As of June 1, 1995, the Louisville office recorded a total
of 13 hours on petitioners’ deficiency case.
Petitioners’ deficiency case never was set for trial.
E.
Assessments; Payments
A Form 2859, Request for Quick or Prompt Assessment, for
1978 was prepared and approved on August 16, 1995.
On August 18,
1995, respondent assessed the deficiencies shown supra in table 2
and interest in the amounts shown in table 3.
Table 3
Year
Interest
1978
1979
1981
1982
$65,336.10
36,456.54
4,689.52
13,243.89
Bills for the assessed amounts were sent to petitioners on the
same day.
The first time petitioners were notified of the
amounts of interest was when they received these bills.
On September 5, 1995, petitioners paid the entire amounts
shown supra on table 2 (deficiencies and additions to tax) for
1978, 1979, 1981, and 1982.
These payments were posted to
petitioners’ account as of September 8, 1995.
In their letter
enclosing these payments, petitioners requested “an abatement of
the interest.”
See supra table 3.
- 25 Additional assessments, abatements, and credits after August
18, 1995, resulted in balances shown in table 4, payments of
which by petitioners were posted on December 11, 1996 (as to
1978, 1981, and 1982), and December 24, 1996 (as to 1979).
Table 4
Year
Interest
1978
1979
1981
1982
$65,316.82
36,519.51
4,974.51
13,952.46
Penalty for
Late Payments
$73.03
123.11
5.53
21.49
Payment
$65,389.85
36,642.62
4,980.04
13,973.95
Petitioners have paid all tax and interest assessed for
1979, 1981, and 1982; no additional tax or interest needs to be
assessed.
F.
The Abatement Process
At or about the time of petitioners’ September 5, 1995,
letter, petitioners also wrote to their Congressman.
On
September 8, 1995, petitioners’ Congressman wrote to respondent.
On September 22, 1995, in response to petitioners’ September
5 letter, respondent thanked petitioners for their payment of
$33,046.02 (the sums of the amounts on table 2, supra) and told
them that (1) respondent had not yet gathered all of the
information necessary to give to petitioners a complete answer to
their abatement request letter, (2) respondent would contact
petitioners within 30 days to inform them about the status of
- 26 their case, and (3) they need not take any further action with
respect to their request.
On September 25, 1995, respondent wrote to petitioners’
Congressman, stating as follows:
Dr. Goettee paid the assessed tax and should now submit his
request for abatement on Form 843. His request should be
mailed to Internal Revenue Service, Philadelphia,
Pennsylvania 19020. We have enclosed a Form 843 for his
convenience.
On October 6, 1995, petitioners received from respondent (an
office in Bensalem, Pennsylvania) a notice of deficiency for
1983.
Respondent enclosed a Form 843 (Claim for Refund and
Request for Abatement) with the 1983 notice of deficiency.
On October 9, 1995, petitioners wrote to the Cincinnati
office, asking respondent to deal with all their tax matters from
one office, because it “is completely overwhelming for us” to
deal with two different offices about tax disputes arising from
the same partnership.
Petitioners enclosed a Form 843 requesting
(1) an abatement of interest on 1983 taxes and (2) an abatement
of 1983 penalties under section 6653.
On October 20, 1995, respondent further replied to
petitioners’ September 5 letter, in pertinent part as follows:
You must file Form 843 for each year you are requesting an
abatement of interest. We have enclosed Forms 843 for your
convenience.
You will receive a notice of the balance due within two to
three weeks.
- 27 Please provide the information by Nov. 18, 1995.
enclosed an envelope for your convenience.
We have
On October 23, 1995, petitioners replied to respondent’s
October 20 letter.
Evidently, the forms respondent had enclosed
with the October 20 letter dealt with 1994 household employment
taxes.
Petitioners used, instead, copies of the Form 843 that
respondent had included in the October 6 letter.
Petitioners
complied with the October 20 letter instructions by enclosing a
separate Form 843 for each of the years 1978, 1979, 1981, and
1982, in the amounts shown in table 3, supra.
On February 5, 1996, respondent proposed to disallow
petitioners’ abatement request in full.7
Respondent gave the
following reasons to support this proposed decision:
(1)
The
time petitioners’ case was before this Court does not constitute
a delay in the performance of a ministerial act, and (2) the
delay in settling petitioners’ case was not attributable to
respondent.
Petitioners appealed respondent’s proposed disallowance.
On
March 21, 1996, Samuel E. Fish, Jr. (hereinafter sometimes
referred to as Fish), an Appeals officer in respondent’s
Baltimore, Maryland, Appeals Office (hereinafter sometimes
7
The amounts listed in the Feb. 5, 1996, letter are
slightly greater than the amounts claimed in petitioners’ Forms
843. We assume that the difference, almost 2.2 percent for each
year, represents the additional interest that had accrued after
the Aug. 18, 1995, assessment. Supra table 3.
- 28 referred to as the Baltimore office), wrote to petitioners about
their appeal.
On April 10, 1996, Rowland wrote to petitioners from the
Cincinnati office in response to the letters from petitioners’
Congressman and both of their Senators.
Her letter was
essentially consistent with respondent’s February 5 letter that
denied petitioners’ abatement requests in full.
On April 24, 1996, Becker traveled from Cincinnati to
petitioners’ residence in New Windsor, Maryland, to discuss their
interest liability.
Becker gave to petitioners a Form 656 (Offer
in Compromise).
On April 29, 1996, Becker wrote to petitioners, in pertinent
part, as follows:
I have also spoken with people from the offices of
Congressman Roscoe B. Bartlett, Senator Barbara A. Mikulski
and Senator Paul S. Sarbanes. In each case, I have
explained your situation and pointed out that the interest
liability is fixed by statute.
It appears that the only avenue available to you at this
time is to prepare the necessary information and forms to
submit an Offer in Compromise to the Collection Division.
This can be done through the Internal Revenue Office in
Frederick or through the Baltimore Office.
On May 29, 1996, petitioners submitted a Form 656 in which
they offered respondent $40,000 to settle their interest
liability for 1978, 1979, 1981, 1982.
Petitioners enclosed a
- 29 check for $40,000 with the May 29 Form 656.8
At respondent’s
request, on June 14, 1996, petitioners resubmitted their offer in
compromise using a newer version of Form 656.
The June 14, 1996,
Form 656 provided that if respondent rejected petitioners’ offer,
then respondent would return the $40,000 without interest.
Respondent denied petitioners’ offer in compromise.
On June
25, 1996, petitioners appealed the denial and asked for a
conference.
In response, on August 7, 1996, Fish arranged for a
conference to be held on August 22, 1996, at the Baltimore
office.
On August 14, 1996, Becker responded to petitioners’
telephone call, as follows:
Thank you for your phone call regarding the status of your
case. I am glad to hear, it finally made it to the Appeals
Office in Baltimore.
As promised, attached are copies of pages from the “Taxpayer
Bill of Rights 2" relating to “Abatement of Interest and
Penalties”. Since this is a very new legislative change the
explanation is brief. It will take some time to develop
detailed guidelines.
8
Both sides’ briefs agree that petitioners paid this
$40,000 to respondent on May 15, 1996. As we have found (infra
text including table 5), respondent abated interest for the
period Oct. 4, 1995, through Sept. 20, 1996. Under these
circumstances, it does not appear to make a difference whether
the $40,000 was paid on May 29, 1996, as indicated in the
stipulated Form 656 of that date, or was paid on May 15, 1996, as
the parties agree on brief.
- 30 As you present your case to the Appeals Officer, you may
want to mention the current change in the law and ask if the
concept can be applied to your case. It may help.
I hope your efforts are successful.
On July 30, 1996, Congress enacted the Taxpayer Bill of
Rights 2 (TBOR 2), Pub. L. 104-168, 110 Stat. 1452.
TBOR 2 sec.
302(a), 110 Stat. at 1456, added section 6404(h)9 which gives to
this Court jurisdiction to review the Commissioner’s refusal to
abate interest under section 6404.
TBOR 2 sec. 302(b), 110 Stat.
at 1458, provides that the amendments made by section 302(a)
apply “to requests for abatement after the date of the enactment
of” TBOR 2.
In lieu of the August 22 conference in the Baltimore office,
petitioners and Fish conferred by telephone on September 4, 1996.
At Fish’s request, on September 4, 1996, petitioners withdrew
their offer in compromise.
On September 13, 1996, Fish advised petitioners to prepare,
sign, and submit a new Form 843 for each year for which they
sought an abatement, so that the Forms 843 would be dated after
9
This provision was enacted as sec. 6404(g). Through a
series of amendments, former sec. 6404(g) was redesignated as
sec. 6404(i). Secs. 3305(a) and 3309(a) of the Internal Revenue
Service Restructuring and Reform Act of 1998 (RRA 1998), Pub. L.
105-206, 112 Stat. 685, 743, 745. These amendments apply to
taxable years beginning after July 22, 1998. RRA 1998 sec.
3305(b), 112 Stat. at 743. Sec. 6404(i) then was redesignated as
sec. 6404(h) by sec. 112(d)(1)(B) of the Victims of Terrorism Tax
Relief Act of 2001, Pub. L. 107-134, 115 Stat. 2427, 2435. We
will refer to this subsection using its current designation, sec.
6404(h).
- 31 July 31, 1996, the effective date for the relevant provisions in
TBOR 2.
Fish advised petitioners to do this to protect their
right to petition the Tax Court to review the Commissioner’s
decision about petitioners’ abatement requests.
On October 3,
1996, petitioners submitted new Forms 843.
On October 25, 1996, Fish recommended that (1) interest
should be abated for the period October 4, 1995, through
September 20, 1996, because for that period “taxpayers were
continually given incorrect advise [sic] and subject to the
processing timeframes of the ill advised offer and interest
abatement claims[, and]” (2) interest should not be abated for
any period before petitioners paid the taxes because-There were no ministerial or managerial acts which
contributed to errors or delays, which were not part of the
tax court/shelter process. The taxpayers were offered
opportunities to resolve the matter in earlier years, as
well as advised that a posted cash bond would suspend the
accrual of interest.
Fish’s analysis presented the dollar effects of his
recommendations on petitioners’ interest abatement claims as
shown in table 5.
Table 5
Year
Claimed
Disallowed
Allowed
1978
1979
1981
1982
1983
$66,763
37,252
4,792
13,533
4,270
$65,439
36,508
4,688
13,143
4,129
$1,324
744
104
390
141
- 32 Fish’s recommendations were approved on October 31, 1996,
and a notice of disallowance was issued to petitioners on
November 13, 1996, setting forth the amounts shown supra under
“Allowed”, disallowing the balance of the claims, but not stating
the amounts disallowed.
G.
Other Matters; Conclusions
At some point, probably in December 1996, possibly in
January 1997, respondent returned to petitioners the $40,000 that
petitioners paid in connection with their offer in compromise.
Tax assessments in the amounts of $1,360 for 1979 and $87
for 1981 are not subject to the section 6621(c) rate.
Respondent has overassessed interest in at least the amounts
of $108.33 for 1981 and $298.47 for 1982.
Respondent’s failure to abate interest for the period
December 2, 1993, through October 26, 1994, was not an abuse of
discretion.
Respondent’s failure to abate interest for the period
December 14, 1994, through January 25, 1995, was not an abuse of
discretion.
Respondent’s failure to abate interest for the period
January 26 through February 24, 1995, was an abuse of discretion.
Respondent concedes that there should be an abatement of interest
for the period February 25 through April 24, 1995.
- 33 Respondent’s failure to abate interest for the period April
25 through May 2, 1995, was not an abuse of discretion.
OPINION
The instant case presents two categories of issues: (1)
Whether respondent’s failure to abate interest for certain time
periods constitutes an abuse of discretion, and (2) whether
respondent’s interest computations are correct.
The proper
treatment of petitioners’ offer in compromise payment arguably
falls into both categories.10
We consider first the issues of
abatements for certain time periods.
I.
Abatements of Interest
Petitioners contend that respondent’s failure to abate
interest for the periods of (1) December 2, 1993, through October
26, 1994 (the first period), and (2) December 14, 1994, through
May 2, 1995 (the second period), constitutes an abuse of
discretion because the interest that accrued during each of these
periods is attributable to a delay in the performance of a
ministerial act by respondent.
Petitioners also urge us to order
abatement for unspecified additional periods.
Respondent concedes that an abatement of interest for part
of the second period--February 25 through April 25, 1995--is
appropriate.
10
Respondent contends, however, that the failure to
Petitioners also filed a motion to shift the burden of
proof. Because we do not decide any issues based on the burden
of proof, we deny petitioners’ motion as moot.
- 34 abate interest for the remaining periods does not amount to an
abuse of discretion because (1) there were no delays during these
periods, and (2) even if there were, the delays were the result
of general administrative decisions, not respondent’s failure to
perform a ministerial act.
We agree with respondent as to the first period, as to parts
of the second period, and as to the unspecified additional
periods.
period.
We agree with petitioners as to part of the second
- 35 Section 6404(e)(1)11 authorizes respondent to abate assessed
interest attributable to error or delay in an IRS officer or
11
Sec. 6404(e)(1) provides, in pertinent part, as follows:
SEC.
6404.
ABATEMENTS.
*
*
*
*
*
*
*
(e) Assessments of Interest Attributable to 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 error or delay by an officer or
employee of the Internal Revenue Service (acting
in his official capacity) in performing a
ministerial act, or
(B) 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 an
officer or employee being erroneous or dilatory in
performing a ministerial 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.
Sec. 301(a) of TBOR 2, Pub. L. 104-168, 110 Stat. 1452, 1457
(1996), amended sec. 6404(e) to permit abatement of interest for
“unreasonable” error and delay in the performance of a
“ministerial or managerial” act. The TBOR 2 amendments of sec.
6404(e) apply to interest accruing with respect to deficiencies
or payments for taxable years beginning after July 30, 1996.
TBOR 2 sec. 301(c), 110 Stat. at 1457. Thus, the amendments do
not apply in the instant case. Woodral v. Commissioner, 112 T.C.
19, 25 n.8 (1999).
- 36 employee’s performing a ministerial act, with certain
restrictions not applicable in the instant case.
As we stated in Krugman v. Commissioner, 112 T.C. 230, 238239 (1999),
Congress intended for the Commissioner to abate interest
under section 6404(e) “where failure to abate interest would
be widely perceived as grossly unfair” but not that it “be
used routinely to avoid payment of interest”. H. Rept. 99426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844; S. Rept.
99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.
- 37 Section 6404(h)12 authorizes this Court to decide whether
respondent’s failure to abate such interest is an abuse of
discretion and, if so, then to order an abatement.
Respondent does not contend that any significant aspect of
the delay is attributable to petitioners.
flush language).
12
Sec. 6404(e)(1) (final
Accordingly, we are left to consider whether
Sec. 6404(h) provides, in pertinent part, as follows:
SEC. 6404.
*
ABATEMENTS.
*
*
*
*
*
*
(h) Review of Denial of Request for Abatement of
Interest.-(1) In general.--The Tax Court shall have
jurisdiction over any action brought by a taxpayer who
meets the requirements referred to in section
7430(c)(4)(A)(ii) to determine whether the Secretary’s
failure to abate interest under this section was an
abuse of discretion, and may order an abatement, if
such action is brought within 180 days after the date
of the mailing of the Secretary’s final determination
not to abate such interest.
(2) Special rules.-(A) Date of mailing.--Rules similar to the
rules of section 6213 shall apply for purposes of
determining the date of the mailing referred to in
paragraph (1).
(B) Relief.--Rules similar to the rules of
section 6512(b) shall apply for purposes of this
subsection.
(C) Review.--An order of the Tax Court under
this subsection shall be reviewable in the same
manner as a decision of the Tax Court, but only
with respect to the matters determined in such
order.
- 38 (1) any delays petitioners identified are respondent’s delays in
performing a ministerial act, and (2) respondent’s failure to
abate interest for any period constitutes an abuse of discretion.
Section 6404(e) does not define the term “ministerial act”.
Lee v. Commissioner, 113 T.C. 145, 149 (1999).
The governing
regulation13 defines the term to mean a procedural or mechanical
13
Sec. 301.6404-2T(b), Temporary Proced. & Admin. Regs.,
52 Fed. Reg. 30163 (Aug. 13, 1987), provides as follows:
Sec. 301.6404-2T Definition of ministerial act (temporary).
(b) Ministerial act--(1) Definition. The term
“ministerial act” means 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 prerequsites to the act, such as conferences and review
by supervisors, have taken place. A decision concerning the
proper application of federal tax law (or other federal or
state law) is not a ministerial act.
(2) Examples. The definition of ministerial act may be
illustrated by the following examples.
Example (1). A taxpayer moves from one state to another
before the Internal Revenue Service selects the taxpayer’s
income tax return for examination. A letter explaining that
the return has been selected for examination is sent to the
taxpayer’s old address and then forwarded to the new
address. The taxpayer timely responds, asking that the
audit be transferred to the Service’s district office that
is nearest the new address. The group manager approves the
request. After the request for transfer has been approved,
the transfer of the case is a ministerial act. The
Commissioner may (in his or her discretion) abate interest
attributable to a delay in transferring the case.
Example (2). An examination of a taxpayer’s income tax
return reveals a deficiency with respect to which a notice
of deficiency will be issued. After the taxpayer and the
Internal Revenue Service have identified all agreed and
(continued...)
- 39 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
13
(...continued)
unagreed issues, the notice has been prepared and reviewed
(including review by District Counsel, if necessary) and any
other relevant prerequisites have been completed, the
issuance of the notice of deficiency is a ministerial act.
The Commissioner may (in his or her discretion) abate
interest attributable to a delay in issuing the notice.
Example (3). A taxpayer invested in a tax shelter and
reported a loss from the tax shelter on the taxpayer’s
income tax return. Internal Revenue Service personnel
conducted an extensive examination of the tax shelter, and
the processing of the taxpayer’s case was delayed during
such examination. Because the period of limitations on
assessment was about to expire, the taxpayer executed a
consent to extend the period of limitations. The time
required to process the taxpayer’s case was not a result of
a delay in performing a ministerial act; consequently,
interest attributable to this period cannot be abated under
paragraph (a) of this section.
Example (4). A revenue agent is sent to a training
course, and the agent’s supervisor decides not to reassign
the agent’s cases. During the training course, no work is
done on the cases assigned to the agent. Neither the
decision to send the agent to the training course nor the
decision not to reassign the agent’s cases is, under the
circumstances, a ministerial act. Thus, interest
attributable to the delay cannot be abated.
Example (5). A taxpayer who claimed a loss from a tax
shelter on the taxpayer’s income tax return is notified that
the Internal Revenue Service intends to examine the return.
However, because of other work priorities and resource
limitations, a decision is made not to commence the
examination for an extended period thereafter. The decision
not to commence the examination involves the exercise of
judgment and discretion and is not a ministerial act;
consequently, interest attributable to the period of delay
cannot be abated.
- 40 supervisors, have taken place.
Sec. 301.6404-2T(b)(1), Temporary
Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).14
The regulation further provides that a decision concerning the
proper application of Federal tax law is not a ministerial act.
Id.
The definition of “ministerial act” in the governing
regulation closely tracks the legislative history relating to
section 6404(e).
See Lee v. Commissioner, 113 T.C. at 149-150
(setting forth portions of the legislative history of section
6404(e) relating to the definition of “ministerial act”); see
14
Sec. 6232(a) of the Technical and Miscellaneous
Revenue Act of 1988 (TAMRA 1988), Pub. L. 100-647, 102 Stat.
3342, 3734-3735, added subsec. (e) to sec. 7805. Sec. 7805(e)(2)
provides that “Any temporary regulation shall expire within 3
years after the date of issuance of such regulation.” Sec.
7805(e)(2) applies to any temporary regulation issued after Nov.
20, 1988. TAMRA 1988 sec. 6232(b), 102 Stat. at 3735. The
regulation herein involved was issued before Nov. 20, 1988, and
thus the “sunset” provision of sec. 7805(e)(2) does not apply to
this regulation.
The final regulations under sec. 6404 were issued on Dec.
18, 1998. The final regulations generally apply to interest
accruing on deficiencies or payments of tax described in sec.
6212(a) for tax years beginning after July 30, 1996. See sec.
301.6404-2(d)(1), Proced. & Admin. Regs. Accordingly, the final
regulations are inapplicable to the instant case, and sec.
301.6404-2T, Temporary Proced. & Admin. Regs., supra, effective
for taxable years beginning after Dec. 31, 1978, but before July
30, 1996, does apply. See sec. 301.6404-2T(c), Temporary Proced.
& Admin. Regs., supra.
We agree with petitioners that the temporary regulation
applies to the instant case; we disagree with respondent’s
statements on brief that the final regulations are “the
applicable regulations”.
- 41 also S. Rept. 99-313, at 209, 1986-3 C.B. (Vol. 3) 1, 209 (“The
IRS may define a ministerial act in regulations.”).
This
consistency between section 301.6404-2T(b)(1), Temporary Proced.
& Admin. Regs., supra, and the legislative history of section
6404(e) satisfies the concern that we might otherwise have had
about the regulation.
Cf. Minahan v. Commissioner, 88 T.C. 492,
505 (1987) (stating:
When the regulation interpreting a statute is written by the
very agency whose “abusive actions or overreaching” were
intended to be deterred by that statute, we must be
especially vigilant to insure that the regulation
“harmonizes with the plain language of the statute, its
origins, and its purpose.” Durbin Paper Stock Co. v.
Commissioner, 80 T.C. [252,] at 257 [(1983)].).
We apply the foregoing first to the events of the first
period (December 2, 1993, through October 26, 1994), then to the
events of the second period (December 14, 1994, through May 2,
1995), and finally to the events of unspecified additional
periods.
A.
First Period (Dec. 2, 1993, through Oct. 26, 1994)
Petitioners contend as follows on brief:
Respondent’s actions to calculate the deficiency and to
transmit decision documents to Petitioners should have taken
no more than ten days. Even so, Respondent’s Appeals Office
did not send a decision document to Petitioners for their
signature until October 26, 1994. The time period for this
ministerial action to be completed by Respondent encompassed
10 months and 24 days, after Petitioners’ transmittal of
their canceled checks to Respondent. Such delay in
performing a simple ministerial act warrants abatement of
the interest accruing during the period December 2, 1993 to
October 26, 1994.
- 42 December 2, 1993 (the start of the first period), is the
date petitioners mailed to respondent their verification
information.
October 1, 1994, is the earliest date respondent
took any action in processing the settlement of petitioners’
case, and October 15, 1994, is about the time when respondent
began to prepare petitioners’ settlement documents.
October 26,
1994 (the end of the first period), is the date Rowland mailed
the settlement documents to petitioners.
Substantially all of the first period consists of the time
before Rowland worked on petitioners’ response to the settlement
offer.
This delay resulted from respondent’s prioritization
decisions.
Appeals officers in the Cincinnati office managed multiple
priorities while processing the Barrister cases.
Cases nearing
the end of the limitations period, service center claim cases,
and cases calendared for trial in Cincinnati and Columbus, Ohio,
took priority over the Barrister cases.
The record shows that respondent (1) established a list of
priorities which places the Barrister cases below three other
types of cases in terms of priority, and (2) processed the
Barrister cases on an alphabetized first in, first out basis as
detailed supra in our findings.
This supports respondent’s
contention that respondent’s inaction during the period December
2, 1993, to October 1, 1994, is attributable to respondent’s
- 43 decision regarding case priorities.
Such a showing, absent
evidence regarding the then prevailing circumstances, paints only
a partial picture, however.
To complete the picture, we examine
the circumstances as they existed during the period to determine
whether respondent’s priority structure completely explains
respondent’s inaction.
Rowland testified, and we found, that the Cincinnati office
was responsible for cases calendared for trial at Cincinnati and
Columbus, Ohio.
Thus, during the first period the primary
attention of the Cincinnati office was focused on cases other
than the Barrister cases.
Rowland testified, and we found, that she maintained her
normal caseload, about 100-120 cases, in addition to working on
her share of the Barrister cases, about 75 in number.
Rowland
was thus managing a caseload during the period that was
significantly larger than her normal caseload.
Rowland
testified, and we found, that (1) the settlement letters
generated a significant and generally prompt response from
Barrister taxpayers, more than half the Barrister taxpayers who
responded to the settlement offer submitted their verification
information within the requested 10 days; (2) she fielded many
phone calls from Barrister taxpayers regarding the settlement;
and (3) it took an average of 26 calendar days to process the
settlement of a Barrister case.
On these facts, we conclude that
- 44 respondent’s priority structure, coupled with the heavy demands
placed on Rowland’s time, contributed to respondent’s inaction in
petitioners’ case during the bulk of the first period.
Section 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs.,
supra, provides that “The term ‘ministerial act’ means a
procedural or mechanical act that does not involve the exercise
of judgment or discretion”. (Emphasis added.)
Examples (4) and
(5) in section 301.6404-2T(b)(2), Temporary Proced. & Admin.
Regs., supra, make it plain that, ordinarily, the making of
decisions about how to prioritize cases constitutes the exercise
of judgment or discretion.
We conclude that Rowland’s delay in beginning to process
petitioners’ response to the settlement offer is properly
attributable to respondent’s reasonable prioritization decisions,
and thus is not attributable to error or delay in performing a
ministerial act.
Once Rowland began to process petitioners’ response, her
actions included the accomplishment of prerequisites (matching
petitioners’ verification materials to the amounts claimed on
their tax returns, determining that petitioners were not involved
in a shelter other than TEA for the relevant years) and the
ministerial act of computing the amounts of the deficiencies and
additions to tax.
It does not appear that there was any delay in
preparing the settlement documents and mailing them to
- 45 petitioners.
Compare example (2) to sec. 301.6404-2T(b)(2),
Temporary Proced. & Admin. Regs., supra.
From the foregoing, we conclude that there was no abuse of
discretion in respondent’s failure to abate interest for any part
of the first period.
We hold for respondent on this issue.
B.
Second Period (Dec. 14, 1994, through May 2, 1995)
On opening brief, petitioners contend as follows with regard
to the second period:
Petitioners sent their executed decision document to
Cincinnati Appeals Office on December 14, 1994. Almost four
and one-half months passed before it was signed by Mr.
Winkler on April 25, 1995. Another week passed before it
was actually filed with the United States Tax Court on May
2, 1995. Due to the delay evident in such time lag,
Petitioners seek abatement of interest for the period
running from December 14, 1994 to May 2, 1995.
On answering brief, respondent replies as follows to
petitioners’ contentions:
While respondent does not necessarily agree with
petitioners’ argument on this particular matter and does not
concur that counter-signing and filing stipulated decision
documents implicates a ministerial decision, respondent will
concede that an abatement of interest, for the period from
February 25, 1995 through April 25, 1995, should be allowed
to petitioners in the unusual circumstances of this case.
In making this concession, however, respondent notes two
points detailed below.
The two points respondent refers to are as follows:
1.
Respondent’s counsel proceeded with settling
individual Barrister cases out of alphabetical order “where
a taxpayer or representative contacted respondent’s counsel
- 46 at random.
Petitioners, in their tax shelter case, never
initiated this type of contact with respondent’s counsel.”
2.
As a result of petitioners’ letter accompanying the
signed decision document, “Any attorney would have to
consider and determine whether petitioners intended to enter
into the settlement.”
Evidently, respondent had not communicated this concession
to petitioners before petitioners sent their answering brief to
the Court.
Consequently, petitioners have not had the
opportunity to point out any implications that respondent’s
concession of 60 days of the second period might have on the 80
days of the second period that remain in dispute.
We take the foregoing into account in our analysis.
December 14, 1994, is the date petitioners mailed to
respondent the executed decision document, and May 2, 1995, is
the date we entered decision in petitioners’ case.
Respondent
did not explain the significance of February 25, 1995.
April 25,
1995, is the date Winkler signed the decision document in
petitioners’ case.
Between December 14, 1994, and December 23, 1994, Rowland
(1) received petitioners’ signed decision document, (2) prepared
and signed an appeal transmittal and case memorandum which
outlined the terms of the settlement, and (3) forwarded the
appeals transmittal and case memorandum to Becker for his
- 47 approval.
On January 13, 1995, Becker (1) signed and approved
the appeals transmittal and case memorandum, (2) prepared a
letter informing petitioners that the settlement offer had been
approved, and (3) delivered the documents to the records office
of the Cincinnati office which had 5 days to transfer the
documents to Winkler for his review and signature.
Taking into
account transmission time, including weekends, it is reasonable
to conclude that Winkler would have received the documents by
about January 25, 1995.
The foregoing activities do not constitute ministerial acts
because they are acts prerequisite to the processing of the
settlement agreement between petitioners and respondent.
Section
301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., supra,
provides that “The term ‘ministerial act’ means a procedural or
mechanical 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.”
Rowland’s preparation of the appeals transmittal and case
memorandum and Becker’s review thereof thus are not ministerial
acts.
Id.
We conclude that, for the period from December 14, 1994,
through about January 25, 1995, there was no error or delay by an
IRS employee in performing a ministerial act, within the meaning
of section 6404(e)(1)(A), and thus respondent did not have
- 48 authority to abate interest in petitioners’ case.
Similarly,
there was no error or delay for the period April 25 (when Winkler
signed the settlement document), through May 2, 1995, when the
decision was entered by the Tax Court.
The remaining 3 months of the second period are more
complicated.
helpful.
Respondent’s two proffered explanations are not
The first explanation, dealing with taking cases out of
alphabetical order, related to the first period (ending October
26, 1994) and not to the second period.
The second explanation,
dealing with uncertainty as to petitioners’ intent to settle,
evidently was resolved by Becker, not later than January 13,
1995, when he notified petitioners in writing that the proposed
settlement “has been approved.”
We consider first whether Winkler’s actions with respect to
the settlement of petitioners’ case constituted ministerial acts.
We have found that in 1993 arrangements were made to have
the Cincinnati office take on part of the work of settling
Barrister cases.
About July 1993, Barrister cases were assigned
to Rowland and her Cincinnati office colleagues.
For about the
first 6 months that the Cincinnati office processed Barrister
cases, proposed decision documents were sent to Winkler and Craig
for approval before the documents were sent to the taxpayers.
Thereafter, the Cincinnati office was deemed to be sufficiently
proficient at drafting these documents, so that that office sent
- 49 those documents to the taxpayers without review by Winkler or
Craig.
Winkler then reviewed the format and contents of the
decision documents, signed them, and forwarded them to the Court
for entry of decision.
These findings suggest that, although
Winkler’s review role had substantially diminished by early 1994,
at that point his actions with regard to Barrister case
settlements still were more than ministerial.
However, our focus is on the status of Winkler’s actions in
early 1995, a year later.
We believe that the clearest evidence
of record on that point is the stipulated January 13, 1995,
letter from Becker to petitioners informing petitioners that the
settlement they reached with Rowland, “as reflected in the
stipulation-decision document, has been approved.”
Becker’s
letter to petitioners goes on to state that “We have forwarded
the stipulation you signed to District Counsel for filing with
the United States Tax Court.”
From this we conclude that Becker,
acting in his official capacity on behalf of respondent, was
assuring petitioners that by January 13, 1995, (1) all the
actions involving the exercise of judgment or discretion in
petitioners’ case had already occurred, and (2) only ministerial
acts remained before the stipulated decision was submitted to
this Court.
From the foregoing, we conclude it is more likely
than not that Winkler’s remaining tasks--signing the stipulation
and causing it to be delivered to this Court--were ministerial.
- 50 Examples (4) and (5) of section 301.6404-2T(b)(2), Temporary
Proced. & Admin. Regs., supra, show that assigning priorities in
the processing of work can constitute the exercise of judgment
and discretion.
We have found that Winkler gave priority to
working on cases calendared for trial by the Court.
If the 3-
month delay in Winkler’s signing the stipulation was attributable
to this prioritizing, then it would appear that, under the
regulation, Winkler was not “dilatory in performing a ministerial
act.”
Sec. 301.6404-2T(a)(final flush language), Temporary
Proced. & Admin. Regs., supra.
Under these circumstances,
abatement of interest for this 3-month period would not be
authorized under the statute and the regulation.
We have not found, and respondent does not direct our
attention to, any evidence in the record herein that the 3-month
delay (or any part thereof) was in fact properly attributable to
Winkler’s prioritizing.
Nevertheless, in the last brief filed in
the instant case, respondent concedes “that an abatement of
interest, for the period from February 25, 1995 through April 25,
1995, should be allowed to petitioners in the unusual
circumstances of this case.”
Respondent does not explain why
this concession is made, nor why the concession period begins on
February 25, 1995.
We have not identified from the record herein
any event on or about February 25, 1995, that might be relevant
to a conclusion that a section 6404 status had changed.
Compare
- 51 Jacobs v. Commissioner, T.C. Memo. 2000-123, with Berry v.
Commissioner, T.C. Memo. 2001-323.
Because respondent’s
concessions came so late in our proceedings, petitioners have
been deprived of the opportunity to explore the events of
February 25, 1995, or thereabouts.
Taking into account the fact and timing of respondent’s
concession, we conclude it is more likely than not that
respondent has conceded that there was an abuse of discretion in
failing to abate interest for the 2-month period February 25
through April 24, 1995.15
We conclude that the period January 25
through February 24, 1995, should be treated the same as the
conceded period.
We hold for respondent as to December 14, 1994, through
January 24, 1995; for petitioners as to January 25 through April
24, 1995; and for respondent as to April 25 through May 2, 1995,
on this issue.
C.
Additional Periods
On answering brief, petitioners urge that we order abatement
for “Additional periods during the 14+ years of interest”.
Petitioners do not direct our attention to any specific periods,
15
We recognize that respondent’s concession includes Apr.
25, 1995. However, we refuse to give effect to that 1 day
because the record clearly and indisputably shows that on that
day Winkler moved the process along. Indeed, the parties have so
stipulated.
- 52 evidently preferring that we conduct a detailed search.
We
decline to do so.
We hold for respondent on this issue.
D.
Abatement Periods--Summary
We hold for petitioners that respondent’s failure to abate
interest for the period January 25 through April 24, 1995, was an
abuse of discretion and will order abatement for this period.
We
hold for respondent as to all other periods placed in dispute in
the instant case.
II.
Interest Computations
Respondent twice computed petitioners’ interest liability:
once before the August 18, 1995, assessment and once before
trial.
Petitioners contend that both of respondent’s interest
computations contain numerous errors, and that respondent’s
failure to correct such errors constitutes an abuse of
discretion.
Respondent contends that, after taking respondent’s
concessions into account, respondent’s trial computations are
correct.16
Before reaching the merits of these disputes, we pause to
discuss our jurisdiction to correct respondent’s computations.
16
Petitioners point out that, if we were to agree with any
of their contentions, then the “bottom line” would take into
account the effect of compounding interest on the interest that
we would have concluded should not have been assessed. E.g., RJR
Nabisco, Inc. v. United States, 955 F.2d 1457 (11th Cir. 1992).
Thus, in general the amounts at stake are greater than the
amounts formally in dispute.
- 53 See, e.g., Ewing v. Commissioner, 118 T.C. 494, 498 (2002).
Our
jurisdiction to correct error in respondent’s interest
computations stems from section 6404(h)(2)(B), which provides
that rules similar to the rules of section 6512(b) apply for
purposes of section 6404(h).
Supra note 12.
Section 6512(b)
generally defines this Court’s jurisdiction with respect to
overpayments.
See Winn-Dixie Stores, Inc. & Subs. v.
Commissioner, 110 T.C. 291, 294 (1998).
Section 6512(b)
provides, inter alia, that if a taxpayer properly invokes our
overpayment jurisdiction under section 6512(b), then we have
jurisdiction to determine the amount of the taxpayer’s
overpayment.
This jurisdiction under section 6512 also permits
us to redetermine a taxpayer’s statutory interest.
Lincir v.
Commissioner, 115 T.C. 293, 298 (2000), affd. 32 Fed. Appx. 278
(9th Cir. 2002); see Zfass v. Commissioner, 118 F.3d 184, 192 n.9
(4th Cir. 1997), affg. T.C. Memo. 1996-167.
Petitioners have paid all the tax and interest assessed for
1979, 1981, 1982, and the parties agree that there is no
additional tax or interest that needs to be assessed.
Respondent’s concession that interest should be abated for the
period of time beginning on February 25, 1995, and ending on
April 25, 1995, results in an overpayment as to each of the years
in issue.
Accordingly, pursuant to section 6404(h)(2)(B), we
have jurisdiction to determine the amount of petitioners’
- 54 overpayment, and, in order to do so, we have jurisdiction to
redetermine the correct amount of the interest on their original
underpayments.
Petitioners assign a number of errors to respondent’s
interest computations.
We consider each of petitioners’
contentions in turn.
A.
Start Dates
The parties agree that June 7, 1982, the date respondent
issued to petitioners their 1981 refund, is the correct start
date for 1981.
The parties disagree as to what are the correct
start dates for 1979 and 1982.
1. 1979
Relying on Avon Products, Inc. v. United States, 588 F.2d
342 (2d Cir. 1978), petitioners contend that June 28, 1982, the
date respondent issued to petitioners a refund for 1979 plus
interest thereon, is the correct start date for 1979 because
petitioners did not have the use of respondent’s money before
that date.
Relying on Rev. Proc. 94-60, 1994-2 C.B. 774,
respondent contends that January 1, 1982, the date respondent
began to accrue interest on petitioners’ overpayment, is the
correct start date for 1979.
Respondent maintains that this
approach “comports with” Avon Products, Inc. v. United States,
supra.
We agree with respondent’s conclusion.
- 55 Section 6601(a)17 provides the general rule that interest on
an underpayment shall accrue during the period from the last date
prescribed for payment until the date paid at the underpayment
rate established under section 6621.
As we stated in Intel Corp.
& Consol. Subs. v. Commissioner, 111 T.C. 90, 92 (1998):
Section 6601 reflects the “use of money” principle: “That
is, the party who has the use of the money pays interest up
until the event which causes the party no longer to have use
of that money.” [BankAmerica Corp. v. Commissioner, 109
T.C. 1, 14 (1997).][18] * * *
Under section 6601(a), interest on an underpayment begins to
accrue when the tax becomes both due and unpaid.
17
SEC. 6601.
Avon Products
INTEREST ON UNDERPAYMENT, NONPAYMENT, OR
EXTENSIONS OF TIME FOR PAYMENT, OF TAX.
(a) General Rule.--If any amount of tax imposed by this
title [title 26, the Internal Revenue Code] (whether
required to be shown on a return, or to be paid by stamp or
by some other method) is not paid on or before the last date
prescribed for payment, interest on such amount at an annual
rate established under section 6621 shall be paid for the
period from such last date to the date paid.
The later amendment of this provision, by sec. 1511(c)(11)
of TRA 1986, 100 Stat. at 2745, applies to interest for periods
after Dec. 31, 1986, TRA 1986 sec. 1511(d), 100 Stat. 2746, and
so it does not affect our search for the starting date for
interest on the 1979 and 1982 underpayments.
18
One may fairly contend that this principle has been
eroded by various provisions, including sec. 6621(c) (discussed
infra at C.) and the interest abatement provision that is the
subject of the instant proceeding. However, the “use of money”
principle remains an appropriate basis for decision where it has
not been modified by statute, as in the instant issue. See,
e.g., Dang v. Commissioner, 259 F.3d 204, 208 n.4 (4th Cir.
2001), affg. an unreported order and decision of this Court
entered July 21, 2000; BankAmerica Corp. v. Commissioner, 109
T.C. 1, 14-16 (1997).
- 56 Inc. v. United States, 588 F.2d at 344.
The last date prescribed
for payment of income tax is generally the due date for filing
the tax return without regard to any extension of time for
filing.
See sec. 6601(b).
Petitioners did not owe any 1979 income tax as of the due
date for filing their 1979 tax return--April 15, 1980.
On their
1981 tax return, petitioners claimed flowthrough items in respect
of their investment in TEA.
Petitioners then carried back
“credits/losses” from 1981 to 1978 and then to 1979, which
resulted in an overpayment for 1979.19
Under subsections (a) and
(b)(2) of section 6611, interest on a refund of an overpayment is
Section 6611(f)20
calculated from the date of the overpayment.
19
Respondent states that petitioners carried back from
1981 to 1978 “the investment credit”. Petitioners state they
carried back “actual losses”. The parties stipulate that
petitioners carried back “credits/losses”. The parties have not
favored us with petitioners’ 1981 tax return or claim for refund
for 1979, and so we do not have a basis in the record for greater
precision as to what was carried back. Although sec. 6611(f)
deals with net operating losses in par. (1) and credits in par.
(2)(A), infra note 20, we are fortunate in that for our purposes
the relevant rules of pars. (1) and (2)(A) are identical.
20
Sec. 6611(f) provides, in pertinent part, as follows:
SEC. 6611.
*
INTEREST ON OVERPAYMENTS.
*
*
*
*
*
*
(f) Refund of Income Tax Caused by Carryback or
Adjustment for Certain Unused Deductions.-(1) Net operating loss or capital loss carryback.
--For purposes of subsection (a), if any overpayment of
(continued...)
- 57 prescribes the date interest begins to accrue on an overpayment
created by a “credits/losses” carryback.
Section 6611(f) as in
effect for June 28, 1982, the date when respondent issued to
petitioners their refund for 1979,21 provided that for these
purposes the overpayment is deemed to have been made after the
last day of the taxable year in which the carryback arises.
The
carryback which resulted in an overpayment for 1979 arose in
20
(...continued)
tax imposed by subtitle A [relating to income taxes]
results from a carryback of a net operating loss or net
capital loss, such overpayment shall be deemed not to
have been made prior to the close of the taxable year
in which such net operating loss or net capital loss
arises.
(2) Certain credit carrybacks.-(A) In general.--For purposes of subsection
(a), if any overpayment of tax imposed by subtitle
A results from a credit carryback, such
overpayment shall be deemed not to have been made
before the close of the taxable year in which such
credit carryback arises * * *.
Sec. 1055(b)(1) of the Taxpayer Relief Act of 1997 (TRA
1997), Pub. L. 105-34, 111 Stat. 788, 944, redesignated par. (2)
of sec. 6611(f) as par. (3).
21
Sec. 346(c)(1)(A) and (B) of TEFRA 1982, 96 Stat. at
637, substituted the phrase “the filing date for” for the phrase
“the close of” in each place the latter phrase appeared in pars.
(1) and (2)(A) of sec. 6611(f). The amendments were effective
for interest accruing after Oct. 3, 1982. See TEFRA 1982 sec.
346(d)(2), 96 Stat. at 638. Interest on petitioners’ overpayment
for 1979 accrued from Jan. 1 through June 16, 1982. Thus, the
amendments do not affect interest on petitioners’ overpayment for
1979.
- 58 1981, and thus the date of petitioners’ overpayment for 1979 was
deemed to be January 1, 1982.
Consistent with these provisions, respondent accrued
interest on petitioners’ 1979 overpayment from January 1, 1982.
As a result of the foregoing, we conclude that petitioners
are deemed to have had the use of their refund on account of
their carryback(s) to 1979 from January 1, 1982.
The 1979 refund
amounted to $10,375.38, consisting of $9,568 plus $807.38
interest.
The parties settled the deficiency proceeding in this
Court by agreeing to a deficiency of $8,207.59 for 1979, plus
$1,641.52 addition to tax under section 6659.
The 1979
deficiency resulted from disallowance of part of the carryback
from 1981.
As we have noted, section 6601(a) provides the general rule
for interest on underpayments.
22
However, section 6601(d),22 as in
Sec. 6601(d) provides, in pertinent part, as follows:
SEC. 6601.
*
INTEREST ON UNDERPAYMENT, NONPAYMENT, OR
EXTENSIONS OF TIME FOR PAYMENT, OF TAX.
*
*
*
*
*
*
(d) Income Tax Reduced by Carryback or Adjustment for
Certain Unused Deductions.-(1) Net operating loss or capital loss
carryback.--If the amount of any tax imposed by
subtitle A is reduced by reason of a carryback of a net
operating loss or net capital loss, such reduction in
tax shall not affect the computation of interest under
this section for the period ending with the last day of
(continued...)
- 59 effect for the disputed June 1-28, 1982, interest period,23
provides that where the income tax has been reduced by
carrybacks, interest is not to accrue for the period ending with
the last day of the taxable year in which the carried back item
arises.
The carryback to 1979, the disallowance of part of which
resulted in the 1979 deficiency, arose in 1981, and thus the
earliest date for interest on the 1979 underpayment is January 1,
1982.
This results in petitioners’ underpayment interest
starting date matching the overpayment interest starting date
that they benefited from.
22
(...continued)
the taxable year in which the net operating loss or net
capital loss arises.
(2)
Certain credit carrybacks.--
(A) In general.--If any credit allowed for
any taxable year is increased by reason of a
credit carryback, such increase shall not affect
the computation of interest under this section for
the period ending with the last day of the taxable
year in which the credit carryback arises * * *.
Sec. 1055(a) of TRA 1997, 111 Stat. 944, redesignated par.
(2) of sec. 6601(d) as par. (3).
23
Sec. 346(c)(2)(A) and (B) of TEFRA 1982, 96 Stat. at
637, 638, substituted the phrase “the filing date for” for the
phrase “the last day of” in each place the latter phrase appeared
in pars. (1) and (2)(A) of sec. 6601(d). The amendments were
effective for interest accruing after Oct. 3, 1982. TEFRA 1982
sec. 346(d)(2), 96 Stat. at 638. Interest on petitioners’
overpayment for 1979 accrued from Jan. 1 through June 16, 1982.
Thus, the amendments do not affect interest on petitioners’
underpayment for 1979.
- 60 Putting it another way, as a result of the carryback(s),
petitioners were deemed to have an overpayment as of January 1,
1982.
As a result of the parties’ settlement in the deficiency
litigation, it developed that petitioners were not entitled to
the bulk of that overpayment.
Because the overpayment and
interest were calculated with a starting date of January 1, 1982,
the resulting underpayment and interest also are calculated with
a starting date of January 1, 1982.
Petitioners’ contention that interest does not begin to
accrue until the date respondent issued to petitioners the refund
appears to hinge on the fact that they did not have actual use of
respondent’s money until the date respondent issued the refund.
Interest has been defined as compensation for the use or
forbearance of money.
(1940).
Deputy v. du Pont, 308 U.S. 488, 498
In this sense, the payment of interest serves as a proxy
for actual use of the money.
Petitioners received interest on
their 1979 refund which began to accrue as of January 1, 1982.
Consistent with the definition of interest, petitioners are
treated as having had the use of respondent’s money (i.e., what
the parties agreed in their settlement papers was respondent’s
money) as of January 1, 1982, even though they did not have
actual use of the refunded dollars until respondent issued the
refund for 1979.
- 61 However, the period beginning January 1, 1982, includes a
12-day period--June 16-28, 1982--during which respondent had the
money and for which respondent did not pay interest to
petitioners.
On brief, each side vigorously disputes the other
side’s contentions as to this 12-day period.
When we clear away
the parties’ language of conflict, it appears that both sides
contend that petitioners are not liable for any interest on
account of this 12-day period.
We conclude that the “use of
money” principle leads to the result that both sides contend is
the correct result.
The parties are to give effect to this
conclusion in the computations under Rule 155.
We hold for respondent that interest on the 1979
underpayment begins to accrue on January 1, 1982, but does not
accrue for the period June 16-28, 1982.
2.
1982
Petitioners’ refund for 1982 was not attributable to a
carryback.
Accordingly, the date of petitioners’ overpayment for
1982 is the first date when the amount of petitioners’ payments
in respect of 1982 exceeds the amount of their liabilities for
1982.
Sec. 301.6611-1(b), Proced. & Admin. Regs.24
Petitioners’
24
Sec. 301.6611-1, Proced. & Admin. Regs., provides, in
pertinent part, as follows:
SEC. 301.6611-1.
*
*
Interest on overpayments.-*
*
*
*
*
(continued...)
- 62 tax payments and credits are deemed made on the last day for
filing the return, April 15, 1983.
6151.
Secs. 6513(a) and (b), and
Thus, April 15, 1983, was the deemed date of petitioners’
overpayment.
Under section 6611(b)(2), interest on an overpayment accrues
from the date of the overpayment.
Consistent with section
6611(b)(2), respondent accrued interest from April 15, 1983, the
date of petitioners’ claimed 1982 overpayment.
As a result of the foregoing, we conclude that petitioners
are deemed to have had the use of their 1982 refund beginning
April 15, 1983.
The 1982 refund amounted to $14,851.79,
consisting of $14,549 plus $302.79 interest.
The parties settled
their deficiency proceedings in this Court by agreeing to a
deficiency of $4,298.
As we have noted, section 6601(a) provides the general rule
that interest on an underpayment accrues from the last date
prescribed for payment, which in the instant case was April 15,
1983.
24
Petitioners raise the same use-of-the-money contention
(...continued)
(b) Date of overpayment. Except as provided in section
6401(a), relating to assessment and collection after the
expiration of the applicable period of limitation, there can
be no overpayment of tax until the entire tax liability has
been satisfied. Therefore, the dates of overpayment of any
tax are the date of payment of the first amount which (when
added to previous payments) is in excess of the tax
liability (including any interest, addition to tax, or
additional amount) and the dates of payment of all amounts
subsequently paid with respect to such liability. * * *
- 63 that they raise with respect to 1979.
For the reasons stated
above with respect to 1979, we reject their contention.
Accordingly, we conclude that the start date for interest on the
1982 underpayment is April 15, 1983.
Petitioners also contend as follows:
Respondent seeks to recover two distinct obligations from
Petitioners. The first obligation is a deficiency in tax,
recoverable under IRC §6213 (along with interest mandated by
IRC §6601). The second obligation is “refunded interest”
erroneously paid to Petitioners, recoverable under IRC §7405
(with interest mandated only by IRC §6602).
Petitioners further contend that respondent’s contentions as to
the start date for 1979 and 1982 mask an impermissible attempt to
recover erroneously refunded interest because the period of
limitations for filing a suit under section 7405 has expired.
See sec. 6532(b).
We disagree.
Respondent chose to proceed against petitioners under the
deficiency procedures.
As our analysis shows, the interest
provisions applicable to these procedures lead to the interest
starting dates contended for by respondent.
We have no occasion
to determine in the instant case whether respondent could
properly proceed against petitioners under section 7405 and, if
so, then what would be the effect of the section 6532(b)
limitations provisions.
In fact, respondent did not proceed
under section 7405 and cannot be compelled to do so.
is respondent’s, not petitioners’.
The choice
E.g., Beer v. Commissioner,
- 64 733 F.2d 435, 436 (6th Cir. 1984) and cases there cited, affg.
T.C. Memo. 1982-735; Pesch v. Commissioner, 78 T.C. 100, 117-118,
120 n.29 (1982); see also Ideal Rlty. Co. v. United States, 561
F.2d 1123, 1125 (4th Cir. 1977).
We hold for respondent that interest on the 1982
underpayment begins to accrue on April 15, 1983.
See our
comments, supra, as to the period for which respondent did not
pay interest on the overpayment.
B.
Asserted Accounting Errors
1.
$2.44
Petitioners contend on opening brief that “$2.44 was paid
5/19/85 not 5/19/86".
Respondent acknowledges on answering brief
that, on an interest computation as to 1979 prepared for trial,
the “$2.44 was listed in error on exhibit 82-R as May 19, 1996
instead of May 19, 1986.”
paid on May 19, 1986.
Respondent insists that “such item was
(Ex. 3-J).”
This dispute affects the “bottom line” only to the extent of
1 year’s worth of interest on $2.44, plus the effect of
compounding the interest on that 1 year’s worth of interest.
See, e.g., Dang v. Commissioner, 259 F.3d at 206.
The only evidence on this matter that we have found in the
record is respondent’s transcript of account, which shows the
$2.44 as “credit applied 05-19-86 from Form 1040 tax period Dec
1985".
In the absence of (1) any restrictions on the use of this
- 65 stipulated exhibit and (2) any evidence contradicting the
correctness of this transcript of account entry, we conclude that
it is more likely than not that the correct date is May 19, 1986,
rather than May 19, 1985.
We hold for respondent on this issue.
2.
$894.09 or $887.33
Petitioners contend on opening brief that “$894.09 (rather
than 887.33) was paid on 12/26/86.”
Respondent acknowledges on
answering brief that, on an interest computation as to 1979
prepared for trial, “the amount of a credit for a payment on
December 26, 1985, was listed incorrectly on exhibit 83-R as
$887.33 instead of $894.09.”
This agreement between the parties, which is consistent with
the information in respondent’s transcript of account for 1979,
is to be given effect in the computation under Rule l55.
C.
Sec. 6621(c) Rate
On April 29, 1985, respondent assessed an additional $1,360
tax liability on account of 1979 and an additional $87 tax
liability on account of 1981.
Apparently, interest was accrued
on these items at the section 6621(c) rate.
The parties have
stipulated that these assessed additional tax liabilities are not
subject to the section 6621(c) rate.
On August 18, 1995, respondent assessed an additional $1,144
tax liability on account of 1981.
Apparently, interest was
- 66 accrued on this item at the section 6621(c) rate.
On opening
brief, petitioners contend that the section 6621(c) rate should
apply to only $1,137 of this item.
On answering brief,
respondent concedes that the section 6621(c) rate should apply to
only $1,137 of the $1,144 additional assessment.
These agreements are to be given effect in the computation
under Rule 155.
As to any other questions regarding the section
6621(c) rate, we note that the parties’ settlement in
petitioners’ deficiency case includes the determination that:
the entire underpayment in income tax for the taxable years
1978, 1979, 1981 and 1982 is a substantial underpayment
attributable to tax-motivated transactions for purposes of
computing the interest payable with respect to such amount
pursuant to I.R.C. § 6621(c), formerly I.R.C. § 6621(d);
This agreement by the parties in petitioners’ deficiency case was
part of the decision we entered disposing of that case.
Apart from the above-noted stipulation and the above-noted
concession, we hold for respondent on this issue.
III.
The $40,000 Offer in Compromise
In May 1996 (supra note 8) petitioners sent to respondent a
check in the amount of $40,000 as part of an offer in compromise
to settle their interest liability for 1978, 1979, 1981, and
1982.
At Fish’s request, on September 4, 1996, petitioners
withdrew their offer in compromise.
At some point, probably in
December 1996, possibly in January 1997, respondent refunded to
petitioners the $40,000, without interest.
- 67 Petitioners contend that the $40,000 they submitted along
with their offer in compromise adequately compensated respondent
for any interest that would have accrued during the period of
time respondent held the $40,000, and thus interest on
petitioners’ interest liabilities should have been tolled during
that period.
Alternatively, petitioners claim that interest
should be tolled from September 4, 1996, the date petitioners
withdrew their offer, until an unspecified date in early January
1997, presumably the date petitioners received from respondent
their $40,000.
Respondent contends that petitioners are not
entitled to an “interest credit”, for lack of a better term, for
the time that respondent held the $40,000 because the Form 656
petitioners executed, the form with which petitioners submitted
the $40,000, provides that respondent is not obligated to pay
interest on the $40,000 petitioners submitted.
We agree with respondent’s conclusion.
Paragraph 7(c) of the Form 656 petitioners executed
provides, in pertinent part, as follows: “I/we understand that
IRS will not pay interest on any amount I/we submit with the
offer.”
Section 301.7122-1(d)(4), Proced. & Admin. Regs.,
dictates the same result.25
Thus, it is clear that petitioners
25
Sec. 301.7122-1(d)(4), Proced. & Admin. Regs., provides,
in pertinent part, as follows:
If an offer in compromise is withdrawn or rejected, the
(continued...)
- 68 are not entitled to interest on the $40,000 submitted with their
offer in compromise.
We still must decide, however, whether
respondent erred in the computation of petitioners’ interest
liability by failing to toll the accrual of interest for the
period in which respondent held the $40,000.
In contending that interest should not accrue during the
period in which respondent held the $40,000, petitioners do not
cite to any specific authority.
Rather, they rely on the general
“use of money” principle described in Avon Products, Inc. v.
United States, 588 F.2d 342 (2d Cir. 1978), and developed by its
progeny.
On the record in the instant case, we conclude that we
cannot hold that respondent abused discretion and we cannot hold
that there was a computational error with regard to the period
25
(...continued)
amount tendered with the offer, including all installments
paid, shall be refunded without interest, unless the
taxpayer has stated or agreed that the amount tendered may
be applied to the liability with respect to which the offer
was submitted.
This regulation, in effect for the period in which
petitioners submitted their offer in compromise, was removed and
replaced by sec. 301.7122-1T, effective July 21, 1999. 64 Fed.
Reg. 39026 (July 21, 1999). The temporary regulation, “with
minor changes”, became final on July 18, 2002. 67 Fed. Reg.
48025 (July 23, 2002). The new regulation provides additional
guidance regarding offers in compromise. T.D. 8829, 1999-2 C.B.
at 235. It does not change the nature of amounts submitted with
an offer in compromise; rather, it makes explicit that those
amounts are considered deposits. Sec. 301.7122-1(h) of the new
regulation.
- 69 during which respondent held the $40,000 that accompanied
petitioners’ offer in compromise.
Firstly, petitioners paid the $40,000 in connection with an
offer in compromise to settle the dispute as to their interest
liabilities for 1978, 1979, 1981, and 1982.
About $65,000 of the
then-disputed interest, more than half the total, was interest
for 1978, a year as to which we do not have jurisdiction to grant
relief.
Indeed, petitioners’ $40,000 offer was less than two-
thirds of the 1978 interest alone.
Neither side has suggested
any way to apportion or allocate the $40,000 offer between 1978
on the one hand and 1979, 1981, and 1982 on the other hand.
Petitioners did not make any such allocation in their offer in
compromise.
An allocation first to the interest on the oldest
year’s liability would not leave anything for any of the years as
to which we could grant relief.
Secondly, respondent abated interest on the entire
liabilities for the period October 4, 1995, through September 20,
1996.
Supra table 5 and associated text.
Respondent held
petitioners’ $40,000 from May 1996 until about the end of that
year.
Thus, there already is an abatement of interest on the
whole debt for somewhat more than half of the period during which
respondent held petitioners’ $40,000.
- 70 Thirdly, it is not at all clear as to how the “use of money”
principle should apply to the $40,000 paid with the offer in
compromise.
A.
Avon Products involved payments of tax.
case, however, involves a deposit.
T.C. 1130, 1136 (1961).
The instant
See Keith v. Commissioner, 35
Unlike payments, deposits are set aside
“in special suspense accounts established for depositing money
received when no assessment is then outstanding against the
taxpayer.”
Rosenman v. United States, 323 U.S. 658, 662 (1945).
“The receipt by the Government of moneys under such an
arrangement carries no more significance than would the giving of
a surety bond.”
Id.
Deposits can be returned to the taxpayer
upon request at anytime before respondent is entitled to assess
the tax.
See Rev. Proc. 84-58, 1984-2 C.B. 501.
Because of
this, respondent does not have unrestricted use of the money, as
respondent does with payments.
B.
Neither respondent nor petitioners have any obligation
to pay interest during the period in which respondent holds a
deposit.
See Rosenman v. United States, 323 U.S. at 663-664;
Rev. Proc. 84-58, 1984-2 C.B. 501.
The purpose of interest,
however, is “to compensate the Government for delay in payment of
a tax,” or to compensate the taxpayer for the use of the
taxpayer’s money.
at 343.
Avon Products, Inc. v. United States, 588 F.2d
Thus, the absence of an obligation to pay interest is
- 71 yet another indication that deposits do not fit neatly into the
“use of money” gloss on sections 6601 and 6611.
C.
The parties have not discussed Rev. Proc. 84-58, 1984-2
C.B. 501, 503, which provides in pertinent part as follows:
Sec. 5. INTEREST
.01 * * * If the remittance is held as a deposit in the
nature of a cash bond, but is returned at the taxpayer’s
request, and a deficiency is later assessed for that period
and type of tax, the taxpayer will not receive credit for
the period in which the funds were held as a deposit. * * *
Petitioners withdrew the offer in compromise and eventually
received back their $40,000.
Under these circumstances, we do
not have to deal with any possible implications of the last
sentence of section 5.01 of Rev. Proc. 84-58.
Nor do we have to
consider whether the fact that petitioners were pro se at the
time they withdrew the offer in compromise and that the
withdrawal was at respondent’s agent’s suggestion has any impact
on the application of that last sentence.
See generally Perkins
v. Commissioner, 92 T.C. 749, 760 (1989).
On this record we conclude that we shall not direct
respondent to abate interest or recompute interest to take
account of the $40,000 that petitioners paid in connection with
their offer in compromise.
We hold for respondent on this issue.
- 72 To take account of respondent’s concessions and the
foregoing,
Decision will be entered
under Rule 155.26
26
The parties have stipulated as follows:
The parties agree that the methodology to use in
determining the correct amount of interest for each year in
issue is first to calculate the interest that accrues on the
balance due (giving effect to all payments, credits, and
abatements shown on the transcripts - exhibit 3-J) from the
appropriate start date determined by the Court to the date
interest was paid for that year with no interest accruing
during the waiver periods, agreed abatement periods, such
further abatement periods as determined by the Court, and
such other periods of no interest accrual determined by the
Court at issue in the case. This accrued interest is then
subtracted from the total interest assessed. If the
difference is a positive number, the difference is an
overassessment of interest which should be abated. Since
the total interest assessed has been paid, such
overassessment will constitute an overpayment which should
be refunded to petitioners.
This stipulation is to be given effect in the Rule 155
computations.
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