Kannarkat P. Verghese, Annie P. Verghese, Personal Representative and Annie P. Verghese
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Opinion
T.C. Memo. 2021-70
UNITED STATES TAX COURT
KANNARKAT P. VERGHESE, DECEASED, ANNIE P. VERGHESE, PERSONAL REPRESENTATIVE, AND ANNIE P. VERGHESE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25757-15L. Filed June 7, 2021.
In 1997 and 1998 Ps held investments in partnerships that, unbeknownst to Ps, reported fraudulent charitable contributions on their partnership tax returns. The partnerships were subject to the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). On their returns for 1997 and 1998, Ps claimed charitable contribution deductions consistent with the partnership returns. The IRS audited the partnership returns and disallowed the charitable contribution deductions for tax years 1996 through 1998. In June 2000 the partnerships commenced the first of three TEFRA proceedings in the Tax Court that were ultimately consolidated for resolution.
Ps’ investments in the partnerships had been actively solicited by promoters of the partnerships who were criminally prosecuted and ultimately convicted of crimes of fraud involving the partnerships, but the criminal prosecutions did not end until 2009. During these criminal proceedings, the TEFRA proceedings in the Tax Court were delayed after the parties to the TEFRA proceedings jointly moved for
Served 06/07/21 -2-
[*2] continuances. The TEFRA proceedings did not conclude until April 2013 when the Tax Court entered stipulated decisions under Tax Court Rule 248(b).
In May 2014 Ps received IRS Notices CP22E showing increases in income tax and interest for tax years 1996 through 1998. Ps thereafter filed Form 843, “Claim for Refund and Request for Abatement”, requesting abatement of the interest for the years during which the TEFRA litigation was pending. Their claim was based on allegations of unfairness and unreasonable delay by the IRS. Ps did not receive any response from the IRS regarding their abatement request before the IRS issued a notice of intent to levy based on the liabilities assessed for tax years 1996 through 1998. Ps requested a Collection Due Process (“CDP”) hearing before the IRS Office of Appeals (“Appeals”) and asserted their abatement request in the context of the CDP hearing. Appeals erroneously determined that the abatement request could not be considered and issued a notice of determination denying abatement. Ps timely petitioned the Tax Court with respect to tax years 1997 and 1998, and the Tax Court subsequently remanded Ps’ claim to Appeals for supplemental proceedings for consideration of Ps’ abatement request. Appeals again denied Ps’ request for abatement, determining that I.R.C. sec. 6404 did not permit abatement under any of the circumstances Ps alleged.
R moved for summary judgment, arguing that the notice of determination should be sustained because none of the grounds for abatement that Ps allege is valid under I.R.C. sec. 6404. Ps contend that under I.R.C. sec. 6404(a) they are entitled to abatement on the basis of principles of fairness and that under I.R.C. sec. 6404(e) the IRS engaged in ministerial or managerial acts that constituted unreasonable delay for which their abatement request should be granted. -3-
[*3] Held: I.R.C. sec. 6404(b) precludes a claim under I.R.C. sec. 6404(a) for abatement of interest on income tax. Because Ps’ request for abatement is for interest assessed on income tax, I.R.C. sec. 6404(a) is inapplicable.
Held, further, with the exception of one period of approximately five months, the administrative record shows that Appeals did not abuse its discretion when it determined that there was no ministerial or managerial act by the IRS sufficient to constitute unreasonable delay justifying abatement under I.R.C. sec. 6404(e). R’s motion for summary judgment will be granted in large part but, as to that five-month period, will be denied in part.
Gerald W. Kelly, Jr., and Daniel S. Heller, for petitioners.
Bartholomew Cirenza and Ryan Z. Sarazin, for respondent.
MEMORANDUM OPINION
GUSTAFSON, Judge: Petitioner Annie P. Verghese and her late husband
Kannarkat P. Verghese filed this suit, pursuant to section 6330(d),1 in response to
the determination of the Office of Appeals (“Appeals”) of the Internal Revenue
1 Unless otherwise indicated, all section references are to the Internal Revenue Code (26 U.S.C.; “the Code”) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. We refer to Mr. and Mrs. Verghese as “petitioners” although Mr. Verghese has been substituted for this case by his estate, with Mrs. Verghese as its representative. -4-
[*4] Service (“IRS”) to (a) sustain the issuance to petitioners of a “Final Notice -
Notice of Intent to Levy” with respect to petitioners’ unpaid liabilities for tax
years 1997 and 1998 and (b) deny petitioners’ request for abatement of almost 13
years’ worth of interest that the IRS assessed in respect of the tax liabilities for
those long-past years. Respondent, the Commissioner of the IRS, has moved for
summary judgment under Rule 121, and petitioners have filed an opposition. For
the reasons explained below, we will grant the Commissioner’s motion in part as
to abatement of interest under section 6404(a) and, as to abatement under section
6404(e), will grant the motion as to most of the interest but will deny it as to
nearly five months’ worth of interest accrued from August 7, 2012, to January 2,
2013, because, under Rule 121(e), petitioners should be allowed to conduct some
discovery as to that five-month period on the issue of whether Appeals abused its
discretion by failing to consider circumstances showing delay by the IRS in
arriving at a settlement with the partners of certain partnerships in which
Mr. Verghese was a partner. -5-
[*5] Background
For purposes of the Commissioner’s motion, we assume correct the facts
asserted by petitioners that are supported by their filings, as well as the facts
demonstrated by the Commissioner that petitioners did not dispute.2
The Heritage partnerships
Mr. Verghese was a partner in each of three different partnerships--Heritage
Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3,
and Heritage Memorial Park Associates 1995-4 (“the Heritage partnerships”), all
of which used the partners’ contributed capital to invest in cemetery plots. The
Heritage partnerships donated the cemetery plots to charity and reported charitable
contributions on their partnership tax returns for the amounts attributed to those
plots. The charitable contributions were “passed through” to the partners of the
partnerships to claim on their individual tax returns. The Heritage partnerships
reported such charitable donations in 1996, 1997, and 1998, while Mr. Verghese
2 Pursuant to Fed. R. Evid. 201, we take judicial notice of the petitions and further pleadings filed in the following Tax Court cases, discussed below (and referred to herein as the “Heritage partnership cases”), which were initiated by the Heritage partnerships: Heritage Mem’l Park Assocs. 1995-2 v. Commissioner, dkt. No. 7176-00; Heritage Mem’l Park Assocs. 1995-3 v. Commissioner, dkt. No. 8260-01; and Heritage Mem’l Park Assocs. 1995-4 v. Commissioner, dkt. No. 10715-02. See Leyshon v. Commissioner, T.C. Memo. 2015-104, at *14-*15, aff’d per curiam, 649 F. App’x 299 (4th Cir. 2016). -6-
[*6] was an investor and partner in the partnerships. (Deductions for 1996 are not
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T.C. Memo. 2021-70
UNITED STATES TAX COURT
KANNARKAT P. VERGHESE, DECEASED, ANNIE P. VERGHESE, PERSONAL REPRESENTATIVE, AND ANNIE P. VERGHESE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25757-15L. Filed June 7, 2021.
In 1997 and 1998 Ps held investments in partnerships that, unbeknownst to Ps, reported fraudulent charitable contributions on their partnership tax returns. The partnerships were subject to the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”). On their returns for 1997 and 1998, Ps claimed charitable contribution deductions consistent with the partnership returns. The IRS audited the partnership returns and disallowed the charitable contribution deductions for tax years 1996 through 1998. In June 2000 the partnerships commenced the first of three TEFRA proceedings in the Tax Court that were ultimately consolidated for resolution.
Ps’ investments in the partnerships had been actively solicited by promoters of the partnerships who were criminally prosecuted and ultimately convicted of crimes of fraud involving the partnerships, but the criminal prosecutions did not end until 2009. During these criminal proceedings, the TEFRA proceedings in the Tax Court were delayed after the parties to the TEFRA proceedings jointly moved for
Served 06/07/21 -2-
[*2] continuances. The TEFRA proceedings did not conclude until April 2013 when the Tax Court entered stipulated decisions under Tax Court Rule 248(b).
In May 2014 Ps received IRS Notices CP22E showing increases in income tax and interest for tax years 1996 through 1998. Ps thereafter filed Form 843, “Claim for Refund and Request for Abatement”, requesting abatement of the interest for the years during which the TEFRA litigation was pending. Their claim was based on allegations of unfairness and unreasonable delay by the IRS. Ps did not receive any response from the IRS regarding their abatement request before the IRS issued a notice of intent to levy based on the liabilities assessed for tax years 1996 through 1998. Ps requested a Collection Due Process (“CDP”) hearing before the IRS Office of Appeals (“Appeals”) and asserted their abatement request in the context of the CDP hearing. Appeals erroneously determined that the abatement request could not be considered and issued a notice of determination denying abatement. Ps timely petitioned the Tax Court with respect to tax years 1997 and 1998, and the Tax Court subsequently remanded Ps’ claim to Appeals for supplemental proceedings for consideration of Ps’ abatement request. Appeals again denied Ps’ request for abatement, determining that I.R.C. sec. 6404 did not permit abatement under any of the circumstances Ps alleged.
R moved for summary judgment, arguing that the notice of determination should be sustained because none of the grounds for abatement that Ps allege is valid under I.R.C. sec. 6404. Ps contend that under I.R.C. sec. 6404(a) they are entitled to abatement on the basis of principles of fairness and that under I.R.C. sec. 6404(e) the IRS engaged in ministerial or managerial acts that constituted unreasonable delay for which their abatement request should be granted. -3-
[*3] Held: I.R.C. sec. 6404(b) precludes a claim under I.R.C. sec. 6404(a) for abatement of interest on income tax. Because Ps’ request for abatement is for interest assessed on income tax, I.R.C. sec. 6404(a) is inapplicable.
Held, further, with the exception of one period of approximately five months, the administrative record shows that Appeals did not abuse its discretion when it determined that there was no ministerial or managerial act by the IRS sufficient to constitute unreasonable delay justifying abatement under I.R.C. sec. 6404(e). R’s motion for summary judgment will be granted in large part but, as to that five-month period, will be denied in part.
Gerald W. Kelly, Jr., and Daniel S. Heller, for petitioners.
Bartholomew Cirenza and Ryan Z. Sarazin, for respondent.
MEMORANDUM OPINION
GUSTAFSON, Judge: Petitioner Annie P. Verghese and her late husband
Kannarkat P. Verghese filed this suit, pursuant to section 6330(d),1 in response to
the determination of the Office of Appeals (“Appeals”) of the Internal Revenue
1 Unless otherwise indicated, all section references are to the Internal Revenue Code (26 U.S.C.; “the Code”) in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar. We refer to Mr. and Mrs. Verghese as “petitioners” although Mr. Verghese has been substituted for this case by his estate, with Mrs. Verghese as its representative. -4-
[*4] Service (“IRS”) to (a) sustain the issuance to petitioners of a “Final Notice -
Notice of Intent to Levy” with respect to petitioners’ unpaid liabilities for tax
years 1997 and 1998 and (b) deny petitioners’ request for abatement of almost 13
years’ worth of interest that the IRS assessed in respect of the tax liabilities for
those long-past years. Respondent, the Commissioner of the IRS, has moved for
summary judgment under Rule 121, and petitioners have filed an opposition. For
the reasons explained below, we will grant the Commissioner’s motion in part as
to abatement of interest under section 6404(a) and, as to abatement under section
6404(e), will grant the motion as to most of the interest but will deny it as to
nearly five months’ worth of interest accrued from August 7, 2012, to January 2,
2013, because, under Rule 121(e), petitioners should be allowed to conduct some
discovery as to that five-month period on the issue of whether Appeals abused its
discretion by failing to consider circumstances showing delay by the IRS in
arriving at a settlement with the partners of certain partnerships in which
Mr. Verghese was a partner. -5-
[*5] Background
For purposes of the Commissioner’s motion, we assume correct the facts
asserted by petitioners that are supported by their filings, as well as the facts
demonstrated by the Commissioner that petitioners did not dispute.2
The Heritage partnerships
Mr. Verghese was a partner in each of three different partnerships--Heritage
Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3,
and Heritage Memorial Park Associates 1995-4 (“the Heritage partnerships”), all
of which used the partners’ contributed capital to invest in cemetery plots. The
Heritage partnerships donated the cemetery plots to charity and reported charitable
contributions on their partnership tax returns for the amounts attributed to those
plots. The charitable contributions were “passed through” to the partners of the
partnerships to claim on their individual tax returns. The Heritage partnerships
reported such charitable donations in 1996, 1997, and 1998, while Mr. Verghese
2 Pursuant to Fed. R. Evid. 201, we take judicial notice of the petitions and further pleadings filed in the following Tax Court cases, discussed below (and referred to herein as the “Heritage partnership cases”), which were initiated by the Heritage partnerships: Heritage Mem’l Park Assocs. 1995-2 v. Commissioner, dkt. No. 7176-00; Heritage Mem’l Park Assocs. 1995-3 v. Commissioner, dkt. No. 8260-01; and Heritage Mem’l Park Assocs. 1995-4 v. Commissioner, dkt. No. 10715-02. See Leyshon v. Commissioner, T.C. Memo. 2015-104, at *14-*15, aff’d per curiam, 649 F. App’x 299 (4th Cir. 2016). -6-
[*6] was an investor and partner in the partnerships. (Deductions for 1996 are not
in dispute because petitioners raised in their petition only claims relating to tax
years 1997 and 1998; but we make reference below to facts relevant here
concerning Heritage Memorial Park Associates 1995-2, the partnership through
which deductions were claimed for 1996.)
The investments in the Heritage partnerships were actively marketed to
Mr. Verghese and the other partners who made similar investments. The person
responsible for much of the direct correspondence and solicitation of partner
investments was Paul V. Decker, an alleged investment adviser based in Bowie,
Maryland. In the years at issue, Mr. Verghese purchased partnership interests that
were advertised to him as “units”, which corresponded to a fixed number of
cemetery sites that the partnerships purchased, allowing him to report on his
personal tax returns (jointly filed with Mrs. Verghese) certain shares of the
charitable contributions reported by the partnerships on their returns, for which he
claimed charitable contribution deductions. He and the other partners were
repeatedly assured of the legitimacy of the transactions that generated the
deductions claimed by the Heritage partnerships, as well as the accuracy of the
appraisals that supported them. Such assurances came in the form of repeated
correspondence from Mr. Decker (often advertising the sale of additional units of -7-
[*7] supposedly limited availability), as well as lengthy legal correspondence from
the attorney who represented the Heritage partnerships in proceedings under the
unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility
Act of 1982 (“TEFRA”). See infra p. 8, “TEFRA proceedings”.
Tax returns for 1997 and 1998
Petitioners filed joint returns for tax years 1997 and 1998, on which they
claimed charitable contribution deductions from their investments in the Heritage
partnerships.
Civil audits of Heritage partnership returns
The IRS initiated in 1998 a civil audit of the return of Heritage Memorial
Associates 1995-2 (regarding the charitable contribution deduction it reported for
1996). As of June 30, 2000, the IRS had commenced civil audits of the returns of
all three of the Heritage partnerships. Petitioners assert, and we assume, that no
one in the IRS ever informed them that, in connection with any tax liability that
might eventually be determined against them, they could suspend the running of
interest by making a “deposit in the nature of a cash bond” (discussed below in
part I.B). The parties dispute whether, if they had been so informed, petitioners
would have made such a deposit; but for purposes of the Commissioner’s motion,
we assume in their favor that they would have. -8-
[*8] Criminal investigation
A grand jury investigation into the activities of certain persons involved in
the Heritage partnerships commenced while the civil audits of the Heritage
partnership returns were still pending. The investors in the partnerships were
aware of the grand jury investigation of at least two of the alleged co-conspirators
in June 2001. The grand jury ultimately returned criminal indictments for four
alleged co-conspirators on September 29, 2005. The four co-conspirators were
convicted and sentenced throughout 2007 and 2008 for crimes relating to the
investigation involving the Heritage partnerships, and not until 2009 did all of the
criminal proceedings ultimately conclude.
TEFRA proceedings
For the two years at issue, the civil issues proceeded to litigation as
follows:3
The Commissioner issued a “Notice of Final Partnership Administrative
Adjustment” (“FPAA”) to Heritage Memorial Park Associates 1995-3 on April 11,
2001, proposing an adjustment of $2,936,700 for tax year 1997 based upon the
3 As to 1996, Heritage Memorial Park Associates 1995-2 filed a petition on June 27, 2000, challenging the Commissioner’s disallowance in the FPAA of a charitable contribution deduction the partnership reported for 1996 in docket No. 7176-00. Because 1996 is not at issue, we need not discuss this litigation further. -9-
[*9] Commissioner’s disallowance of a deduction claimed for a charitable
contribution reported by the partnership. Heritage Memorial Park Associates
1995-3 filed a petition in the Tax Court on June 28, 2001, commencing TEFRA
proceedings in docket No. 8260-01.
The Commissioner issued an FPAA to Heritage Memorial Park Associates
1995-4 on March 29, 2002, proposing an adjustment of $5,282,050 for tax year
1998 based upon the Commissioner’s disallowance of a deduction claimed for a
charitable contribution reported by the partnership. Heritage Memorial Park
Associates 1995-4 filed a petition in the Tax Court on June 25, 2002, commencing
TEFRA proceedings in docket No. 10715-02.
All of the Heritage partnerships initiated their civil TEFRA proceedings
while the criminal investigation was pending and before the issuance of the
criminal indictments of the four co-conspirators. Until 2008 these civil TEFRA
proceedings were essentially paused while the parties therein jointly moved for
continuances. The Commissioner asserts (and petitioners do not dispute) that
during this period the underlying reason for the continuances was the IRS’s
decision to hold the civil TEFRA proceedings in abeyance until the criminal
proceedings related to the activity at issue in the TEFRA litigation were
concluded. - 10 -
[*10] On June 27, 2008, the Commissioner moved the Tax Court to remove the
tax matters partner (“TMP”) in the Heritage partnership cases. Those cases were
consolidated in September 2008. On February 3, 2009, a new TMP was
appointed, and the cases were restored to the general docket on June 26, 2009.
The Tax Court issued a notice of trial in January 2010. In June 2010 new counsel
entered an appearance for the Heritage partnerships and requested a continuance
of the trial. In August 2010 the Heritage partnerships moved to amend their
petitions and did amend them in September 2010. Thereafter the parties engaged
in discovery, and in February 2011 the Commissioner moved to dismiss certain
paragraphs of the amended petitions. The parties continued to engage in discovery
and to brief the issues on pending motions.
On March 2, 2012, the Heritage partnerships moved to remove the
designated TMP and appoint a new TMP, which occurred on April 5, 2012. The
parties filed pretrial memoranda on April 30, 2012, and a trial was set for
August 7, 2012. On May 31, 2012, the Heritage partnerships filed motions for
partial summary judgment, to which the Commissioner filed opposing briefs on
June 29, 2012. The Heritage partnerships filed replies on July 13, 2012. The Tax
Court denied the motions on July 24, 2012. On August 6, the day before the trial
session, the Tax Court entered an order striking certain paragraphs of the petitions, - 11 -
[*11] and the Heritage partnerships filed amended petitions. The Tax Court held a
hearing on August 7, 2012, during which the parties filed two stipulations of fact
and a stipulation of settled issues; that same day the Tax Court ordered the
Commissioner to file a motion for entry of decision pursuant to Rule 248(b) by
October 9, 2012, with which he complied, and with regard to which the Heritage
partnerships, on October 17, 2012, filed a motion to strike accompanied by a
motion to enforce settlement agreement.
As he acknowledged in his motion to withdraw the pleading on November
21, 2012, the Commissioner’s motion for entry of decision did not accurately
represent the stipulations of fact and the resolution of issues that the parties had
previously reached. The Heritage partnerships had alleged in their motion to
strike that the Commissioner had intentionally made such a filing at the direction
of the IRS National Office. On January 2, 2013, the Commissioner filed a second
motion for entry of decision pursuant to Rule 248(b). The parties made no further
filings in the Tax Court in the Heritage partnership cases at issue; decisions were
accordingly entered on April 1, 2013.
Increase in petitioners’ tax liabilities for 1997 and 1998
On May 26, 2014, petitioners received IRS Notices CP22E showing the
following: for tax year 1997, an increase in tax of $32,389 and an increase in - 12 -
[*12] interest of $47,039 (for a total amount due of $79,428); and for tax year
1998, an increase in tax of $21,536 and an increase in interest of $27,844 (for a
total amount due of $49,380). The amounts due had to be paid “by June 16, 2014
to avoid additional penalty and interest charges”.
Requests for abatement of interest
Petitioners filed with the IRS on September 9, 2014, Forms 843, “Claim for
Refund and Request for Abatement”, requesting interest abatement for each of the
tax years 1996, 1997, and 1998. Each Form 843 indicated that the requested
abatement was of interest assessed in respect of income tax and alleged that the
reasons for the request were “[i]nterest was assessed as a result of IRS errors or
delays” and “[r]easonable cause or other reason allowed under the law (other than
erroneous written advice) can be shown for not assessing a penalty or addition to
tax.”
Line 7 of Form 843 prompts the taxpayer to “[e]xplain why you believe this
claim or request should be allowed and show the computation of the amount
shown” for which abatement is requested. For line 7 petitioners attached a lengthy
summary alleging that they had been the victims of a fraudulent scheme and had
been solicited by criminal conspirators to make what petitioners had reasonably
believed were legitimate investments. Petitioners alleged that, unbeknownst to - 13 -
[*13] them, “the Conspirators were fabricating and altering documents related to
the tax losses” and making “a substantial profit on the sale of the properties to the
Partners.” Petitioners also alleged that they were “prepared and willing to pay the
total tax principal owed, however, respectfully request the interest be abated.”
Petitioners’ submission attached to each Form 843 set forth six points of
argument, which we summarize as follows: (1) Petitioners were innocent of the
fraudulent scheme in which they were targeted to participate. (2) Their belief in
their innocence was reasonable because of the repeated assurances they received
from their investment adviser, their accountant, and the attorney for the Heritage
partnerships. (3) The interest assessment (which had been accruing during more
than a decade of Tax Court litigation) was significantly greater than the underlying
tax liabilities and was therefore tantamount to a penalty, but petitioners’ conduct
(unlike that of the criminal conspirators) did not warrant punishment. (4) The
TEFRA litigation involving the Heritage partnerships “began in 2000, and was not
completed until 2013”, “last[ing] much longer than was reasonable”; specifically,
the 5-year period from 2008, when the Heritage partnerships obtained new
counsel, until the conclusion of the cases in 2013 “is very indicative of
unreasonable delays” because the end result was a settlement consisting of a
penalty abatement rather than a decrease in liabilities. (5) Petitioners had an - 14 -
[*14] otherwise “clean” history reflecting compliance with the Federal tax laws.
And (6) denying interest abatement under such circumstances would violate
“public policy [that] does not promote punishing victims of fraud”, as well as
public policy in favor of considering the decline of Mr. Verghese’s mental health
(as was occurring at the time) “at the very least as a mitigating factor”.
Petitioners did not receive any information from the IRS regarding the
disposition of their abatement requests before the IRS’s initiation of collection
action, which we now describe.
Notice of intent to levy
On February 12, 2015, the Commissioner issued to petitioners a “Notice of
Intent to Levy and Notice of your Right to a Hearing” (“levy notice”) for tax years
1997 and 1998, which instructed them to “pay immediately” and to “send * * *
[the IRS] the amount due of $130,565, or we may seize (levy) your property on or
after March 14, 2015.” The amount due consisted of: for 1997, $74,428 owed4
(including interest of $47,039) plus an additional $1,826 of interest and a $2,129
4 Petitioners made a $5,000 payment to the IRS on August 22, 2014, after receiving the Notices CP22E. They later made an additional $5,000 payment on March 5, 2015. At the time of the hearing in this case on the Commissioner’s motion for summary judgment in January 2020, counsel for the Commissioner represented in his arguments that “until approximately six months ago--* * * [petitioners] still hadn’t paid the liability”. - 15 -
[*15] additional penalty; for 1998, $49,380 owed (including interest of $27,844)
plus an additional $1,187 of interest and a $1,615 additional penalty. Through
their representative Daniel Heller petitioners timely filed Form 12153, “Request
for a Collection Due Process or Equivalent Hearing”, requesting a collection due
process (“CDP”) or equivalent hearing.5 On a typewritten attachment to their
Form 12153, petitioners argued that for purposes of section 6330(c)(3)(C) the
collection action would be more intrusive than necessary, because they “are
contesting the interest assessed against them, and intend on satisfying the tax
balance owed after their interest claim is resolved.” Petitioners also attached to
the Form 12153 their previously filed Forms 843 and accompanying
documentation.
CDP hearing
On June 23, 2015, Settlement Officer Nathalie Raygosa (“SO Raygosa”)
sent petitioners and Mr. Heller a letter acknowledging receipt of their request for a
CDP hearing and scheduling a telephone conference for July 21, 2015. When SO
Raygosa held the telephone conference with Mr. Heller, she indicated that she did
5 Petitioners also indicated on Form 12153 that they were seeking collection alternatives by checking boxes corresponding to “installment agreement”, “offer in compromise”, and “I cannot pay balance”. However, petitioners are not pursuing review of Appeals’ determination with respect to collection alternatives, so we do not discuss them further. - 16 -
[*16] not think that petitioners could raise the issue of interest abatement because
she believed that they had had a prior opportunity to do so. SO Raygosa reviewed
additional information and legal argument that Mr. Heller provided and discussed
the issue with him again on August 13 and August 20; but Appeals thereafter
issued a “Notice of Determination Concerning Collection Action(s) Under section
6320 and/or 6330 of the Internal Revenue Code” on September 11, 2015,
sustaining the levy action and concluding that she could not consider petitioners’
interest abatement request.
Tax Court petition
Petitioners timely petitioned the Tax Court on October 13, 2015, for review
of the notice of determination. When they filed the petition, petitioners resided in
Maryland. On June 6, 2016, the Commissioner filed a motion for remand on the
grounds that SO Raygosa had erred in determining that petitioners had had a prior
opportunity to litigate the issue of interest abatement. The Court granted the
motion and remanded the case to Appeals on June 7, 2016. On remand an IRS
general attorney advised the Appeals team manager that--
The primary issue raised by petitioners is interest abatement pursuant to * * * [section] 6404(e). The IRS moved to remand the case because [the] Settlement Officer assigned to petitioner’s initial CDP Hearing incorrectly determined that petitioners had a prior - 17 -
[*17] opportunity to raise the interest abatement issue by virtue of various partnership-level Tax Court cases.
The supplemental CDP hearing should address petitioner’s claim for interest abatement on the merits. You should allow petitioners to submit whatever documentation and testimony they believe is relevant to the interest abatement issue. Your supplemental notice of determination should indicate whether petitioners properly raised the interest abatement issue in their supplemental hearing, and if so, whether you agreed to abate any portion of the interest assessed by respondent.
The memorandum further set a deadline of August 16, 2016, by which to conduct
the administrative hearing.
Supplemental CDP hearing
On remand the case was assigned to SO Edwards, who contacted Mr. Heller
on July 21, 2016, by telephone and followed up with a letter indicating that his
understanding of “the purpose of the remand is to review whether interest
abatement is appropriate for tax years 1997 and 1998”. SO Edwards also
indicated that he needed certain documents missing from the administrative file,
including “proof of unreasonable delays by the IRS referenced in your Form 843
claims”, and scheduled a telephone conference for August 16, 2016, to discuss
interest abatement.
On August 3, 2016, SO Edwards received and thereafter considered
documents from Mr. Heller in support of the interest abatement claims for 1997 - 18 -
[*18] and 1998. He also examined the legal authorities submitted in support of
Mr. Heller’s arguments regarding the availability to petitioners of an abatement
claim under section 6404(a)--i.e., the cases H. & H. Trim & Upholstery Co. v.
Commissioner, T.C. Memo. 2003-9, and King v. Commissioner, T.C. Memo.
2015-36, rev’d, 829 F.3d 795 (7th Cir. 2016).6 Moreover, SO Edwards discussed
the merits of these legal authorities with IRS counsel and with Mr. Heller during
the scheduled telephone conference.
During SO Edwards’s review in consideration of Mr. Heller’s interest
abatement argument under section 6404(e), he conducted additional research
regarding what factors contributed to the delay between the Heritage partnerships’
commencing TEFRA litigation and the conclusion of those cases. In his initial
conversations with IRS counsel on July 20, 2016, SO Edwards noted: “I discussed
notes from the trial * * * that may be needed because of arguments raised by
6 Mr. Heller noted in his correspondence to SO Edwards (and we agree) that the Court of Appeals for the Seventh Circuit’s reversal of King v. Commissioner, T.C. Memo. 2015-36, rev’d, 829 F.3d 795 (7th Cir. 2016), is not binding authority on this Court where, as here, the case is appealable to the Court of Appeals for the Fourth Circuit. See sec. 7482(b); see also Lardas v. Commissioner, 99 T.C. 490, 495 (1992) (explaining Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), and stating “[i]t should be emphasized that the logic behind the Golsen doctrine is not that we lack the authority to render a decision inconsistent with any Court of Appeals (including the one to which an appeal would lie), but that it would be futile and wasteful to do so where we would surely be reversed”). - 19 -
[*19] taxpayers [sic] counsel * * * [that] delays in the trial were due to IRS. How
can I evaluate that claim without court docs?”.
SO Edwards held the telephone conference with Mr. Heller on August 16,
2016, during which they discussed the two distinct grounds raised for interest
abatement--“i.e., unreasonable delays and excessive [interest]”. SO Edwards
pointed out that “excessive doesn’t mean there shouldn’t be any interest charged”
and raised the subject of partial abatement, to which Mr. Heller responded that “he
would need to first see how much * * * [SO Edwards] would be willing to abate”.
In correspondence and documents submitted before the telephone conference, Mr.
Heller did not identify to SO Edwards any discrete periods of time that allegedly
constituted the “unreasonable delay” by the IRS other than the generally long
duration of the TEFRA litigation, specifically the period from 2008 through 2013
during which the Heritage partnerships tried to obtain a settlement.
At the end of the telephone conference, Mr. Heller indicated that he would
like a face-to-face meeting, and SO Edwards said he would be willing to discuss
the case in person upon completion of his review. SO Edwards’ case notes further
indicate his “plan of action: [c]omplete review of excessive and unreasonable
delays”. - 20 -
[*20] SO Edwards paused his work on the case until January 9, 2017, the date on
which his notes begin with the statement that “[t]he case was delayed due to
another remand case, tax court testimony and other priority cases”. On that day he
again reviewed Mr. Heller’s arguments that: (1) the interest was excessive
because of the “unfair” circumstance that petitioners were the victims of a
calculated fraud; (2) petitioners did not know (because the IRS did not tell them)
that they could post a deposit in the nature of a cash bond which would have
stopped the interest from accruing; and (3) delays by the IRS caused the TEFRA
litigation to remain unresolved until 2013 (thereby prolonging the accrual of
interest). On the issue of the IRS’s delay, SO Edwards reviewed the docket entries
to ascertain “if there were delays and who prompted them”; he then telephoned the
IRS attorney who served as counsel for the Commissioner in the TEFRA
litigation. The IRS attorney told him that there were 12 continuances of the
litigation, some of which were joint motions and all of which were prompted by
the criminal cases against the promoters of the Heritage partnerships, and that the
Department of Justice did not want them to move forward with the cases while the
criminal actions were pending. - 21 -
[*21] On February 16, 2017, SO Edwards reviewed the IRS attorney’s TEFRA
litigation files,7 which were consistent with the attorney’s recollection of the cases
and, further, showed that the criminal cases did not conclude until 2009.
SO Edwards also noted that in 2010 the Heritage partnerships obtained new
counsel who filed a motion for partial summary judgment on an issue related to
allowable expenses, which was ultimately denied in 2012. SO Edwards reviewed
Internal Revenue Manual (IRM) pt. 8.7.7.13 (May 15, 2012) (“Abatement of
Interest Claims”) and determined that there were no facts present corresponding to
the criteria for the abatement of interest either during the pendency of the criminal
case, when “the IRS couldn’t pursue the civil matter”, or after the criminal matter
concluded and “there was an ongoing trial with new counsel * * * fighting for
additional expenses” until the motion for partial summary judgment was denied in
late July 2012.
SO Edwards spoke with Mr. Heller on March 23, 2017, and advised him of
his conclusions that “interest abatement is not applicable based on the facts and
circumstances of the case” and explained his conclusions. Mr. Heller again
requested a face-to-face meeting; but SO Edwards said he did not understand what
7 The IRS attorney’s TEFRA litigation files have not been submitted as part of the administrative record in this CDP case. - 22 -
[*22] purpose a face-to-face meeting would serve, and he indicated he would need
to review the order on remand and speak to an IRS attorney to confirm. Later that
day he called Mr. Heller back and left a message offering times for a face-to-face
meeting. On March 27, 2017, Mr. Heller sent SO Edwards a fax stating in
relevant part that “you have made it abundantly clear that even if you were to
humor this meeting, it would serve no purpose for the Taxpayers, we do not
believe it would be prudent or advisable for our office to engage in this meeting
with you at this time”.
On June 14, 2017, Appeals issued to petitioners a “Supplemental Notice of
Determination Concerning Collection Action(s) Under Section 6320 and/or 6330”
for tax years 1997 and 1998, sustaining Appeals’ denial of petitioners’ request for
abatement of interest and consequently sustaining the Levy Notice. In the
supplemental notice of determination SO Edwards listed the requirements of
applicable law and administrative procedure that he verified had been met. On the
issue of interest abatement, he ultimately concluded that “the cases [that
petitioners] cited were not applicable to the facts in the Taxpayers’ case and
therefore [he] determined the interest is not excessive” under section 6404(a). He
arrived at this conclusion because he reasoned that in the cases provided on this
issue, “the fairness test as it relates to excessiveness is a but for test”, meaning that - 23 -
[*23] the interest was not excessive (or unfair) unless “but for” reliance on advice
that the IRS gave that was erroneous, the delay would not have occurred. SO
Edwards concluded that the IRS’s conduct in this case did not fulfill that criterion.
SO Edwards further observed that section 6404(e) “allows for the abatement
of interest on any deficiency attributable in whole or in part to any unreasonable
error or delay by an officer or employee of the Internal Revenue Service (acting in
his official capacity) in performing a ministerial or managerial act” and that, upon
his review of the Heritage partnership cases, he believed that the continuances due
to the pending criminal matters were not unreasonable, that many were in fact
“joint in nature”, and that, “once the criminal matters were concluded and a new
* * * [TMP] found, the Tax Court case resumed”. Accordingly, he concluded that
the statutory criteria for abatement under section 6404(e) were not met.
The supplemental notice of determination addressed petitioners’ remaining
arguments for abatement and determined them to be without merit: SO Edwards
determined that petitioners’ allegedly reasonable belief that the deductions they
claimed for the Heritage partnership investments were valid because promoters of
the investments had repeatedly assured them so was not pertinent under
section 6404(e) because it constituted a “reasonable cause argument” prohibited - 24 -
[*24] by IRM pt. 8.7.7.13.8 SO Edwards dismissed their assertion that they had
not been informed during the TEFRA litigation that they could post a bond to
suspend interest accrual, because (he concluded) “the statute doesn’t provide for
interest abatement when the IRS doesn’t advise the Taxpayer to post a bond.”
SO Edwards accordingly determined that “the proposed levy balances the efficient
collection of taxes with your legitimate concern that the collection action be no
more intrusive than necessary”.
Further Tax Court proceedings
Proceedings on petitioners’ Tax Court petition resumed in July 2017; trial
was thereafter set for June 4, 2018; and in the interim, the parties engaged in
discovery. The Commissioner filed a motion for summary judgment on April 5,
2018, contending that Appeals did not abuse its discretion when it issued the
supplemental notice of determination denying abatement of interest and sustaining
the Levy Notice. Petitioners filed a notice of objection opposing summary
judgment by highlighting the lack of evidence in the record rather than identifying
specific facts in dispute. With respect to abatement based on unreasonable
8 Internal Revenue Manual pt. 8.7.7.13 (May 15, 2012) includes the following “[n]ote: See Treasury Regulation section 301.6404-2(c) for examples of ministerial and managerial acts. Do not abate interest based on ‘reasonable cause criteria’.” - 25 -
[*25] ministerial or managerial delay by the IRS, petitioners argue that in SO
Edwards’ documentation of his review of the TEFRA litigation, he failed to
elucidate the specific reasons that each continuance had been requested and
therefore “SO Edwards’ case history fails to establish a sufficient factual basis that
Petitioners are unable to prove the interest assessment was the result of an
unreasonable delay by Respondent.” Similarly petitioners argue that SO Edwards
did not adequately address the argument that the IRS failed to inform them that
they could post a bond because “he simply states that he could not find proof”
thereof. Finally, they argue that SO Edwards “created a new [and incorrect] legal
standard” in his application of section 6404(a): “[I]t appears that he determined
that I.R.C. § 6404(a) applies only when an interest assessment would not exist ‘but
for’ advice by the IRS.” Petitioners contend that summary judgment would be
premature because--
Petitioners believe Respondent has in its possession, custody, or control, relevant records not currently available to Petitioners, which further strengthen their claims of unreasonable delay or error, such as the records SO Edwards reviewed. These records were requested via formal discovery, and Petitioners are waiting to receive the discovery responses from Respondent.
Petitioners also raise new issues regarding “respondent’s delays and errors
after the filing of the interest abatement request,” pointing to the six months that - 26 -
[*26] elapsed between their initial request for interest abatement and any further
contact from the IRS, the year that elapsed while SO Raygosa mistakenly disposed
of their CDP case without considering interest abatement, and the time that SO
Edwards took to complete his administrative hearing and issue the supplemental
notice of determination, which included at least one 3-month delay he
acknowledged was due to other demands of his caseload.
Petitioners filed a motion to compel on May 7, 2018, seeking, inter alia,
production of documents they requested April 3, 2018, including “[a]ll records
relating to Heritage Park files”. The Court initially granted this request without
directing the Commissioner to file a response. The Commissioner moved for
reconsideration of that ruling, and the Court held a telephone conference with the
parties and subsequently vacated its order compelling the discovery. (The Judge
assigned to the case thereafter retired, and the case was reassigned in
August 2019.)
The Court resumed consideration of the pending motion for summary
judgment and held a hearing on January 14, 2020, during which counsel for the
parties presented oral argument regarding the legal framework of the abatement
claim. At the hearing Mr. Heller appeared for petitioners and urged that they still
had not received access to the records that they sought in order to prove the merits - 27 -
[*27] of their abatement claim (i.e., to show that Appeals abused its discretion
when it denied the claim). He also stated that petitioners “had a pretty strong
record” supporting their “excessive unfairness” claims. After the hearing and
pursuant to order of the Court, the parties submitted supplemental briefs on the
issue of whether interest assessed on income tax could properly be the subject of
an abatement under section 6404(a).
Discussion
I. General legal principles
A. Summary judgment
The purpose of summary judgment is to expedite litigation and avoid
unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988).
The Court may grant summary judgment when there is no genuine dispute as to
any material fact and a decision may be rendered as a matter of law. Rule 121(b);
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965
(7th Cir. 1994). In deciding whether to grant summary judgment, we draw factual
inferences in the light most favorable to the nonmoving party, Sundstrand Corp. v.
Commissioner, 98 T.C. at 520--in this instance, petitioners. “The opposing party
is to be afforded the benefit of all reasonable doubt, and any inference to be drawn
from the underlying facts contained in the record must be viewed in a light most - 28 -
[*28] favorable to the party opposing the motion for summary judgment.”
Espinoza v. Commissioner, 78 T.C. 412, 416 (1982).
A party opposing summary judgment “may not rest upon the mere
allegations or denials” but rather “must set forth specific facts showing that there
is a genuine dispute for trial.” Rule 121(d). In a circumstance where such a
showing of facts is not possible, Rule 121(e) provides:
When Affidavits or Declarations Are Unavailable: If it appears from the affidavits or declarations of a party opposing the motion that such party cannot for reasons stated present by affidavit or declaration facts essential to justify such party’s opposition, then the Court may deny the motion or may order a continuance to permit affidavits or declarations to be obtained or other steps to be taken or may make such other order as is just. If it appears from the affidavits or declarations of a party opposing the motion that such party’s only legally available method of contravening the facts set forth in the supporting affidavits or declarations of the moving party is through cross-examination of such affiants or declarants or the testimony of third parties from whom affidavits or declarations cannot be secured, then such a showing may be deemed sufficient to establish that the facts set forth in such supporting affidavits or declarations are genuinely disputed.
We have no such affidavit or declaration in our record--only assertions by
petitioners’ counsel that facts they believe exist that would assist their claim have
not yet been discovered, and that they anticipate further discovery and, if
necessary, trial subpoenas for witnesses who may know such facts. - 29 -
[*29] Although petitioners did not comply with the precise letter of Rule 121(e),
they did previously file a motion to compel, which the Court first granted and then
denied. Mr. Heller urged at the hearing and in prior proceedings before the Court
that further discovery should be permitted after resolution of the Commissioner’s
motion for summary judgment. Therefore we construe petitioners’ opposition to
include the assertion that they cannot sufficiently oppose the Commissioner’s
factual assertions without further discovery.
B. Interest on Federal income tax liability
Interest on a Federal income tax underpayment arises automatically under
section 6601. Under section 6601(a) the interest “shall be paid for the period from
* * * [“the last date prescribed for payment”] to the date paid.”
Important to this case, section 6601(e)(1) provides that interest arising
under section 6601 is “treated as tax”; that is, it “shall be paid upon notice and
demand, and shall be assessed, collected, and paid in the same manner as taxes.
Any reference in this title * * * to any tax imposed by this title shall be deemed
also to refer to interest imposed by this section on such tax.”9
9 In text above we elide from the quotation of section 6601(e)(1) an exception--“except subchapter B of chapter 63, relating to deficiency procedures”--that is not relevant here. - 30 -
[*30] A taxpayer whose liability is in dispute, and who therefore may (or may not)
be incurring a mounting interest obligation while the dispute is pending, has the
option of making a “deposit”. Under section 6603--effective since October 2004--
a taxpayer may make a cash deposit before assessment toward “any tax imposed
under subtitle A or B or chapter 41, 42, 43, or 44 which has not been assessed at
the time of the deposit”; and “[t]o the extent that such deposit is used by the
Secretary to pay tax, for purposes of section 6601 (relating to interest on
underpayments), the tax shall be treated as paid when the deposit is made”.
Sec. 6603(a) and (b). Before the enactment of section 6603, the IRS had
prescribed administratively an equivalent method for taxpayers to make and
designate remittances to the IRS as “deposits in the nature of a cash bond” which
were “made merely to stop the running of interest” and not “in satisfaction of a tax
liability”. Rev. Proc. 84-58, secs. 1, 2.03, 1984-2 C.B. 501, 501 supplemented by
Announcement 86-114 (Nov. 24, 1986), 1986-47 I.R.B. 46 (specifying how a
partner in a partnership may make a deposit of tax or interest upon the issuance of
the FPAA), superseded by Rev. Proc. 2005-18, sec. 9, 2005-1 C.B. 798, 801
(“Rev. Proc. 84-58 is superseded, effective with respect to remittances made on or
after March 28, 2005”). Petitioners did not ever make such a deposit, either under
Rev. Proc. 84-58 or its successor or under section 6603. Viewing the facts in the - 31 -
[*31] light most favorable to petitioners, we assume for purposes of the
Commissioner’s motion that the IRS did not specifically advise petitioners that
they could suspend the running of interest by making a deposit.
C. Interest abatement
Congress authorized the IRS to abate interest for reasons specified in
section 6404, and the IRS’s decisions whether to abate interest are subject to
abuse-of-discretion review by this Court. See sec. 6404(h)(1);10 Woodral v.
Commissioner, 112 T.C. 19, 23 (1999); Foote v. Commissioner, T.C. Memo.
2015-187, at *15-*16, aff’d, 700 F. App’x 760 (9th Cir. 2017). With the
exception of this limited power of review over abatement, this Court generally
lacks jurisdiction over issues concerning interest. Urbano v. Commissioner, 122
T.C. 384, 390 (2004); see also Med James, Inc. v. Commissioner, 121 T.C. 147,
151 (2003).
1. Interest abatement under section 6404(a) (“excessive in amount”)
Section 6404(a)(1) empowers the IRS to abate the unpaid portion of the
assessment of any tax or any liability in respect thereof that is “excessive in
10 Section 6404(h), by cross-referencing section 7430(c)(4)(A)(ii), imposes a “net worth” requirement on any taxpayer seeking review in the Tax Court. The parties have stipulated that petitioners’ net worth meets that requirement. - 32 -
[*32] amount”. However, section 6404(b) precludes abatement under section
6404(a)(1) of interest on income tax. Urbano v. Commissioner, 122 T.C. at 395.
That is, as we have observed, “what section 6404(a) gives, section 6404(b) takes
away (in certain circumstances).”11 Adams v. Commissioner, T.C. Memo. 2019-
99, at *8-*9 (citing Urbano v. Commissioner, 122 T.C. at 390), aff’d, 811 F.
App’x 276 (5th Cir. 2020). This is so because section 6404(b) provides that a
taxpayer may not file a claim for abatement “in respect of any assessment of any
tax imposed under subtitle A or B.” As we explain below in part II.A, petitioners
have not persuaded us that we should alter our interpretation of the statute.
11 The text of these paragraphs is as follows:
(a) General rule.--The Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which--
(1) is excessive in amount, or
(2) is assessed after the expiration of the period of limitation properly applicable thereto, or
(3) is erroneously or illegally assessed.
(b) No claim for abatement of income, estate, and gift taxes.--No claim for abatement shall be filed by a taxpayer in respect of any assessment of any tax imposed under subtitle A or B. - 33 -
[*33] 2. Interest abatement under section 6404(e) (“ministerial” or “managerial” error or delay)
Section 6404(e)(1)(A) authorizes the Commissioner to abate an assessment
of interest on “any deficiency attributable * * * to any unreasonable error or delay
by an officer or employee of the Internal Revenue Service * * * in performing a
ministerial or managerial act”. “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 prerequisites to the act, such as
conferences and review by supervisors, have taken place.” 26 C.F.R.
sec. 301.6404-2(b)(2), Proced. & Admin. Regs. A “[m]anagerial act” is “an
administrative act that occurs during the processing of a taxpayer’s case involving
the temporary or permanent loss of records or the exercise of judgment or
discretion relating to management of personnel.” Id. subpara. (1). A decision
concerning the proper application of Federal tax law is neither a managerial nor a
ministerial act. Id. para. (b).
The flush text of section 6404(e)(1) adds two caveats. First, an error or
delay is taken into account only after the IRS has contacted the taxpayer in writing
with respect to the deficiency or the payment. Sec. 6404(e)(1) (flush text). For
purposes of evaluating this requirement with respect to partnership items that are - 34 -
[*34] subject to litigation in a TEFRA proceeding, the relevant date occurs when
the Commissioner first contacts the taxpayers in writing regarding the examination
of the partnership. See Larkin v. Commissioner, T.C. Memo. 2010-73, 2010 WL
1490588, at *3. Second, an error or delay is considered “only if” no significant
aspect of the error or delay is attributable to the taxpayer involved.
Sec. 6404(e)(1)(B). We have construed this “attributable to the taxpayer”
exclusion to mean that “no abatement is warranted where, notwithstanding a
mistake by the Commissioner, no earlier payment [of the tax] would have been
made.” See Braun v. Commissioner, T.C. Memo. 2005-221, 2005 WL 2293523,
at *5. This is so because “[i]nterest accruing merely because a taxpayer fails to
pay the assessed tax is not subject to abatement under section 6404(e).” Id.
In addition to these requirements, a request for abatement under section
6404(e) cannot be formulated as a broad request to waive all interest; rather, the
taxpayer must identify a mistake by the Commissioner and must also link the
mistake to a specific period of delay as to which interest should be abated. See
Hancock v. Commissioner, T.C. Memo. 2012-31, 2012 WL 311663, at *4 (citing
Hill v. Commissioner, T.C. Memo. 2009-39, Guerrero v. Commissioner, T.C.
Memo. 2006-201, and Braun v. Commissioner, T.C. Memo. 2005-221). The
“requisite correlation between an error or delay attributable to the Commissioner - 35 -
[*35] and a specific period of time is, for the most part, missing where a taxpayer
requests that all interest with respect to the deficiencies be abated.” Braun v.
Commissioner, 2005 WL 2293523, at *5 (citing Donovan v. Commissioner, T.C.
Memo. 2000-220).
D. Collection review procedure for a proposed levy
If a taxpayer fails to pay any Federal tax liability after notice and demand,
section 6331(a) authorizes the IRS to collect the tax by levy on the taxpayer’s
property. However, Congress has added to chapter 64 of the Code a provision (in
subchapter D, part I) entitled Due Process for Collections”, with which the IRS
must comply before it can proceed with a levy: The IRS must first issue a final
notice of intent to levy and must notify the taxpayer of the right to an
administrative hearing. Sec. 6330(a) and (b)(1). After receiving such a notice, the
taxpayer may request that administrative hearing, which is called a “CDP hearing”
and takes place before Appeals. Sec. 6330(a)(3)(B), (b)(1).
Section 6330(c) sets forth collection-related issues to be considered at the
agency-level CDP hearing, none of which is at issue here. Finally, in some
circumstances12 section 6330(c)(2)(B) permits the taxpayer to contest the existence
12 Section 6330(c)(2)(B) permits a liability challenge only if the taxpayer did not receive a notice of deficiency or otherwise have an opportunity to dispute the (continued...) - 36 -
[*36] and amount of the underlying tax liability. The Commissioner
acknowledges that petitioners were entitled at the CDP hearing to dispute their
liability for interest by requesting an abatement. The parties agree that this was a
permissible liability challenge, and we so assume.13
E. Tax Court review
When Appeals issues its determination, the taxpayer may petition the Court
for review, pursuant to section 6330(d)(1), as petitioners have done. Section 6330
does not state what our standard of review should be in CDP cases; but we have
taken our cue from legislative history, see Goza v. Commissioner, 114 T.C. 176,
181-182 (2000), and we follow an abuse-of-discretion standard in some
12 (...continued) tax liability. 13 Perhaps one could argue that a dispute about the propriety of Appeals’ denying an abatement of interest is not a liability challenge but instead involves an alleged failure of “verification” under section 6330(c)(1), or constitutes a “challenge to the appropriateness of collection actions” under section 6330(c)(2)(A)(ii), or is some other “relevant issue relating to the unpaid tax or the proposed levy” under section 6330(c)(2)(A). We need not entertain those possibilities, however, not only because the parties have agreed that this is a liability challenge but also, and more important, because the principal consequences of deciding whether an issue is or is not a liability challenge are also agreed: Deciding whether an issue is a liability issue can affect whether the challenge is permitted, and the parties agree that here the challenge is permitted. Deciding whether an issue is a liability issue also usually affects what the Court’s standard of review should be, and the standard of review here is not in contention. See infra pt. I.E. - 37 -
[*37] circumstances and a de novo standard in others: As to collection-related
issues other than the underlying liability, we review Appeals’ determination for
abuse of discretion, id.; but we have no collection-related issues in dispute here.
When an underlying tax liability is properly at issue, the taxpayer in a CDP case is
usually entitled to de novo review. Id. at 182. However, Appeals’ notice of
determination serves as its final determination on the matter of abatement under
section 6404(h). See Gray v. Commissioner, 138 T.C. 295, 303-305 (2012),
supplemented by 140 T.C. 163 (2013). As we observed in part I.C, section
6404(h)(1) empowers us “to determine whether the Secretary’s failure to abate
interest under this section was an abuse of discretion”. (Emphasis added.)
Applying that abuse-of-discretion standard, we decide whether the
determination was arbitrary, capricious, or without sound basis in fact or law. See
Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir.
2006).
II. Analysis
A. Abatement under section 6404(a)
The Commissioner contends that SO Edwards’s decision to deny abatement
on equitable grounds under section 6404(a) was neither arbitrary nor capricious,
nor did it lack sound basis in law, because “[t]he disputed interest was assessed on - 38 -
[*38] the correct principal amount, and was not assessed erroneously or at
usurious rates”, and (more germane to petitioners’ arguments) because SO
Edwards did not misapply the law. In the supplemental notice of determination he
determined that petitioners did not meet the legal criteria for abatement under
section 6404(a); and the Commissioner argues that regardless of his precise
reasoning--i.e., whether he so concluded because of “the lack of a clear equitable
legal standard” or, as petitioners contend, he erroneously applied a “but-for” test
to determine entitlement to relief under section 6404(a)--his conclusion was
correct and was therefore not an abuse of discretion. We have previously held that
Appeals cannot abuse its discretion where it declines to authorize abatement of
interest that the statute itself does not authorize. See Woodral v. Commissioner,
112 T.C. at 21-25 (holding that section 6404(e) does not authorize abatement for
interest on employment taxes and that “a person with no discretion simply cannot
abuse it”). Accordingly, we turn to the merits of the parties’ arguments regarding
whether section 6404(a) authorizes the IRS to abate interest assessed on income
tax.
Petitioners rely on our opinions in King v. Commissioner, T.C. Memo.
2015-36, and H. & H. Trim & Upholstery Co. v. Commissioner, T.C. Memo.
2003-9, for the proposition that section “6404(a) [provides] grounds for interest - 39 -
[*39] abatement when interest is excessive, * * * defined [in King] as “unfair[]
under all facts and circumstances”. But these cases involved assessments of
employment tax pursuant to sections 3102 and 3402 (in subtitle C), not
assessments of income tax under subtitle A (explicitly excluded from
section 6404(a) by section 6404(b)(1)). Moreover, because employment taxes are
not eligible for abatement under section 6404(e), see Woodral v. Commissioner,
112 T.C. at 25, the primary issue in these opinions was whether abatement could
be obtained for employment taxes under section 6404(a). These opinions are thus
inapposite where, as here, petitioners seek an abatement of interest on income tax.
The Commissioner argues that, consistent with our holdings in Urbano v.
Commissioner, 122 T.C. 384, Adams v. Commissioner, T.C. Memo. 2019-99,
Kersh v. Commissioner, T.C. Memo. 2009-260, and Corson v. Commissioner,
T.C. Memo. 2009-95, “section 6404(b) * * * is a categorical bar to the application
of section 6404(a)(1) in all cases pertaining to interest on the assessment of
income taxes”. But petitioners urge that these cases
have generally quickly disposed of Subsection A arguments contesting interest in income tax cases. However, it is Petitioners’ position that prior decisions were based on a misinterpretation of the statute. * * * - 40 -
[*40] [A] plain reading of Subsection B (and Treas. Reg. § 301.6404- 1(b)[14]) provides taxpayers are generally barred from filing claims for abatements of taxes imposed under subtitle A (i.e., income tax principal).
Petitioners argue that the statutory phrase in section 6404(b) “in respect of any
assessment of any tax imposed under subtitle A or B” (emphasis added) means any
assessment of tax only, and that the “silence regarding ‘interest’ controls since
Congress used the phrase ‘assessment of any tax or any liability in respect
thereof’” in section 6404(a). We disagree.
Section 6601(e)(1) provides, with limited exceptions inapplicable here, that
any reference in the Code to any “tax” imposed by the Code “shall be deemed also
to refer to interest imposed by this section on such tax”. Sec. 6601(e)(1).
14 To establish that “tax” means “only tax” and that to implicate interest requires an explicit statement regarding “interest”, petitioners quote from and emphasize portions of this regulation as follows:
(b) No claim for abatement may be filed with respect to income, estate, or gift tax.
(c) Except in case of income, estate, or gift tax, if more than the correct amount of tax, interest, additional amount, addition to the tax, or assessable penalty is assessed but not paid to the district director, the person against whom the assessment is made may file a claim for abatement of such overassessment.
26 C.F.R. sec. 301.6404-1, Proced. & Admin. Regs. (emphasis added by petitioners). - 41 -
[*41] Applying this principle, we have held that the prohibition of section 6404(b)
that “[n]o claim for abatement shall be filed by a taxpayer in respect of any
assessment of any tax imposed under subtitle A or B” (emphasis added) means
that Congress did not authorize abatement for any tax imposed under subtitle A or
B or for any interest imposed on that tax. Urbano v. Commissioner, 122 T.C.
at 395; see also Goettee v. Commissioner, 192 F. App’x 212, 217 (4th Cir. 2006)
(“Because the excess interest at issue is a liability ‘in respect of’ an income tax
assessment, and because income tax assessments are specifically barred from
consideration, the Tax Court correctly refused to consider the Goettees’ claim
under Section 6404(a).”), aff’g 124 T.C. 286 (2005), and T.C. Memo. 2003-43.
We find similarly unavailing petitioners’ arguments regarding the text of the
regulations that implement section 6404. It is true that, as in the statute itself, only
“tax” is mentioned in the statement of the bar against abatement in 26 C.F.R.
section 301.6404-1(b), Proced. & Admin. Regs. (“No claim for abatement may be
filed with respect to income, estate, or gift tax”). And petitioners point to a
supposed distinction between “tax” and “tax * * * [and] interest” in the description
of the allowance of abatement in section -1(c), which states:
(c) Except in case of income, estate, or gift tax, if more than the correct amount of tax, interest, additional amount, addition to the tax, or assessable penalty is assessed but not paid to the district director, - 42 -
[*42] the person against whom the assessment is made may file a claim for abatement of such overassessment. * * * [Emphasis added.]
However, the regulations repeat the provision of section 6601(e) of the
statute to the effect that interest is treated as tax. See 26 C.F.R.
sec. 301.6601-1(f)(1), Proced. & Admin. Regs.15 Not surprisingly, the regulations
follow the statute in construing “tax” to include interest on that tax. If “tax” is
“deemed also to refer to interest imposed * * * on such tax”--as the statute, see
sec. 6601(e)(1), and the regulation, see sec. 301.6601-1(f)(1), Proced. & Admin.
Regs., both provide--then a bar on the abatement of “income tax” and an
allowance of abatement that excepts “income tax” necessarily bars and excepts the
“interest imposed” on income tax.
Appeals cannot abuse its discretion by declining to do something as to
which Congress did not confer discretion, Woodral v. Commissioner, 112 T.C.
at 25; and section 6404(a) does not give the IRS discretion to abate interest on
15 26 C.F.R. section 301.6601-1(f)(1), Proced. & Admin. Regs., provides:
Any interest prescribed by section 6601 shall be assessed and collected in the same manner as tax and shall be paid upon notice and demand by the district director or the director of the regional service center. Any reference in the Code (except in subchapter B, chapter 63, relating to deficiency procedures) to any tax imposed by the Code shall be deemed also to refer to the interest imposed by section 6601 on such tax. * * * [Emphasis added.] - 43 -
[*43] income tax. Accordingly, we will grant the Commissioner’s motion as it
relates to any abatement of interest under section 6404(a).
B. Abatement under section 6404(e)
Viewing the facts in the light most favorable to petitioners, we assume that
they requested abatement under section 6404(e) for the period constituting the
nearly 13-year duration--from June 27, 2000, through April 1, 2013--of the
TEFRA litigation by the Heritage partnerships.16 We note that the record before
us does not reveal the date on which the Commissioner first contacted petitioners
in writing regarding the examination of the Heritage partnerships’ returns, see sec.
6404(e), but we assume for purposes of summary judgment that it occurred before
the commencement of the TEFRA litigation.
16 Though petitioners now also complain about the delay caused by the CDP proceeding before SO Raygosa in which she incorrectly concluded they could not raise the issue of interest abatement and allege additional periods of delay in SO Edwards’s processing of the case on remand, these issues were not properly placed before SO Edwards and therefore do not constitute a determination that we are authorized to review. See Giamelli v. Commissioner, 129 T.C. 107, 114 (2007) (“[I]ssues under section 6330 must have been raised properly when the Appeals officer made her determination before we can review those issues in the context of an appeal of that determination”). And the same applies under section 6404. See Foote v. Commissioner, T.C. Memo. 2015-187, at *16-*17, aff’d, 700 F. App’x 760 (9th Cir. 2017). - 44 -
[*44] 1. Failure to advise of the opportunity to make a “deposit”
We first address petitioners’ argument that the Commissioner’s failure to
inform them of the opportunity to suspend the running of interest by making a
“deposit” constituted an act of “delay” within the meaning of section 6404(e).
SO Edwards found no evidence that such a “failure” occurred, and moreover
concluded that “the statute doesn’t provide for interest abatement when the IRS
doesn’t advise the Taxpayer to post a bond.” Although (as we have assumed) the
Commissioner did not specifically advise petitioners of the opportunity to post a
cash bond, the IRS has since 1984--long before the years at issue--published
guidance advising all taxpayers of the opportunity to remit to the IRS a deposit in
the nature of a cash bond and (relevant here) has also advised how to do so before
the assessment of the tax upon which interest may be assessed. The accrual of
such interest could be reduced or eliminated by following those procedures. See
Rev. Proc. 84-58, supra, and other published guidance referenced supra part I.B.
Because this information was available to the public, petitioners’ failure to make a
deposit to halt interest accrual cannot be attributed to delay or failure of the IRS to
advise them personally of this information.17 The supposed absence of a personal
17 The Commissioner does not contend that his motion should be granted because the undisputed facts of record demonstrate that petitioners, in the absence (continued...) - 45 -
[*45] invitation to make a deposit did not give rise to an abuse of discretion when
SO Edwards determined that section 6404(e) does not provide for interest
abatement under such circumstances.
2. Delay during criminal proceedings
SO Edwards observed (and petitioners do not dispute) that the criminal
proceedings against the conspirators involved in the Heritage partnerships did not
conclude until 2009 (though he did not give a precise date, nor does the record
reveal one). Petitioners argue that the entire duration of the 2000-2013 civil
TEFRA litigation–which, from 2001-2009, was concurrent with the criminal
proceedings--constituted an unreasonable delay. But “[b]road allegations
regarding a lack of timeliness and accuracy” are generally insufficient to identify
an error or delay arising from a ministerial or managerial act of the IRS. Bartelma
v. Commissioner, T.C. Memo. 2005-64, 2005 WL 713798, at *3.
With respect to pending litigation, it is well established that “[t]he mere
passage of time in the litigation phase of a tax dispute does not establish error or
17 (...continued) of any alleged delay, would nonetheless have failed to pay the liabilities as required by section 6404(e)(1); and we assume for purposes of the Commissioner’s motion that petitioners would have paid the liabilities, consistent with their allegation throughout the CDP proceedings that they would pay the liabilities once their request for interest abatement was addressed. - 46 -
[*46] delay” under section 6404(e). Lee v. Commissioner, 113 T.C. 145, 150
(1999). And delay during civil litigation that is the result of the Commissioner’s
strategy to first dispose of criminal proceedings “necessarily require[s] the
exercise of judgment” and therefore cannot constitute a ministerial act. Id. at 150-
151; see also Taylor v. Commissioner, 113 T.C. 206, 211-212 (1999) (explaining
the reasons for the IRS’s longstanding policy “to defer civil assessment and
collection until the completion of criminal proceedings” (quoting Badaracco v.
Commissioner, 693 F.2d 298, 302 (3d Cir. 1982), rev’g T.C. Memo. 1981 404,
aff’d, 464 U.S. 386 (1984)), aff’d, 9 F. App’x 700 (9th Cir. 2001); Dadian v.
Commissioner, T.C. Memo. 2004-121, 2004 WL 1118291, at *4 (holding that
denial of interest abatement was not abuse of discretion with respect to period of
delay caused by a related criminal investigation of tax shelter promoter).
Nor does that exercise of judgment constitute a “managerial act” as
contemplated by the statute.18 See Adams v. Commissioner, at *11 n.6; see also
26 C.F.R. sec. 301.6404-2(b)(1) (“Managerial act means an administrative act that
18 Section 6404(e) was amended in 1996, effective only for tax years beginning after July 30, 1996, to allow relief from interest that piles up because of “managerial acts” by the IRS. Taxpayer Bill of Rights 2, Pub. L. No. 104-168, sec. 301(a)(2), 110 Stat. at 1457 (1996). As a result, much of our jurisprudence in this area evaluates only whether there was a “ministerial act” within the meaning of section 6404(e). - 47 -
[*47] occurs during the processing of a taxpayer’s case involving the temporary or
permanent loss of records or the exercise of judgment or discretion relating to
management of personnel”). Regulatory examples of delay due to managerial acts
that may constitute grounds for abatement include delays in an audit due to the
reassignment of IRS personnel working on the audit, an extended grant of sick
leave to IRS personnel without reassigning the case, and the IRS’s act of
misplacing a case file. See 26 C.F.R. sec. 301.6404-2(c), Examples (4), (5),
and (6). The decision to delay the processing of a taxpayer’s case pending the
completion of an audit of a related return--such as one involving a tax shelter in
which the taxpayer invested--is classified as a “general administrative decision”
which constitutes neither a ministerial nor managerial act. Id. Example (7). We
therefore hold that the Commissioner is entitled to summary judgment under
section 6404(e) for the period from the commencement of the TEFRA litigation
until the conclusion of the criminal proceedings in 2009.
3. Post-criminal proceeding delay during TEFRA litigation
a. February 2009 through August 2012
As to the remaining period of the Heritage partnerships’ TEFRA litigation,
the record establishes that a new TMP was appointed pursuant to the
Commissioner’s motion in February 2009, and therefore any allegation of delay on - 48 -
[*48] the part of the IRS relating to this appointment would have coincided with
the criminal litigation, the pendency of which precludes entitlement to abatement
for the reasons stated above in part II.B.2. In June 2010 the Heritage partnerships
obtained new counsel who immediately began actively litigating their cases by
engaging in discovery and eventually filing a motion for partial summary
judgment in May 2012. That motion was denied in late July 2012. Mere weeks
later on August 7, 2012, the parties filed the stipulations which ultimately formed
the basis of their settlement. Because the record shows that the passage of time
during this stage of the litigation was due to affirmative litigation efforts of the
Heritage partnerships (and not the IRS), we will grant the Commissioner’s motion
for summary judgment under section 6404(e) as to the period from the end of the
criminal proceedings until August 7, 2012.
b. August 2012 through January 2013
There is only one period for which we cannot rule out the existence of the
type of managerial or ministerial act that could constitute unreasonable delay
under section 6404(e), and that is the period from the date of the stipulations on
August 7, 2012, until the Commissioner filed his second motion for entry of
decision (after voluntarily withdrawing the first) on January 2, 2013. It appears
from the pleadings in the Heritage partnership cases that some delay occurred that - 49 -
[*49] was not clearly due to ongoing litigation efforts or litigation strategy; what
is not apparent is whether such delay constituted a managerial or ministerial act of
the type contemplated by section 6404(e). We have previously held that the IRS’s
nearly five-year delay in the counter-signing of a settlement agreement during the
pendency of partnership litigation constituted an unreasonable delay due to a
ministerial act of the IRS, see Mathia v. Commissioner, T.C. Memo. 2009-120,
2009 WL 1471716, at *15-*17, aff’d, 669 F.3d 1080 (10th Cir. 2012); and we
cannot say whether the shorter delay in this case had the same defect.
It is not apparent that SO Edwards considered this nearly 5-month period
from August 7, 2012, until January 2, 2013, in his evaluation of petitioners’ claim
under section 6404(e). Because we draw all inferences in favor of petitioners and
because we have concluded that they have opposed the Commissioner’s motion
for summary judgment on the basis that they lack affirmative facts necessary to
create a factual dispute, we will not grant the Commissioner’s motion for summary
judgment as to this limited time period. Rather, we will allow further discovery
related to potential delay in entry of the stipulated decisions in the Heritage
partnership cases, limited to this five-month period: August 7, 2012, through
January 2, 2013. - 50 -
[*50] c. January 2013 through April 2013
The continued pendency of the case from January 2, 2013, until the entry of
decisions on April 1, 2013, was not a product of any action of the IRS but was
rather a function of the time periods required under Rule 248(b). Therefore,
Appeals did not abuse its discretion when it denied abatement under section
6404(e) for interest assessed during that time.
Conclusion
For the reasons stated in this opinion, we will grant the Commissioner’s
motion for summary judgment in part, holding that Appeals did not abuse its
discretion when it declined to offer any collection alternatives, that Appeals did
not abuse its discretion when it denied abatement under section 6404(a), and that
Appeals did not abuse its discretion when it denied abatement under section
6404(e) because of the Commissioner’s supposed failure to inform petitioners of
the opportunity to suspend the running of interest by making a “deposit”, nor when
it denied abatement for the period other than from August 7, 2012, through
January 2, 2013. As to that nearly five-month period, we will deny the
Commissioner’s motion for summary judgment and will order further proceedings. - 51 -
[*51] To reflect the foregoing,
An appropriate order will be
issued.
Related
Cite This Page — Counsel Stack
Kannarkat P. Verghese, Annie P. Verghese, Personal Representative and Annie P. Verghese, Counsel Stack Legal Research, https://law.counselstack.com/opinion/kannarkat-p-verghese-annie-p-verghese-personal-representative-and-annie-tax-2021.