Palihnich v. Comm'r

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent issued a final determination disallowing petitioners' claim under section 6404(e) for abatement of interest related to petitioners' 1980 and 1981 tax years. Petitioners timely filed a petition under section 6404(g)¹ and Rule 280.

*300 The issue for decision is whether respondent's denial of petitioners' request to abate interest relating to petitioners' 1980 and 1981 tax years was an abuse of discretion. Resolution of this issue depends on resolution of the following issues:

1. Whether respondent's loss of petitioners' 1981-82 amended returns for almost 11 years was a ministerial act. We hold that it was.

2. Whether respondent's refusal to abate interest that accrued from May 1987 to March 1998 on petitioners' tax liability for 1980 was an abuse of discretion. We hold that it was.

3. Whether respondent's refusal to abate interest that accrued other than during the time respondent lost petitioners' 1981-82 amended returns was an abuse of discretion. We hold that it was not.

Section references are to the Internal Revenue Code as amended. Rule references are to the Tax Court Rules of Practice and Procedure. References to petitioner are to Nicholas J. Palihnich.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

Petitioners are married and lived in Hopkinton, Massachusetts, when they filed the*301 petition in this case.

   1. Petitioners' White Rim Investment and Respondent's

   Disallowance of Petitioners' White Rim Deductions

Petitioners were limited partners in the White Rim Oil & Gas Partnership (White Rim) in 1980-83. Petitioners deducted losses from White Rim on their 1980-83 Federal income tax returns. On dates not stated in the record, respondent audited the returns of White Rim and its limited partners and examined petitioners' income tax returns for 1980-83.

On June 11, 1984, respondent sent a notice of deficiency to petitioners in which respondent determined a $ 39,599 deficiency for 1980 resulting from respondent's disallowance of a $ 79,198 loss related to White Rim. Petitioners timely filed a petition in this Court.

In 1986, petitioners received a notice of deficiency for 1981. In it, respondent determined a deficiency which resulted from the disallowance of petitioners' claimed losses for White Rim. Except for petitioners' White Rim deductions, respondent has never questioned any item on any of petitioners' tax returns.

2. Petitioners' Amended Returns for 1981-82

In 1986 and 1987, respondent issued notices of tax due and filed tax liens for*302 petitioners' 1981-82 tax liabilities. As a result, petitioners decided to fully pay their White Rim tax liabilities in 1987. To accomplish this, they planned to file amended returns for 1981 and 1982, to refinance their home to fully pay their 1982 tax liability, and to apply overpayments totaling about $ 33,000 from 1985-87 to their 1980-83 liabilities. Petitioners believed that, as a result of these actions, they would fully pay all tax liabilities asserted by respondent relating to their White Rim investment.

Early in 1987, petitioners told respondent's representatives that petitioners planned to file 1981-82 amended returns and that they thought that, as a result, they would owe no tax for those years. Samuel Coleman, a certified public accountant, prepared, and in May 1987 filed, petitioners' amended returns for 1981 and 1982 in which they carried back net operating losses (NOLs) from 1984 and 1985 to 1981 and 1982, resulting in zero tax due for 1981 and a $ 2,844 refund for 1982.

Respondent's Brookhaven Service Center lost petitioners' 1981-82 amended returns in 1987. Respondent did not process them until March 1998.

Sometime after they filed their amended returns, petitioners*303 wrote to respondent seeking information about their 1981 amended return. An employee in respondent's office in Holtsville, New York, wrote in reply that respondent would respond more fully in 90 days. Shortly thereafter, respondent informed petitioners that respondent had transferred the matter to respondent's office in Newark, New Jersey. On June 11, 1987, petitioners wrote to respondent at respondent's Holtsville, New York, office seeking information about their 1982 amended return. Respondent replied to petitioners on September 23, 1987, stating that respondent would respond more fully in 90 days. Respondent did not contact petitioners again about their 1981-82 amended returns until early 1998.

3. Petitioners' Payment of Tax

In 1986-90 and 1992, respondent applied substantial overpayments and credits from 1980, 1982, and 1985-87 to petitioners' tax liability for 1981. Respondent also applied the $ 14,193 in withholding credits that petitioners had reported on their 1981 return to their 1981 tax liability.

In October 1987, petitioners paid their nearly $ 76,000 tax liability for 1982. They expected that, because they had claimed NOLs on their 1981-82 amended returns and made full*304 payment for 1982, respondent would apply overpayments and withholding credits of about $ 33,000 from 1985-87 to 1980 rather than to 1981 or 1982. Petitioners believed that, after the filing of their 1981-82 amended returns, the paying of the $ 76,000 liability for 1982, and the application of overpayments to 1980, they would have fully paid all tax liabilities asserted by respondent relating to their White Rim investment.

Respondent sent to petitioners notices of tax lien for 1981 on April 8, 1988, and June 19, 1991, a final notice of intent to levy for 1981 on June 22, 1992, and a certificate of release of Federal tax lien for 1981 on August 27, 1992.

Respondent did not contact petitioners further about their 1980-83 tax years until 1997. From 1987 to 1997, petitioners continued reasonably to believe that they had paid all taxes respondent had asserted they owed relating to their 1980-83 tax liabilities arising from White Rim. The parties settled petitioners' 1980 Tax Court case on December 8, 1997. At that time, petitioners still believed that they had fully paid the 1980 deficiency and interest thereon.

4. Respondent's Discovery of Petitioner's Amended Returns

On February 23, 1998, petitioners*305 wrote to respondent seeking information about their 1981-82 amended returns. As a result of petitioners' letter, respondent realized that respondent had lost petitioners' 1981-82 amended returns. Respondent found and processed petitioners' 1981-82 amended returns in March 1998.

On April 27, 1998, we entered a decision in petitioners' 1980 case that petitioners had a deficiency in income tax of $ 39,599 for 1980. On August 21, 1998, respondent issued to petitioners a notice of tax due for 1980 showing an assessment of additional tax of $ 39,599, interest of $ 93,172.57, an adjustment or credit of $ 74,537.94, and a balance due of $ 58,233.63.

Respondent abated interest from May 1987 to March 1998 with respect to petitioners' 1981 and 1982 tax years. In April 1999, petitioners filed a claim under section 6404(e) in which they asked respondent to abate $ 16,512.15 of interest for 1980 and $ 210.98 for 1981 because respondent had lost their 1981-82 amended returns for almost 11 years. On April 13, 2000, respondent issued a final determination denying petitioners' interest abatement claim.

              *306   OPINION

The Commissioner may abate interest assessed on any deficiency or payment of tax to the extent that any error or delay in payment of the tax is attributable to erroneous or dilatory performance of a ministerial act by an officer or employee of the Commissioner, and the taxpayer caused no significant aspect of the delay. Sec. 6404(e)(1). ² We apply an abuse of discretion standard in reviewing the Commissioner's determination not to abate interest. Lee v. Commissioner, 113 T.C. 145, 149 (1999); Krugman v. Commissioner, 112 T.C. 230, 239 (1999).

Respondent contends that: (1) Respondent's loss of petitioners' 1981-82 amended returns for almost 11 years was not a ministerial act; (2) petitioners' delay in paying their 1980 tax was not attributable to respondent's loss of their amended 1981-82 returns; (3) petitioners' delay in paying their 1980 tax was attributable to petitioners' decision to wait for the processing of their 1981-82 amended returns; and (4) respondent's refusal to abate $ 210.98 in interest for 1981 was not an abuse of discretion because that interest did not accrue during the time respondent lost petitioners' 1981-82 amended returns.

Respondent contends that respondent's loss of petitioners' 1981-82 amended returns was not a ministerial act. We disagree.

Respondent's loss of petitioners' 1981-82 amended returns fits easily within the definition of a ministerial act contained in Treasury regulations. Those regulations state that a ministerial act is a procedural or mechanical act that occurs during the processing of a taxpayer's case that does not involve the exercise of judgment or discretion*308 by the Commissioner. Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987). The Commissioner's loss of a taxpayer's return is a procedural or mechanical act that does not involve the exercise of discretion or judgment by the Commissioner. The Commissioner's loss of a taxpayer's returns is similar to an unexplained delay in transferring a file or issuing a notice of deficiency. See, e.g., sec. 301.6404-2T(b), Examples (1) and (2), Temporary Proced. & Admin. Regs., supra.

In contrast, the loss of a taxpayer's return is unlike a decision about prioritizing cases or decisions (based on workload and limited resources) whether or when to begin an audit or whether to send a revenue agent to training without reassigning that agent's cases, all of which are purposeful activities by the Commissioner. See, e.g., sec. 301.6404-2T(b)(2), Examples (3), (4), and (5), Temporary Proced. & Admin. Regs., supra. Respondent has identified no purpose served by losing a taxpayer's returns, and we know of none.

In 1996, Congress amended section 6404(e) to provide for abatement of interest that accrues as a result of an unreasonable error or delay in performing*309 a ministerial or managerial act. Sec. 6404(e)(1)(A) and (B); Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301(a), 110 Stat. 1457 (1996). Respondent points out that a regulation promulgated after enactment of that 1996 amendment, section 301.6404-2(b)(1), Proced. & Admin. Regs., provides: "Managerial act means an administrative act that occurs during the processing of a taxpayer's case involving the temporary or permanent loss of records". Respondent also points out that section 301.6404-2(c), Example (6),Proced. & Admin. Regs. (Example (6)), provides as follows:

     Example 6. A revenue agent has completed an

   examination of the income tax return of a taxpayer. There are

   issues that are not agreed upon between the taxpayer and the

   IRS. Before the notice of deficiency is prepared and reviewed, a

   clerical employee misplaces the taxpayer's case file. The act of

   misplacing the case file is a managerial act. The Commissioner

   may (in the Commissioner's discretion) abate interest

   attributable to any unreasonable delay resulting from the file

   being misplaced.

Respondent contends that Example (6) supports a*310 holding here that the loss of a taxpayer's records is a managerial act. We disagree. First, we believe that the loss of a taxpayer's return is a ministerial act under the applicable version of section 6404(e)(1). See supra note 2. The loss of a taxpayer's records or returns does not require the exercise of judgment or discretion. Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., supra . Second, as respondent acknowledges, Example (6) applies only to interest accruing with respect to deficiencies for tax years beginning after July 30, 1996. We conclude that respondent's loss of petitioners' 1981-82 amended returns was a ministerial act for purposes of section 6404(e).

D. Whether Petitioners' Delay in Paying Their Tax for 1980 Is Attributable to Respondent's Loss of Petitioners' 1981-82 Amended Returns

Respondent contends that petitioners' delay in paying their 1980 tax from May 1987 to March 1998 is not attributable to respondent's loss of petitioners' 1981-82 amended returns. We disagree.

The term "attributable to" means due to, caused by, or generated by. Lawinger v. Commissioner, 103 T.C. 428, 435 (1994). The record shows that petitioners' delay in paying the*311 1980 tax is attributable to respondent's loss of their 1981-82 amended returns. The NOLs claimed on petitioners' 1981-82 amended returns plus their $ 76,000 payment for 1982 eliminated their liabilities for 1981 and 1982. If those returns had been timely processed in 1987, $ 33,000 in overpayments from 1985-87 and a $ 2,844 refund for 1982 (and any interest that accrued on the overpayments and refund) would have been available to pay petitioners' 1980 tax liability.

Petitioners decided to fully pay their White Rim tax liabilities in 1987. In 1987, petitioners reasonably believed that, after they filed their amended returns and respondent applied overpayments to their 1980 year, they had paid amounts substantially equal to the total tax liabilities arising from their investment in White Rim for 1980-83, including the $ 39,599 deficiency respondent had determined for 1980. Petitioners' belief on this point was reasonable as shown by the fact that, in August 1998, after respondent processed the amended returns, respondent applied a $ 74,537 credit to petitioners' 1980 tax year. The pendency until 1998 of petitioners' 1980 Tax Court case has no bearing on the interest abatement issue*312 here because petitioners reasonably believed that they had already paid the tax they owed for 1980.

We conclude that respondent's loss of petitioners' 1981-82 amended returns from 1987 to 1998 caused them to delay paying their 1980 tax until 1998.

The situation in this case is analogous to that in Douponce v. Commissioner, T.C. Memo. 1999-398, where the Court held that the Commissioner's failure to provide a taxpayer with a correct payoff amount was a ministerial error that warranted the abatement of interest. A ministerial error by respondent caused both the taxpayer in Douponce and petitioners to delay paying their tax.

Respondent contends that Douponce is distinguishable from this case because there is no evidence that petitioners were misled by incorrect information from respondent concerning the correct amount of tax due for 1980. We disagree. As in Douponce, "the only reason for the delay" in petitioners' payment of tax was respondent's ministerial error; i.e., the loss of petitioners' amended returns for 11 years.

Respondent contends that this situation is analogous to that in Wish v. Commissioner, T.C. Memo. 2001-57. We disagree. In Wish, the taxpayers*313 knew they owed tax for 1981 but resisted collection efforts, anticipating that they would use a refund for 1985 to pay their 1981 tax. We held in Wish that the Commissioner's refusal to abate interest that accrued for 1981 while the taxpayers were awaiting their refund for 1985 was not an abuse of discretion because the delay in processing the refund did not cause the taxpayers to delay paying their 1981 tax. We said that the taxpayer in Wish "chose to await the determination of the refund claim for 1985, while all along requesting holds on collection." Here, unlike the taxpayers in Wish, petitioners reasonably believed they had taken steps sufficient to pay their 1980 tax; and here, unlike the delay in Wish, it was respondent's ministerial error that caused the delay.

We conclude that petitioners' delay in paying their 1980 tax from May 1987 to March 1998 was attributable to respondent's loss of their amended 1981-82 returns.

Respondent contends that petitioners significantly contributed to the delay. We disagree.

Petitioners had no role in losing their 1981-82 amended returns for 11 years and deserve credit for bringing*314 to respondent's attention the fact that respondent had lost those returns. Petitioners reasonably believed that they had paid their 1980 tax and did not significantly contribute to the delay. Petitioner credibly testified that petitioners would have paid the 1980 tax liability earlier had they known that they still owed tax for that year. As discussed above, the only reason for the delay in petitioners' payment of their tax for 1980 was respondent's loss of petitioners' amended returns for 11 years. Thus, respondent's refusal to abate interest that accrued from May 1987 to March 1998 on petitioners' tax liability for 1980 was an abuse of discretion.

F. Whether Respondent's Refusal To Abate Interest That Accrued Other Than From May 1987 to March 1998 Was an Abuse of Discretion

Petitioners contend that respondent's failure to abate an additional $ 210.98 for 1981 was an abuse of discretion. Petitioners have not stated the period during which the $ 210.98 in interest accrued. Petitioners agree that respondent has abated interest for 1981 from May 1987 to March 1998. The taxpayer must establish a correlation between the alleged error or delay by the Commissioner and a specific period*315 for which interest should be abated as a result of that error or delay. Donovan v. Commissioner, T.C. Memo. 2000-220. Thus, the $ 210.98 in interest for 1981 does not relate to respondent's loss of petitioners' 1981-82 amended returns. ³

We conclude that respondent's failure to abate $ 210.98 in interest for 1981 was not an abuse of discretion.

To reflect the foregoing,

Decision will be entered under Rule 155.