1 Redesignated sec. 6404(i) by the Internal Revenue Service

(continued...)

 T.C. Memo. 1999-419

UNITED STATES TAX COURT

DAVID AND BARBARA KINCAID, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21682-97. Filed December 27, 1999.

David Kincaid and Barbara Kincaid, pro se.

Doreen M. Susi and David W. Otto, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent issued a final determination

disallowing petitioners' claim for abatement of interest relating

to petitioners' 1979 and 1982 tax years. Petitioners timely

filed a petition under section 6404(g)1 and Rule 280.
- 2 -

1(...continued)

Restructuring and Reform Act of 1998, Pub. L. 105-206, secs.

3305(a), 3309(a), 112 Stat. 685, 743, 745.

2 Petitioners do not request abatement of interest that

accrued before Jan. 1, 1988.

The issues for decision are:

1. Whether respondent’s denial of petitioners' claim for

abatement of interest that accrued after 19872 for petitioners'

1979 and 1982 tax years was an abuse of discretion. We hold that

it was not except as noted herein.

2. Whether we have jurisdiction to review respondent's

failure to abate additional interest for tax-motivated

transactions imposed by section 6621(c) as in effect for the

years in issue. We hold that we do not.

Unless otherwise indicated, section references are to the

Internal Revenue Code. Rule references are to the Tax Court

Rules of Practice and Procedure. References to petitioner are to

David Kincaid.

FINDINGS OF FACT

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

Petitioners lived in Yuma, Arizona, when they filed the

petition to abate interest.

A. Petitioners’ Investment in Signature Associates

In the early 1980's, petitioners invested in Signature

Associates (Signature), a limited partnership, which invested in
- 3 -

Encoder Associates (Encoder), a limited partnership. Encoder was

part of a national group of about 83 energy management systems

limited partnerships (EMS). Respondent audited the EMS

partnerships from 1979 to 1985. Encoder and some of the other

EMS partnerships were subject to the unified partnership audit

and litigation provisions of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, sec. 402(a),

96 Stat. 324, 648.

EMS taxpayers filed about 1,200 petitions in the Tax Court. 

In 1987, an EMS shelter group was formed, and the participants

agreed to have trials in and to be bound by the results of two

EMS test cases.

On October 14, 1987, attorneys from both sides met to plan

an Appeals conference for all Encoder limited partners. The

Appeals conference for all Encoder limited partners was held on

November 10, 1987.

Around 1989, respondent had settlement negotiations with

Encoder. Some of Encoder's limited partners settled, but

Signature did not. On June 4, 1990, respondent sent a final

partnership administrative adjustment (FPAA) to Signature telling

Signature about adjustments to Encoder's 1982 return.

The test cases were tried in May 1991. Decisions in the

test cases became final on September 2, 1993. Decision documents
- 4 -

based on the outcome of the test cases were filed on March 14,

1994. 

The Encoder decision became final on June 12, 1994. 

Respondent denied petitioners’ claim for their proportionate

share of credits on their 1982 return and for a carryback of

unused credit to their 1979 return. On May 29, 1995, respondent

assessed tax against petitioners of $3,211 for 1979, and $9,400

for 1982, relating to petitioners' indirect investment in Encoder

through Signature. 

B. Respondent's Notices of Deficiency for 1979 and 1982 and

Later Events

Respondent mailed affected items notices of deficiency to

petitioners for 1979 on May 30, 1995, and for 1982 on June 5,

1995. In them, respondent determined that petitioners were

liable for the addition to tax for overvaluation under section

6659 relating to their share of the Signature/Encoder disallowed

credits in 1979 and 1982. Petitioners filed a petition with this

Court on August 28, 1995, disputing the determinations (docket

No. 16805-95). Respondent filed an answer on October 30, 1995. 

On January 31, 1996, Patrick Wilcox (Wilcox), respondent's

Appeals officer, sent a letter to petitioners stating that it was

important to meet as soon as possible. On February 2, 1996,

petitioners' daughter telephoned Wilcox to arrange a conference. 

On February 3, 1996, petitioners wrote a letter to Wilcox stating

that they were ready to meet.
- 5 -

On March 19, 1996, petitioners' daughter wrote to Loren

Peterson (Peterson), respondent’s Appeals officer, to ask how

much respondent claimed petitioners owed for 1979 and 1982

including taxes, interest, and penalties.

On March 23, 1996, petitioners filed with the Ogden Service

Center a request to abate interest (Form 843) that had accrued on

their tax liabilities for 1979 and 1982. On May 3, 1996, the

Ogden Service Center notified petitioners that their request for

abatement was being sent to Andover, Massachusetts, for

processing. On June 19, 1996, petitioners received a telephone

call from Larry Landon (Landon) of the Andover Service Center. 

Landon said that their request for abatement would be handled by

respondent's Phoenix Appeals office. 

On June 20, 1996, petitioners’ daughter wrote Peterson to

ask whether petitioners' request for abatement should be handled

by his office. She asked Peterson for copies of all documents

relating to petitioners' 1979 and 1982 taxes, especially

pertaining to Signature and Encoder. On July 12, 1996,

petitioner met with Peterson.

On November 22, 1996, petitioners signed a second request

for abatement of interest (Form 843) for their 1979 and 1982

years.

A notice of trial on December 9, 1996, was served on

September 18, 1996. On December 9, 1996, the parties reported
- 6 -

that the case had settled. On March 26, 1997, the Court entered

a stipulated decision in docket No. 16805-95. In it, the parties

agreed that petitioners were liable for additions to tax under

section 6659 of $401 for 1979 and $1,175 for 1982. Petitioners

paid the assessments of those additions to tax and the taxes

assessed as computational adjustments but did not pay the

interest because they believe the process had been unfair. 

On July 25, 1997, respondent issued a final determination

denying petitioners’ interest abatement claim.

OPINION

A. Abatement of Interest

1. The Commissioner's Authority To Abate Interest

Under section 6404(e)(1), the Commissioner may abate part or

all of an assessment of interest on any deficiency or payment of

tax if (a) either (1) the deficiency was attributable to an error

or delay by a Service official in performing a ministerial act,

or (2) an error or delay by the taxpayer in paying his or her tax

is attributable to a Service official being erroneous or dilatory

in performing a ministerial act; and (b) the taxpayer caused no

significant aspect of the delay. Interest is abatable only after

the Commissioner has contacted the taxpayer in writing about the

deficiency or payment in question. See sec. 6404(e) (flush

language). We apply an abuse of discretion standard in reviewing
- 7 - 7

3 Petitioners concede that they are liable for interest

that accrued from Apr. 15, 1980 (for 1979), and Apr. 15, 1983

(for 1982), to Dec. 31, 1987.

the Commissioner’s failure to abate interest. See Woodral v.

Commissioner, 112 T.C. 19, 23 (1999).

2. Ministerial or Managerial Act

Petitioners contend that we must abate interest which

accrued as a result of an error or delay by an IRS officer or

employee in performing a managerial act as well as a ministerial

act. We disagree. 

Congress amended section 6404(e) in 1996 to permit abatement

of interest for unreasonable error and delay in performing a

ministerial or managerial act. Taxpayer Bill of Rights 2 (TBOR

2), Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1452, 1457

(1996). However, that standard first applies to tax years

beginning after July 30, 1996. TBOR 2, sec. 301(c), 110 Stat.

1457. Thus, it does not apply here. See Krugman v.

Commissioner, 112 T.C. 230, 239 (1999); Woodral v. Commissioner,

supra at 25 n.8.

Petitioners contend that respondent committed an abuse of

discretion by failing to abate interest relating to their 1979

and 1982 tax years after December 31, 1987.3

a. January 1, 1988, to September 30, 1995

Petitioners contend that respondent should have informed

them before May 30, 1995, and June 5, 1995, that they might be
- 8 - 8

liable for income tax deficiencies for 1982 and 1979,

respectively. Petitioners contend that the period from 1979, the

earlier year in issue, to 1995, when respondent issued the

notices of deficiency, was simply too long. As to the FPAA sent

on June 4, 1990, petitioners also contend that respondent’s

employees had a ministerial duty to send an FPAA in the Encoder

case to Signature, and that respondent cannot prove that

respondent mailed it to the correct address. 

We disagree because petitioners’ arguments relate to the

time before May 30, 1995. The Commissioner may not abate

interest that accrues before the Commissioner first contacts the

taxpayer in writing with respect to the deficiency or payment of

tax. Sec. 6404(e) (flush language); Krugman v. Commissioner,

supra at 239. Respondent first contacted petitioners in writing

about the additions to tax for 1979 and 1982 in the notices of

deficiency for those years, sent on May 30 and June 5, 1995. 

Thus, respondent’s refusal to abate interest before those dates

was not an abuse of discretion. See sec. 6404(e) (flush

language); Krugman v. Commissioner, supra.

In addition, based on the detailed testimony of respondent’s

lead project attorney for the EMS litigation, we find that none

of the delays before September 30, 1995, resulted from errors by

respondent's employees in performing a ministerial act.
- 9 - 9

Petitioners also contend that they would have agreed to a

settlement in the Encoder partnership case in 1987 and 1988 if

they had been offered one on similar terms to those involving

other limited partnerships in which they were direct or indirect

partners. Petitioners contend that treating them differently

from other taxpayers in their situation was a ministerial error

which requires respondent to abate assessment of accrued interest

from January 1, 1988, to the present. We disagree based on the

testimony of respondent’s lead project attorney for the EMS

litigation.

b. October 1, 1995 to Date

Petitioners contend that respondent's employees gave them

incorrect information and did not respond to them, causing

significant delays in resolving this matter. Petitioner

testified that, around October 1995, respondent's District

Counsel told them that interest would be tolled until the appeal

was decided. Petitioner testified that respondent's Appeals

officer told petitioners' daughter on March 12, 1996, that

interest had not accrued since October. Respondent offered no

evidence to counter petitioner's testimony. We conclude that the

statements by respondent's employees caused petitioners to delay

the payment of interest starting October 1, 1995, and refusal to

abate interest accruing thereafter was an abuse of discretion. 

See Douponce v. Commissioner, T.C. Memo. 1999-398.
- 10 - 10

B. Tax-Motivated Interest Rate and TEFRA Constitutional Issues

Petitioners contend that they should not be liable for

additional interest under section 6621(c), the 120 percent taxmotivated interest rate, because it is a penalty. Petitioners

also contend that the TEFRA procedures are unconstitutional

because they do not provide due process, and that the Code

sections which provide for 120 percent tax-motivated interest are

unconstitutional ex post facto laws because Congress enacted them

after petitioners incurred their tax liabilities in 1979 and

1982. 

We lack jurisdiction under section 6404(g) to decide whether

petitioners are liable for additional interest under section

6621(c), or to decide issues relating to the constitutionality of

the TEFRA procedures, for the same reasons that we lack

jurisdiction under section 6404(g) to decide whether a taxpayer

is liable for additions to tax. See Krugman v. Commissioner, 112

T.C. at 237.

To reflect the foregoing,

Decision will be entered

under Rule 155.