TAX COURT OPINION

Case: David H. Baral
Docket Number: 546-08
Judge: Gustafson
Opinion Type: memo
Filed: 05/26/2009
Pages: 14

T .C . Memo . 2009- 11 3 UNITED STATES TAX COURT DAVID H . BARAL, Petit COMMISSIONER OF INTERNAL REV I Loner V . NUE, Responden t Docket No . 546-08 . Filed May 26, 2009 . _P timely filed his 2001 Feder 1 income tax return f $3,303 . After a s return, R ated liability . reported income , $1,076 and issued a reporting an income tax liability .correction of a patent error on P' determined P's tax liability to be refund to P based on that recalcul Subsequently, R discovered P had u .wholly unrelated to the prior adju resulted in a deficiency . Rdeter using the correct tax liability le liability P had already paid and a deficiency with interest . Pursuan 6404, P sought,an abatement of int because P initially reported an income tax liability of ,.$3,303, R .should have taken that into consideration and should have charged interest only on the amount of the deficiency that exceeded the $3,313 that P ha d originally reported . R denied P's abatement request . P petitioned this Court for a review of R's denial of abatement of interest . stment, whic h 7 ined P's deficiency ss the $1 ;076 of ssessed th e t to I .R .C . sec . erest, arguing tha t ,ERV MAY 2 6 2009 Held : R did not abuse his .discretion in denying P's abatement of interest request and requiring P to pay interest on his entire deficiency . Thus, P is not entitled to relief under I .R .C . 'sec . 6404 . David H .. Baral, pro se . Andrew M . Stroot , for respondent, . MEMORANDUM FINDINGS OF FACT AND OPINIO N GUSTAFSON, Judge : This case is before the Court 'on petitioner David H . Baral's petition'for review of the Internal Revenue Service's (IRS) failure to abate interest under section 6404 .'1 II The issue for decision is whether the IRS's denial of Mr : -B~a al' .s request to abate interest' with respect to his income tax deficiency for 2001 . was an abuse(cid:127)of discretion . We hold that it was ;j not . FINDINGS OF FAC T Some of the facts have been stipulated and are~so found . .The stipulation of facts filed November 5, 2008, and the ; attache d exhibits are incorporated herein by this reference . At the time Mr . Baral filed-his petition, he resided in Washington, D .C . lUnless otherwise indicated, allcitations of sections refer to the',Internal Revenue Code of 1986(26 U .S .C .), as amended, and all citations of Rules refer to the Tax Court Rules of Practice and Procedure . J" Mr . Baral timely filed his Form 100, U .S . Individual Income . Tax Return, for tax year 2001 . On that return'Mr . Baral incorrectly computed the'taxable portion of his Social Security benefits, reported too large an amount n line 20b of his .return,, and consequently reported a higher inco e tax liability than'he was liable for with respect to those benefits . Mr . Baral reported that his income tax liability f'or 2001 was $3,303 . Because of this patent defect on the face of Mr . Baral' .s 2001 return, the IRS reduced Mr . Baral's income tax liability to $1,075 .96 to reflect the proper taxable portion of his Social Security benefits . On May 20, 2002, the IRS sent Mr . Baral a letter explaining the changes it had made to his return and indicating that since Mr . Baral had made $7,038 in total payments to the IRS--through withholdings, esti~ated payments and/o r amounts applied from his 2000 return--Yi e would be due a large r refund than he originally reported on his 2001 return . 2 On May 20, 2002, the IRS refunded to Mr . Baral a n overpayment of income tax of $5,962 .04! This was $2,227 .04 more than Mr . Baral was expecting, but Mr . ~aral did not contact the IRS regarding the higher refund amount . 2Mr . Baral originally reported that he overpaid his 2001 taxes by $3,735, i .e ., his $7,038 paym nts less his $3,303 income tax liability . . However, When the IRS educed Mr . Baral's income tax liability . to $1,075 .96, that increased Mr . Baral's overpayment of income tax to $5,962 .04 i .e ., payments of $7,038 less the adjusted income tax liability of $1,075 .96 . A - 4 - Almost 2 years later, on March 1, 2004, the IRS discovered that Mr . Baral had failed to report $9,552 of pension/annuit y incomej''~on his 2001 return . The IRS issued to Mr . Baral,a Notice CP2000, proposing changes to his 200f return to reflect th e previously unreported pension/annuity, income . This . unreported income which was wholly unrelated toIthe prior adjustment, resulted in additional tax due from Mr . Baral . As a'result, on July 26, 2004, the IRS issued to Mr . Baral .a statutory notice o f deficiency, in which it determined .an~income tax deficiency o $2,640!3 Mr . Baral timely petitionedthis Court for a Ill redetermination of that deficiency atdocket .No . 20136-04S . . On November 2, 2005, astipulated decision was entered in docketiNo . 20136-04S, in which Mr . Baral agreed to the ful l incomel,tax deficiency that had been determined in the notice of deficiency--i .e ., $2,640 . On the decision document that ; Mr . Basal signed, the parties stipulated, inter alia- It is further stipulated that interest wil l be assessed as provided by law on the deficienc y due from petitioner . Mr . Basal paid that deficiency in full on or about March 13, 2006 . ,,On June 26, 2006, the IRS assessed the interest of $598 .2 7 3Mr . Baral's total income tax liability for 2001--taking into consideration the proper taxable .;; portion of his Social Security benefits and the unreported income--was $3,716 . The IRS retained only $1,075 .96 of Mr . Baral's tax payments after processing his prior refund, so the resulting deficiency :;was $2,64011ti .e ., $3,716 minus $1,076 . . due on that deficiency . Mr . Baral paid the interest in full on or about July 14, 2006 . On December 11, 2006, Mr . Baral submitted a Form 8 .43, Claim for Refund and Request for Abatement, 4 eking an abatement of a portion of the interest that was assessed and paid with respect to the 2001 deficiency . Mr . Baral's contention was that the, IRS's unsolicited adjustment to the taxable portion of his Social Security benefit resulted in more money being refunded to him in May 2002 than he had requested on his return . Consequently, his . 2001 deficiency was higher than it would .have been if that adjustment had never been made . Mr . Baral argues that had the IR S not made the initial adjustment to his return, his deficiency would have only been $413, i .e ., the correct tax liability of ,$3,716 less the $3,303 amount Mr . Baral had initially reported a s his income tax liability . So Mr . Bara contends that the IRS, instead of charging interest on a deficiency of $2,640, should have charged interest on a deficiency of only $413 . By letter dated July 9, 2007, which served as th IRS's fina l determination, the IRS denied Mr . Bara 's request for abatement of interest. In support of this denia , the IRS stated : . (cid:127) There was no unreasonable er to the performance of . a mini act in processing the examin or or delay relating_ terial or managerial tion of your return . (cid:127) The excess refund you received was the result of the Service Center correctio of an error you made on your 2001 return . You re2eived a correction notice which granted an opportunity for your [sic] 4. - 6 - to confirm or dispute the correction made . You did,not return the excess refund until after you had been examined and your case processed throu hg the Tax Courts . On January 7, 2008,9 Mr . Baral timely filed a petition fo r this Court's review of the IRS's failure to abate interest under iP section 6404, disputing the IRS's determination not to abate an d II refund 'him a . portion of the interest he paid on his 200 1 deficiency . Mr . Baral's petition repeated the same argument h e made on his Form 843, i .e ., that because he initially reported an 'I . income tax liability of $3,303, the IRS should have taken tha t into consideration and should have charged interest only on a deficiency amount equal to the correct tax liability less the $3,3031,he had originally reported . OPINION The Commissioner Has Authority To Abate Interest, and the Tax Court Has Authority To Review"that Determination . Under section 6404(e)(1), the IRS may abate part or all o f an assessment of interest on any . deficiency or payment . of tax i f (a) either (1) the deficiency was attributable to an unreasonable 1 e rror or delay by an IRS official in performing a ministerial o r if 9The last day on which Mr . Baral had to file a petition with the Tax Court was January 5, 2008 . However, because January 5, 2008, fell on a Saturday, Mr . Baral had until the next business day, i .e ., Monday, January 7, 2008, to timely file his petition . See Rule 25(a) (2) (B) . L . I 1I managerial act,5 or (2) an error or delay by the taxpayer i n paying his or her taxis attributable t an IRS official's bein g erroneous or dilatory in performing a ministerial or manageria l act ; and (b) the taxpayer caused no significant aspect of . :the delay . Interest can be abated only after the Commissioner has contacted the taxpayer in writing about the deficiency or paymen t in question . See sec . 6404(e) (flush language) ; Krugman v . . Commissioner , 112 T .C . 230 (1999) . If the IRS denies the . abatement request, the taxpayer may petition the Tax Court for a review of hat determination . Sec . 6404(h)(1) ; see Hinck v . United States, .550 U .S . 501, 506 (2007) (holding that .the Tax Court provides the exclusive forum for judicial review of the IRS's refusal to abate interest) . Since the IRS's authority to abate interest is . discretionary and not mandatory, the Tax Court may order the abatement of interest only if it finds that the IRS abused its discretion by failing-to abate the interest ., Sec . 6404(h)(1) ; ec . 301 .6404-2(a)(1) , 5A "ministerial act" is defined as a "procedural or mechanical act that does not involve the exercise of judgment of discretion, and that occurs during the processing of a taxpayer's case after all prerequisites to the act * * * have taken place ." Sec . 301 .6404-2(b)(2), Proced . & Admin . Regs . A "managerial act" is defined as "an administrative act t at occurs during the processing of a taxpayer's case involv' .ng the temporary or permanent loss of records or the exercise of judgment or discretion related to management of personnel ." Sec . 301 .6404-2(b)(1), Proced . & Admin . Regs . . Under these definitions, a decision concerning the proper applica ion of Federal tax law is neither a managerial nor a . ministerial act . II - 8 - Proced .' & Admin . Regs . (2.6 C .F .R .) In order to prevail, a taxpayer must prove thatthe IRS exercised its discretio n arbitrarily, capriciously, or without' sound basis in fact or law . See Woodral v . Commissioner , 112 T .C .il19, 23 (1999) . ft Mr . Baral's case, we have jurisdiction to determin e whether-the IRS's failure to abate interest under section 6404(e) (1) was an abuse of discretion.;because (i) Mr . Baral file d J a claim with the IRS under section 6404(e) seeking an abatement of interest (ii) the IRS issued a final determination which disallowed Mr . Baral's claim to abate, interest, and (iii ) Mr . Baral timely filed a petition to 'review the failure to abate interest . See sec . 6404(h) . lil9i II . The .IRS's Refusal To Abate a Portion of Mr . Baral's ' Interest With Respect to The 200-1 Deficiency Was Not an 'Abuse of Discretion . For a taxpayer to be-eligible for an abatement of interest ilk on a deficiency, the Code requires . that the accrual of interest result ;l;from an unreasonable error or delay due to a managerial or ministerial act . Sec . 6404(e)(1) . Mr . Baral has neither allege d nor shown that there was .any managerial or ministerial act durin g the processing of his case that resulted in the accrual o f a'llowed'to charge deficiency interest only on a $413 deficiency , as opposed to a $2,640 deficiency . Mr Baral's position is not unsympathetic : He initialry .reported .'$3,303 as his income ta x i'V II liability . He was willing to pay and did pay that amount as .hi s tax liability . But for the IRS's redu c :ion of his income ta x liability--which Mr . Baral never reques ed--the IRS would hav e retained $3,303 of his tax payments . Therefore (he reasons), i f the IRS later determined that Mr . Baral was deficient in hi s income tax payments, then .most of that deficiency was attributable not to Mr . Baral's underreporting but to the-IRS's unsolicited' refund . Unfortunately, there are several flaws in Mr . Baral's position . First, the reduction that the IRS made in Mr . Baral's income tax liability for 2001 .was entirely proper, since it was due to a patent error on the return . r . Baral reported his Social Security income as $16,548 and reported the taxable portion thereof as $14,070 . The IRS, pon an inspection of the numbers on Mr . Baral's return, recogni ed this as an error and corrected it . Mr . Baral makes no arguent that the IRS' s correction of the taxable portion of h :s Social Security benefits- was incorrect ; he complains only that the IRS made the correction of its own accord . When the IRS accurately spots an error on a return and fixes it to give the taxpayer a larger refund, the IRS, can hardly be criticized . Second, irrespective of the adjus ment to the'taxable portion of the Social Security benefits, Mr .-Baral had income-- wholly unrelated . to the IRS's prior adjustment--that he failed to - 10 - report-;and that was missing from his :2001 . return because of his own error . This discrepancy did not'come to light until, after the IRS had made the initial correction to Mr . Baral'.s return and had issued him a refund based on that', corrected information . M Ba Cal makes no argument that the failure to report hi s .p,ension/annuity income was due to anything other than his own Third, Mr . Baral desires for statutory interest to b e assessed on an amount--$413--that was not the amount determined to be his deficiency . In Mr . Baral's .deficiency suit at docket o . 20136-04S, the Court entered a stipulated decision tha t Mr . Baral had an income tax deficiencyj .of $2,640 . Mr . Baral stipulated the truism that the deficiency would bear interest "as provided by law" . The relevant law here is section 6601(a) , which'.,provides that statutory interest shall be charged on the amount of the deficiency,=until the deficiency is paid in full . By entering into a stipulated decision,in docket No . 20136-04S , Mr . Basal agreed that his deficiency for 2001 was $2,640 . Section+6601(a) mandates that interest be charged on that amount , i',!.e , I~,the deficiency amount . To some extent Mr . Baral's argument that the deficiency interest should be charged only on a deficiency of $413 is a n attempt to repudiate the deficiency amount already determined to be $2,;6'40 . That $413 .amount however,!~is a fictitious - 11 - "deficiency" that never existed, and it is the higher amount of $2,640 that was Mr . Baral's actual defil iency, as defined in the statute . Section 6211(a) defines a def . ciency as follows : SEC . 6211(a) . In General .--F in the case of income, estate, and subtitles . A and B and excise taxes 42, 43, and 44 the term "deficienc which the tax imposed by subtitle 43, or 44 exceeds the excess of-- r purposes of this title gift taxes imposed by imposed by chapters 41 , means the amount b y or B, or chapter 41,'42 , (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plu s (B) the amounts previously assessed (or collected without assess ent) as a deficiency , over-- (2) the amount of rebates, as defined i n subsection (b) (2) , made . (61 Mr . Baral's deficiency .for 2001 was determined as "the amount by which the tax imposed by subtitle A or B" .(i .e ., $3,716) exceeds the sum of "the amount shown as the to by the taxpayer upon hi s 6The Internal Revenue Code recognizes two types of refunds : Acme Steele Co . v . Commissioner , T .C . rebate and nonrebate . Memo . 2003-118 (citing O'Bryant v . Unired States , 49 F .3d 340 , 342 (7th Cir . 1995)) . A rebate refund a substantive recalculation of a .taxpa amount of tax, due is less than the tax Mr . Baral initially reported his tax 1 IRS substantively recalculated his lia . on the return and determined his tax 1 This recalculation of Mr . Baral's inco : in an increased refund to Mr . Baral of this $2,227 was a rebate refund . . See Steele Co . v . Commissioner , su ra . is issued on the basis o f errs liability, e .g ., the shown on the return . ability to be $3,303 . The ility because of an erro r Lability to be $1,076 . e tax liability resulted $2,227 . By definition , sec . 6211 (b) . (2) ; Acme 11 - 1 2 return" (i .e ., $3,303) over "the amount of rebates * * * made" (i .e .,,j,i$2,227) . Therefore, Mr . Baral's properly compute d 1 deficiency in his deficiency suit at docket No . 20136-04S was, a s it,should have been, $2,640 . Since the IRS properly assessed statutory interest o n Mr, . Baral's deficiency calculated according to the statute, and s'ince , Mr . .Baral has neither alleged nor shown that there was an y .unreasonable error or . delay in performance of a managerial or ministerial act during the processing of his case that resulted in the accrual of interest , we cannot ,; find that the IRS abused its discretion in denying Mr . Baral's request for abatement under section 6404(e .)(1 ) I If Mr . Baral ' s abatement request had been treated as a request for abatement of "the assessment of * * * interest on [an] erroneous refund" under section 6404 ( e)(2) (i .e ., treating the interest at issue as attributable ± to the May 2002 erroneous refund ); instead of as a request for abatement of the assessmen t interest on a deficiency under section 6404(e)(1), the n interest might not have started running against Mr . Baral unti l i slbmetime in 2004, and a portion of the interest might be abated on that ground . The Court therefore invited the parties t o consider the possible' applicability of section 6404(e)(2) . However, as respondent correctly argued, it is section 64'04(e)(1) I that ,"by its terms , addresses abatement of interest when, as 11, 11 ;1Bi d~~ 13 - here, the interest has been assessed on account of a deficiency . Section 6404(e)(2) deal's with abatement of interest when the IRS prevails in an erroneous refund suit an interest is assessed thereafter . Because the IRS chose to p rsue deficiency procedures against Mr .- Baral, interest ccrued on the deficiency ; and any abatement of interest--i .e ., interest on that deficiency--must be addressed under section 6404(e)(1), not section 6404(e)(2) . . The IRS considered Mr . Baral's abatement request under the proper Code section, section 6404(e)(1), when making its determination . III . Conclusio n The IRS properly assessed interes on Mr . Baral's 2001 income tax deficiency of $2,640 accord,ng to law and according t o his stipulation in-docket No . 20136-04 His argument that th e IRS should have charged interest on only a hypothetica l deficiency of $413 has no legal basis . The IRS made no error in processing the refund that gave rise t the deficiency . Rather, the errors here were Mr . Baral's--i .e . erroneously computing th e taxable portion of his Social, Security benefits and erroneously omitting his pension/annuity income . ccordingly, we hold that the IRS did not abuse its discretion i denying Mr . Baral's request for interest abatement under s ction 6404 . Ali y l~ - 14 - To reflect the foregoing, il. Decision will be entere d for respondent . IL .U. ii6i