T.C. Memo. 2007-5



                      UNITED STATES TAX COURT


        RICHARD NICHOLS AND LISA NICHOLS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1384-05L.                Filed January 9, 2007.


     David B. Shiner, for petitioners.

     Gregory J. Stull, for respondent.


                        MEMORANDUM OPINION


     HOLMES, Judge: In 2001, Richard Nichols and his wife Lisa

reached a compromise with the IRS on their 1994 tax liability.

The Nicholses agreed that the IRS could immediately assess and

collect an agreed amount, but they reserved the right to sue for

a refund.   The Nicholses then learned that they had net operating

losses from later years.    They asked the Commissioner to let them

use these losses to reduce their 1994 tax liability; they also
                                - 2 -

asked for a partial abatement of interest.   The Commissioner took

the position that a deal’s a deal, and moved to collect the

unpaid 1994 tax.

     There are only two issues for us to decide: (1) may the

Nicholses use the net operating losses to fend off the

Commissioner’s collection effort?; and (2) are they entitled to

an abatement of interest?   The Commissioner has moved for summary

judgment on both.

                              Background

     This case began with the Commissioner’s audit of the

Nicholses’ 1994 tax return.    The audit was prolonged, but in May

2001 the parties finally negotiated a compromise and executed a

standard IRS Form 870, entitled “Waiver of Restrictions on

Assessment and Collection of Deficiency in Tax and Acceptance of

Overassessment.”    As the name states, a taxpayer who signs this

form waives any restrictions on assessment of a disputed tax by

the Commissioner.   Waiving restrictions on assessment may seem a

minor detail--assessment is little more than a recording of a tax

liability in the IRS’s records, sec. 6203,1 but it is an

important milestone in tax procedure because, once the IRS

assesses a liability, it can then begin to try to collect.

     Signing a Form 870 and agreeing to immediate assessment and


     1
       All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 3 -

collection of a specific deficiency is not the same as agreeing

that the deficiency agreed to is accurate.   A taxpayer who signs

the form may later claim a refund after paying.   But he gives up

the right to come to Tax Court:   “If you later file a claim and

the Service disallows it, you may file suit for refund in a

district court or in the United States Claims Court, but you may

not file a petition with the United States Tax Court.”   Just to

make sure that point is clear, the form also states--directly

above the signature line--“I understand that by signing this

waiver, I will not be able to contest these years in the United

States Tax Court, unless additional deficiencies are determined

for these years.”

     The Commissioner assessed the tax as agreed, but the

Nicholses never paid because they learned later in 2001 that one

of their businesses had produced net operating losses (NOLs) for

the tax years 1995 and 1997.   This spurred them to file an

amended 1994 tax return (Form 1040X) in December 2002, claiming

these NOLs as deductions that they could carry back to the 1994

tax year.   The IRS treated their 1040X as a refund claim and

rejected it as untimely.2   The filing and rejection of a Form

1040X is often the prelude to a refund action, but the Nicholses



     2
       The rejection letter stated that no credit or refund would
be allowed for a claim filed more than three years after the due
date of the returns which established the NOLs; i.e., the 1995
and 1997 tax returns.
                               - 4 -

never filed one.   With no voluntary payment in sight, the

Commissioner sent a collection due process (CDP) notice in

February 2003, which warned the Nicholses that he intended to

levy their property to collect the still unpaid 1994 taxes.    The

Nicholses did not request a CDP hearing after getting the notice,

but instead sent a letter in March requesting reconsideration of

the IRS’s decision to deny them the benefit of the NOLs that they

had claimed on their 1040X.3

     In April 2003, the IRS sent the Nicholses a CDP notice of

the filing of a federal tax lien.   This time, the Nicholses did

request a CDP hearing, arguing that the filing of a lien was

premature as there were still “significant issues that remain

unresolved.”   Foremost among these open issues was their March

2003 request to the IRS that it reconsider its decision denying

them the NOL carrybacks.   Their CDP request also mentioned that

they planned to seek an abatement of interest, though they didn’t

actually ask for one in their CDP request.4



     3
       At about the same time, they also sent a letter to the IRS
asking for an installment payment plan, conditioned on a
reduction in the 1994 deficiency. However, at that time they had
not filed a tax return for any tax year after 1997, and the
Commissioner will not consider giving installment agreements to
taxpayers who are not current in their filing obligations. See
Orum v. Commissioner, 

, 820 (7th Cir. 2005), affg.

(2004); Internal Revenue Manual sec. 5.14.1.5.1(4) and
(5).
     4
       The Nicholses raised several other procedural arguments in
their CDP request which they have since conceded.
                               - 5 -

     The Nicholses finally requested interest abatement on

October 31, 2003, in a letter sent to an IRS agent not involved

in the CDP process.   In that letter, they asked for an abatement

of 75% of the accrued interest because of “numerous lengthy spans

of time during which the files just sat on the respective

personnel’s desks.”   They also claimed that the initial audit

took six years to complete and that this was an unreasonable

amount of time.   The letter didn’t offer any other reasons for

the interest abatement, nor did it explain why they decided to

ask for an abatement of only 75 percent of the interest charged.

The first IRS agent to consider the matter denied the request

quickly, but the Nicholses asked the IRS Appeals Office to review

that denial, arguing that the acts complained of were

“managerial” under section 301.6404-2 of the Procedure and

Administration Regulations.   The Appeals Office has not yet held

a conference to consider their request.

     Although the Nicholses had not listed either the NOL

carryback or the interest abatement issues as reasons to release

the lien, the Appeals officer who held the CDP hearing considered

the NOL carryback issue and noted in the record that the

Nicholses were pursuing interest abatement.   In June 2004, that

officer tentatively agreed with the Nicholses to allow all the

NOLs.   In a letter confirming their understanding of this

agreement, the Nicholses also asked him to abate all interest and
                               - 6 -

penalties “to expedite the closure of the 1994 tax year.”   All

this fell through, though, when the Appeals team manager looked

at the arrangement and nixed both the tentative settlement and

the Nicholses’ plea for interest abatement.

     In October 2004, the Appeals officer faxed a draft version

of the notice of determination to the Nicholses at their request.

This draft included the NOLs as a separate issue “raised by the

taxpayer” and concluded that the 1994 Form 1040X needed to be

directed to a different division within the IRS if it was to lead

to a reconsideration of the 1994 tax liability.    The final notice

of determination, issued on December 22, 2004, no longer included

the NOLs as a separate issue, noting them only as part of a

collection alternative offered by the Nicholses--one which “may

be considered by other functions within the Service.”    (This may

refer to the IRS’s audit reconsideration group.)   The Nicholses

filed a timely petition to review this final notice of

determination, and the Commissioner has now moved for summary

judgment.   The Nicholses were Illinois residents when they filed

their petition, and we put the case on a Chicago trial calendar.

                            Discussion

     Summary judgment is appropriate where it is shown that

“there is no genuine issue as to any material fact and that a

decision may be rendered as a matter of law.”   Rule 121(b); Fla.

Peach Corp. v. Commissioner, 

, 681 (1988).    If there
                               - 7 -

are any factual inferences to be made, we make them in favor of

the party opposing summary judgment--in this case, the Nicholses.

See Adickes v. S.H. Kress & Co., 

, 157 (1970).    The

Nicholses may not, however, rest on their pleadings but “must set

forth specific facts showing that there is a genuine issue for

trial.”   Rule 121(d); Dahlstrom v. Commissioner, 

,

820-21 (1985).

A.   Challenge to Deficiency

     The first issue is whether the Nicholses can apply their

NOLs to reduce the tax liability that they agreed the

Commissioner could assess when they signed the Form 870.    If this

case was one under section 6213(a) to redetermine a deficiency,

the answer would be easy:   The Supreme Court itself has ruled

that a waiver of assessment, signed before the Commissioner sends

a notice of deficiency, is fully effective and allows the

Commissioner to begin collection immediately after assessment.

See United States v. Price, 

, 313 (1960).   Courts

uniformly understand that signing a Form 870 means giving up the

right to come to Tax Court with a deficiency suit.   See Smith v.

United States, 

, 766-767 (5th Cir. 2003); Phila. &

Reading Corp. v. United States, 

, 1067 (3d Cir.

1991); Kalil v. Enochs, 

, 469 (5th Cir. 1961) (and

cases cited there); Webster v. Commissioner, T.C. Memo. 1992-538.

     The Nicholses claim that they are not trying to rewrite the
                                - 8 -

deal they made but only apply additional deductions to the agreed

upon deficiency.    To support their argument, they rely on Urbano

v. Commissioner, 

, 392 (2004), where we held that the

parties’ agreement that a particular amount could be assessed did

not bar us from reviewing that amount when the reason for review

was not part of the original agreement and was unknown by either

party at the time the agreement was signed.       The Nicholses claim

that their situation is just like the one in Urbano because their

NOLs weren’t included in the Form 870 and neither party knew of

their availability when they signed the form.

       The problem with this argument is that Urbano featured a

different IRS form, Form 4549-CG.

   The consent-to-

assessment language on a Form 4549-CG states:         “I do not wish to

* * * contest in the United States Tax Court the findings in this

report.    Therefore, I give my consent to the immediate assessment

and collection of any increase in tax and penalties * * * .”

This waiver, which extends only to “the findings in this report,”

is plainly more limited than the waiver on a Form 870.        And in

Urbano, we heard the taxpayers’ challenge to the amount of

interest that they owed because the “findings” reported on the

Form 4549-CG did not include a finding on that issue.

   A Form 870 has a different purpose--it memorializes an

agreement that the Commissioner can assess a particular amount of

tax.    Someone signing a Form 870 is not even agreeing that he
                                 - 9 -

owes the extra tax--only that the Commissioner can assess and

collect it, leaving him with the right to sue for a refund.

Likewise, from the Commissioner’s perspective, signing a Form 870

isn’t his agreement that no more extra tax might be owed; the

“General Information” section of Form 870 states: “[Your consent]

will not prevent us from later determining, if necessary, that

you owe additional tax * * *.”

     But the Nicholses have another argument.    They contend that,

even if the Form 870 would bar them from opening the front door

to Tax Court to challenge the deficiency assessed against them,

they can still sneak in the back door by challenging the

Commissioner’s decision to try to collect on the assessment

because they never got a notice of deficiency.   And section

6330(c)(2)(B) gives their argument a superficial plausibility--

that section allows taxpayers to challenge their underlying tax

liability if they “did not receive any statutory notice of

deficiency for such tax liability or did not otherwise have an

opportunity to dispute such tax liability.”

     The Nicholses, it is undisputed, did not receive a notice of

deficiency.   But of course the reason they didn’t receive one is

that they voluntarily waived their right to do so when they

signed the Form 870.   We have held that section 6330 “provides no

consolation to petitioners who themselves made the choice not to

receive * * * [a notice of deficiency].”   Aguirre v.
                              - 10 -

Commissioner, 

, 327 (2001); see also Deutsch v.

Commissioner, T.C. Memo. 2006-27.   And that’s just the choice the

Nicholses made.

     The Nicholses’ claim must also fail for a second reason.

Before the Commissioner tried collecting the disputed 1994

liability via a lien under section 6320, he had sent them a CDP

notice saying that he intended to collect via a levy under

section 6330.   Even if the Nicholses hadn’t signed the Form 870,

failing to request a CDP hearing after getting a notice of intent

to levy would bar them from contesting their tax liability.    The

regulation states:

          Where the taxpayer previously received a CDP
          Notice under section 6330 with respect to the
          same tax and tax period and did not request a
          CDP hearing with respect to that earlier CDP
          Notice, the taxpayer already had an
          opportunity to dispute the existence or
          amount of the underlying tax liability.

Sec. 301.6320-1(e)(3), A-E7, Proced. & Admin. Regs; see also Bell

v. Commissioner, 

, 358 (2006); Mays v. Commissioner,

T.C. Memo. 2006-197.

     The Nicholses finally argue that the Commissioner forfeited

the right to invoke the above regulation--section 301.6320-

1(e)(3), A-E7, Proced. & Admin. Regs.--when he actually

considered the NOLs during their later CDP hearing.   See sec.

301.6320-1(f)(2), A-F5, Proced. & Admin. Regs. (allowing Tax

Court review of any issue raised in the taxpayer’s CDP hearing).
                                - 11 -

This argument hearkens to the liberal rules of pleading that

treat issues actually tried as if they had been raised in the

pleadings.    See Rule 41(b)(1); Fed. R. Civ. P. 15(b).       And the

Nicholses might even be able to tease such an argument out of the

regulations themselves.     Consider the regulation as it stood when

they had their hearing:

             In seeking Tax Court or district court review
             of Appeals’ Notice of Determination, the
             taxpayer can only request that the court
             consider an issue that was raised in the
             taxpayer’s CDP hearing.

Sec. 301.6320-1(f)(2), A-F5, Proced. & Admin. Regs. (as amended

in 2002) (emphasis added).     And compare it to the recent

revision:

             In seeking Tax Court review   of a Notice of
             Determination, the taxpayer   can only ask the
             court to consider an issue,   including a
             challenge to the underlying   tax liability,
             that was properly raised in   the taxpayer’s
             CDP hearing.

Sec. 301.6320-1(f)(2), A-F3, Proced. & Admin. Regs. (effective

Nov. 16, 2006) (emphasis added).

     The problem with this reasoning is that the revised

regulation states existing law; it doesn’t change it.         We had

already held before this revision that the Code itself limits the

power of the Commissioner (and on appeal, us) to reconsider

liability issues.     De novo review such as the Nicholses are

requesting is appropriate only “[w]here the validity of the tax

liability was properly at issue in the hearing * * *.”         H. Conf.
                               - 12 -

Rept. 105-599, at 266 (1998), 1998-3 C.B. 770, 1020; see Sego v.

Commissioner, 

(2000).    Because they gave up

their right to come to Tax Court to redetermine their deficiency

before collection, they can’t successfully complain when the

Commissioner tries to collect.

B.   Abatement of Interest

     The Nicholses also ask us to review their request for

interest abatement, either as a direct appeal of the

Commissioner’s denial of their request under section 6404 or as

part of their CDP hearing under section 6320.    Under either

theory, we must decide whether the Commissioner abused his

discretion.   Sec. 6404(h)(1); Sego, 

.

     Direct review under section 6404(h)(1) requires a taxpayer

to petition this Court within 180 days of the Secretary’s final

determination not to abate interest.    The problem for the

Nicholses is that the Secretary has not yet issued a final

determination.   The first request for interest abatement, which

the Nicholses included in a letter dated October 31, 2003, was

denied on November 20, 2003.   The Nicholses then filed an appeal

with the IRS in December 2003, but that appeal has not yet run

its course.   Even if we treat the initial rejection as a final

determination, they did not meet the Code’s 180-day deadline.     We

thus have no independent jurisdiction under section 6404.

     We may, however, have jurisdiction under section 6320.     In
                               - 13 -

Katz v. Commissioner, 

, 340-341 (2000), we held that

we have jurisdiction to review the Commissioner’s determination

not to abate interest that is the subject of his collection

effort.    That we have jurisdiction to review the Commissioner’s

refusal to abate interest after a CDP hearing doesn’t relieve

taxpayers from the usual requirement that they raise the issue.

Sec. 301.6320-1(f)(2), A-F5, Proced. & Admin. Regs. (as amended

in 2002); see Magana v. Commissioner, 

, 493 (2002)

(only issues raised during the CDP hearing or otherwise brought

to the Appeals Office’s attention generally considered on

review).    The Nicholses claim they raised interest abatement as

an issue, the Commissioner claims they didn’t, and the record

doesn’t provide a clear indication either way.      Because this is

the Commissioner’s summary judgment motion, we assume that the

Nicholses properly raised the issue, and ask whether the

Commissioner has shown that there is no genuine dispute that his

refusal to abate interest was an abuse of discretion.     Rule 121.

     We begin with the Code:    Section 6404(e)(1) states that

interest may be abated for “any deficiency attributable * * * to

any error or delay by an officer or employee of the Internal

Revenue Service * * * in performing a ministerial act,” though

only when “no significant aspect of such error or delay can be

attributed to the taxpayer * * *.”      Sec. 6404(e).5

     5
         Section 6404(e) was amended in 1996 to allow relief from
                                                     (continued...)
                              - 14 -

     Regulations define “ministerial act” as “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.”   Sec. 301.6404-

2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 30163

(Aug. 13, 1987).   The regulations illustrate how the Commissioner

applies this definition with numerous examples.   See sec.

301.6404-2T(b)(2), Temporary Proced. & Admin. 

.     A

consistent theme in the examples is that decisions on allocating

IRS personnel are “managerial,” not “ministerial,” meaning that

delays caused by the Nicholses’ file sitting “on the respective

personnel’s desk”--even if we assume on a summary judgment motion

that those delays are completely the IRS’s fault--from the onset

of the audit until the execution of the Form 870 are not

ministerial.   This is not new--we have held in the past that the

“mere passage of time” does not “establish error or delay * * *

in performing a ministerial act.”   Lee v. Commissioner, 

, 150 (1999).   And, as the Commissioner argues, once the Form

870 was signed, the Nicholses themselves were directly

responsible for the interest accrual by choosing not to pay the


     5
      (...continued)
interest that piled up because of “managerial acts” by the IRS,
but that amendment is effective only for tax years beginning
after July 30, 1996. Taxpayer Bill of Rights 2, Pub. L. 104-168,
sec. 301(a)(2), 110 Stat. 1457.
                                - 15 -

tax liability they agreed to or at least posting a bond or

remitting a deposit.    See Chan v. Commissioner, T.C. Memo. 2001-

268.    We therefore conclude that the Commissioner did not abuse

his discretion by refusing to abate the interest that the

Nicholses owe.

       Summary judgment for the Commissioner being appropriate on

both of the issues before us,



                                     An order and decision in favor

                                of respondent will be entered.