T.C. Summary Opinion 2008-79



                          UNITED STATES TAX COURT



                   SELECT STEEL INC., Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



        Docket No. 12881-06S.               Filed July 7, 2008.



        Craig Appleby (an officer), for petitioner.

        Karen Nicholson Sommers, for respondent.



        COHEN, Judge:    This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed.       Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case.     Unless otherwise indicated, all section references are to
                               - 2 -

the Internal Revenue Code as amended, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

     Respondent determined that petitioner was not entitled to an

abatement of interest on its Federal income tax liability for its

taxable year ended February 28, 1994 (1994 fiscal year), and

upheld respondent’s notice of lien filing related to petitioner’s

liability for the unpaid interest.     After concessions the sole

issue for decision is whether respondent’s decision not to abate

interest with respect to petitioner’s income tax liability for

the 1994 fiscal year was an abuse of discretion.

                            Background

     Some of the facts have been stipulated, and the stipulated

facts are incorporated in our findings by this reference.

Petitioner is a corporation organized under the laws of and with

its principal place of business in the State of California.

     Petitioner is engaged in business as a steel contracting

firm.   Petitioner timely filed its Federal income tax return for

the 1994 fiscal year and calculated its tax liability for that

year using the cash method of accounting.     In April 1996 the

Internal Revenue Service (IRS) initiated an examination of

petitioner’s Federal income tax return for the 1994 fiscal year.

The principal issue during the examination was whether petitioner

was required to convert to the accrual method of accounting.

Between February 1997 and August 1999 petitioner and the IRS
                               - 3 -

executed four agreements that collectively extended the period of

limitations on assessment of tax approximately 3 years.

     Computational errors by the examining agent were common

throughout the examination of petitioner’s return, and such

errors resulted in multiple recalculations that were the primary

cause of the lengthiness of the examination process.   On August

25, 1997, petitioner’s accountant sent a letter to the tax

examiner acknowledging his receipt of her audit report and

addressing several computational errors in the report.    Although

petitioner fundamentally disagreed with the IRS regarding the

necessity that it convert to the accrual method of accounting,

petitioner relented on this issue at least by August 25, 1997.

However, the examiner did not close the examination of

petitioner’s 1994 fiscal year until the end of September 1999.

      On September 28 and 29, 1999, the examiner sent letters to

both petitioner and its accountant summarizing the conclusion of

petitioner’s examination, which resulted in petitioner’s changing

its method of accounting.   The examiner acknowledged in the

letters that the examination was lengthy and that the IRS

assigned to petitioner’s examination four different audit

managers, each of whom gave petitioner different advice and

information at different times in the audit process.   The

examiner explained in the letter to petitioner that the fourth

and final IRS audit manager notified petitioner in June 1999 that
                                - 4 -

it could not choose the year it changed methods of accounting,

although petitioner had been told otherwise by an earlier audit

manager.    She also summarized that the primary result of the

examination was to convert petitioner from the cash method of

accounting to the accrual method.    However, the examiner did not

explain fully in the letters why petitioner’s examination was not

completed for 3-1/2 years.

     Upon receipt of a final determination regarding the interest

applicable to the liability for its 1994 fiscal year, petitioner

submitted on October 15, 2003, a Form 656, Offer in Compromise

(OIC), to the IRS explaining its challenge to the interest

assessed and including a $2,500 check in an attempt to settle its

dispute with the IRS.    The IRS cashed the check on October 20,

2003, and applied $2,500 to petitioner’s account as an “overpaid

credit”.    However, the IRS did not respond to petitioner until

approximately 8 months later on June 15, 2004, when petitioner

was notified that only the first page of the 30-page OIC was

received.    The IRS directed petitioner to the appropriate form

for requesting only abatement of interest, Form 843, Claim for

Refund and Request for Abatement.    Petitioner promptly completed

Form 843, attached the documents it had submitted with Form 656,

and submitted the request for abatement on July 12, 2004.    On

October 7, 2004, approximately 1 year after the original document
                              - 5 -

was submitted, the IRS notified petitioner that it had found the

original 30-page OIC.

     On February 23, 2005, respondent mailed to petitioner a

notice of lien notifying petitioner of the collection action

taken with regard to the unpaid tax liability for interest

related to the 1994 fiscal year.   On March 28, 2005, in response

to the notice of lien, petitioner mailed to the IRS Form 12153,

Request for a Collection Due Process Hearing.   On June 27, 2005,

the IRS mailed a letter to petitioner denying its request for

abatement of interest.

     Petitioner’s request for a collection due process hearing

and its request for abatement of interest were assigned to

different Appeals officers at the IRS, who coordinated with each

other in their review of petitioner’s requests.   The Appeals

officers considered almost exclusively the letters and documents

petitioner submitted when requesting abatement of interest and

challenging the tax lien because the IRS could not find its own

case file regarding petitioner’s examination.   The Appeals

officer reviewing petitioner’s request for abatement of interest

denied the request in full because she found that petitioner did

not raise “qualifying ministerial arguments” in its request.

     Petitioner’s letter requesting abatement of interest stated

in part:

          I am pleading for you to carefully review all the
     facts regarding this audit, for the tax period ending
                         - 6 -

2/28/1994, not 2004, as indicated in your letter. The
amount of the claim was not $2,500.00 as stated in your
letter, but for all interest on this tax amount except
for the $2,500.00 which I sent to the IRS in good faith
with an Offer in Compromise. The Offer in Compromise
was prepared and sent at the suggestion of the Laguna
Nigel [sic] IRS Office, only to be rejected because I
was later informed that an Offer in Compromise could
not apply to interest, only taxes.

     During the three and one half years it took for
the IRS to complete the audit there were ministerial
acts involved which consisted of completed audit forms
given to our accountant which contained calculation
errors, and where in carelessness, the auditor omitted
deductions, which resulted in Select Steel paying our
accountant to correct these, with months and months of
delays accumulating during this time. The entire audit
was a sad comedy of errors, and we relied on the advice
of our auditor that due to the numerous IRS delays
during the audit, that the interest would be waived.

     I am requesting an appeal based on such. I am
again enclosing copies of paperwork I have sent in the
past with this letter. Your files should show the
delays which took place in this audit which resulted in
the excessive interest charges. There should be copies
of the incorrectly calculated audit forms prepared by
the IRS in your files along with the final form.
Please remember that Select Steel paid the taxes in
full promptly, and the taxes were due to a new ruling
that businesses such as ours should be on an accrual
basis instead of cash basis. There were no penalties
assessed, just the exorbitant interest for the three
and one half years that it took for the IRS to complete
the audit.

     Please call me if you have any questions. I
sincerely hope that you can locate all the past audit
records and that the ministerial acts will become
apparent to you. We have acted in good faith
throughout this process, and have been spent [sic]
countless hours trying to resolve this, in spite of
errors and incorrect information supplied by the IRS.
[Emphasis added.]
                               - 7 -

The documents attached to petitioner’s letter included the

September 1999 letters from the examiner and petitioner’s October

2003 OIC attempting to settle the interest charge for $2,500.

     In the March 19, 2005, letter disallowing in full

petitioner’s request for abatement of interest, the IRS provided

petitioner with the following cursory denial:

     This letter is your legal notice that your claim
     is fully disallowed for the following reason:

          There was no error or unreasonable delay
     relating to the performance of a ministerial act
     by an employee or officer of the Internal Revenue
     Service.

In the final determination letter denying the request for

abatement of interest, dated June 1, 2006, petitioner received

another cursory denial of its request for abatement of interest:

          The delays cited in your claim are attributable to
     the exercise of judgment or to managerial acts, not to
     ministerial acts qualifying for abatement under IRC
     Sec. 6404(e)(1) as applicable for the tax period at
     issue.

Also on June 1, 2006, the IRS mailed a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330,

holding that the tax lien filed was an appropriate collection

action.   Petitioner responded by filing the petition.

                            Discussion

     If, as part of a section 6330 proceeding, a taxpayer makes a

request for abatement of interest, the Court has jurisdiction

over the request for abatement of interest that is the subject of
                                 - 8 -

the Commissioner’s collection activities.     Katz v. Commissioner,

, 340-341 (2000).    Under section 6404(e)(1), as in

effect for petitioner’s 1994 fiscal year, the Commissioner may

abate part or all of an assessment of interest on any deficiency

or payment of income taxes to the extent that the deficiency in

payment is attributable in whole or in part to any error or delay

by an officer or employee of the IRS in performing a ministerial

act.    Although Congress amended section 6404(e)(1) in 1996 to

permit the Commissioner to abate interest with respect to

“unreasonable” error or delay resulting from “managerial” or

ministerial acts, the amendment applies only to interest accruing

with respect to deficiencies for taxable years beginning after

July 30, 1996, and is inapplicable to the instant case.     See

Taxpayer Bill of Rights 2, Pub. L. 104-168, sec. 301, 110 Stat.

1457 (1996).

       The term “ministerial act” means a procedural or mechanical

act that does not involve the exercise of judgment or discretion

and occurs during the processing of a taxpayer’s case after all

the prerequisites to the act, such as conferences and review by

supervisors, have taken place.     Corson v. Commissioner, 

, 207 (2004).    A decision concerning the proper application of

Federal tax law is not a ministerial act.

delay

in performing a ministerial act is taken into account only if it

is in no significant aspect attributable to the taxpayer and only
                                - 9 -

if it occurs after the IRS has contacted the taxpayer in writing

with respect to the deficiency or payment.    Sec. 6404(e)(1).

Section 6404(e) is intended to apply only “in instances where

failure to abate interest would be widely perceived as grossly

unfair.”    H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1,

844.

       Section 6404(h)(1) authorizes the Court to decide whether

the Commissioner’s failure to abate interest was an abuse of

discretion and, if so, to order an abatement.    See Jones v.

Commissioner, T.C. Memo. 2008-56.    Generally, the taxpayer must

prove that the Commissioner’s discretion was exercised

arbitrarily, capriciously, or without sound basis in fact or law.

Lee v. Commissioner, 

, 149 (1999); Woodral v.

Commissioner, 

, 23 (1999).    However, “The Commissioner

is in the best position to know what actions were taken by IRS

officers and employees during the period for which petitioners’

abatement request was made and during any subsequent inquiry

based upon that request.”    Jacobs v. Commissioner, T.C. Memo.

2000-123.

       Petitioner argues that the delay in full payment of its

Federal tax liability for 1994 is attributable not to its own

actions in any way but rather to substantial delays during the

IRS audit.    Petitioner was able to present a few documents at

trial indicating both ministerial and managerial errors and
                              - 10 -

delays on the part of the IRS, as well as disagreement between

the parties regarding the proper application of Federal tax law.

Petitioner also maintained at trial that it would not have

consented to the extensions of the period of limitations if it

had known that interest during the extension periods would

continue to accrue on any deficiency in tax ultimately assessed.

(Petitioner’s officers assert that they were assured by an

examiner that interest would be waived, but they did not provide

specific details or corroboration of this claim.)

     Respondent contends that on the basis of the “available

evidence”, petitioner’s request for abatement of interest was

properly disallowed because petitioner failed to show error or

delay by IRS employees in performing a ministerial act.   However,

the available evidence is scant primarily because of respondent’s

destruction or loss of petitioner’s case file.   The few documents

in evidence have been supplied by petitioner, whose access to the

information and documents most pertinent to resolution of this

case is severely limited.   There are no documents explaining what

was happening from August 25, 1997, until the end of September

1999 when the examiner sent the letters to petitioner and its

accountant at the close of the examination.   Respondent argues on

brief that petitioner’s agreements to extend the period of

limitations demonstrate that the delays in the examination

process were not solely attributable to respondent.   We disagree.
                               - 11 -

Even where a taxpayer agrees to extend the period of limitations,

there may be instances where actions or inactions of IRS

employees may result in ministerial errors or delays.    See Jacobs

v. 

.   Where neither the taxpayer nor the Court

is given a rational explanation for the Commissioner’s

discretionary decision, we may find an abuse of discretion.    See

Dadian v. Commissioner, T.C. Memo. 2004-121; Jacobs v.

.   Petitioner’s claims in its letter

requesting abatement of interest that extensive ministerial

errors and delays occurred during its examination, including

calculation errors and omissions in the audit reports prepared by

the examiner, were neither addressed nor denied during the

Appeals process or at trial.   Such errors and delays are

ministerial because they do not involve the exercise of judgment

or discretion, the supervisors’ reviews had already taken place

(apparently several times), and computational errors do not

involve the application of Federal tax law.   See Jones v.

.   Furthermore, the Appeals Office knew from

petitioner’s letter requesting abatement of interest that

petitioner was reasonably relying on the Appeals officer to

review the IRS case file for specific examples of the calculation

errors and related ministerial delays alleged.   The Appeals

officer did not, however, inform petitioner that its case file

was missing until after petitioner had petitioned the Court
                             - 12 -

challenging the determinations.   Although petitioner received

categorical denials that any ministerial errors or delays had

occurred contributing to the accrual of interest on its account,

petitioner was not aware until shortly before trial that

respondent was not able to find its case file.   At the time

petitioner submitted the documents accompanying its letter

requesting abatement of interest, petitioner directed attention

to the evidence of ministerial errors and delays in its case file

and reasonably believed that the IRS would consult the case file

in reviewing petitioner’s request.

     Because respondent has offered no explanation of the denial

of petitioner’s claims for abatement of interest due to

ministerial calculation errors, we hold that it was an abuse of

discretion for respondent to disallow in full petitioner’s

request for abatement of interest.    See Dadian v. 

; see also Jacobs v. 

.

     For the period from the beginning of petitioner’s

examination until August 25, 1997, the first date in the record

when petitioner’s accountant notified the IRS of several

calculation errors in the examiner’s audit report, petitioner’s

request for abatement of interest was properly denied.    Until

August 25, 1997, petitioner and the examiner were engaged in

disagreements regarding the proper application of Federal tax

law, specifically whether petitioner was required to convert to
                              - 13 -

the accrual method of accounting.   As of at least August 25,

1997, however, petitioner had conceded the substantive tax law

challenge.   Because respondent has failed to produce petitioner’s

case file, the record is void of any documentation of events that

occurred between August 25, 1997, and September 28, 1999, when

the examiner acknowledged that the fourth and final IRS audit

manager had notified petitioner in June 1999 that it could not

pick the year that it changed methods of accounting, as

petitioner had been advised by a previous audit manager.     This

change was due to a prior incorrect statement of Federal tax law

by the previous audit manager, and thus the delay following this

notification was not due to a ministerial error.   Therefore, for

the period between July 1 and September 28, 1999, the denial of

petitioner’s request for abatement of interest was appropriate.

     For the remaining period from August 25, 1997, through the

end of June 1999, we hold that respondent’s denial of abatement

of interest was an abuse of discretion.    Following petitioner’s

notification to the examiner of calculation errors in the audit

report, the examination continued for approximately 2 additional

years.   During that time all prerequisites to the act of

recalculating petitioner’s tax liability had occurred.    See

Corson v. Commissioner, 

.    Respondent has

presented no explanation or evidence regarding what occurred

during this lengthy period.   Petitioner alleged multiple
                                - 14 -

calculation errors throughout the audit process that respondent

has failed to address.   Such errors are ministerial because they

do not involve managerial discretion and do not involve opinions

regarding the proper application of Federal tax law.

     The record does not show that any significant portion of the

delay during this period was attributable to petitioner, who has

demonstrated timeliness in its communications with the IRS and

who paid the tax deficiency found by the examiner immediately

upon the conclusion of the examination.   Respondent is in the

best position to know what actions IRS officers and employees

took during the period for which petitioners’ abatement request

was made, yet respondent has provided no such information to

petitioner or to the Court.   See Jacobs v. 

.

Because respondent has failed to address petitioner’s claims of

delays due to computational ministerial errors adequately and

because the Appeals office did not base the decision to deny

petitioner’s request for abatement of interest upon a full review

of petitioner’s case, we hold that respondent’s denial for the

period for which there is no documentation or information

regarding how the examination was conducted was arbitrary,

without sound basis in fact or law, and an abuse of discretion.

See Lee v. Commissioner, 

; Woodral v.

Commissioner, 

.    Petitioner’s situation is one

“where failure to abate interest would be widely perceived as
                              - 15 -

grossly unfair.”   See H. Rept. 426, supra at 844, 1986-3 C.B.

(Vol. 2) at 844.

     We conclude that the determination to uphold the filing of

the tax lien as an appropriate collection action was an abuse of

discretion.   Petitioner has promptly paid all undisputed amounts

and has proceeded diligently to resolve disputes.   There is no

basis for concluding that the lien is necessary to protect the

Government’s interest.   In reaching our decision, we have

considered all arguments made, and, to the extent not mentioned,

we conclude that they are irrelevant, moot, or without merit.


                                    Decision will be entered

                               under Rule 155.