                        T.C. Memo. 2004-121



                      UNITED STATES TAX COURT



   THOMAS FREDERICK DADIAN AND LOIS ANN DADIAN, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1051-02.              Filed May 19, 2004.


     Thomas Frederick and Lois Ann Dadian, pro sese.

     Jonathan H. Sloat, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   Respondent denied petitioners’ request under

section 64041 for abatement of interest on their Federal income

tax deficiency for 1984.   The issue for decision is whether



     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the time the petition was
filed, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 2 -

respondent’s denial was an abuse of discretion.    Because we

believe some delays were caused by the dilatory performance of

ministerial acts by respondent, we hold that it was an abuse of

discretion in part, and that petitioners are entitled to interest

abatement for the periods:   (1) September 9, 1995, through March

31, 1996; and (2) April 1 through July 19, 1999.

                         FINDINGS OF FACT

     Some of the facts are stipulated.    The stipulation of facts

and the attached exhibits are incorporated herein by this

reference.   At the time the petition was filed, petitioners

resided in Santa Paula, California.

     On their 1984 Federal income tax return, petitioners

reported a loss on Schedule E, Supplemental Income and Loss, of

$12,750, attributable to their investment in a partnership called

South Bay Partners (South Bay).    South Bay was a limited partner

in Redwood Associates (Redwood), one of 50 coal tax shelter

partnerships or joint ventures (Swanton programs) created by

Norman Swanton (Mr. Swanton).2    In 1972, Mr. Swanton cofounded




     2
       Redwood and 18 other Swanton programs were formed after
the enactment of the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA), Pub. L. 97-248, secs. 402-407(a), 96 Stat. 648, and
are subject to the partnership rules of TEFRA. The remaining 30
Swanton partnerships were formed before the enactment of TEFRA.
                                 - 3 -

the Swanton Corp., a Delaware corporation headquartered in New

York, which promoted the Swanton programs.3

     On July 14, 1986, respondent issued a notice of beginning of

administrative proceeding (NBAP) to South Bay with respect to his

examination of Redwood under the audit procedures of the Tax

Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-

248, secs. 402-407(a), 96 Stat. 648.     As a result of the

examination of the Swanton programs, respondent recommended that

the Department of Justice (DOJ) criminally prosecute Mr. Swanton.

During the criminal investigation, respondent suspended civil

action with respect to the Swanton programs.     Eventually, the

period of limitations for criminal prosecution of Mr. Swanton

expired.4

         On August 1, 1990, respondent issued a notice of final

partnership administrative adjustment (FPAA) to Redwood.      On

October 26, 1990, Redwood filed a petition with this Court,

challenging respondent’s determinations in the FPAA.

     In May 1991, Moira Sullivan (Ms. Sullivan), an Internal

Revenue Service (IRS) attorney, was assigned to work on the


     3
       For a more detailed discussion of the Swanton programs,
see Kelley v. Commissioner, T.C. Memo. 1993-495.
     4
       Respondent’s records of the Swanton programs were
destroyed in the terrorist attack on the World Trade Center on
Sept. 11, 2001. We have accepted uncontradicted testimony from
an Internal Revenue Service (IRS) attorney who worked on the
cases regarding certain details of the events surrounding the
litigation and settlement of the Swanton programs.
                               - 4 -

Swanton programs.   In September 1991, respondent and counsel

representing the TEFRA Swanton programs reached a basis of

settlement, but finalization of the settlement was deferred

pending the trial of the pre-TEFRA cases.

     Two trials for the pre-TEFRA Swanton programs were conducted

in the Tax Court, one in 1989 and the other in 1992.      Smith v.

Commissioner, 92 T.C. 1349 (1989); Kelley v. Commissioner, T.C.

Memo. 1993-495.   Respondent filed his final brief in the pre-

TEFRA Tax Court litigation on August 14, 1992.5   Negotiations

regarding the terms of the settlement of the TEFRA Swanton

programs then restarted and continued until September 1993.      The

final terms of settlement allowed the investors to deduct half

their cash investments, and subjected them to increased interest

under section 6621(c).

     In late 1993, Ms. Sullivan began working on the

implementation of the basis of settlement for the TEFRA

partnerships.   Although other IRS employees helped her

occasionally, Ms. Sullivan was generally the only IRS employee

assigned to the task of implementing the basis of settlement.

The settlement required her to draft closing agreements with

settlement numbers for each of the 37 Redwood partners, including



     5
       The Tax Court docket entry sheet for Kelley v.
Commissioner, supra, docket No. 34982-85, shows this date.
Respondent filed a notice of intent not to file a surrebuttal
brief on Sept. 30, 1992.
                                - 5 -

South Bay.    She was not required to draft closing agreements for

petitioners or for the other investors beyond the Redwood partner

level.    To calculate the settlement numbers, Ms. Sullivan relied

on investment records provided by the Swanton Corp.   These

records stated each partner’s cash account, which included the

cash each partner had contributed and any distributions that each

partner had received.   The records also listed the tax years in

which any contributions or distributions had been made.     For each

closing agreement, Ms. Sullivan had to divide the partner’s cash

account, as listed on the Swanton records, in half.   The

resulting number, which represented the partner’s allowable

deduction under the settlement terms, was inserted into the

closing agreement.

     Ms. Sullivan sent out closing agreements to Redwood’s

counsel and tax matters partner (TMP) in February or March 1996.

In late 1997, Redwood’s TMP notified Ms. Sullivan that the

investment amounts on which she based the Redwood calculations

were incorrect.   After recalculating the Redwood numbers, Ms.

Sullivan sent the final set of closing agreements for Redwood’s

partners to Redwood’s TMP and counsel during the first quarter of

1998.    South Bay’s TMP signed a closing agreement with respect to

South Bay’s tax liabilities on March 13, 1999.   Respondent

countersigned the closing agreement on July 19, 1999.
                                - 6 -

     On February 9, 2000, respondent sent petitioners a letter

explaining that the examination of Redwood had been completed.

There is no evidence in the record that respondent contacted

petitioners personally before this date regarding their 1984

taxable year.   With the February 9, 2000, letter, respondent also

sent petitioners Form 4549A-CG, Income Tax Examination Changes

(notice of adjustment), notifying petitioners that their 1984

taxable income had been adjusted by $10,219.     The adjustment

resulted in a deficiency of $3,912 for 1984.     The notice of

adjustment also stated that petitioners owed $16,390.95 of

section 6621(c) interest.   Respondent assessed the deficiency and

the interest on May 29, 2000.   On June 7, 2000, petitioners paid

$20,302.95 toward their assessed liabilities.6

     On December 18, 2000, petitioners filed Form 843, Claim for

Refund and Request for Abatement, requesting abatement of the

interest that had accrued from 1986 to 2000.     On November 29,

2001, respondent issued a notice of determination (notice) to

petitioners, denying in full their request for interest

abatement.   The notice states that the Appeals officer did not

find any errors or delays on respondent’s part to merit the

abatement of interest.   The notice also states that respondent


     6
       Although the parties have stipulated that petitioners made
a $20,302.95 payment on June 7, 2003, the Form 4340, Certificate
of Assessments Payments and Other Specified Matters, included in
the record as Exhibit 7-J shows that the payment was credited to
petitioners’ account on June 7, 2000.
                               - 7 -

was not authorized to abate the interest that accrued before

February 9, 2000, because respondent did not notify petitioners

of the deficiency in writing before that date.

     Petitioners timely filed a petition in this Court requesting

review of respondent’s determination to deny their request for

interest abatement.

                              OPINION

     As applicable to the year in question, section 6404(e)(1)(B)

provides that the Commissioner may abate all or any part of an

assessment of interest on any payment of certain taxes to the

extent that any error or delay in such payment is attributable to

an officer or employee of the IRS “being erroneous or dilatory in

performing a ministerial act”.7   A ministerial act is 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.   Lee v.

Commissioner, 113 T.C. 145, 150 (1999); see also sec. 301.6404-

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

(Aug. 13, 1987).   Abatement is available under section 6404(e)



     7
       Congress amended sec. 6404(e) in 1996 to permit abatement
of interest for “unreasonable” error or delay in performing a
ministerial or “managerial” act. Taxpayer Bill of Rights 2, Pub.
L. 104-168, sec. 301(a), 110 Stat. 1457 (1996). That standard
applies only to tax years beginning after July 30, 1996, and thus
does not apply in the present case. Id. sec. 301(c).
                               - 8 -

only for periods after the IRS has contacted the taxpayer in

writing with respect to the deficiency or payment.    Sec.

6404(e)(1).

     This Court may order abatement of interest only when the

Commissioner has abused his discretion in denying a taxpayer’s

request to abate interest.   Sec. 6404(h).   To show an abuse of

discretion, a taxpayer must prove that the Commissioner exercised

this discretion arbitrarily, capriciously, or without sound basis

in fact or law.   Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

     The Appeals officer denied petitioners’ request for

abatement in part because the IRS did not notify them of the

Redwood audit until February 9, 2000, when the notice of

adjustment was sent.   Section 6404(e) limits the Commissioner’s

authority to abate interest to periods after which the IRS has

contacted the taxpayer in writing about the deficiency or

payment.

     TEFRA requires the Commissioner to notify certain partners

of the beginning and ending of a partnership audit.    Sec.

6223(a).   The Commissioner is not required to give notice to a

partner if the partnership has more than 100 partners, and the

partner has less than a 1-percent profits interest.    Sec.

6223(b)(1).   In the case of an indirect partner owning an

interest in the partnership through a pass-thru entity that would

otherwise be entitled to notice, the Commissioner is required to
                                - 9 -

give notice to such partner, in lieu of the pass-thru entity, if

the indirect partner’s name, address, and profits interest is

provided.   Sec. 6223(c)(3).    To trigger the Commissioner’s duty

to notify under section 6223(a), the names, addresses, and

profits interests of partners and indirect partners must be

provided to the IRS in one of two ways.      They must be furnished

either on the tax return of the partnership being audited, or in

a letter to the IRS that fulfills the requirements of section

301.6223(c)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg.

6784 (Mar. 5, 1987).    Sec. 6223(c).   The IRS may use other

information that is available to it; however, it is not required

to “search its records” to obtain information not provided under

section 6223(c).    Sec. 301.6223(c)-1T(f), Temporary Proced. &

Admin. Regs., supra.8

     In this case, the IRS was required to, and did, notify South

Bay of the Redwood audit.    Sec. 6223(a).   Redwood’s partnership

return would have indicated South Bay’s name, address, and

profits interest, and would also have indicated that Redwood had

only 37 partners.    There is no evidence in the record that the

Redwood partnership return would have named South Bay’s partners.

Although the IRS could have discovered that information using its

own records, in this case it chose not to.     As a result,


     8
      The temporary regulations were in effect for the year in
issue; the Commissioner published final regulations effective
Oct. 4, 2001. Sec. 301.6223(c)-1(g), Proced. & Admin. Regs.
                                - 10 -

petitioners were not entitled to receive personal notification by

the IRS of the Redwood audit.

     Instead, South Bay’s TMP was required to notify petitioners

of the partnership level proceedings.     Sec. 6223(g) and (h)(2).

     The Appeals officer concluded that because petitioners were

not entitled to personal notification until the notice of

adjustment was sent, they were not entitled to interest abatement

under section 6404(e) before that date.     However, the date the

NBAP was sent to South Bay should be considered the date of

respondent’s first written contact with petitioners for purposes

of section 6404(e).   See Mekulsia v. Commissioner, T.C. Memo.

2003-138.   In this case, the Appeals officer did not apply this

requirement correctly.   Consequently, we will look to the

specifics of petitioners’ case in order to decide whether they

are entitled to abatement of interest.

     Petitioners argue that respondent abused his discretion in

denying their request for interest abatement for the period July

14, 1986, through February 9, 2000.      The table below describes

the time line in which the relevant events occurred.
                                - 11 -

           Activity                             Date

Petitioners file their 1984              Apr. 15, 1985
   return

Pre-TEFRA test cases begin in            1989
   Tax Court

Ms. Sullivan is assigned to              May 1991
   Swanton programs

Tentative basis of settlement            Sept. 1991
   is reached for TEFRA
   Swanton programs

Respondent files last brief in           Aug. 14, 1992
   pre-TEFRA Swanton Tax Court
   litigation

Final agreement on terms of              Sept. 1993
   settlement is reached

Ms. Sullivan sends closing               February/March 1996
   agreements to Redwood

Redwood’s TMP and counsel                End of 1997
   inform Ms. Sullivan that
   the computations for
   Redwood were based on
   incorrect investment
   numbers

Ms. Sullivan sends revised               First quarter 1998
   closing agreements to
   Redwood

South Bay’s TMP signs closing            Mar. 13, 1999
   agreement

Respondent countersigns South            July 19, 1999
   Bay closing agreement

Respondent issues notice of              Feb. 9, 2000
   adjustment to petitioners
                                 - 12 -

A.     July 14, 1986, Through May 8, 1992

       We held in Beagles v. Commissioner, T.C. Memo. 2003-67, that

the Commissioner was not erroneous or dilatory in performing a

ministerial act with respect to the Swanton programs between April

15, 1984, and May 8, 1992.     We will briefly describe the events

that support this holding.

        Respondent suspended his activity on the Swanton programs

from April 1984 until the period of limitations for criminal

prosecution of Mr. Swanton expired, because Mr. Swanton was being

criminally investigated by the DOJ.       We have previously held that

the delay of a civil matter until resolution of related criminal

proceedings is reasonable.     Taylor v. Commissioner, 113 T.C. 206,

212 (1999), affd. 9 Fed. Appx. 700 (9th Cir. 2001).       After the

criminal investigation of Mr. Swanton ended, litigation in this

Court for the pre-TEFRA Swanton programs continued until September

1992.     See Smith v. Commissioner, 92 T.C. 1349 (1989); Kelley v.

Commissioner, T.C. Memo. 1993-495.     The mere passing of time

during the litigation phase of a dispute does not establish an

error or delay by the Commissioner in performing a ministerial

act.    Lee v. Commissioner, 113 T.C. at 150.     We therefore

conclude, as this Court did in Beagles v. Commissioner, supra,

that it was not an abuse of discretion for respondent to deny

petitioners’ request for abatement of interest for the period July

14, 1986, through May 8, 1992.
                                 - 13 -

        Beagles v. Commissioner, supra, does not provide us with

guidance for periods after May 8, 1992, because in that case the

Commissioner granted interest abatement to the taxpayer for the

period May 8, 1992, through April 15, 1999.     We review the events

that occurred after May 8, 1992, to determine whether respondent

abused his discretion.

B.   May 9, 1992, Through September 1993

      From May 9 to August 14, 1992, respondent was involved in

litigation before this Court concerning the pre-TEFRA Swanton

programs.     In accordance with our holding above, it was not an

abuse of discretion for respondent to deny interest abatement for

that period.     See Lee v. Commissioner, supra.

      After the completion of the pre-TEFRA Tax Court litigation,

Ms. Sullivan negotiated with counsel for the TEFRA Swanton

programs regarding the final terms of settlement until September

1993.     The TEFRA Swanton settlement work was added to Ms.

Sullivan’s normal caseload.     According to her testimony, because

she was not assisted by any other attorney, she could not finalize

the terms of settlement while briefing the pre-TEFRA cases.    The

settlements could have been completed more quickly if more than

one person had regularly been working on them.     Arguably,

respondent made a managerial error when he assigned only one

employee to handle the settlement of all of the TEFRA

partnerships.     This managerial decision contributed to the delay
                               - 14 -

in the resolution of petitioners’ case after the overall

settlement was reached.

     Under current law, section 6404(e) would authorize abatement

of interest during periods in which the settlement of the Redwood

case was set aside as a result of managerial errors.   However, the

language added to section 6404(e) permitting the abatement of

interest for unreasonable errors or delays in performing

managerial acts applies only to tax years beginning after July 30,

1996, and thus does not apply in the present case.   Taxpayer Bill

of Rights 2, Pub. L. 104-168, sec. 301(c), 110 Stat. 1452, 1457

(1996).

     For tax years prior to 1996, section 6404(e) allows interest

abatement only for errors or delays by an officer or employee of

the IRS in performing ministerial acts.   Respondent’s decision to

assign only one attorney to the Swanton TEFRA cases was not a

ministerial act, because the decision required discretion and

judgment.   See Mekulsia v. Commissioner, T.C. Memo. 2003-138;

Beagles v. Commissioner, supra; Jacobs v. Commissioner, T.C. Memo.

2000-123; sec. 301.6404-2T(b)(2), Examples (4) and (5), Temporary

Proced. & Admin. Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).   The

settlement negotiations that lasted until September 1993 also were

not ministerial.   So, through September 1993, the delay was not

due to a ministerial act.   However, further analysis is necessary
                               - 15 -

in order to determine whether any ministerial errors by respondent

contributed to the subsequent delays in petitioners’ case.

C.   October 1993 Through March 1996

     After the terms of the settlement were resolved, respondent

had to identify each of the 37 Redwood partners, determine each

partner’s cash account, and divide each cash account in half to

arrive at the allowable deduction for each partner.   All of this

information was available to Ms. Sullivan on the records provided

by the Swanton Corp.   The determination of the allowable amounts

did not involve any tax computation; it simply involved taking

one-half of each partner’s cash account.   The closing agreement

language had previously been agreed upon, and, therefore, the

preparation of each closing agreement was a matter of inserting

the amount allowable as a deduction.    We therefore conclude that

Ms. Sullivan’s remaining tasks were ministerial acts.   See, e.g.,

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

Regs., supra.

     Given the number of investors involved in the settlement,

there were many closing agreements that needed to be prepared, but

the South Bay closing agreement was not sent to Redwood until

February or March 1996, a period of 2-1/2 years after the terms of

settlement were agreed on.

     This Court recently held that it was not a ministerial error

for respondent to send out closing agreements to a similar Swanton
                                - 16 -

partnership as late as September 9, 1995.    Deverna v.

Commissioner, T.C. Memo. 2004-80.    In Deverna, we recognized that

because there were many Swanton investors, 2 years from the time

of settlement was an acceptable delay.   Nevertheless, to prepare

closing agreements, Ms. Sullivan was ultimately just taking

numbers from records that were available to her.   The South Bay

closing agreement was sent to Redwood in February or March 1996.

Respondent has not adequately explained the additional 6-month

delay in sending out South Bay’s closing agreement.   Ms.

Sullivan’s only explanation of the delay was that the Swanton

investors were numerous.    Without a more specific explanation of

the events that caused the additional 6-month delay past the time

the closing agreements were sent out in Deverna, abatement of

interest is appropriate for this additional 6-month period.

Therefore, it was an abuse of discretion to deny abatement of

interest for the period September 9, 1995, through March 31, 1996.

D.   April 1, 1996, Through March 31, 1998

      Ms. Sullivan sent the closing agreements to Redwood by March

31, 1996.   Sometime at the end of 1997, Redwood’s TMP informed Ms.

Sullivan that the computations she had done for Redwood were based

on incorrect investment figures.    Ms. Sullivan testified that she

based her calculations on records that the Swanton Corp. kept for

all the Swanton programs.    Redwood’s investment schedule differed

from those of the other Swanton programs.    The Swanton records do
                               - 17 -

not reflect the difference, and this error in the records caused

Ms. Sullivan’s initial calculations to be inaccurate.    She sent

the next set of closing agreements to Redwood in the first quarter

of 1998.   The delay caused by the miscalculations was the result

of a mutual mistake, not of a unilateral ministerial error by

respondent.   Therefore, petitioners are not entitled to interest

abatement for the period April 1, 1996, through the time

respondent sent the next set of closing agreements.

      Redwood’s TMP notified Ms. Sullivan of the error in “late

1997”.   Ms. Sullivan sent out the revised closing agreements in

the first quarter of 1998.   Petitioners have not established

specific days or even months during which these events occurred.

Without more details, we cannot measure the time that passed

between late 1997 and the date that the new closing agreements

were sent out with any degree of exactness.   Although it is

unfortunate that 2 years were lost because of the mistake in

computations, we cannot find that petitioners are entitled to

interest abatement for the period April 1, 1996, through March 31,

1998, because the use of the wrong data was not solely

respondent’s error.

E.   April 1, 1998, Through July 19, 1999

      After the revised closing agreements were sent to Redwood in

the first quarter of 1998, it took approximately 1 year for South

Bay’s TMP to sign South Bay’s closing agreement, on March 13,
                                 - 18 -

1999.     During this period, the delay appears to be the

responsibility of South Bay’s TMP.     Nothing in the record

indicates otherwise.     Therefore, petitioners are not entitled to

abatement of interest for the period April 1, 1998, through March

13, 1999.

     After South Bay’s TMP signed the closing agreement and sent

it back to respondent, respondent was required to countersign the

closing agreement.     The testimony concerning respondent’s receipt

of the executed closing agreement is speculative.     Taking into

account the date of execution, respondent likely received the

signed closing agreement by the end of March.     See Goettee v.

Commissioner, T.C. Memo. 2003-43.     Respondent drafted the closing

agreements, which were very similar to those used in all the

Swanton program settlements.     Respondent’s countersignature did

not require discretion and consequently was a ministerial act.

See id.    Respondent countersigned South Bay’s closing agreement on

July 19, 1999, 4 months after South Bay signed it.     Respondent has

not adequately explained the specific events that occurred during

that period to cause the delay, or why abatement of interest for

that period was denied.    See, e.g., Jacobs v. Commissioner, T.C.

Memo. 2000-123.    In light of the facts of this case, we believe 3-

1/2 months was an unreasonable delay.     Petitioners are entitled to

interest abatement for respondent’s delay in countersigning the

closing agreement, for the period April 1 through July 19, 1999.
                               - 19 -

F.   July 20, 1999, Through February 9, 2000

     After the South Bay closing agreement was countersigned,

respondent adjusted petitioners’ 1984 return according to the

terms of the closing agreement and, on February 9, 2000, issued

petitioners the notice of adjustment.    Respondent followed regular

IRS procedures in the processing of petitioners’ notice of

adjustment.   Petitioners have not shown that respondent was

dilatory in performing a ministerial act during this period.    We

hold that it was not an abuse of discretion for respondent to deny

petitioners’ request for interest abatement for the period July

20, 1999, through February 9, 2000.


                                          Decision will be entered

                                      under Rule 155.
