                                                  LUTHER HERBERT ALLCORN, III, PETITIONER v.
                                                     COMMISSIONER OF INTERNAL REVENUE,
                                                                RESPONDENT
                                                    Docket No. 4775–11.                         Filed August 9, 2012.

                                                 P timely filed his 2008 Form 1040, U.S. Individual Income
                                               Tax Return, after previously filing a Form 1040–ES, Esti-
                                               mated Tax, and paying $4,000 in estimated taxes. On his
                                               Form 1040, P mistakenly added the $4,000 estimated tax pay-
                                               ment to the income tax withheld reported on line 62 instead
                                               of the estimated tax payments reported on line 63. That mis-
                                               take contributed to R’s issuance of a refund to P on May 11,
                                               2009. R later realized that P had reported the $4,000 esti-
                                               mated tax payment on line 62, and R subsequently informed
                                               P that he owed $4,000 plus a penalty and interest. P filed a
                                               request for abatement, and R granted P’s request to abate the
                                               penalty but denied P’s request to abate the interest. Held:
                                               Even though the refund was recoverable by assessment and
                                               levy procedures, the refund also would have been recoverable
                                               by filing a civil suit pursuant to I.R.C. sec. 7405 and was
                                               therefore an erroneous refund under I.R.C. sec. 6602. Held,
                                               further, because the refund constituted an erroneous refund
                                               under I.R.C. sec. 6602, it was also an erroneous refund pursu-
                                               ant to I.R.C. sec. 6404(e)(2). Held, further, even though
                                               interest abatement was not mandatory pursuant to I.R.C. sec.
                                               6404(e)(2) because P’s mistake contributed to causing the
                                               erroneous refund, R still had the authority to abate the
                                               interest with respect to the erroneous refund. Held, further, R
                                               did not abuse his discretion by denying P’s request to abate
                                               the interest on the erroneous refund.

                                           Luther Herbert Allcorn III, pro se.
                                           Beth A. Nunnink, for respondent.




                                                                                                                                   53




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00001   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     54                  139 UNITED STATES TAX COURT REPORTS                                     (53)


                                                                                  OPINION

                                       WELLS, Judge: This case is before the Court on the parties’
                                     cross-motions for summary judgment pursuant to Rule 121. 1
                                     We must decide whether respondent abused his discretion
                                     when he determined not to abate the interest with respect to
                                     an erroneous refund issued to petitioner.

                                                                               Background
                                       Some of the facts and certain exhibits have been stipu-
                                     lated. The remaining facts set forth below are based upon
                                     examination of the pleadings, moving papers, responses, and
                                     attachments. At the time he filed his petition, petitioner
                                     resided in Tennessee.
                                       Petitioner timely filed his 2008 Form 1040, U.S. Individual
                                     Income Tax Return. Petitioner previously had submitted a
                                     Form 1040–ES, Estimated Tax, and he had paid $4,000 in
                                     estimated tax. Petitioner was unsure where to report his
                                     $4,000 estimated tax payment on his Form 1040, and he
                                     added it to the total in ‘‘Line 62, Federal income tax withheld
                                     from Forms W–2 and 1099.’’ Petitioner did not report any
                                     amount on ‘‘Line 63, 2008 estimated tax payments and
                                     amount applied from 2007 return.’’ He did not put the
                                     amount from his Form 1040–ES on line 63 because line 63
                                     did not refer to the Form 1040–ES.
                                       With his tax return, petitioner submitted a Form W–2,
                                     Wage and Tax Statement, reporting Federal income tax with-
                                     held of $24,106.75. Petitioner also submitted two Forms
                                     1099–R, Distributions From Pensions, Annuities, Retirement
                                     or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,
                                     reporting Federal income tax withheld of $2,395.80 and
                                     $738.23. The sum of the Federal income tax withholdings
                                     reported on those forms was $27,241. However, because he
                                     also included the $4,000 estimated tax payment on line 62,
                                     the total he reported on that line was $31,241. Petitioner
                                     reported $31,241 in total payments on ‘‘Line 71, Add lines 62
                                     through 70. These are your total payments.’’ Petitioner
                                     included a note with his Form W–2 that stated: ‘‘Additional
                                     $4000 was sent with Form 1040–ES.’’ On his Form 1040,
                                     petitioner reported that he was due a refund of $857.
                                      1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as

                                     amended, and Rule references are to the Tax Court Rules of Practice and Procedure.




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00002   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                          ALLCORN v. COMMISSIONER                                         55


                                        In a letter dated May 11, 2009, respondent informed peti-
                                     tioner that he was due a refund of $5,179.52. The letter con-
                                     tained a tax statement which reported that petitioner had
                                     total tax withheld of $31,241 and estimated tax payments of
                                     $4,000 for total payments of $35,241. The remainder of the
                                     refund due to petitioner was the result of an error he had
                                     made when he calculated his tax on qualified dividends.
                                     However, the May 11, 2009, letter did not mention that error
                                     and did not otherwise explain how respondent calculated the
                                     refund due to petitioner. On or about May 11, 2009, peti-
                                     tioner received a refund of $5,179.52. Of that amount, peti-
                                     tioner was not entitled to $4,000 (petitioner’s excess refund 2)
                                     because that amount reflected respondent’s double counting
                                     of his estimated tax payments.
                                        In a letter dated August 30, 2010, respondent informed
                                     petitioner that he owed $4,514.19. The letter explained: ‘‘We
                                     changed your 2008 account to correct your total federal
                                     income tax withheld.’’ In addition to reducing the amount of
                                     Federal income tax withheld by $4,000, respondent also
                                     added a late payment penalty of $300 and interest of
                                     $214.19. Apparently confused by the August 30, 2010, letter,
                                     petitioner called respondent’s office and received an expla-
                                     nation of how respondent had calculated petitioner’s tax
                                     liability. After the telephone conversation with respondent’s
                                     office, he agreed that he owed $4,000, but he disputed the
                                     penalty and interest. On or about September 1, 2010, peti-
                                     tioner submitted Form 843, Claim for Refund and Request
                                     for Abatement. Respondent received petitioner’s Form 843
                                     and payment of $4,000 on September 3, 2010.
                                        In a letter dated January 28, 2011, respondent granted
                                     petitioner’s request to abate the penalty but denied peti-
                                     tioner’s request to abate the interest. The letter explained:
                                     ‘‘Since the tax information shown on your original return was
                                     incorrect or incomplete, this is considered a contributing
                                     factor in the issuance of the refund, and therefore does not
                                     qualify for the removal of the interest charge under the Tax
                                     Reform Act of 1986.’’ Petitioner timely filed a petition with
                                     respect to respondent’s determination not to abate interest.
                                       2 We refer to this amount as petitioner’s excess refund to avoid confusion with the term ‘‘erro-

                                     neous refund’’ used in sec. 6404(e)(2), as discussed below.




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00003   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     56                  139 UNITED STATES TAX COURT REPORTS                                     (53)


                                                                                Discussion
                                        Rule 121(a) provides that either party may move for sum-
                                     mary judgment upon all or any part of the legal issues in
                                     controversy. Summary judgment may be granted only if no
                                     genuine issue exists as to any material fact and the issues
                                     presented by the motion may be decided as a matter of law.
                                     See Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C.
                                     518, 520 (1992), aff ’d, 17 F.3d 965 (7th Cir. 1994). The par-
                                     ties have filed cross-motions for summary judgment, and we
                                     agree that there are no genuine issues of material fact and
                                     that the case may be decided as a matter of law.
                                        The Commissioner has the authority to abate, in whole or
                                     in part, an assessment of interest on: (1) a deficiency if the
                                     accrual of such interest is attributable to an error or delay
                                     by an officer or employee of the Internal Revenue Service
                                     (IRS), acting in an official capacity, in performing a ministe-
                                     rial or managerial act; or (2) any payment of any tax
                                     described in section 6212(a) to the extent that any error or
                                     delay in such payment is attributable to such officer’s or
                                     employee’s being erroneous or dilatory in performing a min-
                                     isterial or managerial act. Sec. 6404(e)(1). An error or delay
                                     by the Commissioner can be taken into account only: (1) if
                                     it occurs after the Commissioner has contacted the taxpayer
                                     in writing with respect to the deficiency or payment of tax;
                                     and (2) if no significant aspect of the error or delay is attrib-
                                     utable to the taxpayer. Id.; Krugman v. Commissioner, 112
                                     T.C. 230, 239 (1999). Additionally, the Commissioner must
                                     abate the assessment of interest on an erroneous refund of
                                     $50,000 or less unless the erroneous refund was caused by
                                     the taxpayer. Sec. 6404(e)(2).
                                        The periods during which interest may be abated under
                                     section 6404(e)(1) and (2) are different, but those periods may
                                     overlap. Section 6404(e)(1) applies to abate interest attrib-
                                     utable to an error or delay by the IRS in performing a min-
                                     isterial or managerial act during the period after the IRS has
                                     contacted the taxpayer in writing with respect to the defi-
                                     ciency or payment. In contrast, interest abatement pursuant
                                     to section 6404(e)(2) applies to the period before a demand
                                     for payment has been made. However, both section 6404(e)(1)
                                     and (2) may apply to the abatement of interest for the period
                                     between when the taxpayer is first contacted in writing




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00004   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                          ALLCORN v. COMMISSIONER                                         57


                                     regarding the deficiency or payment and the date a demand
                                     for payment is made. For example, as contemplated in the
                                     legislative history and by examples in the regulations, the
                                     period pursuant to section 6404(e)(1) may begin when the IRS
                                     commences an audit. See H.R. Rept. No. 99–426, at 844
                                     (1985), 1986–3 C.B. (Vol. 2) 1, 844; sec. 301.6404–2(c), Exam-
                                     ples (1), (4), (5), (6), Proced. & Admin. Regs. That period
                                     would begin before a demand for repayment has been made,
                                     and either section 6404(e)(1) or (2) could apply to abate the
                                     interest assessed during that time.
                                        This Court may order an abatement of interest only if we
                                     conclude that the Commissioner abused his discretion in
                                     failing to do so. Sec. 6404(h). In order to demonstrate an
                                     abuse of discretion, a taxpayer must prove that the Commis-
                                     sioner exercised his discretion arbitrarily, capriciously, or
                                     without sound basis in fact or law. Rule 142(a); Lee v.
                                     Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commis-
                                     sioner, 112 T.C. 19, 23 (1999). Congress did not intend for
                                     section 6404(e) to be used routinely to avoid the payment of
                                     interest; rather, Congress intended abatement of interest
                                     only where the failure to do so ‘‘would be widely perceived as
                                     grossly unfair.’’ H.R. Rept. No. 99–426, supra at 844, 1986–
                                     3 C.B. (Vol. 2) at 844; S. Rept. No. 99–313, at 208 (1986),
                                     1986–3 C.B. (Vol. 3) 1, 208.
                                        Respondent contends that petitioner’s excess refund was
                                     caused by petitioner’s own mistake and that respondent is
                                     not at fault in any way. In contrast, petitioner contends that
                                     he is not at fault in any way and that the error is entirely
                                     respondent’s. Insofar as petitioner erred by reporting his esti-
                                     mated tax payments on line 62 instead of line 63 of his Form
                                     1040, he contends that the Form 1040 is unclear. Petitioner
                                     further contends that respondent should have been able to
                                     figure out that petitioner reported his estimated tax pay-
                                     ments on line 62 because the sum of the Federal income tax
                                     withheld on his Forms 1099–R and W–2 was $4,000 less
                                     than that reported on line 62. Additionally, petitioner con-
                                     tends that respondent ignored the note he included with his
                                     Form W–2 that explained that the additional $4,000 had
                                     been paid with his Form 1040–ES. Respondent contends that
                                     petitioner’s note was ambiguous. Although neither party is
                                     willing to admit to making an error, it is clear to us that
                                     both parties made errors. Accordingly, we examine the




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00005   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     58                   139 UNITED STATES TAX COURT REPORTS                                     (53)


                                     statute to decide whether, on the basis of the facts and the
                                     errors committed by both parties, respondent abused his
                                     discretion in denying petitioner’s request for abatement of
                                     interest.
                                       As a preliminary matter, we must decide whether section
                                     6404(e)(1) or (2) applies to the facts of the instant case.
                                     Respondent contends that section 6404(e)(1) applies. Section
                                     6404(e)(1) provides:
                                           SEC. 6404(e). ABATEMENT OF INTEREST ATTRIBUTABLE TO UNREASON-
                                     ABLE      ERRORS AND DELAYS BY INTERNAL REVENUE SERVICE.—
                                             (1) IN GENERAL.—In the case of any assessment of interest on—
                                                (A) any deficiency attributable in whole or in part to any unreason-
                                             able error or delay by an officer or employee of the Internal Revenue
                                             Service (acting in his official capacity) in performing a ministerial or
                                             managerial act, or
                                                (B) any payment of any tax described in section 6212(a) to the
                                             extent that any unreasonable error or delay in such payment is attrib-
                                             utable to such officer or employee being erroneous or dilatory in per-
                                             forming a ministerial or managerial act,
                                           the Secretary may abate the assessment of all or any part of such
                                           interest for any period. For purposes of the preceding sentence, an error
                                           or delay shall be taken into account only if no significant aspect of such
                                           error or delay can be attributed to the taxpayer involved, and after the
                                           Internal Revenue Service has contacted the taxpayer in writing with
                                           respect to such deficiency or payment.

                                     Respondent’s motion does not state whether respondent con-
                                     siders subparagraph (A) or (B) applicable to the excess
                                     refund. Additionally, although it is unclear from respondent’s
                                     motion, we assume that respondent considers that the period
                                     during which abatement of interest may have been available
                                     to petitioner began when the IRS contacted him with the May
                                     11, 2009, letter. We further assume that respondent con-
                                     siders that letter to constitute the contact in writing with
                                     respect to a deficiency or payment that is required by section
                                     6404(e)(1) before a taxpayer becomes eligible for abatement
                                     of interest. 3
                                        In contrast, petitioner appears to seek an abatement of
                                     interest pursuant to section 6404(e)(2), which concerns the
                                       3 We treat this as a concession by respondent and do not decide whether the May 11, 2009,

                                     letter constituted a contact in writing with respect to a deficiency or payment pursuant to sec.
                                     6404(e)(1). If it did not constitute such a contact in writing, the interest abatement period pur-
                                     suant to sec. 6404(e)(1) could not have begun, if at all, until the next time respondent contacted
                                     petitioner in writing, i.e., when the demand for repayment was made. Because petitioner
                                     promptly paid, no amount of interest would be eligible for abatement pursuant to sec. 6404(e)(1).




VerDate Nov 24 2008   09:54 Jun 05, 2014    Jkt 372897   PO 20012   Frm 00006   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                          ALLCORN v. COMMISSIONER                                         59


                                     abatement of interest with respect to an erroneous refund.
                                     Unlike the discretionary interest abatement provision of sec-
                                     tion 6404(e)(1), interest abatement pursuant to section
                                     6404(e)(2) is mandatory unless one of two exceptions applies.
                                     Section 6404(e)(2) provides:
                                     The Secretary shall abate the assessment of all interest on any erroneous
                                     refund under section 6602 until the date demand for repayment is made,
                                     unless—
                                         (A) the taxpayer (or a related party) has in any way caused such erro-
                                       neous refund, or
                                         (B) such erroneous refund exceeds $50,000.

                                     Respondent contends that section 6404(e)(2) does not apply
                                     because, according to respondent, the instant case does not
                                     involve a dispute over an erroneous refund under section
                                     6602 but rather an assessment of overstated withholding.
                                        Section 6602 provides: ‘‘Any portion of an internal revenue
                                     tax (or any interest, assessable penalty, additional amount,
                                     or addition to tax) which has been erroneously refunded, and
                                     which is recoverable by suit pursuant to section 7405, shall
                                     bear interest at the underpayment rate established under
                                     section 6621 from the date of the payment of the refund.’’
                                     Section 7405 concerns actions for recovery of erroneous
                                     refunds, and section 7405(b) provides: ‘‘Any portion of a tax
                                     imposed by this title which has been erroneously refunded (if
                                     such refund would not be considered as erroneous under sec-
                                     tion 6514 [4]) may be recovered by civil action brought in the
                                     name of the United States.’’ Respondent contends that peti-
                                     tioner’s excess refund is not an erroneous refund recoverable
                                     by suit under section 6602 but, instead, an assessment of
                                     overstated withholding made pursuant to section 6201(a)(3).
                                        One distinction between an erroneous refund and a defi-
                                     ciency or payment with respect to taxes described in section
                                     6212(a) is the manner by which the Commissioner is able to
                                     recover the amount owed from the taxpayer. In the case of
                                     a deficiency or payment with respect to taxes described in
                                     section 6212(a), the Commissioner may seek to recover from
                                     the taxpayer by pursuing assessment and levy procedures. In
                                     contrast, in the case of an erroneous refund, the Commis-
                                     sioner may seek to recover from the taxpayer by filing a civil
                                       4 Sec. 6514 concerns refunds made after the expiration of the period of limitation for filing

                                     refund claims. The recovery of such refunds is governed by sec. 7405(a).




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00007   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     60                  139 UNITED STATES TAX COURT REPORTS                                        (53)


                                     suit pursuant to section 7405. Oftentimes, an erroneous
                                     refund may also result in a tax liability, in which case the
                                     Commissioner has the option to recover the amount of the
                                     taxpayer’s liability by civil suit or through the assessment
                                     and levy procedures. 5 See United States v. Frontone, 383
                                     F.3d 656, 661 (7th Cir. 2004); Brookhurst, Inc. v. United
                                     States, 931 F.2d 554, 555–557 (9th Cir. 1991); Beer v.
                                     Commissioner, 733 F.2d 435 (6th Cir. 1984), aff ’g T.C. Memo.
                                     1982–735; Warner v. Commissioner, 526 F.2d 1 (9th Cir.
                                     1975), aff ’g T.C. Memo. 1974–243; United States v. C & R
                                     Invs., Inc., 404 F.2d 314 (10th Cir. 1968).
                                       For an amount paid to a taxpayer by the IRS to constitute
                                     an erroneous refund pursuant to section 6602, it is not nec-
                                     essary that the Commissioner have sought to recover it via
                                     a refund suit; it is sufficient that it be ‘‘recoverable by suit
                                     pursuant to section 7405’’. (Emphasis added.) Respondent
                                     does not contest that a refund was issued to petitioner or
                                     that a refund should not have been issued. In effect,
                                     respondent has conceded that an erroneous refund occurred.
                                     Had petitioner refused to pay over the amount owed,
                                     respondent would have had the authority to pursue recovery
                                     by filing a civil suit to recover petitioner’s excess refund.
                                     However, respondent contends that, because petitioner’s
                                     excess refund was also recoverable by assessment, section
                                     6404(e)(2) does not apply.
                                       Respondent’s contention is at odds with a straightforward
                                     reading of the statute and with the legislative history. For
                                     some erroneous refunds, both section 6404(e)(1) and (2) may
                                     apply. The legislative history of section 6404(e) shows that
                                     Congress contemplated that both paragraphs (1) and (2)
                                     might apply: It refers to ‘‘overstated refunds’’, which could
                                     only occur in instances where an erroneous refund creates a
                                     tax liability. See H.R. Rept. No. 99–426, supra at 845, 1986–
                                     3 C.B. (Vol. 2) at 845; S. Rept. No. 99–313, supra at 209,
                                     1986–3 C.B. (Vol. 3) at 209; H.R. Conf. Rept. No. 99–841
                                       5 Not all erroneous refunds will result in tax liabilities. If, for instance, a taxpayer who earned

                                     no income and therefore owed no taxes received an erroneous refund, the Commissioner’s only
                                     option for recovery would be a civil suit. See United States v. Frontone, 383 F.3d 656, 660–661
                                     (7th Cir. 2004). The Commissioner may use the assessment procedures to collect an erroneous
                                     refund only if the refund gives rise to a tax liability. See id. at 659–661; cf. Interlake Corp. v.
                                     Commissioner, 112 T.C. 103, 110 (1999) (holding that the Commissioner may not use deficiency
                                     procedures to collect an erroneous refund that does not give rise to a deficiency); Lesinski v.
                                     Commissioner, T.C. Memo. 1997–234 (same).




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00008   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                          ALLCORN v. COMMISSIONER                                         61


                                     (Vol. II), at II–811, 1986–3 C.B. (Vol. 4) 1, 811. Indeed, the
                                     House report includes an example explaining that such an
                                     overstated refund might occur ‘‘by overstating a claim for a
                                     refund on a tax return.’’ H.R. Rept. No. 99–426, supra at 845.
                                       Respondent contends that petitioner’s situation is analo-
                                     gous to that of the taxpayer in Baral v. Commissioner, T.C.
                                     Memo. 2009–113, where we concluded that section 6404(e)(2)
                                     did not apply. We disagree. In Baral, the taxpayer incorrectly
                                     computed the taxable portion of his Social Security benefits
                                     and therefore reported a higher income tax liability with
                                     respect to those benefits. The Commissioner noticed the tax-
                                     payer’s mistake and corrected it, issuing the taxpayer a
                                     refund. However, the Commissioner later discovered that the
                                     taxpayer had failed to report his pension income and there-
                                     fore was liable for tax on that unreported income, and the
                                     Commissioner subsequently issued a notice of deficiency. The
                                     unreported income in Baral ‘‘was wholly unrelated to the
                                     prior adjustment’’. We held that section 6404(e)(1), and not
                                     section 6404(e)(2), applied to govern the taxpayer’s eligibility
                                     for abatement of interest on her deficiency in Baral.
                                       In contrast, the instant case is distinguishable from Baral
                                     because petitioner’s overstated withholding is directly related
                                     to the prior adjustment. Indeed, on line 71 of his Form 1040,
                                     petitioner reported the correct amount of total payments.
                                     Petitioner’s mistake was adding his estimated tax to his
                                     withholding amount on line 62 instead of entering it on line
                                     63. Had respondent considered the entirety of petitioner’s
                                     return at the same time, no adjustments would have been
                                     necessary. Instead, respondent apparently considered the
                                     amount petitioner reported on line 63, i.e., zero, approxi-
                                     mately 15 months before respondent considered the amount
                                     petitioner reported on line 62.
                                       Petitioner contends that respondent should have noticed
                                     the mistake he made because he included with his Forms W–
                                     2 and 1099–R a note stating that the additional $4,000 was
                                     submitted with his Form 1040–ES. Respondent contends that
                                     he cannot be expected to read all of the notes sent by tax-
                                     payers. However, respondent’s contention is at odds with the
                                     Internal Revenue Manual, which instructs: ‘‘Examine all
                                     attachments to the return’’ and ‘‘all taxpayer-initiated cor-




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00009   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     62                  139 UNITED STATES TAX COURT REPORTS                                     (53)


                                     respondence must be responded to within 30 days.’’ 6 Internal
                                     Revenue Manual pt. 3.11.3.3.7 (Jan. 1, 2008). Respondent
                                     further contends that petitioner’s note is ambiguous, and we
                                     agree, but the note could have alerted respondent of the need
                                     to verify the payments in both lines 62 and 63.
                                        On the basis of the foregoing, we conclude that both sec-
                                     tion 6404(e)(1) and (2) may apply to petitioner’s excess
                                     refund. However, as explained above, the period for which a
                                     taxpayer may be entitled to an abatement of interest is dif-
                                     ferent under section 6404(e)(1) and (2). Pursuant to section
                                     6404(e)(1), the period begins only ‘‘after the Internal Revenue
                                     Service has contacted the taxpayer in writing with respect to
                                     such deficiency or payment.’’ See Krugman v. Commissioner,
                                     112 T.C. at 239; Harbaugh v. Commissioner, T.C. Memo.
                                     2003–316; Donovan v. Commissioner, T.C. Memo. 2000–220.
                                     Pursuant to section 6404(e)(2), the period begins with the
                                     issuance of an erroneous refund and continues until a
                                     demand for repayment is made. Because petitioner promptly
                                     paid upon receiving a demand for repayment and because, as
                                     explained above, respondent appears to have taken the posi-
                                     tion that he contacted petitioner in writing with respect to
                                     the deficiency or payment with the May 11, 2009, letter, the
                                     period during which interest abatement may be available is
                                     the same pursuant to both section 6404(e)(1) and (2).
                                        As relevant here, section 6404(e)(2) requires that the
                                     Commissioner abate interest unless the taxpayer ‘‘in any way
                                     caused such erroneous refund’’. (Emphasis added.) From the
                                     wording of the statute, it appears that Congress intended
                                     that mandatory interest abatement apply only in a narrow
                                     range of circumstances where the erroneous refund was
                                     caused entirely by the Commissioner’s own error. The statute
                                     suggests that, in a situation where the taxpayer contributed
                                     in even the smallest degree to the issuance of the erroneous
                                     refund, mandatory interest abatement does not apply. None-
                                     theless, courts that have considered the application of section
                                     6404(e)(2) to situations in which the taxpayer may have
                                     contributed in some small way to the issuance of the erro-
                                       6 We are not suggesting that petitioner’s note required a response; rather, we note that the

                                     Internal Revenue Manual instructs that any attachment to a return that could be considered
                                     correspondence should receive a prompt reply. That instruction, and the instruction to examine
                                     all attachments, are at odds with respondent’s suggestion that it is acceptable for IRS employees
                                     to overlook or discard notes attached to returns.




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00010   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                          ALLCORN v. COMMISSIONER                                         63


                                     neous refund appear to have taken a more flexible approach
                                     to the statute. In Converse v. United States, 839 F. Supp.
                                     1274, 1278 (N.D. Ohio 1993), the District Court ordered the
                                     Government to abate interest on an erroneous refund pursu-
                                     ant to section 6404(e)(2) despite the court’s finding that the
                                     taxpayers’ actions helped cause the erroneous refund. The
                                     court stated:
                                     Although the taxpayers arguably ‘‘caused such erroneous refund’’ by their
                                     improper filing of claims and by failing to draw the executed Form 870–
                                     AD to the attention of the IRS agent processing the claim, this Court also
                                     finds that the failure of the IRS to properly search its own records to
                                     ascertain the existence of any impediment to the claim (such as a Form
                                     870–AD) helped to cause the erroneous refund. Therefore, the Court finds
                                     that the Government must abate any interest until * * * the date when
                                     demand for repayment was officially made. [Id.]

                                     Similarly, in Lindstedt v. United States, 78 A.F.T.R.2d (RIA)
                                     96–6211, 96–2 U.S. Tax Cas. (CCH) para. 50,488 (Fed. Cl.
                                     1996), the Court of Federal Claims, citing Converse, held that
                                     it was immaterial whether the taxpayer may have added
                                     confusion by failing to file a quarterly return because the
                                     Government clearly made an error in its handling of the tax-
                                     payer’s return. Accordingly, in Lindstedt, the Court of Fed-
                                     eral Claims ordered the Government to abate any interest
                                     assessed before its demand for repayment. 7
                                       However, the courts in Lindstedt and Converse did not
                                     explain how their conclusions were consistent with a statute
                                     that limits mandatory abatement to situations in which tax-
                                     payers did not cause the erroneous refund ‘‘in any way’’.
                                     Upon further analysis, we consider those conclusions to be
                                     consistent with section 6404(e)(2) because, although the
                                     statute does not explicitly state so, we conclude, for the rea-
                                     sons explained below, that the Commissioner has the
                                     authority to abate interest with respect to erroneous refunds
                                     even when he is not required to.
                                       As a preliminary matter, we conclude that the Commis-
                                     sioner is authorized to abate interest on erroneous refunds
                                     even when he is not required to do so because any other
                                       7 In contrast to Converse v. United States, 839 F. Supp. 1274, 1278 (N.D. Ohio 1993), and

                                     Lindstedt v. United States, 78 A.F.T.R.2d (RIA) 96–6211, 96–2 U.S. Tax Cas. (CCH) para. 50,488
                                     (Fed. Cl. 1996), we concluded in Pettyjohn v. Commissioner, T.C. Memo. 2001–227, that the tax-
                                     payer was ineligible for a refund pursuant to sec. 6404(e)(2) because she caused the Commis-
                                     sioner to issue refunds when she repeatedly claimed overpayments of income tax.




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00011   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     64                  139 UNITED STATES TAX COURT REPORTS                                     (53)


                                     result would be inconsistent with section 6404(e)(1). For
                                     instance, some erroneous refunds will also result in defi-
                                     ciencies, and, for those deficiencies, the Commissioner is
                                     authorized by section 6404(e)(1) to abate interest on a defi-
                                     ciency caused by an error or delay ‘‘if no significant aspect
                                     of such error or delay can be attributed to the taxpayer’’.
                                     That limitation authorizes abatement even if the taxpayer is
                                     somewhat at fault for the error or delay, as long as the tax-
                                     payer’s fault is not a significant aspect of the error or delay.
                                     Consequently, the section 6404(e)(1) limitation is not as
                                     restrictive as the limitation under section 6404(e)(2), which
                                     reserves mandatory abatement for those situations where the
                                     taxpayer has not ‘‘in any way caused’’ the error. If a taxpayer
                                     committed some minor fault that contributed to the Commis-
                                     sioner’s issuance of an erroneous refund but that was none-
                                     theless overwhelmingly the Commissioner’s error, and, if
                                     that refund resulted in a deficiency, the Commissioner
                                     clearly would be authorized to abate interest pursuant to sec-
                                     tion 6404(e)(1) for the period after the Commissioner con-
                                     tacted the taxpayer in writing. However, if section 6404(e)(2)
                                     is read to restrict abatements on erroneous refunds to only
                                     those situations where the taxpayer did not cause the erro-
                                     neous refund ‘‘in any way’’, then the taxpayer would be ineli-
                                     gible for abatement pursuant to section 6404(e)(2). Because
                                     that result seems incongruous, we conclude that the ‘‘in any
                                     way caused’’ limitation under section 6404(e)(2) applies only
                                     to the mandatory nature of section 6404(e)(2) and does not
                                     restrict the Commissioner’s authority to abate interest with
                                     respect to erroneous refunds.
                                        Secondly, such a reading is more consistent with the
                                     congressional intent manifest in the legislative history of sec-
                                     tion 6404(e). The House report provides the following expla-
                                     nation for the amendment to section 6404:
                                                                               Present Law
                                       Under present law, the IRS does not generally have the authority to
                                     abate interest charges where the additional interest has been caused by
                                     IRS errors and delays. This results from the IRS’s long-established position
                                     that once tax liability is established, the amount of interest is merely a
                                     mathematical computation based on the rate of interest and due date of
                                     the return. Consequently, the interest portion of the amount owed to the
                                     Government cannot be reduced unless the underlying deficiency is reduced.
                                     The IRS does, however, have the authority to abate interest resulting from




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00012   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                          ALLCORN v. COMMISSIONER                                         65


                                     a mathematical error of an IRS employee who assists taxpayers in pre-
                                     paring their income tax returns (sec. 6404(d)).

                                                                           Reasons for Change
                                        In some cases, the IRS has admitted that its own errors or delays have
                                     caused taxpayers to incur additional interest charges. This may even occur
                                     after the underlying tax liability has been correctly adjusted by the IRS
                                     or admitted by the taxpayer. The committee believes that where an IRS
                                     official acting in his official capacity fails to perform a ministerial act, such
                                     as issuing either a statutory notice of deficiency or notice and demand for
                                     payment after all procedural and substantive preliminaries have been com-
                                     pleted, authority should be available for the IRS to abate the interest inde-
                                     pendent of the underlying tax liability. The committee is especially con-
                                     cerned about IRS errors that cause taxpayers to receive much larger
                                     refunds than they are entitled to.
                                        [H.R. Rept. No. 99–426, supra at 844, 1986–3 C.B. (Vol. 2) at 844.]

                                     As the House report makes clear, Congress intended that
                                     section 6404(e) would give the IRS the authority to abate
                                     interest. Because Congress was especially concerned about
                                     IRS errors that caused taxpayers to receive much larger
                                     refunds than those to which they were entitled, Congress
                                     elected to make interest abatement with respect to such
                                     refunds mandatory unless the refunds were over a certain
                                     size or unless the taxpayer ‘‘in any way caused’’ the erro-
                                     neous refund. However, Congress did not intend that the
                                     mandatory abatement provision limit the authority of the IRS
                                     to abate interest. Indeed, the basic purpose of adding section
                                     6404(e) was to give the IRS discretion to abate interest in
                                     appropriate situations. Reading section 6404(e)(2) to limit the
                                     Commissioner’s authority to abate interest would be incon-
                                     sistent with that purpose.
                                       On the basis of the foregoing, we conclude that section
                                     6404(e)(2) does not limit the Commissioner’s authority to
                                     abate interest. 8 Accordingly, although we conclude that peti-
                                       8 This conclusion is also consistent with the conclusion reached by the Commissioner in Inter-

                                     nal Revenue Manual pt. 20.2.7.5 (Mar. 9, 2010), which states:
                                     For refunds greater than $50,000, the abatement of interest under IRC 6404(e)(2) is not re-
                                     quired, but may be allowed on a case by case basis. The IRS has the discretionary authority
                                     to abate interest on erroneous refunds that exceed $50,000. IRS employees should consider the
                                     following facts and circumstances when determining whether or not to abate interest due to an
                                     erroneous refund:
                                     • Did the taxpayer cause or contribute to the error or delay?
                                     • Did the taxpayer fail to return the erroneous refund for a significant period of time after dis-
                                     covery of the error or after the taxpayer reasonably should have discovered the error?
                                     • Did the taxpayer return the erroneous refund before the IRS notified the taxpayer of the
                                                                                                   Continued




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00013   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     66                  139 UNITED STATES TAX COURT REPORTS                                     (53)


                                     tioner contributed to the cause of petitioner’s excess refund
                                     when he reported his estimated tax payment on the wrong
                                     line, we conclude that respondent still had the authority to
                                     abate the interest on that erroneous refund. Consequently,
                                     we now consider whether respondent abused his discretion in
                                     declining to abate the interest on petitioner’s excess refund
                                     pursuant to section 6404(e)(1) or (2).
                                        When we review the Commissioner’s actions under an
                                     abuse of discretion standard, we do not substitute our judg-
                                     ment for that of the Commissioner. See Murphy v. Commis-
                                     sioner, 125 T.C. 301, 320 (2005), aff ’d, 469 F.3d 27 (1st Cir.
                                     2006). Rather, we consider whether the Commissioner has
                                     exercised his discretion arbitrarily, capriciously, or without
                                     sound basis in fact or law. See Lee v. Commissioner, 113 T.C.
                                     at 149; Woodral v. Commissioner, 112 T.C. at 23.
                                        In respondent’s January 28, 2011, letter denying peti-
                                     tioner’s request to abate the interest on petitioner’s excess
                                     refund, respondent explained that, because an error on peti-
                                     tioner’s return contributed to the issuance of the refund, peti-
                                     tioner did not qualify for interest abatement. We cannot con-
                                     clude that it was an abuse of discretion for respondent to
                                     decline to abate interest because of petitioner’s mistake on
                                     his Form 1040. That determination is consistent with the
                                     limitations regarding taxpayer fault in both section
                                     6404(e)(1) and (2). Additionally, we note that petitioner
                                     should have been aware that respondent had issued an erro-
                                     neous refund when he received a much larger refund than he
                                     expected because the May 11, 2009, letter and tax statement
                                     explained that respondent had changed the amount of esti-
                                     mated tax reported on petitioner’s return. That explanation
                                     should have alerted petitioner to respondent’s error and
                                     prompted petitioner to contact respondent to inquire about
                                     the refund, as petitioner did when he received respondent’s
                                     August 30, 2010, letter telling petitioner that he owed
                                     money. 9 On the basis of the foregoing, we conclude that
                                     respondent did not abuse his discretion when he denied peti-
                                     tioner’s request for abatement of interest with respect to the
                                     erroneous refund.
                                     error?
                                     • Is the taxpayer sophisticated in tax or business matters?
                                       9 Indeed, the May 11, 2009, letter included a contact number and stated: ‘‘If you think we

                                     made a mistake, please call us at the number listed above.’’




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00014   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
                                     (53)                           ALLCORN v. COMMISSIONER                                        67


                                        In reaching these holdings, we have considered all the par-
                                     ties’ arguments, and, to the extent not addressed herein, we
                                     conclude that they are moot, irrelevant, or without merit.
                                        To reflect the foregoing,
                                                                     An appropriate order and decision will be
                                                                   entered.

                                                                               f




VerDate Nov 24 2008   09:54 Jun 05, 2014   Jkt 372897   PO 20012   Frm 00015   Fmt 2847   Sfmt 2847   V:\FILES\BOUND VOL. WITHOUT CROP MARKS\B.V.139\ALLCORN.AUG   JAMIE
