                        T.C. Memo. 2008-126



                      UNITED STATES TAX COURT



                JAMES A. MATTHEWS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

                SUPERIOR PRODUCTS SALES, INC. v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19277-05, 19278-05.     Filed May 5, 2008.



     Harris H. Barnes, III, for petitioners.

     John F. Driscoll, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   These consolidated cases, hereinafter

referred to as the instant case, are presently before the Court
                               - 2 -

on cross-motions for summary judgment pursuant to Rule 121.1    The

instant case arises from petitions for judicial review of failure

to abate interest under section 6404 and Rule 280.   The principal

issue for decision is whether respondent’s disallowance of

interest abatement as to each petitioner represents an abuse of

discretion.

                           Background

     The record consists primarily of the parties’ pleadings;

their respective cross-motions for summary judgment; various

responses, declarations, and memoranda in support of or

opposition to the motions, as applicable; and the transcript of a

hearing held on the motions.   Additionally, at the hearing the

parties filed a stipulation of facts and accompanying exhibits

for purposes of deciding the instant motions.   The stipulations

of fact are incorporated in this opinion by reference.

     Petitioner James A. Matthews (Mr. Matthews) resided in

Mississippi, at the time of filing the petition.   Petitioner

Superior Products Sales, Inc. (Superior), is a corporation formed

under the laws of Mississippi having an address in Tupelo,

Mississippi, at the time of filing the petition herein.

     For all tax periods ending in 1990 through 1996,

Mr. Matthews was the majority shareholder and controlling officer


     1
       Unless otherwise indicated, section and Code references
are to the Internal Revenue Code of 1986, as amended, and Rule
references are to the Tax Court Rules of Practice and Procedure.
                                - 3 -

of Superior, a C corporation under the Code.    Superior is a

manufacturing enterprise engaged in the fabrication of

polyurethane foam and related products for use in furniture.

During the early to mid 1990s, Mount Vernon Foam Sales, Inc.

(Mount Vernon), was a customer of Superior.    Superior filed Forms

1120, U.S. Corporation Income Tax Return, for the taxable years

ended March 31, 1994 (TYE 1994), and March 31, 1995 (TYE 1995),

on or about December 19, 1994, and December 18, 1995,

respectively.    Mr. Matthews filed Forms 1040, U.S. Individual

Income Tax Return, for the taxable years 1990 and 1992 through

1995 on April 15 of each of the succeeding years.    Mr. Matthews

likewise filed a Form 1040 for the taxable year 1996, but the

record is ambiguous as to whether that return was filed on April

15 or August 18, 1997.

     Superior’s TYE 1994 was selected by the Internal Revenue

Service (IRS) for civil examination.    On July 9, 1996, the

revenue agent assigned to conduct the examination sent to

Superior an initial appointment letter scheduling a meeting for

July 22, 1996.    That meeting was conducted as scheduled, and the

revenue agent thereafter engaged in review of corporate records

and additional discussions with representatives throughout August

and September 1996.    In early October 1996, the examination was

expanded to include Superior’s TYE 1995, and on October 4, 1996,

written notice to that effect was sent to Superior.    The revenue
                                 - 4 -

agent also began at that time to explore the possibility of

extending the examination to include Mr. Matthews’s 1994 and 1995

taxable years.   After additional research, the revenue agent on

January 28, 1997, first contacted Mr. Matthews in writing

regarding examination of his 1994 and 1995 tax years, scheduling

an initial appointment for February 19, 1997, and requesting that

various documents be produced.

     During February 1997 the revenue agent conducted interviews

and discussions with appropriate third parties, including

representatives of Mount Vernon.    During late February 1997, the

IRS Examination Division formally made a referral for additional

investigation to the IRS Criminal Investigation Division with

respect to Superior’s TYE 1994 and TYE 1995 and Mr. Matthews’s

1994 and 1995 tax years.   The referral report cited unreported

cash sales to Mount Vernon from which Mr. Matthews diverted the

funds for personal use.

     The IRS Criminal Investigation Division accepted the

referral, and a special agent from that division was assigned to

conduct the investigation.   In accordance with IRS administrative

procedures, the civil examination activity was generally

suspended because of the criminal referral, although a revenue

agent continued to provide a minor amount of supportive

administrative activity in coordination with the special agent.

During its course, the criminal investigation was expanded to
                               - 5 -

include Superior’s taxable year ended March 31, 1996 (TYE 1996),

and Mr. Matthews’s 1996 taxable year.

     Criminal prosecution referrals were made by the IRS to the

U.S. Department of Justice during late August or early September

of 2001.   The IRS recommended the prosecution of multiple counts

under section 7206(1) and (2), as well as 18 U.S.C. section 371,

arising from the preparation and filing of Superior’s corporate

income tax returns for TYE 1995 and TYE 1996.   On February 1,

2002, a waiver of indictment and a criminal information were

filed against Mr. Matthews in the U.S. District Court for the

Northern District of Mississippi in connection with his

involvement in the preparation and filing of Superior’s corporate

income tax returns for TYE 1995 and TYE 1996.

     During February 2002 Mr. Matthews pleaded guilty to one

count charging him with violation of section 7206(1) in regard to

filing Superior’s income tax return for TYE 1995.   The criminal

fraud charge was premised on the unreported cash sales by

Superior to Mount Vernon.   Mr. Matthews’s sentencing was

scheduled for May 2002.   During February 2002 Mr. Matthews also

expressed a desire to resolve before his scheduled sentencing

certain civil aspects arising from the criminal prosecution.     In

response to Mr. Matthews’s expressed wishes, an assigned IRS
                               - 6 -

revenue agent was authorized to work with Superior and Mr.

Matthews in an attempt to resolve relevant civil aspects relating

to the taxable years of each ending in 1994 through 1996, even

though the criminal aspects of those years were not yet formally

resolved.

     On March 1, 2002, the revenue agent met with representatives

for petitioners and provided them with an information document

request (IDR) asking for additional information necessary to

conduct the examination.   The IDR set a response date of

March 18, 2002.   On or about April 23, 2002, the revenue agent

formally requested approval from appropriate IRS Examination

Division personnel to expand the examination to include

Superior’s taxable years ending March 31, 1991 through 1993

(TYE 1991, TYE 1992, and TYE 1993, respectively), and Mr.

Matthews’s 1990 through 1993 taxable years.    On the basis of

information developed by the revenue agent, the extension was

approved.

     On April 29, 2002, the revenue agent faxed to petitioners’

representatives proposed computations reflecting the impact of

pertinent unreported income on Superior’s TYE 1991 through 1996.

Contemporaneously, the revenue agent discussed with the

representatives the fact that the unreported income amounts would

flow through to Mr. Matthews as dividends.    The facsimile

transmission was the first written contact by the IRS with either
                               - 7 -

Superior or Mr. Matthews that dealt with their 1990 through 1993

periods.   In response, petitioners’ representatives called on

May 3, 2003, to advise the revenue agent that petitioners

disagreed with certain of the computations, did not wish to

discuss years prior to 1994, and would not be providing any

further information.   Similarly, on May 23, 2002, the

representatives advised the revenue agent that no further

information would be provided in compliance with IDRs.

     During the week of May 23, 2002, the revenue agent made

several telephone calls to petitioners’ representatives in an

attempt to arrange a meeting that was eventually held on May 31,

2002.   At that time, the revenue agent served a summons or

summonses for additional information with a response date of

June 19, 2002.   Petitioners responded to the summons(es) with a

letter dated June 28, 2002, communicating an intent to supply

only a portion of the materials requested and claiming that a

significant percentage were protected by privilege doctrines or

were no longer available.

     Meanwhile, Mr. Matthews was sentenced on May 8, 2002.    By

letter dated May 28, 2002, the U.S. Department of Justice advised

the IRS that it was closing its files on the criminal aspects of

the Superior and Matthews cases.

     Throughout July and August 2002 the revenue agent and

representatives of petitioners continued to communicate with
                               - 8 -

respect to the summoned information and possible enforcement.

On August 26, 2002, the revenue agent received a letter dated

August 22, 2002, from petitioners’ counsel indicating that

petitioners had supplied all that they were able or willing to

produce and suggesting that the revenue agent prepare and provide

computations based upon the available information.   The parties

would then be in a position to determine whether any agreement

could be reached as to acceptable amounts of tax liabilities

owed.   By facsimile transmittal dated August 28, 2002, the

revenue agent responded with a letter and computations reflecting

liabilities for Mr. Matthews for years 1990 through 1996.

During September and October 2002 the revenue agent had frequent

and ongoing communications with representatives of petitioners,

seeking to arrive at appropriate tax computation figures for both

Superior and Mr. Matthews that would be acceptable to all

parties.   These communications included additional records

petitioners provided.

     Under cover of a November 15, 2002, letter, and with the

understanding that the enclosed computations were acceptable to

all parties, the revenue agent provided to petitioners proposed

final examination reports for all years under audit; i.e.,

Superior’s TYE 1991 through 1996 and Mr. Matthews’s tax years

1990 through 1996.   On December 2, 2002, petitioners executed and

the IRS received Forms 870, Waiver of Restrictions on Assessment
                               - 9 -

and Collection and Acceptance of Overassessment, with respect to

each of the taxable years covered by the final examination

reports.

     On January 13, 2003, the IRS received from Mr. Matthews a

check for $3,815,655.89.   By letter dated January 14, 2003, to

Mr. Matthews and his representatives the IRS confirmed receipt of

the funds and stated:   “The check was applied to Mr. James

Matthews, Sr. individual tax liability for tax years 1990 to 1996

inclusive.”   The remittance paid in full Mr. Matthews’s account

balances, including tax, penalties, and interest, for 1990 and

1992 through 1996.   Superior’s account for TYE 1995 had been paid

in full by an advance payment on April 30, 2002.   The record does

not reflect any payments with respect to Superior’s liabilities

for TYE 1994, and the present status of that account is unclear.

     On or about May 19, 2004, Mr. Matthews filed with the IRS a

separate Form 843, Claim for Refund and Request for Abatement,

with respect to each of his taxable years 1990 and 1992 through

1996.   The Forms 843 sought abatement of interest under section

6404(e)(1) for the subject years.   Superior likewise filed a

separate Form 843 requesting abatement of interest for TYE 1994

and TYE 1995.

     The IRS, by letter dated July 20, 2004, disallowed

Superior’s claims for abatement.    Superior responded in August of

2004 with a request for reconsideration by the IRS Office of
                                - 10 -

Appeals.   Regarding Mr. Matthews’s claims, the IRS on December 9,

2004, sent a tentative disallowance, and Mr. Matthews in late

December submitted a letter treated as a request for

reconsideration.

     Both petitioners’ cases were assigned to an Appeals officer

during January 2005, at which time the officer sent each

petitioner an initial letter.    After research and review of

relevant files and legal authority, the Appeals officer on

May 25, 2005, sent to petitioners’ representative a letter

scheduling a joint conference for June 15, 2005, and asking that

an explanation of the legal authority for petitioners’ claims be

provided before the meeting.    The conference was rescheduled for

June 16, 2005, at the request of petitioners’ representative, and

so held, but neither an explanation of legal authority nor

further factual information was provided to the Appeals officer.

     On August 26, 2005, the Appeals officer advised petitioners’

counsel by telephone that, on the existing record, he intended to

disallow the claims for abatement in their entirety.     A Full

Disallowance-Final Determination was issued to each petitioner on

September 14, 2005, on the grounds that no error or delay merited

abatement of interest.   The petitions in the instant case were

thereafter timely filed on October 13, 2005, and the instant

cross-motions for summary judgment followed.
                                 - 11 -

                               Discussion

I.   General Rules

      A.   Summary Judgment

      Rule 121(a) allows a party to move “for a summary

adjudication in the moving party’s favor upon all or any part of

the legal issues in controversy.”     Rule 121(b) directs that a

decision on such a motion shall be rendered “if the pleadings,

answers to interrogatories, depositions, admissions, and any

other acceptable materials, together with the affidavits, if any,

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

that a decision may be rendered as a matter of law.”

      The moving party bears the burden of demonstrating that no

genuine issue of material fact exists and that he or she is

entitled to judgment as a matter of law.       Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994).    Facts are viewed in the light most favorable to the

nonmoving party.     Id.   However, where a motion for summary

judgment has been properly made and supported by the moving

party, the opposing party may not rest upon mere allegations or

denials contained in that party’s pleadings but must by

affidavits or otherwise set forth specific facts showing that

there is a genuine issue for trial.       Rule 121(d).2


      2
       Petitioners have filed respective motions for leave to
file motion to shift the burden of proof to respondent and have
                                                   (continued...)
                              - 12 -

     B.   Section 6404

     Section 6404(e), as in effect for the years in issue,

provided in relevant part as follows:

          SEC. 6404(e). Assessments of Interest
     Attributable to 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 error or delay by an
                officer or employee of the Internal Revenue
                Service (acting in his official capacity) in
                performing a ministerial act, or

                     (B) 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 an officer or employee being erroneous
                or dilatory in performing a ministerial 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.[3]


     2
      (...continued)
lodged corresponding motions to shift the burden. At the
hearing, however, the parties concurred with the Court that those
motions would need to be reached only if a material fact or facts
remaining in question precluded disposition by summary judgment.
Given the Court’s conclusions below, the motions for leave will
be denied as moot.
     3
       Sec. 6404(e) was amended in 1996 by the Taxpayer Bill of
Rights 2, Pub. L. 104-168, sec. 301, 110 Stat. 1457 (1996), to
permit abatement with respect to “unreasonable” error or delay in
                                                   (continued...)
                              - 13 -

     For purposes of section 6404(e), a “ministerial act” is

defined as “a procedural or mechanical act that does not involve

the exercise of judgment or discretion, and that occurs during

the processing of a taxpayer’s case after all prerequisites to

the act, such as conferences and review by supervisors, have

taken place.”   Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin.

Regs., 52 Fed. Reg. 30163 (Aug. 13, 1987).4   Furthermore, “A

decision concerning the proper application of federal tax law (or

other federal or state law) is not a ministerial act.”   Id.

     Section 6404(h)(1) provides the Tax Court with jurisdiction

to review denials of requests for abatement of interest under an

abuse of discretion standard.5   Action constitutes an abuse of


     3
      (...continued)
performing a “ministerial or managerial” act. The amendment is
effective for tax years beginning after July 30, 1996, and is
thus inapplicable to the cases at bar. See Woodral v.
Commissioner, 112 T.C. 19, 25 n.8 (1999).
     4
       Temporary regulations are entitled to the same weight and
binding effect as final regulations. Peterson Marital Trust v.
Commissioner, 102 T.C. 790, 797 (1994), affd. 78 F.3d 795 (2d
Cir. 1996). Final regulations were promulgated under sec. 6404
after the years in issue and contain a definition of “ministerial
act” that does not differ from that set forth in the temporary
regulations. Sec. 301.6404-2(b)(2), Proced. & Admin. Regs.
     5
       The provision for Tax Court review of interest abatement
determinations was enacted as sec. 6404(g). Taxpayer Bill of
Rights 2 (TBOR 2), sec. 302(a), 110 Stat. 1457 (1996). The
provision was then redesignated after the years in issue, first
as sec. 6404(i) by the Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, secs. 3305(a), 3309(a), 112
Stat. 743, 745, and then as sec. 6404(h) by the Victims of
Terrorism Tax Relief Act of 2001, Pub. L. 107-134, sec.
                                                   (continued...)
                                 - 14 -

discretion where arbitrary, capricious, or without sound basis in

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

Congress originally intended by section 6404(e) to sanction

abatement of interest only where failure to do so “would be

widely perceived as grossly unfair”, not to provide a remedy

enabling taxpayers “routinely to avoid payment of interest”.

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

S. Rept. 99-313, at 208 (1986), 1986-3 C.B. (Vol. 3) 1, 208.

II.   Positions of the Parties

      Respondent’s motion for summary judgment, arguing that

petitioners are not entitled to abatement of interest with

respect to any of the tax years in issue, is premised on three

principal considerations:   (1) Section 6404(e) as a matter of law

precludes abatement for any period before the IRS first contacted

the taxpayer in writing with respect to the underlying deficiency

or payment of tax; (2) judicial precedent establishes that

abatement under section 6404(e) is not available for the period

during which a civil examination is suspended for a criminal

fraud investigation; and (3) the record reveals no error or delay

in performing a ministerial act during any of the remaining

periods.


      5
      (...continued)
112(d)(1)(B), 115 Stat. 2435 (2002). The provision as enacted
and redesignated applies to requests for abatement after July 30,
1996. TBOR 2 sec. 302(b), 110 Stat. 1458. To avoid confusion,
references herein will be to the current designation.
                              - 15 -

     For purposes of the cross-motions for summary judgment,

petitioners advance a primary and an alternative position.     As

reflected in petitioners’ computations, the primary argument

maintains that interest should be abated for the entire period

from the filing of the underlying return until at least December

5, 2002.   The alternative argument, offered in acknowledgment of

precedent pertaining to criminal investigations, seeks abatement

for the period just described, less the interest accruing from

March 1, 1997, through May 28, 2002.   In making their arguments,

petitioners contend that an overarching “grossly unfair” standard

should trump period limitations that might otherwise derive from

statutory language and interpretive jurisprudence.   Petitioners

then claim that they should be deemed to have made a sufficient

showing of error or delay by the IRS in performing a ministerial

act because the IRS failed to keep an adequate record of

administrative activity, in violation of IRS Internal Revenue

Manual directives, throughout the processing of petitioners’

cases.
                                  - 16 -

III.       Analysis

       A.     Years Before the Court

       As noted supra, the jurisdiction of the Tax Court in

interest abatement cases is premised on section 6404(h).           Section

6404(h)(1) authorizes the Court to determine whether a failure to

abate interest was an abuse of discretion where:         (1) The

Commissioner has mailed to the taxpayer a notice of final

determination not to abate interest; (2) the taxpayer files a

petition for review within 180 days of the mailing of the notice;

and (3) the taxpayer meets the income limitations provided in

section 7430(c)(4)(A)(ii).6      See also Rule 280(b).

       With respect to Mr. Matthews, the record reflects that he

submitted to the IRS requests for abatement for the taxable years

1990, 1992, 1993, 1994, 1995, and 1996.      The notice of final

determination issued to Mr. Matthews likewise denied abatement

explicitly for the 1990 and 1992 through 1996 periods.         However,

in petitioners’ computations for purposes of the pending cross-

motions, interest accruing with respect to Mr. Matthews’s taxable

year 1991 is included.      Because the record establishes no basis

upon which the Court may exercise jurisdiction over any claims




       6
       Petitioners have asserted that they satisfy the income
limitations imposed by sec. 7430(c)(4)(A)(ii), and respondent has
not challenged those assertions. The Court therefore will not
further address the requirement under sec. 7430(c)(4)(A)(ii).
                               - 17 -

pertaining to 1991, the Court may not consider or direct

abatement for that year.

     Similarly, as to Superior, the record contains Forms 843

submitted to the IRS seeking interest abatement for TYE 1994 and

TYE 1995.   The notice of final determination issued to Superior

specifically addresses disallowance for TYE 1994 and TYE 1995.

Consistently, that notice was attached to the petition at docket

No. 19278-05.   However, petitioners’ computations include

interest accruing with respect to Superior’s TYE 1991, TYE 1992,

TYE 1993, TYE 1994, and TYE 1995.   Absent any indication that a

final determination has been issued or petitioned for Superior’s

TYE 1991, TYE 1992, or TYE 1993, the Court is constrained to

conclude that interest pertaining to those periods should not be

considered or allowed.   Having clarified the tax years properly

before us, we turn to our review of those years and to the issue

of whether respondent’s denial of interest abatement with respect

to the years in issue constitutes an abuse of discretion.

     B.   Abatement for Periods Before First Contact

     As quoted in full supra, the flush language of section

6404(e)(1) expressly limits the periods for which abatement under

that provision is available, stating that “an error or delay

shall be taken into account only * * * after the Internal Revenue

Service has contacted the taxpayer in writing with respect to

such deficiency or payment.”   The foregoing restriction has been
                             - 18 -

the subject of repeated judicial interpretation and, without

exception, applied in instances where taxpayers have sought

abatement for the period preceding notification from the IRS.

E.g., Krugman v. Commissioner, 112 T.C. 230, 239 (1999); Hawksley

v. Commissioner, T.C. Memo. 2000-354; Banat v. Commissioner, T.C.

Memo. 2000-141, affd. 5 Fed. Appx. 36 (2d Cir. 2001); Nerad v.

Commissioner, T.C. Memo. 1999-376.    We have explained the

rationale for the statutory limit as follows:

          Petitioner’s argument that the IRS failed to
     examine his return promptly in light of the statement
     on the return is without merit. We have previously
     held that this Court is not at liberty to modify a
     period of time prescribed by a statute of limitations
     in which the Commissioner is authorized to act. See
     Foster v. Commissioner, 80 T.C. 34, 229 (1983), affd.
     in part and vacated in part on another issue 756 F.2d
     1430 (9th Cir. 1985); Saigh v. Commissioner, 36 T.C.
     395, 424-425 (1961). Section 6501 expressly defines
     the period that respondent is authorized to assess
     deficiencies against taxpayers. * * * The timeliness
     of respondent’s examination is not an error for
     purposes of section 6404(e). [Nerad v. Commissioner,
     supra.]

     Moreover, congressional pronouncements and action both at

the time of enactment of section 6404(e) and upon amendment of

section 6404 after the years in issue strongly buttress adherence

to the plain meaning of the text.    Legislative history

accompanying the 1986 enactment of section 6404(e) notes

specifically that section 6404(e)(1) “does not therefore permit

the abatement of interest for the period between the date the

taxpayer files a return and the date the IRS commences an audit,
                              - 19 -

regardless of the length of that time period.”    H. Rept. 99-426,

supra at 844, 1986-3 C.B. (Vol. 2) at 844; S. Rept. 99-313,

supra at 208, 1986-3 C.B. (Vol. 3) at 208.

     We also note that Congress amended section 6404 with the

addition of subsection (g) in 1998, thereby providing for a

suspension of interest where the Secretary fails to notify a

taxpayer of liability within a stated period (18 months under the

original version of section 6404(g)) from the later of the filing

or the due date of the corresponding return.    Internal Revenue

Service Restructuring and Reform Act of 1998, Pub. L. 105-206,

sec. 3305, 112 Stat. 743.   Although the provision is effective

only for tax years ending after July 22, 1998, id., and is thus

inapplicable here, it is relevant to the extent that its

enactment suggests the absence of an existing remedy under

section 6404(e)(1) in analogous circumstances.

     Petitioners acknowledge the timing restrictions in the flush

language of section 6404(e)(1), as well as the judicial and

legislative authorities described supra.     Petitioners contend,

nonetheless, that the apparent strict interpretation signaled by

the statute must be balanced against, and moderated by, the

statement contained in the legislative history and often repeated

in caselaw that Congress did “not intend that this provision be

used routinely to avoid payment of interest; rather it intends

that the provision be utilized in instances where failure to
                             - 20 -

abate interest would be widely perceived as grossly unfair.”    H.

Rept. 99-426, supra at 844, 1986-3 C.B. (Vol. 2) at 844; S. Rept.

99-313, supra at 208, 1986-3 C.B. (Vol. 3) at 208.   Petitioners

maintain that, taking into account both clauses of the foregoing

statement:

     it is obvious that a “grossly unfair” standard must be
     considered in evaluating each unique set of facts and
     circumstances. In other words, the statute should be
     interpreted based on strict construction of the
     language regarding dates, amounts, etc.; however, this
     strict interpretation is limited to producing an
     equitable result that is not “grossly unfair.”

Petitioners contend that the “notion of limiting strict

construction of I.R.C. § 6404 with a subjective equitable

standard (‘grossly unfair’) is also reflected in an evolving

policy trend of both the IRS and Congress.”   In support of their

contentions, petitioners cite various revenue procedures and

statutory enactments (including section 6404(g)).

     Petitioners argue that for certain of the years in issue 8

to 10 years passed before the receipt of any notice that the IRS

was considering audits of the underlying returns, concluding:

          In the present matter, the assessment of compound
     interest for such a long period of time outside the
     normal statute of limitations; and without providing
     reasonable notice to the taxpayer from the onset of the
     investigation, clearly defeats any notion of fair play
     and runs contrary to the evolving policy demonstrated
     by the IRS and Congress. Such “grossly unfair” acts
     are the limiting standard to which Congress was clearly
     referring in H. Rept. 99-426, at 844 (1985).
     Furthermore, this case far exceeds the scope of
     “routine” in consideration of the abatement of
     interest. Not only does this matter involve
                             - 21 -

     significant dollar amounts, but it also contains
     elements of criminal and civil fraud.

          The present case sets forth unique circumstances
     where, in lieu of the trend enhancing the taxpayer’s
     ability to eliminate and/or minimize interest charges,
     upholding the interest charges against the taxpayer
     would produce a result that is “grossly unfair” and in
     direct conflict with the application of the statute as
     intended by Congress. * * *

     We disagree for several reasons.    First are the fundamental

and closely related tenets of statutory construction that (1) a

statute is to be interpreted so as to give effect to its plain

and ordinary meaning unless to do so would produce an absurd or

futile result, and (2) a statute clear and unambiguous on its

face must be regarded as conclusive absent an unequivocal

expression of legislative intent to the contrary.     E.g., Am.

Tobacco Co. v. Patterson, 456 U.S. 63, 68 (1982); United States

v. Am. Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940);

Fla. Hosp. Trust Fund v. Commissioner, 103 T.C. 140, 152 (1994),

affd. 71 F.3d 808 (11th Cir. 1996).     In the instant case, the

text in issue is a brief statement of temporal limitation, a

relatively routine feature of many taxing statutes.     We are hard

pressed to see any absurdity, futility, or ambiguity that would

permit the text of the statute to be overridden by legislative

history, especially by the legislative expression on which

petitioners rely, which falls far short of an unequivocal

repudiation of the statutory language.     Rather, we believe that

the two would appear to reflect a harmony of purpose.
                              - 22 -

     Although petitioners attempt to characterize the “grossly

unfair” clause as a liberalization, the restrictive nature of the

language would seem more rationally to be interpreted as

reiterating the general narrowness of the relief afforded by the

statute.   In the legislative history, the “grossly unfair” clause

is followed immediately by statements reprising specific limits

imposed by section 6404(e)(1) on the period for which relief may

be available, including the rule of IRS contact.    See H. Rept.

99-426, supra at 844, 1986-3 C.B. (Vol. 2) at 844; S. Rept. 99-

313, supra at 208, 1986-3 C.B. (Vol. 3) at 208.     Likewise, the

clause is immediately preceded by the statement cautioning

against routine use to avoid payment.   In that configuration, we

find it particularly difficult to read the “grossly unfair”

clause in the legislative history as an exception arising from

the midst of what is otherwise a description of the narrowness of

the remedy.

     Furthermore, even if the Court were willing to accept a

“grossly unfair” exception, the facts of the instant case would

fail to support its application.   Stated simply, petitioners seek

equitable relief, whereas the instant case is tainted by

Mr. Matthews’s criminal conviction for tax fraud.    As the Supreme

Court has observed in the context of the unlimited statute of

limitations for assessment in the case of a fraudulent return:

          We do not find petitioners’ complaint of “unfair
     treatment” persuasive. Petitioners claim that it is
                                - 23 -

     unfair “to forever suspend a Sword of Damocles over a
     taxpayer who at one time may have filed a fraudulent
     return, but who has subsequently recanted and filed an
     amended return providing the Government with all the
     information necessary to properly assess the tax.” * *
     * But it seems to us that a taxpayer who has filed a
     fraudulent return with intent to evade tax hardly is in
     a position to complain of the fairness of a rule that
     facilitates the Commissioner’s collection of the tax
     due. A taxpayer who has been the subject of a tax
     fraud investigation is not likely to be surprised when
     a notice of deficiency arrives, even if it does not
     arrive promptly after he files an amended return.
     [Badaracco v. Commissioner, 464 U.S. 386, 400 (1984).]

     Petitioners in the instant case are essentially seeking to

be placed in the position they would have occupied had they filed

and paid timely.   We will not permit such a result under the

facts.   With respect to each of the tax years in issue,

petitioners are not entitled to abatement of interest for any

period before the first written IRS contact regarding liabilities

for that year.   The parties stipulated the dates of first contact

as follows:

           Superior       TYE    1994    July 9, 1996
                          TYE    1995    Oct. 4, 1996

          Mr. Matthews           1990    Apr.   29,   2002
                                 1992    Apr.   29,   2002
                                 1993    Apr.   29,   2002
                                 1994    Jan.   28,   1997
                                 1995    Jan.   28,   1997

Concerning Mr. Matthews’s 1996 taxable year, the parties

stipulated that no written document was sent before the beginning

of the criminal investigation.
                              - 24 -

     C.   Abatement During Criminal Investigation

     As stipulated by the parties, the relevant criminal

investigation pertaining to Superior and Mr. Matthews was ongoing

from late February 1997 until May 28, 2002.   The subject of

interest abatement vis-a-vis criminal investigations has been

addressed in previous litigation.   Courts have long recognized

the general policy within the IRS to suspend resolution of a

civil examination pending completion of a criminal examination,

as well as the realities that may necessitate such an approach.

See, e.g., Badaracco v. Commissioner, supra at 399; United States

v. LaSalle Natl. Bank, 437 U.S. 298, 308-313 (1978).    In the

words of the Supreme Court:   “As a practical matter, therefore,

the Commissioner frequently is forced to place a civil audit in

abeyance when a criminal prosecution is recommended.”    Badaracco

v. Commissioner, supra at 399.

     This Court has noted that while a tax fraud investigation

comprises both civil and criminal aspects, the criminal aspects

dominate insofar as the investigation is controlled by the IRS

Criminal Investigation Division.    Taylor v. Commissioner 113 T.C.

206, 211-212 (1999), affd. 9 Fed. Appx. 700 (9th Cir. 2001);

Gorgie v. Commissioner, T.C. Memo. 2000-80.   Such a policy is

intended to avoid the conflicts between civil and criminal

discovery rules, the issues related to witness testimony and

self-incrimination, and the problems of inherent confusion that
                                    - 25 -

could result if civil and criminal proceedings were allowed to

take place concurrently.         Taylor v. Commissioner, supra at 212.

Consequently, civil assessment and collection are typically

deferred.    Id.

     In the context of a specific case, the foregoing and related

considerations must be weighed and applied by the IRS in deciding

how to proceed.       Id. at 212-213.   As a result, this Court has

held:   “The timing of the decision to defer the civil proceedings

until resolution of the criminal aspects does not detract from

the fact that the exercise of judgment is required in making such

a decision.”       Id. at 213.   The decision therefore is “not a

ministerial act.”       Id.; Hanks v. Commissioner, T.C. Memo. 2001-

319; Gorgie v. Commissioner, supra.

     Petitioners acknowledge and do not appear to raise any

direct challenge of the above rule.          They posit, however, “that

while the decision to suspend civil activity in itself may not be

a ministerial duty, actions prior to and subsequent to the making

of the actual decision may be defined as ministerial.”         We

disagree with their argument as applied to the circumstances of

this case.    See Gorgie v. Commissioner, supra (“The time spent

investigating whether to impose civil or criminal fraud

penalties, regardless of petitioners’ guilt or innocence, is not

a ground under section 6404(e) that would allow respondent to

abate interest.”).
                                - 26 -

     We conclude that petitioners are not entitled to interest

abatement for the period of the criminal investigation.

Additionally, in the light of the parties’ stipulations and the

circumstances discussed infra, we find it unnecessary to

determine whether the period of suspension should be considered

to end on May 28, 2002, when the U.S. Department of Justice

formally closed the files on its criminal case or at the earlier

time in February 2002 when the IRS resumed civil examination

activity at petitioners’ express request.

     D.   Abatement for Periods From July 1996 to February 1997
          and From February to November 2002

     There remain two periods during which some or all of the tax

years in issue were being examined for civil purposes.    Those

timeframes will be evaluated in turn for the existence of

ministerial error or delay.   As a threshold matter, however, we

will address the primary argument advanced by petitioners in

connection with the concept of ministerial error or delay.

     Petitioners quote extensively from provisions of the

Internal Revenue Manual, contending throughout their submissions

on this point that “The IRS, according to the Internal Revenue

Manual, is mandated to keep copious records of all action taken

by the Service on each case.”    Petitioners express their position

as follows:

          The Examining Officer’s Activity Records on the
     Petitioner show that the IRS has produced a number of
     records that are vague, uninformative, and fail to
                              - 27 -

     comply with it [sic] own practice and procedures. Due
     to the IRS’s failure to provide detailed records as
     required by its own practice and procedures, Petitioner
     claims that it is entitled, as a matter of law, to have
     such acts deemed favorably to the Petitioner, and
     regarded by the Court as being ministerial in nature.
     The Court should further determine that it is, in fact,
     the IRS’s duty to keep copious records of all action
     taken by the Service, its examiners, or others
     responsible for activity on the case; and that the
     Service is in violation of such a ministerial duty in
     this case. In the present case, the IRS violated its
     own manual.

     Initially, we note the well-settled principle that the

Internal Revenue Manual does not have the force of law, is not

binding on the IRS, and confers no rights on taxpayers.   E.g.,

Fargo v. Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), affg.

T.C. Memo. 2004-13; Carlson v. United States, 126 F.3d 915, 922

(7th Cir. 1997); Tavano v. Commissioner, 986 F.2d 1389, 1390

(11th Cir. 1993), affg. T.C. Memo. 1991-237; Marks v.

Commissioner, 947 F.2d 983, 986 n.1 (D.C. Cir. 1991), affg. T.C.

Memo. 1989-575.   Moreover, even if some duty of documentation

incumbent upon the IRS could be inferred from the Internal

Revenue Manual or other pertinent law, petitioners’ contentions

as applied to the instant case fail in the circumstances.

     In support of their argument petitioners enumerate seven

periods (many overlapping) as to which they claim that particular

IRS records, or the IRS records generally, are deficient.

According to petitioners, the cited periods and/or records

reflect no activity, state only “worked on case”, or otherwise
                               - 28 -

reveal no activity of significance.     However, six of the seven

identified periods transpired entirely within the period of the

criminal investigation.   The sole remaining complaint is raised

with respect to entries from January 28, 1997, through

December 2, 2002, in a specific record of the examining revenue

agent.   That record likewise is without significant relevance as

it is merely a correspondence log and full activity for relevant

times is recounted in other records of the revenue agent.

Accordingly, even petitioners’ argument fails.

          1.   Period From July 1996 to Late February 1997

     The first written contact with respect to any of the tax

years in issue was the appointment letter concerning Superior’s

TYE 1994 sent on July 9, 1996.   Superior’s TYE 1995 was added to

the audit, and the first notice thereof was provided on

October 4, 1996.   Similarly, Mr. Matthews’s 1994 and 1995 taxable

years were added, with written notice sent on January 28, 1997.

     Examination of the revenue agent’s activity records from

July 1996 through mid-February 1997 reveals consistent and

ongoing substantive work on the cases, including interviews,

courthouse research, review of returns and taxpayer or third-

party records, and analysis.   By the second week of February, the

emphasis had shifted to coordination and preparation of the fraud

referral, but nowhere do the records reflect any serious breaks

in activity.   We perceive nothing in the processing of
                                - 29 -

petitioners’ cases before the commencement of the criminal

investigation that would suggest ministerial errors or delays.

            2.   Period From February to Mid-November 2002

     Civil examination of petitioners’ returns resumed in

February of 2002, and proposed final examination reports setting

forth balances due for each of the years in issue were provided

to petitioners on November 15, 2002.     IRS records for the

intervening period reflect consistent and ongoing examination

activity.    Regular communication occurred between the revenue

agent and petitioners’ representatives, including repeated

requests by the revenue agent for information.     Additionally, by

written contact on April 29, 2002, a date falling within this

period, Mr. Matthews’s 1990, 1992, and 1993 taxable years were

added to the audit.    Notably, petitioners initially declined to

provide certain information requested, forcing the IRS to pursue

summons procedures.    Furthermore, even when petitioners began to

work more cooperatively with the revenue agent in the fall of

2002, information was typically not provided by promised

deadlines, necessitating considerable followup by the revenue

agent.

     Once negotiations between the parties concerning the

relevant computations were completed, the revenue agent prepared

and provided the final examination reports within 2 days.      From

that point, petitioners were solely responsible for terminating
                             - 30 -

the accrual of interest by remitting payment.       On the record we

find no ministerial errors or delays affecting the period from

February through mid-November 2002.

     E.   Conclusion

     In accordance with governing law and the complete records in

the instant case, we conclude that respondent committed no abuse

of discretion in determining that petitioners were not entitled

to abatement of interest pursuant to section 6404(e)(1) with

respect to any of the years in issue.    Respondent’s motions for

summary judgment will be granted, and petitioners’ cross-motions

will be denied.

     The Court has considered all other arguments made by the

parties and, to the extent not specifically addressed herein, has

concluded that they are irrelevant, moot, or without merit.      To

reflect the foregoing,


                                           Appropriate orders and

                                      decisions for respondent will

                                      be entered.
