                         T.C. Memo. 2012-116



                   UNITED STATES TAX COURT



            MICHAEL COLEMAN, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket Nos. 2945-09L, 3164-09.              Filed April 23, 2012.



      R denied P’s request for interest abatement and sustained collection
actions related to P’s income tax deficiencies arising from P’s participation
in some of the Hoyt partnership tax shelters.

      Held: R’s determinations are sustained.



Mark D. Pastor, for petitioner.

Laura J. Mullin, for respondent.
                                          -2-

                            MEMORANDUM OPINION


      WHERRY, Judge: These consolidated cases are before the Court on a

petition for review of two determinations by respondent. Respondent determined to

sustain his plan to levy on petitioner’s assets, and respondent denied petitioner’s

request for an abatement of interest. Petitioner seeks review of respondent’s

determinations.

      These cases stem from petitioner’s participation in two partnership tax

shelters for the 1989, 1990, 1991, 1992, 1994, 1995, and 1996 tax years.1 The

issue for decision is whether respondent’s settlement officers abused their discretion

in denying abatement of the interest on petitioner’s outstanding liabilities.

                                      Background

      These cases were submitted fully stipulated pursuant to Rule 122.2 The

parties’ stipulation of facts, with accompanying exhibits, is incorporated herein by

this reference. At the time the petitions were filed, petitioner resided in California.




      1
       The tax years 1989, 1990, and 1991 are at issue because of net operating
loss (NOL) carrybacks to those years.
      2
       Unless otherwise indicated, all section references are to the Internal Revenue
Code of 1986, as amended. The Rule references are to the Tax Court Rules of
Practice and Procedure.
                                          -3-

        The underlying deficiencies in these cases arose out of petitioner’s investment

in two partnerships, Shorthorn Genetic Engineering 1990-2 JV (SGE) and Florin

Farms No. 5 (FF). The liabilities are assessments under the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324, relating to

the Hoyt & Sons Ranch Properties tax shelter.3

        On June 3, 1996, respondent mailed to petitioner a notice of beginning of an

administrative proceeding (NBAP) for SGE for the 1992 tax year. On February 18,

1997, respondent mailed to petitioner a notice of final partnership administrative

adjustment (FPAA) for SGE for the 1992 tax year. On September 28, 1998,

respondent mailed to petitioner an NBAP and an FPAA for SGE for the 1994 tax

year.

        On January 12, 1999, respondent mailed to petitioner a letter and an attached

Form 4549A-CG, Income Tax Examination Changes, and Form 886-A, Explanation

of Items, explaining how the adjustments made during the examination of SGE and

FF affected his individual income tax return for tax years 1989 through 1993. The

cover letter explained that because the examination of Hoyt & Sons Ranch


        3
       The Hoyt partnerships have been “found to be illegal tax shelters. [Mr.]
Hoyt is currently serving a federal prison sentence of 235 months for conspir[ing] to
commit fraud, bankruptcy fraud, and money laundering.” Mekulsia v.
Commissioner, 389 F.3d 601, 601 (6th Cir. 2004), aff’g T.C. Memo. 2003-138.
                                          -4-

Properties partnerships “affects the partnership/s corporation * * * in which you are

an investor, your individual return has been adjusted accordingly.” Form 4549A-

CG broke down the adjustments by tax year and computed the interest on the

deficiencies to date. The Form 866-A stated that “Additional interest will be

charged at the current rate compounded daily. Interest is charged from the original

due date of the return to a date 30 days after an agreement to the additional tax is

signed, or to the date of payment, if earlier.”

        On April 12, 1999, respondent mailed to petitioner an NBAP for FF for the

1996 tax year. On May 17, 1999, respondent mailed to petitioner an NBAP and an

FPAA for SGE for the 1995 tax year. On September 27, 1999, respondent mailed

petitioner an NBAP and an FPAA for SGE for the 1996 tax year. Also, on

September 27, 1999, respondent mailed petitioner an FPAA for FF for the 1996 tax

year.

        On April 24, 2000, respondent mailed petitioner a second Form 4549A-CG.

The cover letter to this Form 4549A-CG explained that

        This report is a modification of an earlier report that adjusted the
        distribution income coming into your partnership for Hoyt and Sons
        Ranch Property * * * for the year ending December 31, 1992. This
        adjustment decreases some of the tax previously assessed. The final
        determination on most of the audit issues on the investor partnerships
        are not yet complete and are not reflected in this report.
                                          -5-

      On May 3, 2006, as a result of a petition filed on July 26, 1999, at docket No.

12964-99, in response to the FPAA for FF’s 1995 taxable year, the Court entered a

decision in FF’s partnership-level TEFRA proceeding. Also on May 3, 2006, as a

result of a petition filed on October 26, 1999, at docket No. 16587-99, in response

to the FPAA for FF’s 1996 taxable year, the Court entered a decision in FF’s

partnership-level TEFRA proceeding. On May 5, 2006, as a result of a petition

filed on September 14, 1998, at docket No. 15262-98, in response to the FPAA for

FF’s 1994 taxable year, the Court entered a decision in FF’s partnership-level

TEFRA proceeding. On May 17, 2006, as a result of a petition filed on May 15,

1997, at docket No. 9852-97, in response to the FPAA for SGE’s 1992 taxable

year, the Court entered a decision in SGE’s partnership- level TEFRA proceeding.4

      Petitioner then submitted a request for interest abatement, and on December

31, 2006, respondent mailed petitioner a Notice of Full Disallowance--Final

Determination, informing petitioner that respondent was “disallowing your request

for an abatement of interest.” This letter explained that petitioner, if he met the




      4
       All of these decisions were entered pursuant to stipulated decisions entered
by the parties.
                                           -6-

eligibility requirements, could request review of this determination by the Tax

Court.

         On July 12, 2007, respondent mailed petitioner another Form 4549A-CG

setting forth the computational adjustments under section 6231(a)(6), arising out of

the FPAA adjustments, resulting in income tax deficiencies for petitioner for taxable

years 1989 through 1996. On July 21, 2007, respondent assessed the additional tax

due and interest he determined to be due for tax years 1989, 1990, 1991, 1992,

1994, 1995, and 1996 in the total amount of $61,139.78.

         On January 2, 2008, respondent sent petitioner a Final Notice of Intent to

Levy and Notice of Your Right to a Hearing for tax years 1989, 1990, 1991, 1992,

1994, 1995, and 1996. Included was an account summary showing:

                     Assessed           Accrued         Late payment
     Year            balance            interest           penalty           Total
     1989           $24,497.87          $985.99            $315.49         $25,799.35
     1990             21,326.61         4,535.20             541.94         26,403.75
     1991            28,304.92          1,255.73             627.13         30,187.78
     1992              9,558.99           384.72            150.70          10,094.41
     1994              1,850.24            74.47              31.65          1,956.36
     1995              5,882.71           236.76            117.67           6,237.14
     1996              1,800.04            50.06              23.40          1,873.50
         Total       93,221.38          7,522.93           1,807.98        102,552.29
                                           -7-

      Respondent received petitioner’s Form 12153, Request for a Collection Due

Process or Equivalent Hearing, dated January 29, 2008, on February 20, 2008. On

Form 12153 petitioner had checked the box for withdrawal of the tax lien as well as

the boxes for installment agreement and offer-in-compromise. In an attachment to

Form 12153 petitioner’s attorney stated that the tax which was assessed had been

miscalculated and requested a re-audit. He also stated that petitioner was entitled to

interest abatement “due to unreasonable errors and delays by the Internal Revenue

Service in making the subject assessments of interest against taxpayer Michael

Coleman pursuant to Section 6404(e)”.

      On August 21, 2008, Settlement Officer Nathan August sent petitioner a letter

acknowledging receipt of his request for a collection due process (CDP) hearing and

scheduling a face-to-face CDP hearing with his attorney on October 14, 2008.

      On December 11, 2008, respondent and petitioner’s attorney had a face-to-

face hearing. Petitioner’s attorney continued to assert that the interest should be

abated under section 6404(e). Respondent’s contemporaneous written case activity

record states that petitioner’s attorney

      stated that it was “ridiculous that seven years expired” from the date of
      [sic] the Tax Court opinion was issued until the tax assessments were
      made against TP. * * * [The attorney] said there is “no reason why
                                         -8-

       something wasn’t done much earlier in this matter” and that there is “no
       justifiable excuse” for the IRS to take seven years to make the assessments
       against TP.

Officer August explained that while an opinion was issued in May 2000, the Court’s

decisions on the proceedings that gave rise to petitioner’s liabilities were not entered

until May 2006 and that under TEFRA the period of limitations for assessment did

not expire until one year after the Court entered its decision plus 90 days.

      Officer August’s notes also state that petitioner’s attorney argued that “it was

incumbent upon the IRS to have filed a motion in the Tax Court trial to have the Tax

Matters Partner Walter Jay Hoyt removed from representing the Hoyt Partnership

investors once the Tax Court deemed Mr. Hoyt to have acted fraudulently * * *

argu[ing] that if the IRS had done so the Tax Court case would have reached a

‘conclusion’ earlier.”

      On December 31, 2008, respondent sent petitioner a Notice of Determination

Concerning Collection Action(s) Under Section 6320 and/or 6330. In an attachment

to the notice of determination respondent explained his reasoning for the

determination.

      On February 9, 2009, petitioner timely filed a petition with this Court at

docket No. 2945-09L. Petitioner argued, inter alia:
                                        -9-

      Respondent erred in unreasonably delaying the making of the
      underlying assessments against Petitioner for the subject tax years
      1989, 1990, 1991, 1992, 1994, 1995, and 1996, to the substantial
      prejudice of Petitioner, including but not limited to, the assessment of
      excessive interest against Petitioner for each of said aforementioned
      income tax years, as Respondent’s delay in making said assessment
      until approximately July 31, 2007, was the product of Respondent’s
      careless, reckless, and unreasonable conduct through the unreasonable
      errors and/or delays by an officer or employee of the Internal Revenue
      Service.

      On February 10, 2009, petitioner filed with this Court a petition for review of

failure to abate interest under code section 6404 at docket No. 3164-09 and made

the same arguments as in his petition filed on February 9, 2009.5 On August 20,

2009, respondent filed a motion for summary judgment. On October 26, 2009,

petitioner filed his objection to that motion. By order on January 8, 2010, the Court

granted summary judgment, allowing respondent to proceed with collection activity

pursuant to the notice of determination dated December 31, 2008, and denied

summary judgment with respect to the interest abatement issue.

      These cases were called from the calendar on September 13, 2010, in Los

Angeles, California. The parties asked the Court to be allowed to submit the cases

under Rule 122, and the Court agreed. Respondent reserved objections to the



      5
       Docket Nos. 2945-09L and 3164-09 were consolidated for trial, briefing, and
opinion by order of this Court on April 16, 2009.
                                         - 10 -

stipulation of facts and the accompanying exhibits as to materiality for paragraphs

33 through 48 and the corresponding Exhibits 18-P through 32-P.6

                                      Discussion

      Interest on a Federal income tax deficiency generally accrues at the rate

specified by section 6621 from the last date prescribed for payment until the date on

which the tax is paid. Sec. 6601(a). Under the applicable version of section

6404(e)(1) the Secretary may abate all or any part of that interest to the extent it

accrued because of “any error or delay by an officer or employee of the Internal

Revenue Service (acting in his official capacity) in performing a ministerial act”.7

      6
        On brief respondent objected to these stipulations and exhibits on the
grounds of relevancy, arguing that they all pertain to the criminal proceedings
against Mr. Hoyt and are irrelevant to petitioner’s case. The Court finds that these
stipulations and exhibits are relevant to the case at hand; accordingly we overrule
respondent’s objections. Fed. R. Evid. 401 defines “Relevant evidence” as
“evidence having any tendency to make the existence of any fact that is of
consequence to the determination of the action more probable or less probable than
it would be without the evidence.”
      7
       Sec. 6404(e)(1) applies to interest accruing with respect to deficiencies or
payments for tax years beginning after December 31, 1978. Tax Reform Act of
1986, Pub. L. No. 99-514, sec. 1563(b), 100 Stat. at 2762; see Coco v.
Commissioner, T.C. Memo. 2001-80. In 1996 Congress amended sec.
6404(e)(1)(A) to refer to “unreasonable” errors or delays and “ministerial or
managerial” acts. Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. No. 104-168, sec.
301(a), 110 Stat. at 1457 (1996); see Hinck v. United States, 550 U.S. 501, 505 n.1
(2007). Those amendments apply to interest accruing on deficiencies for tax years
beginning after July 30, 1996. TBOR 2 sec. 301(c), 110 Stat. at 1457; Hinck, 550
                                                                         (continued...)
                                          - 11 -

      A ministerial act is a procedural or mechanical act that does not involve the

exercise of judgment or discretion and occurs during the processing of a taxpayer’s

case after all the prerequisites to the act, such as conferences and review by

supervisors, have taken place. See Lee v. Commissioner, 113 T.C. 145, 149-150

(1999); sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg.

30163 (Aug. 13, 1987). An error or delay will be taken into account only if no

significant aspect of it is attributable to the taxpayer involved and it occurs after the

Internal Revenue Service (IRS) has contacted the taxpayer, in writing, with respect

to the deficiency or payment of tax on which the interest is accruing. Sec.

6404(e)(1).

      Even when there has been an error or delay with respect to a ministerial act,

the Secretary has discretion to decide whether to abate interest. Sec. 6404(e); see

Grandelli v. Commissioner, T.C. Memo. 2008-55. We have jurisdiction under

6404(h) to determine whether the Secretary’s decision not to abate interest was an

abuse of discretion. The taxpayer bears the burden of proving that the Secretary

acted arbitrarily, capriciously, or without sound basis in fact or law. Woodral v.

Commissioner, 112 T.C. 19, 23 (1999). To meet this burden the taxpayer must

      7
        (...continued)
U.S. at 505 n.1. Because this case involves interest accruing with respect to tax
years prior to 1996, sec. 6404(e)(1) applies but the 1996 amendments do not.
                                         - 12 -

establish “(1) An error or delay by the IRS in performing a ministerial * * * act; (2)

a correlation between [any such error or delay and] a specific period of delay in

payment * * *; and (3) that the taxpayer would have paid the tax liability earlier but

for the IRS’s error” or delay. See Sher v. Commissioner, T.C. Memo. 2009-86,

aff’d, 381 Fed. Appx. 62 (2d Cir. 2010).

      Petitioner essentially argues that he should have been notified “as a simple

ministerial act by Respondent of the initial indictment [of Mr. Hoyt] on November

24, 1998” and that the lack of this simple notification “inviting Petitioner to take the

opportunity to settle the case and avoid further interest” was an error or delay by the

IRS in performing a ministerial act.8 Petitioner urges this Court to find that

respondent abused his discretion in refusing to abate interest from the date of Mr.

Hoyt’s initial indictment on November 24, 1998, until the amounts were assessed on

July 31, 2007.

      The petitions in the original partnership-level cases were filed in 1999, and

the final decisions by this Court were not entered until May 2006. We note: “The

      8
        Petitioner apparently abandons the argument that it was an error for the
Commissioner to fail to remove Mr. Hoyt as the tax matters partner. This was a
wise decision given that the Court has previously found that it was not an abuse of
discretion for the Commissioner to refuse to abate interest on deficiencies arising
from the Hoyt tax shelters when the Commissioner did not remove Mr. Hoyt as the
tax matters partner and did not notify Mr. Hoyt that he was under criminal
investigation. See Mekulsia v. Commissioner, T.C. Memo. 2003-138.
                                          - 13 -

mere passage of time in the litigation phase of a tax dispute does not establish error

or delay by the Commissioner in performing a ministerial act. * * * Respondent’s

decision on how to proceed in the litigation phase of the case necessarily required

the exercise of judgment and thus cannot be a ministerial act.” Lee v.

Commissioner, 113 T.C. at 150-151.

      Under section 6229(d) respondent could not assess income tax liabilities of

the individual partner until the decision entered in the litigation matter of the

partnership became final, which is 90 days after entry of decision in order to allow

time for appeal. See Mathia v. Commissioner, T.C. Memo. 2009-120, aff’d, 669

F.3d 1080 (10th Cir. 2012). Respondent then had one year to assess the tax

deficiency. See sec. 6229(d)(2). Respondent assessed petitioner’s liabilities on

July 21, 2007, which was less than the one year plus 90 days, see sec. 7481, after

the earliest of the decisions filed by this Court, May 3, 2006.

      Petitioner has not shown that respondent abused his discretion in waiting to

assess the deficiencies until the decisions of the Court were final, and we do not find

that it was an abuse of discretion that respondent did not notify petitioner that Mr.

Hoyt had been indicted and invite petitioner to settle. Respondent was required to

exercise judgment or discretion in determining whether to notify petitioner about
                                        - 14 -

Mr. Hoyt’s indictment and/or inviting petitioner to settle and therefore it was not a

ministerial act under section 6404(e)(1).9

      The Court has considered all of petitioner’s contentions, arguments, requests,

and statements. To the extent not discussed herein, the Court concludes that they

are meritless, moot, or irrelevant.

      To reflect the foregoing,


                                                       Decisions will be entered

                                                 for respondent.




      9
        These cases exemplify shortcomings in TEFRA’s procedure provisions
which, in some instances, turn the control and management of TEFRA cases over to
unscrupulous promoters who do not represent the investors’ best interests. See
Superior Trading, LLC v. Commissioner, T.C. Memo. 2012-110. Congress
recognized this problem and the limitations on interest relief in part in TBOR 2,
which amended sec. 6404(e)(1)(A) to add to “ministerial acts” “managerial acts”.
TBOR 2 sec. 301(a), 110 Stat. at 1457. We also note “The Commissioner has no
obligation under the Constitution to apprise investors of the character of their
TMP’s or even of their criminal propensities.” Phillips v. Commissioner, 272 F.3d
1172, 1174 (9th Cir. 2002), aff’g 114 T.C. 115 (2000).
