                  T.C. Memo. 2009-24



                UNITED STATES TAX COURT



      RONALD D. AND ANN S. YOUNG, Petitioners v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 17563-07.               Filed February 4, 2009.



     Ps requested an abatement of interest on Federal income
tax deficiencies for the taxable years 1997 through 2000. R
determined that Ps were not entitled to an abatement of
interest.

     Held: R’s determination was not an abuse of discretion.



Ronald D. and Ann S. Young, pro sese.

Jonathan J. Ono, for respondent.
                               - 2 -

                        MEMORANDUM OPINION


     WHERRY, Judge:   Respondent determined that petitioners are

not entitled to an abatement of interest on Federal income tax

deficiencies for their 1997, 1998, 1999, and 2000 tax years.    The

issue for decision is whether respondent’s refusal to abate

interest was an abuse of discretion.

                            Background

     This case was submitted fully stipulated pursuant to Rule

122 of the Court’s Rules of Practice and Procedure.   The

stipulation of the parties, with accompanying exhibits, is

incorporated herein by this reference.   Petitioners filed timely

joint Forms 1040, U.S. Individual Income Tax Return, for their

1997, 1998, 1999, and 2000 tax years.

     From 1997 through 2000 Mr. Young worked on Johnston Island

for Washington Group International, formerly known as Raytheon

Demilitarization Co. (Raytheon).   During those years he received

wages from Raytheon of $82,939, $77,012, $79,108, and $83,422,

respectively.   On their joint returns, petitioners reported

receiving those amounts as wage income but excluded them from

gross income, citing section 1.931-1, Income Tax Regs.

     Respondent subsequently determined that, pursuant to section

931,1 petitioners were not entitled to exclude any portion of Mr.


     1
      All section references are to the Internal Revenue Code of
                                                   (continued...)
                               - 3 -

Young’s Raytheon wages.   Respondent issued a notice of deficiency

for petitioners’ 1997 tax year and a notice of deficiency for

petitioners’ 1998, 1999, and 2000 tax years.   Petitioners timely

petitioned this Court to redetermine the deficiencies.   Those

petitions were docketed at docket Nos. 8295-01 and 10376-03.     In

both cases the parties executed stipulated decisions that upheld

respondent’s adjustments pursuant to section 931 and held that

petitioners were liable for the asserted income tax deficiencies

in all 4 years.

     Thereafter, respondent assessed the income tax deficiencies

for those years along with related interest.   Petitioners filed

administrative requests for abatement of the related interest,

which respondent’s Appeals Office ultimately disallowed in full

for all 4 years.

     On August 7, 2007, petitioners timely petitioned the Court

to review respondent’s refusal to abate interest.   They resided

in Florida when they filed their petition.   In the petition

petitioners argue that

     The action of the Commissioner to continue the
     publication of Treasury Regulation 1.931-1 following
     the enactment of the Tax Reform Act of 1986 until April
     6, 2005, a period of almost twenty years, constitutes
     an error and delay in the performance of his/her
     managerial or ministerial duty, mandated by statute,
     entitling petitioners to the abatement of interest on



     1
      (...continued)
1986, as amended.
                               - 4 -

     the deficiencies resulting therefrom, during the period
     of the Commissioner’s failure to act.

Petitioners had an opportunity to file a brief but did not do so.

     Some additional background is necessary to fully understand

petitioners’ argument.   Before 1986, section 931 permitted U.S.

citizens “to exclude income derived from sources within

possessions of the United States, except for Puerto Rico, the

U.S. Virgin Islands, or Guam, if certain conditions were

satisfied.”   See Specking v. Commissioner, 117 T.C. 95, 102

(2001), affd. sub nom. Haessly v. Commissioner, 68 Fed. Appx. 44

(9th Cir. 2003), affd. sub nom. Umbach v. Commissioner, 357 F.3d

1108 (10th Cir. 2003).   Johnston Island was not specifically

mentioned in section 931; however, section 1.931-1(a)(1), Income

Tax Regs., defined “possession of the United States” to include

Johnston Island.   See Specking v. Commissioner, supra at 103.

     In 1986, section 931 was amended by the Tax Reform Act of

1986, Pub. L. 99-514, sec. 1272(a), 100 Stat. 2593.   As amended,

section 931 permits bona fide residents of Guam, American Samoa,

and the Northern Mariana Islands to exclude income derived from

within any of those three specified possessions.   See Specking v.

Commissioner, supra at 110.   Despite the statutory amendment,

section 1.931-1(a)(1), Income Tax Regs., continued to refer to

Johnston Island until it was amended in April 2005.   See T.D.

9194, 2005-1 C.B. 1016 (revising section 1.931-1, Income Tax

Regs., and adding section 1.931-1T, Temporary Income Tax Regs.,
                               - 5 -

promulgated under amended section 931); see also Smith v.

Commissioner, T.C. Memo. 2006-51 n.8.

     Like petitioners, a number of other taxpayers relied on

section 1.931-1(a)(1), Income Tax Regs., to exclude Johnston

Island income even after section 931 was amended.   See, e.g.,

Farrell v. United States, 313 F.3d 1214, 1215 (9th Cir. 2002);

Specking v. Commissioner, supra; Smith v. Commissioner, supra;

Taibo v. Commissioner, T.C. Memo. 2004-196.   In cases before this

Court we have determined that those taxpayers were not justified

in doing so because section 931 controlled and because section

1.931-1(a)(1), Income Tax Regs., had been rendered obsolete in

light of the amendment to section 931.   See Specking v.

Commissioner, supra at 110-111; Jones v. Commissioner, T.C. Memo.

2003-14.   We noted that the failure to amend the regulation

sooner did not suggest that taxpayers were still permitted to

exclude Johnston Island income:   “‘The Treasury’s relaxed

approach to amending its regulations to track Code changes is

well documented. * * * The absence of any amendment * * * is more

likely a reflection of the Treasury’s inattention than any

affirmative intention on its part to say anything at all.’”

Specking v. Commissioner, supra at 111 (quoting United Dominion

Indus., Inc., v. United States, 532 U.S. 822, 836-837 (2001)).
                               - 6 -

                            Discussion

     Under section 6601(a), interest on a Federal income tax

liability 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.   If there is an “unreasonable 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,” the Secretary may abate all or any part of the interest

that accrues because of the error or delay.    Sec. 6404(e)(1).     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.     Id.; sec. 301.6404-

2(a)(2), Proced. & Admin. Regs.

     Even when there is an unreasonable error or delay with

respect to a managerial or 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 section 6404(h) to determine whether the

Secretary’s decision not to abate interest was an abuse of

discretion.   In such cases the taxpayer bears the burden of

proving that the Commissioner exercised this discretion
                                 - 7 -

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

See Woodral v. Commissioner, 112 T.C. 19, 23 (1999).

     Petitioners have conceded that they could not exclude Mr.

Young’s Johnston Island income and that they are liable for

income tax deficiencies for 1997, 1998, 1999, and 2000.    Citing

section 6404(e), however, they argue that the failure to promptly

amend section 1.931-1, Income Tax Regs., after the statutory

amendment was an unreasonable error or delay in performing a

managerial or ministerial act.    They argue further that that

error or delay led them to exclude Mr. Young’s Johnston Island

income on their 1997 through 2000 returns, which ultimately

resulted in the deficiencies and the interest on those
                               - 8 -

deficiencies.2   Accordingly, they assert that the Secretary

should abate the interest on those deficiencies.

     Petitioners’ argument is unpersuasive for two reasons.

First, for petitioners to prevail, we would have to determine

that the delay in amending section 1.931-1, Income Tax Regs., was

an unreasonable error or delay by an IRS officer or employee.

Petitioners have not provided evidence that the error or delay in

performing that act was attributable to an IRS officer or

employee.   The process of amending a regulation is extensive and

involves multiple layers of analysis, review, and approval within

both the IRS and the Treasury Department.   See, e.g., sec.

601.601(a), Statement of Procedural Rules; Internal Revenue



     2
      As we have seen, taxpayers who excluded Johnston Island
income after the statutory amendment have not been successful
using this type of cause-and-effect argument--based on their
reliance on the Secretary’s delay in amending the regulation--to
avoid liability for income tax deficiencies. See, e.g., Specking
v. Commissioner, 117 T.C. 95, 110-111 (2001), affd. sub nom.
Haessly v. Commissioner, 68 Fed. Appx. 44 (9th Cir. 2003), affd.
sub nom. Umbach v. Commissioner, 357 F.3d 1108 (10th Cir. 2003);
Smith v. Commissioner, T.C. Memo. 2006-51.

     The argument has been used successfully, however, to avoid
liability for the sec. 6662(a) accuracy-related penalty. See
Taibo v. Commissioner, T.C. Memo. 2004-196 (holding that a
taxpayer who relied on sec. 1.931-1, Income Tax Regs., had a
reasonable basis for excluding Johnston Island income earned in
2000). But see Smith v. Commissioner, T.C. Memo. 2006-51
(concluding that taxpayer did not have reasonable basis where he
relied on sec. 1.931-1, Income Tax Regs., as to income earned in
2001, after courts had rejected that argument); Hautzinger v.
Commissioner, T.C. Memo. 2003-236 (upholding a penalty even as to
income earned in 1998 before the courts had addressed the
validity of sec. 1.931-1, Income Tax Regs.).
                               - 9 -

Manual (IRM) pt. 32.1.1 et seq. (Aug. 11, 2004) (Chief Counsel

Regulation Handbook).3   Notably, both the IRS Commissioner and an

Assistant Treasury Secretary must approve and sign final

regulations.   See sec. 601.601(a), Statement of Procedural Rules;

IRM pt. 32.1.6, 32.1.8 (Aug. 11, 2004).   Because there is no

indication that the delay in amending section 1.931-1, Income Tax

Regs., was attributable to IRS officers or employees as opposed

to Treasury Department officials or employees, interest abatement

under section 6404(e) is not appropriate.

     Second, even if the delay in amending section 1.931-1,

Income Tax Regs., was an unreasonable error or delay by an IRS

officer or employee in performing a managerial or ministerial

act, petitioners would still not prevail.   They argue that they

should not have to pay any interest on their income tax

deficiencies because those deficiencies were caused by the delay

in amending the regulation.   Based on that argument, petitioners

have not shown the “requisite correlation between an error or

delay attributable to the Commissioner and a specific period of


     3
      See also Swallows Holding, Ltd. v. Commissioner, 126 T.C.
96, 177 (2006) (Holmes, J., dissenting) (“The IRS and Treasury
use the same regulation-writing process for both general and
specific authority regulations, subjecting both to the same
painstaking review under the IRS’s ‘Regulation Drafting
Handbook,’ I.R.M. 32.1.5. Both types [general a.k.a.
interpretive regulations and specific authority a.k.a.
legislative regulations] are issued as Treasury decisions, and
both are signed by an Assistant Treasury Secretary and the IRS
Commissioner.”), vacated and remanded 515 F.3d 162 (3d Cir.
2008).
                               - 10 -

time” during which interest should be abated.    Braun v.

Commissioner, T.C. Memo. 2005-221; see Guerrero v. Commissioner,

T.C. Memo. 2006-201 (“A request demanding abatement of all

interest charged does not satisfy the required link; it merely

represents a request for exemption from interest.”).

     Moreover, under section 6404(e), respondent could not abate

the interest that accrued on petitioners’ deficiencies during the

period from when interest began to accrue to when petitioners

received written notice of the deficiencies.    In determining

whether to abate interest that accrued after written notice was

received, respondent could only consider whether the continued

failure to amend section 1.931-1, Income Tax Regs., after such

notice was received resulted in any additional interest charges.

Petitioners have not shown that any such additional interest

accrued or that they would have paid their tax liabilities

earlier had the regulation been amended during the prosecution of

their cases before the IRS.4   See Guerrero v. Commissioner, supra


     4
      We note that the statutory notice of deficiency for
petitioners’ 1997 tax year was issued on Apr. 6, 2001, which was
after the U.S. District Court for the District of Hawaii held
that sec. 931 and sec. 1.931-1, Income Tax Regs., did not permit
taxpayers to exclude income earned on Johnston Island in 1994,
1995, and 1996. Farrell v. United States, 87 AFTR 2d 2001-1159,
2001-1 USTC par. 50,279 (D. Haw. 2001), affd. 313 F.3d 1214 (9th
Cir. 2002). The notice of deficiency for petitioners’ 1998,
1999, and 2000 tax years was issued on Apr. 5, 2002, which was
after this Court reached the same conclusion in Specking v.
Commissioner, supra. Accordingly, even though sec. 1.931-1,
Income Tax Regs., was not amended until 2005, petitioners had at
least some notice at a relatively early stage that the regulation
                                                   (continued...)
                              - 11 -

(“Abatement of interest is not appropriate simply because a

taxpayer might have made a tax payment sooner.”); Braun v.

Commissioner, supra (holding that interest abatement was not

warranted under section 6404(e) where the taxpayer had not

demonstrated that he and his wife would have paid their tax

liabilities earlier but for the Commissioner’s actions).

     In any event, the failure to timely amend section 1.931-1,

Income Tax Regs., is not the type of error--such as the failure

to send a notice of deficiency or a notice and demand for

payment, for example--that would have affected the timely

prosecution of petitioners’ cases before the IRS or prevented the

prompt resolution of those cases, resulting in additional

interest charges.

     For these reasons, abatement of interest under section

6404(e) is not appropriate, and respondent’s refusal to abate

interest was not an abuse of discretion.   The Court has

considered all of petitioners’ contentions, arguments, requests,

and statements.   To the extent not discussed herein, we conclude

that they are meritless, moot, or irrelevant.




     4
      (...continued)
did not support their position because it was in conflict with
the amended statute and therefore obsolete.
                        - 12 -

To reflect the foregoing,


                                  Decision will be entered

                             for respondent.
