                         T.C. Memo. 2003-316



                       UNITED STATES TAX COURT



   STANLEY R. HARBAUGH AND BONNIE L. HARBAUGH, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10591-02.              Filed November 13, 2003.


     Stanley R. Harbaugh and Bonnie L. Harbaugh, pro sese.

     Frederick J. Lockhart, Jr. and Sara J. Barkley, for

 respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:    On December 19, 2001, respondent issued a

notice of final determination denying petitioners’ claim under

section 64041 for abatement of interest on income tax liabilities


     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect at the time the petition was
                                                   (continued...)
                                 - 2 -

for 1993, 1994, and 1995.    Petitioners timely filed a petition

seeking review of respondent’s determination not to abate

interest.    Initially, we must decide whether petitioners reached

an enforceable compromise of their tax liabilities under section

7122.    We hold that petitioners did not reach an enforceable

compromise under section 7122.    The remaining issue for decision

is whether respondent’s denial of interest abatement with respect

to petitioners’ income taxes for 1993, 1994, and 1995 was an

abuse of discretion under section 6404.2     For the reasons stated

herein, we hold that respondent’s refusal to abate the interest

on petitioners’ income tax liabilities from December 22, 1996 to

August 11, 1999, was an abuse of discretion but that in all other

respects the failure to allow abatement was not an abuse of

discretion.

                          FINDINGS OF FACT

     Some of the facts have been stipulated.     The stipulation of

facts and the attached exhibits are incorporated herein by this

reference.    Petitioners resided in Longmont, Colorado, at the

time the petition was filed.    References to petitioner are to

Stanley Harbaugh.


     1
      (...continued)
filed, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
     2
       Petitioners’ petition requests review only with respect to
the interest accrued since August 1996, on their income tax
liabilities for 1993, 1994, and 1995.
                                 - 3 -



Trust Fund Recovery Penalty and Income Tax Deficiencies

     On September 3, 1992, respondent filed a Notice of Federal

Tax Lien for $9,536.28 against petitioner with respect to a trust

fund recovery penalty (the TFRP) under section 6672 for

employment tax periods ending September 30, 1989, December 31,

1989, and March 31, 1990.3

     Petitioners filed their 1993 Federal income tax return on

April 15, 1994, showing tax due of $917.15, but remitted no

payment with the return.     Petitioners filed their 1994 Federal

income tax return on July 8, 1996, showing tax due of $1,498, but

remitted no payment with the return.     Petitioners filed their

1995 Federal income tax return on April 15, 1996, showing tax due

of $964, and, again, no payment was remitted with the return.4

Installment Agreement

     In August 1996, petitioner called the Internal Revenue

Service (IRS) to discuss the payment of his existing tax

liabilities (the first call).     During the first call, petitioner

spoke to an employee of the IRS whom he recalls as “Miss

Morrison” at one of the IRS’s automated collection sites (ACS).

     3
       The trust fund recovery penalty (TFRP) was assessed on
June 8, 1992, as a result of employment tax liabilities incurred
by Northern Colorado Travel while petitioner was its president.
     4
       Petitioners also filed a chapter 13 bankruptcy petition on
June 24, 1993, which was dismissed on Jan. 13, 1995; they
received a debt discharge in a chapter 7 proceeding on Mar. 27,
1996.
                               - 4 -

Petitioners were unable to pay their tax liabilities in August

1996.   Petitioner and the ACS employee agreed during the first

call that petitioners would pay $225 per month to the IRS for 36

months, for a total amount paid of $8,100.   The agreement between

petitioner and the ACS employee was not put in writing.    At the

end of the first call, petitioner believed that, if he timely

made all 36 payments and did not become delinquent with any of

his other tax liabilities, his 1993, 1994, and 1995 income tax

liabilities and the TFRP would be extinguished, including any

interest and penalties thereon.

     The first monthly statement reflecting a payment due

pursuant to the installment agreement was dated December 11,

1996.   The statement showed balances of petitioners’ liabilities

that were inconsistent with petitioner’s belief about what he

owed as a result of the first call.    Shortly after receiving the

statement, petitioner called the IRS in response to this

statement and again spoke with the ACS employee, “Miss Morrison”

(the second call).   Petitioner was told during the second call

that the statement was a reminder of his payment due date, and

that the old liabilities would be reflected on his statements in

case of default.   He was also told that at the end of the 36

months the additional amounts would be removed.   Petitioners made

their December 1996 payment on December 22, 1996.   At the time of
                                 - 5 -

trial, respondent had not located the ACS employee with whom

petitioner entered into the agreement.

     Petitioners made 34 payments of $225, commencing September

23, 1996, until June 23, 1999.    The first two payments made by

petitioners were credited by respondent to petitioners’ 1993

income tax deficiency.   The remaining 32 payments were credited

to the TFRP.   Petitioners received monthly statements from the

IRS reflecting both the installment amount currently due ($225)

and petitioners’ total outstanding liabilities.

Remaining Liabilities

     After petitioners’ 34th payment was credited in June 1999,

petitioners’ accounts showed that accrued interest on the TFRP,

as well as income taxes and interest thereon, remained due.    The

interest on the TFRP was secured by the lien.     On July 22, 1999,

after learning from the IRS the amount necessary to release the

lien, petitioners made a payment of $1,345.84, and the lien was

released.   After the payment on July 22, 1999, petitioners

received another monthly statement dated August 11, 1999, and

continued to receive statements through March 15, 2000, showing

amounts due with respect to their income taxes.

Requests for Abatement

     On June 14, 2000, petitioners filed Form 843, Claim for

Refund and Request for Abatement, with the IRS, claiming a refund
                               - 6 -

of $895.84 with respect to the TFRP.5    On April 17, 2001, the

claim for refund was denied by the IRS.    On April 23, 2001,

petitioners filed additional Forms 843 with respect to their

income taxes for 1993, 1994, and 1995.    The Forms 843 were

treated as requests for abatement of interest on petitioners’

income taxes.   On May 3, 2001, respondent denied petitioners’

claims for interest abatement for 1993, 1994, and 1995.    On May

30, 2001, petitioners requested review by the IRS Appeals Office

of the denial of interest abatement.    On December 19, 2001, the

IRS Appeals officer sent a final determination letter denying

petitioners’ claim for interest abatement for 1993, 1994, and

1995.

                              OPINION

     As a preliminary matter, we must decide whether an agreement

to compromise petitioners’ liabilities was reached between

petitioner and the ACS employee.   If we find that a valid

compromise existed, then it appears that petitioners’ liabilities

should have been extinguished upon their final payment on July

22, 1999.   If we find that no compromise existed, we must decide

whether respondent abused his discretion in refusing to abate

interest on petitioners’ income tax liabilities.


     5
       The $895.84 represented the portion of the July 22, 1999,
payment that exceeded the $450 that petitioners’ 35th and 36th
installment payments would have totaled.
                                - 7 -

Compromise of Tax Liabilities

     Petitioner contends that the first call resulted in an

agreement under which he would be required to pay a total amount

that was less than he owed.   We have found as a fact that he

believed that after making the payments for 36 months, he would

owe nothing more with respect to his tax liabilities.

     Respondent contends that an installment agreement, not a

compromise, was made during the first call.     Respondent contends

that, according to guidelines set forth in the Internal Revenue

Manual, amounts that were accrued but unassessed at the time of

the first call, such as interest and penalties, would not be

covered by the installment payments, and would remain due even

after all of the installment payments had been made.

     It is well settled that section 7122 and the regulations

thereunder provide the exclusive method of effectuating a valid

compromise of assessed tax liabilities.      Ringgold v.

Commissioner, T.C. Memo. 2003-199; see also Botany Worsted Mills

v. United States, 278 U.S. 282, 288-89 (1929); Laurins v.

Commissioner, 889 F.2d 910 (9th Cir. 1989), affg. Norman v.

Commissioner, T.C. Memo. 1987-265.      After evaluating the

requirements of section 7122 and the regulations thereunder, we

find that petitioner and the ACS employee did not enter into a

binding agreement to compromise petitioners’ liabilities.
                                   - 8 -

    When the first and second calls were made, a liability could

be compromised only if there was doubt as to liability or doubt

as to collectibility.6      Sec. 301.7122-1(a), Proced. & Admin.

Regs.       Petitioners’ liability was not in doubt at the time of the

“agreement” because petitioners had filed the tax returns

calculating the taxes due and were not contesting the accuracy of

the returns.       Petitioners have not established that they

delivered any financial statements or other evidence of their

financial situation to the IRS at the time of the first call

indicating doubt as to collectibility.       Thus, the evidence does

not demonstrate that a valid basis existed for compromising

petitioners’ tax liabilities.

    The regulations also required offers in compromise to be

submitted on “forms prescribed by the Internal Revenue Service”.

Sec. 301.7122-1(d)(1), Proced. & Admin. Regs.       An offer is

accepted “only when the proponent thereof is so notified in

writing.”       Sec. 301.7122-1(d)(3), Proced. & Admin. Regs.; see

also Ringgold v. Commissioner, supra.       Petitioners did not submit

a written offer in compromise to the IRS.       They also do not claim

to have received a written acceptance of the purported agreement

from the IRS.       Without satisfaction of these procedural elements,

we cannot find that a valid compromise was made.


        6
       In response to the enactment in 1998 of sec. 7122(c), the
regulations were changed to add a third basis for compromise.
                               - 9 -

     Finally, the ACS employee did not have the authority to

compromise petitioners’ liabilities.   Deleg. Order No. 11 (Rev.

24), 1994-2 C.B. 550.   It is the responsibility of the person

entering into an agreement with an employee of the IRS to

ascertain that the employee stays within the bounds of her

authority.   Boulez v. Commissioner, 810 F.2d 209, 218 (D.C. Cir.

1987), affg. 76 T.C. 209 (1981).   A compromise agreement made by

an employee lacking the requisite authority is not binding on the

Commissioner.   Id.

     We therefore conclude that petitioner and the ACS employee

did not reach a valid agreement to compromise petitioners’ tax

liabilities during the first or second call.

Abatement of Interest

     We now decide whether respondent abused his discretion by

refusing to abate interest on petitioners’ liabilities.

     Section 6404(e)(1)(B) provides that the Commissioner may

abate all or any part of an assessment of interest on any payment

of certain taxes if an error or delay in such payment is

attributable to an officer or employee of the IRS being

“erroneous or dilatory in performing a ministerial act”.7    A

     7
       Congress amended sec. 6404(e) in 1996 to permit abatement
of interest for “unreasonable” error or delay in performing a
ministerial or “managerial” act. Taxpayer Bill of Rights 2, Pub.
L. 104-168, sec. 301(a), 110 Stat. 1457 (1996). That standard
applies only to tax years beginning after July 30, 1996, and thus
does not apply in the present case. Taxpayer Bill of Rights 2,
                                                   (continued...)
                               - 10 -

ministerial act is a procedural or mechanical act that does not

involve the exercise of judgment or discretion and that occurs

during the processing of a taxpayer’s case after all

prerequisites to the act, such as conferences and review by

supervisors, have taken place.    Lee v. Commissioner, 113 T.C.

145, 150 (1999); see also sec. 301.6404-2T(b)(1), Temporary

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

Abatement is available under section 6404(e) only for periods

after the IRS has contacted the taxpayer in writing with respect

to the payment.   Sec. 6404(e)(1).

     This Court has jurisdiction to order an abatement of

interest only when the Commissioner has abused his discretion in

denying a taxpayer’s request to abate interest.    Sec. 6404(h).

In order for a taxpayer to show an abuse of discretion, he must

prove that the Commissioner exercised this discretion

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

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

whether petitioners are entitled to abatement, we will look at

each relevant time period.

August to December 22, 1996

     During the first call in August 1996, an installment

agreement was established.    Because petitioners were unable to


     7
      (...continued)
sec. 301(c), 110 Stat. 1457.
                               - 11 -

pay the tax liabilities in August 1996, no erroneous or dilatory

performance of a ministerial act by an employee of the IRS

contributed to a delay or error in payment during the period

between the first call and the date of the second call.

Therefore, respondent did not abuse his discretion in refusing to

abate interest on petitioners’ income tax liabilities for the

period from August 1996 to December 22, 1996.

December 22, 1996 to August 11, 1999

       We have found as a fact that during the second call the ACS

employee informed petitioner that the additional amounts would be

adjusted at the end of the 36 month installment term, and that

all the balances would come off at the end.   The ACS employee did

not clarify to petitioner that unassessed interest would continue

to accrue during the installment period, but instead confirmed

petitioner’s flawed understanding of the agreement.    The act by

the ACS employee of misinforming petitioners about what their

total liability would ultimately be was ministerial.    Douponce v.

Commissioner, T.C. Memo. 1999-398; see also Smith v.

Commissioner, T.C. Memo. 2002-1; Kincaid v. Commissioner, T.C.

Memo. 1999-419; sec. 301.6404-2(c), Example (11), Proced. &

Admin. Regs.    All prerequisites to the act of establishing an

installment agreement had been performed during the first call

and during the initial processing of petitioners’ case by the

IRS.    The clarification of petitioners’ installment agreement did
                               - 12 -

not require any judgment or discretion on the part of the ACS

employee.

     As a result of the information they received during the

second call, petitioners made payments according to the

installment agreement.    They made the monthly $225 payments

without fail and paid $1,345.84 at the end of the installment

period in order to release the lien.    We cannot assume that

petitioners would not have made earlier or larger payments to

avoid the accrual of interest had the ACS employee made clear the

correct amount due.    Indeed, petitioners paid what they believed

was $895.85 more than they were required to pay in order to

remove the lien.    Their subsequent act of claiming a refund of

this amount further supports their position that they believed

their total tax liabilities were extinguished after making 36

payments of $225.    Therefore, we find that the ACS employee’s

error in misinforming petitioners caused a delay in payment by

petitioners.

     We now must decide the appropriate period during which

interest should have been abated.    The first monthly statement

that petitioners received was dated December 11, 1996.

Petitioners’ notes indicate that they made the payment for that

month on December 22, 1996.    The second call was made sometime

between December 11 and December 22.    Because petitioners have

not provided an exact date on which the second call was made, we
                              - 13 -

find that respondent should have abated the interest that accrued

from December 22, 1996, until the date it became clear to

petitioners that their liabilities had not, in fact, been

extinguished.   The first notice indicating that there were

amounts still outstanding after petitioners’ July 22, 1999,

payment was the monthly statement dated August 11, 1999.

Therefore, we conclude that respondent abused his discretion in

refusing to abate interest that accrued during the period from

December 22, 1996 to August 11, 1999.

August 11, 1999 to Present

     After the August 11, 1999, statement was received by

petitioners, petitioners were on notice that their understanding

of the installment agreement was incorrect and that some

additional amounts were still due.     Their failure to make any

payments after that date was a result of their decision to

challenge respondent’s position.   There was no erroneous or

dilatory performance of a ministerial act on respondent’s part to

cause this delay.   Therefore, we hold that respondent did not

abuse his discretion in refusing to abate interest for the period

after August 11, 1999.


                                         Decision will be entered

                                   under Rule 155.
