                        T.C. Memo. 2001-268



                      UNITED STATES TAX COURT



                  KIN SANG CHAN, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16135-99.                     Filed October 4, 2001.


     A. Duane Webber and Dirk Gifford, for petitioner.

     William J. Gregg, for respondent.



                        MEMORANDUM OPINION


     DAWSON, Judge:   This case was assigned to Special Trial

Judge John F. Dean pursuant to the provisions of section

7443A(b)(5), in effect when this case commenced, and Rules 180

and 181 and Interim Rule 183.   Unless otherwise indicated,

section references are to the Internal Revenue Code as in effect

for the tax years for which petitioner seeks abatement of
                                - 2 -

interest.   All Rule references are to the Tax Court Rules of

Practice and Procedure.    The Court agrees with and adopts the

opinion of the Special Trial Judge which is set forth below.

                OPINION OF THE SPECIAL TRIAL JUDGE

     DEAN, Special Trial Judge:     On May 6, 1999, respondent

issued a notice of final determination denying petitioner’s claim

to abate interest for the taxable years 1992 and 1993.

Petitioner challenged the determination by timely filing a

petition under section 6404(i), as in effect at the time the

petition was filed, and Rule 281.

     The issue for decision is whether petitioner is entitled to

abatement of interest assessments from October 20, 1994, through

the present date with respect to his 1992 and 1993 taxable years.

                             Background

     The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.    Petitioner resided in Bayside,

New York, at the time his petition was filed with the Court.

     Petitioner emigrated from Hong Kong to live in the New York

City area in 1988.    On April 11, 1991, Kin Sang Chan, Inc.

(KSCI), was incorporated with petitioner acting as the sole

shareholder and president.    KSCI traded stocks for profit solely

on the Hong Kong Stock Exchange.    KSCI obtained funds to purchase

stocks by using credit cards and a line of credit from the Hang

Seng Bank of China.    The line of credit was secured by a security
                               - 3 -

interest in the stock purchased by KSCI.     When KSCI sold stock,

KSCI was required to repay a portion of its loans from the bank

in an amount equal to 50 percent of the original purchase price

of the stock sold.

     On April 25, 1991, KSCI elected to be treated as an S

corporation by filing Form 2553, Election by a Small Business

Corporation, with the Internal Revenue Service (IRS).     On July 8,

1991, the IRS accepted KSCI’s election to be treated as an S

corporation.   KSCI timely filed Forms 1120S, U.S. Income Tax

Return for an S Corporation, for taxable years 1992 and 1993.

KSCI’s returns were prepared by Han Fin Chang (Mr. Chang), a

certified public accountant.

     Petitioner and his wife timely filed with the IRS joint

Forms 1040, U.S. Individual Income Tax Return, for taxable years

1992 and 1993.   Mr. Chang prepared the returns for petitioner and

his wife.

     On October 20, 1994, the IRS sent KSCI a letter stating that

KSCI’s 1992 tax return had been assigned to Melvin Matos (Mr.

Matos), an IRS examiner, for examination.     Petitioner, on behalf

of KSCI, contacted Mr. Matos on October 25, 1994, by telephone

and advised Mr. Matos that KSCI’s accountant, Mr. Chang, would

contact Mr. Matos to schedule an appointment to commence the

examination of KSCI’s 1992 return.     On December 5, 1994, Mr.

Matos contacted Mr. Chang by phone, and they agreed to meet on
                                - 4 -

January 4, 1995, to commence the examination of KSCI’s 1992

return.

     At the January 4 meeting petitioner and Mr. Chang provided

Mr. Matos with copies of KSCI’s bank statements and dividends

received account statements.   Mr. Matos then requested that

additional information be supplied by KSCI on or before January

18, 1995.

     On April 21, 1995, at the request of his supervisor, Mr.

Matos began to review whether KSCI was a personal holding

company.    On April 24, 1995, Mr. Matos and petitioner had a phone

conversation, and petitioner agreed to provide the additional

information previously requested by Mr. Matos.   On April 27,

1995, petitioner provided Mr. Matos with that information.

     On May 18, 1995, Mr. Matos met with petitioner and asked

petitioner to forward to KSCI’s accountant an additional

information request.   On June 29, 1995, petitioner provided

answers to some of the questions in the information request.    Mr.

Matos and petitioner scheduled another meeting for August 3,

1995, to review the remaining information requested, and the two

met on that date.   On August 7, 1995, Mr. Matos contacted

petitioner and requested a copy of KSCI’s 1993 tax return.     Mr.

Matos received a copy of KSCI’s 1993 Form 1120S on August 25,

1995.
                               - 5 -

     On September 15, 1995, Mr. Matos, with the approval of his

supervisor, began treating KSCI as a personal holding company and

not an S corporation for the 1992 and 1993 tax years.    On

September 21, 1995, Mr. Matos met with petitioner, and petitioner

refused to agree to any adjustment that included the personal

holding company tax.   On September 27, 1995, petitioner sent Mr.

Matos by facsimile a list of expenses for KSCI’s 1993 tax year.

     On November 13, 1995, Mr. Matos prepared Forms 1120, U.S.

Corporation Income Tax Return, for KSCI using information derived

from KSCI’s Forms 1120S and other materials obtained during the

examination.   At a December 15, 1995, meeting, Mr. Matos proposed

adjustments based on an examination of the Forms 1120S filed by

KSCI for the 1992 and 1993 tax years that treated KSCI as a

personal holding company rather than as an S corporation.

     On December 15, 1995, petitioner and Mrs. Chan (the Chans)

executed Forms 872, Consent to Extend the Time to Assess Tax, for

each of their joint tax returns filed for tax years 1992 and

1993.   On January 16, 1996, the IRS sent petitioner a letter

proposing examination adjustments to the Chans’ 1992 and 1993 tax

returns.   In the letter, the IRS treated KSCI as a C corporation

and proposed to treat certain payments made by KSCI as

constructive dividends to the Chans.

     On January 16, 1996, the IRS sent a letter to petitioner

proposing examination adjustments to KSCI’s 1992 and 1993 tax
                               - 6 -

returns.   The adjustments treated KSCI as a personal holding

company under section 542, and the proposed tax deficiencies for

KSCI were computed as if KSCI were a C corporation.   The proposed

increases in the tax liabilities of KSCI and the Chans totaled

more than $103,000, plus interest and penalties, and were

primarily based on the premise that KSCI was a personal holding

company and not an S corporation.

     On February 2, 1996, petitioner mailed a certified letter to

the IRS seeking an administrative appeal of the examination

changes.   On March 21, 1996, the IRS transferred the Chans’ case

to its Appeals Office in Long Island, New York.   From February 2,

1996, until January 15, 1997, the IRS did not respond in writing

to the request by KSCI and the Chans for an Appeals Office review

of the adjustments proposed by Mr. Matos.

     Petitioner and William J. Peter (Mr. Peter), the Appeals

Officer assigned to review the tax returns of KSCI and the Chans,

had a meeting scheduled for April 9, 1997.   The meeting, however,

was postponed because Mr. Peter was selected for jury duty.     On

July 24, 1997, Mr. Peter and petitioner held a conference to

discuss the proposed adjustments.

     On July 29, 1997, Mr. Peter sent the Chans a letter and

enclosed agreement forms for them to sign reflecting the

adjustments agreed upon during petitioner’s and Mr. Peter’s July

24 conference.   In the computations reflected in the Form 870-AD,
                                - 7 -

Offer to Waive Restrictions on Assessment and Collection of Tax

Deficiency and to Accept Overassessment, enclosed with the July

29 letter, KSCI was treated as an S corporation.    The Form 870-AD

reflected adjustments to increase the taxable income of KSCI by

$48,864 and $49,092 for 1992 and 1993, respectively.    Because

KSCI was treated as an S corporation, there was no tax imposed on

KSCI as a result of the adjustments.

     The Form 870-AD reflected adjustments to increase the

taxable income of petitioner and his wife by $42,755 and $42,803

for 1992 and 1993, respectively.    As a result of the increases in

taxable income, the Form 870-AD set forth increases in the Chans’

tax liabilities of $9,477 and $9,868 for the respective tax

years.    On August 4, 1997, Mr. and Mrs. Chan executed the Form

870-AD.

     On August 21, 1997, Mr. Peter sent a letter to petitioner

reciting approval of the settlement of examination changes.    In

the Appeals Transmittal and Supporting statement, dated August

21, 1997, Mr. Peter explained that it was an error for the

examining agent to treat KSCI as a C corporation in the

examination.    Mr. Peter concluded that KSCI was not a personal

holding company, and that absent evidence to the contrary,

petitioner would not be treated as having received constructive

dividends from KSCI in 1992 and 1993.
                               - 8 -

     On October 20, 1997, the IRS mailed correspondence to the

Chans consisting of final Statements of Account and bills for

examination adjustments for the Chans’ taxable years 1992 and

1993.   Petitioner first was informed of the amount of interest

computed with respect to the deficiencies in the Chans’ income

taxes on this occasion.

     Petitioner filed a Form 433-F, Collection Information

Statement, on November 26, 1997, requesting to pay the amounts

owed in installments of $400 per month.   On January 26, 1998, the

IRS sent a letter to petitioner rejecting his request for payment

by installment.   After receiving a letter from petitioner

concerning the rejection of his installment agreement request,

the IRS, on March 18, 1998, consented to allow the Chans to pay

their tax liability in $400 monthly installments.

     On April 11, 1998, petitioner sent to the IRS a letter

requesting waiver of interest and penalties with respect to the

adjustments for the taxable years 1992 and 1993.    On April 28,

1998, the IRS prepared a Notice of Federal Tax Lien concerning

the unpaid income tax deficiency assessments.   On May 4, 1998,

the IRS sent a letter to petitioner notifying him that before any

request for penalty abatement could be entertained by the IRS,

petitioner would have to pay the entire amount of tax owed.    On

November 14, 1998, petitioner filed Forms 843, Claim for Refund

and Request for Abatement, seeking interest and penalty
                               - 9 -

abatement.   On January 14, 1999, the IRS mailed a letter to

petitioner disallowing an abatement of interest.

     On January 25, 1999, petitioner mailed the IRS a certified

letter replying to the IRS’s disallowance of his request for

abatement of interest and penalties.      On March 29, 1999, an IRS

Appeals officer mailed a letter to petitioner disallowing

petitioner’s abatement claims, and a final determination letter

was issued on May 6, 1999.   On October 9, 1999, petitioner’s

Petition for Review of Failure to Abate Interest Under Code

Section 6404 on the assessed tax deficiencies for 1992 and 1993

was filed with the Court.

     Respondent concedes that interest on the tax deficiencies

assessed with respect to petitioner and his wife should be abated

pursuant to section 6404(e) for the period from February 2

through December 31, 1996.   Petitioner concedes that the interest

that accrued before October 20, 1994, should not be abated.

                             Discussion

     Pursuant to section 6404(i),1 the Tax Court has the

authority to review the Commissioner’s denial of a taxpayer’s

request for abatement of interest.     The Court may order an

abatement where the Commissioner’s failure to abate interest was


     1
        Sec. 6404(i) was formerly designated sec. 6404(g) but was
redesignated sec. 6404(i) by the Internal Revenue Service
Restructuring & Reform Act of 1998, Pub. L. 105-206, secs.
3305(a), 3309(a), 112 Stat. 685, 743, 745.
                              - 10 -

an abuse of discretion.   Sec. 6404(i).   The taxpayer must

demonstrate that the Commissioner, in failing to abate interest,

exercised his discretion arbitrarily, capriciously, or without

sound basis in law or fact.   Woodral v. Commissioner, 112 T.C.

19, 23 (1999).

     Petitioner requests abatement of interest pursuant to

section 6404(e)(1).   Section 6404(e)(1), as applicable to

petitioner’s 1992 and 1993 tax years,2 reads 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
          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.


     2
        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 (TBOR
2), Pub. L. 104-168, sec. 301(a)(1) and (2), 110 Stat. 1452, 1457
(1996). That standard, however, applies to tax years beginning
after July 30, 1996. TBOR 2 sec. 301(c), 110 Stat. 1457.
                              - 11 -

          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.

The deficiency or payment, therefore, must be attributable to

an error or delay by an officer or employee (employee) of the

IRS in the performance of a ministerial act.    Id.

     Temporary regulations interpreting section 6404(e) define

the term “ministerial act” 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).3   A decision concerning the proper application

of Federal tax law, or other Federal or State law, is not a

ministerial act.    Id.

     Congress intended for the Commissioner to abate interest

“where failure to abate interest would be widely perceived as

grossly unfair.”    H. Rept. 99-426, at 844 (1985), 1986-3 C.B.



     3
        Final regulations under sec. 6404, issued in 1998 and
generally applicable to interest accruing on deficiencies or
payments of tax for taxable years beginning after July 30, 1996,
provide the same definition of ministerial act. Sec. 301.6404-
2(b)(2), Proced. & Admin. Regs.
                               - 12 -

(Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1986), 1986-3 C.B.

(Vol. 3) 1, 208.   Congress intended that abatement would be

used sparingly, and it did not intend that abatement “be used

routinely to avoid payment of interest”.   Id.

    Petitioner contends that by conceding that the assessment

of interest on the Chans’ tax deficiencies should be abated for

the period between February 2 and December 31, 1996, respondent

has conceded that he abused his discretion when he failed to

abate interest resulting from the erroneous performance of a

ministerial act.   Petitioner argues that the question before

the Court relates to the appropriate period for the abatement

of interest and that the resolution of this issue does not

require a further showing under an abuse of discretion

standard.   Rather, petitioner maintains that he need only

demonstrate that the interest he seeks to have abated was

attributable to errors or delays by respondent’s employees in

performing ministerial acts.

    Respondent maintains that the specified period for which he

agreed to abate the assessment of interest coincides with a

demonstrable lack of respondent’s activity between the

completion of the underlying income tax examination by Mr.

Matos and the response to the request by KSCI and the Chans for

an administrative appeal of the examination findings.

Consequently, respondent reasons that the concession derives

from that delay rather than an admission that respondent
                             - 13 -

otherwise committed any errors or delays in the performance of

a ministerial act in denying petitioner’s interest abatement

request during the administrative process.

    Respondent stipulated that “interest on the tax

deficiencies assessed with respect to Mr. and Mrs. Chan for

1992 and 1993 should be abated pursuant to Section 6404(e) of

the Internal Revenue Code for the period from February 2, 1996

through December 31, 1996.” (Emphasis added.)    By conceding

that interest should be abated pursuant to section 6404(e),

respondent conceded that the requirements of that section were

satisfied.   Thus, respondent has acknowledged that the

assessment of interest for that period on the Chans’

deficiencies is attributable to an error or delay by an IRS

employee in performing a ministerial act.

    To establish that he is entitled to have the assessment of

interest abated for any other period, petitioner first must

show that the interest assessed for that period is attributable

to the delay acknowledged by respondent or that the interest is

attributable to an error or another delay by an IRS employee in

performing a ministerial act.    Respondent “may abate the

assessment of all or any part of such interest for any period.”

Sec. 6404(e) (emphasis added).    Thus, petitioner must establish

that respondent abused his discretion by failing to abate
                             - 14 -

interest for the specific periods for which petitioner seeks to

have the assessment of interest abated.

    Petitioner makes no argument regarding the delay between

the completion of the underlying income tax examination and the

administrative appeal of the examination findings but maintains

that the examining agent’s mischaracterization of KSCI as a C

corporation was a ministerial act.    Petitioner argues that the

mischaracterization was a ministerial act because:   (1) The

examining agent treated KSCI as a C corporation without

engaging in any analysis and without making any judgments or

discretionary determinations; (2) the examining agent’s

disregard of KSCI’s status as an S corporation was arbitrary

and based solely on instructions from his supervisor and not

from any reasoned considerations of facts or law; and (3) the

examining agent’s approach was a procedural error that was

tantamount to placing KSCI’s tax returns in the C corporation

“stack” rather than in the S corporation “stack”.

    Petitioner contends that respondent’s error directly

resulted in the imposition of interest on the Chans with

respect to the ultimately agreed tax deficiencies for 1992 and

1993.   If not for this error, petitioner maintains, the

determination of the proper deficiencies would have been made

timely, and the Chans could have paid the deficiencies.
                              - 15 -

    We disagree with petitioner’s reasoning.    First, the

examining agent’s characterization of KSCI as a C corporation

was a result of the misapplication of the personal holding

company provisions of the Internal Revenue Code.    Mr. Matos was

instructed by his supervisor to research the effect of the

personal holding company rules on the Chans’ Form 1040 and

KSCI’s Form 1120S.    Mr. Matos’s activity record indicates that

Mr. Matos researched, albeit cursorily, the personal holding

company provisions and concluded that two tests determined

whether a corporation was a personal holding company:    The

stock ownership test and the adjusted gross income test.     It

appears that on the basis of this research Mr. Matos’s

supervisor instructed him to apply the personal holding company

provisions to KSCI.

    Mr. Peter, the Appeals officer assigned to the

administrative appeal of the underlying cases, determined that

Mr. Matos had incorrectly treated KSCI as a personal holding

company.    Mr. Peter concluded that pursuant to section 1363(a)

the personal holding company tax is not applicable to electing

subchapter S corporations.   Section 1363(a) provides that

“Except as otherwise provided in this subchapter, an S

corporation shall not be subject to the taxes imposed by this

chapter.”   The chapter referred to is chapter 1 of the Internal

Revenue Code of which the personal holding company provisions
                                - 16 -

of sections 541 through 547 are a part.    Because subchapter S

of chapter 1 of the Internal Revenue Code does not specifically

provide that S corporations are subject to the personal holding

company provisions, an S corporation is not subject to the

personal holding company rules.

     The Appeals Transmittal Memorandum and Supporting Statement

completed by Mr. Peter with respect to the Chans’ 1992 and 1993

tax years stated that “the examining agent determined that the

corporation was a personal holding company (“PHC”) subject to

the personal holding company tax and no longer eligible as a

subchapter S corporation.” (Emphasis added.)    The Appeals

Transmittal Memorandum and Supporting Statement completed by

Mr. Peter with respect to KSCI’s case summarized Mr. Matos’s

classification of KSCI as a C corporation as follows:

         Finally, the examining agent determined that the
    taxpayer was a personal holding company (“PHC”) subject
    to the PHC tax. As a result of his determining that
    the taxpayer was a PHC, he denied the taxpayer its
    subchapter S status and computed its tax liability
    based upon the taxpayer being a regular Chapter C
    corporation. [Emphasis added.]

    The record as whole establishes that either Mr. Matos or

his supervisor determined that the personal holding company

provisions applied to KSCI regardless of its election to be

treated as an S corporation.4    Such a decision involves the


     4
        Although the provisions of sec. 1362(d)(3) do not apply
to the case at bar, they can cause certain S corporations with
                                                   (continued...)
                             - 17 -

proper application of Federal tax law and thus is not a

ministerial act.   Sec. 301.6404-2T(b)(1), Temporary Proced. &

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

     Even if Mr. Matos simply followed his supervisor’s

instructions when he ultimately applied the personal holding

company provisions to KSCI and treated it as a C corporation,

the decision by the supervisor to apply those provisions to

KSCI was not a procedural or mechanical act.   The decision

required the exercise of judgment and application of the law as

evidenced by the supervisor’s several requests recorded in the

activity record in KSCI’s underlying case that Mr. Matos

research the personal holding company rules.

     Assuming arguendo that the treatment of KSCI as a personal

holding company was a ministerial act, the assessment of

interest in this case was not attributable to that act.    The

interest at issue was assessed on a deficiency resulting from

petitioner’s failure to report capital gains and dividend


     4
      (...continued)
accumulated earnings and profits to lose their S corporation
status and be treated as C corporations. The examining agent
here applied the personal holding company provisions to KSCI as
if the provisions operated in like manner to sec. 1362(d)(3) to
terminate a corporation’s valid election to be treated as an S
corporation. We note that former sec. 1372(e)(5) as originally
enacted in 1958 provided for the termination of S corporation
status if the corporation had passive investment income as
defined in sec. 1372(e)(5).
                              - 18 -

income from KSCI, as well as KSCI’s deducting office expenses

to which it was not entitled.   On their 1992 and 1993 Forms

1040, the Chans reported $6,109 and $6,289, respectively, as

income from KSCI.   Appeals determined that petitioner received

income of $42,755 in 1992 and $42,803 in 1993 from KSCI, and

petitioner agreed to deficiencies and additions to tax based on

the receipt of that income.

    We are unpersuaded by petitioner’s argument that

respondent’s erroneous determination that KSCI was a personal

holding company prevented him from settling earlier with

respondent and thereby directly caused the assessment of

interest in this case.   Nothing in the record suggests that

petitioner made any attempt to pay or acknowledge the

deficiencies in tax attributable to his failure to report

taxable income from KSCI.

    Further, petitioner’s reliance on the fact that it took the

Appeals officer only one meeting with Mr. Chan to agree to the

appropriate tax adjustments does not support his theory that

the interest covering the entire period for which he seeks

abatement is attributable to the examining agent’s improper

application of the personal holding company provisions.

Petitioner’s first meeting with Mr. Matos took place on January

4, 1995.   At that meeting petitioner provided Mr. Matos with

various KSCI records, and Mr. Matos requested that additional
                               - 19 -

information regarding KSCI be supplied on or before January 18,

1995.   It was not until April 27, 1995, that petitioner

complied with Mr. Matos’s request for additional information.

Petitioner acknowledges that it was not until April 21, 1995,

that Mr. Matos began to review whether KSCI was a personal

holding company.

    The record also indicates that Mr. Matos collected other

information from petitioner throughout the course of his

examination.   Nothing in the record indicates that this

information was related solely to the treatment of KSCI as a

personal holding company.   During his examination, Mr. Matos

made adjustments to KSCI’s income for omitted capital gain and

dividend income and disallowed certain KSCI expenses.    These

adjustments and disallowances were sustained at the

administrative appeal level.    The information gathered during

the examination process enabled the Appeals officer to resolve

KSCI’s and the Chans’ 1992 and 1993 deficiency determinations

in a short time.

    For the period from October 20, 1997, when the IRS mailed

the Chans final Statements of Account and bills for examination

adjustments, to the present, any interest which accrued on

petitioner’s tax deficiencies was solely due to petitioner’s

failure to pay his outstanding tax liabilities.    Petitioner’s

argument that he could have sold his Hong Kong stocks before
                               - 20 -

the “Asia Financial Crisis”, which according to him started on

October 23, 1997, at much higher prices and paid the tax due is

irrelevant to our consideration.5

     Consequently, respondent’s refusal to further abate

interest was not an abuse of discretion.   We have considered

all other arguments advanced by petitioner, and to the extent

not discussed above, have found those arguments to be

irrelevant or without merit.

     To reflect the foregoing,

                                         Decision will be entered

                                    for respondent.




     5
        We note that petitioner agreed to the tax deficiencies
and penalties for his 1992 and 1993 tax years in August of 1997,
before the start of the financial crisis in Asia, which
petitioner alleges caused him to pay his tax liabilities in
installments. Petitioner chose to continue to speculate in the
Hong Kong Stock Exchange until he received his final statements
of account and bills for those tax years.
