                        T.C. Memo. 1999-414



                      UNITED STATES TAX COURT



            HUGH D. AND NANCY L. SIMS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8919-99.                  Filed December 22, 1999.



     Hugh D. Sims, pro se.

     Blaine C. Holiday, for respondent.



                        MEMORANDUM OPINION


     MARVEL, Judge:   On March 19, 1999, respondent issued a

notice of final determination denying petitioners’ claim to abate

interest for the taxable year 1993.   On April 19, 1999,

petitioners filed a timely petition to review respondent’s

determination.   The only issue for decision is whether
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petitioners are entitled to an abatement of interest pursuant to

section 6404(e).1

                            Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts is incorporated herein by this

reference.   Petitioners resided in St. Paul, Minnesota, when the

petition in this case was filed.   References to petitioner are to

Hugh D. Sims.

     This case arises from the settlement of a class action

lawsuit against Northwest Airlines for alleged violations of the

Age Discrimination in Employment Act (ADEA).    Petitioner, a

retired U.S. Air Force pilot, was working for a commercial air

carrier when he received an unsolicited letter from the U.S.

Equal Employment Opportunity Commission (EEOC) asking him if he

would like to participate in a class action lawsuit against

Northwest Airlines.   He agreed to participate.

     In the summer of 1987, during the pendency of the lawsuit,

petitioner was interviewed for employment by Northwest Airlines

and hired as an employee.

     Sometime after petitioner was hired by Northwest Airlines,

the class action lawsuit was settled.    Under the terms of the



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure. Monetary amounts are rounded to the nearest dollar.
                              - 3 -

settlement agreement, petitioner, in 1993, received $33,000,

which was allocated by court order as follows:

               Back wages                $18,505
               Interest                    8,327
               Liquidated damages          6,168


     By letter dated February 10, 1994, the supervising attorney

for the EEOC informed petitioner that the United States Court of

Federal Claims had decided an unrelated case, Bennett v. United

States, 30 Fed. Cl. 396 (1994), revd. without published opinion

60 F.3d 843 (Fed. Cir. 1995), which held that “ADEA settlement

payments for backpay and liquidated damages are not taxable.”    He

enclosed a copy of the opinion as well as a copy of an IRS ruling

regarding the taxability of money received in settlement of sex

and race discrimination claims.   In the letter, the attorney

advised petitioner to consult with his tax adviser “regarding the

effect of the enclosed, if any, on your recent recovery in the

subject action.”

     On their 1993 Federal income tax return, petitioners

reported the backpay award of $18,505 as wages on line 7 and the

interest award of $8,327 on line 8(a).   Petitioners did not

report the liquidated damage award of $6,168.    Petitioners

claimed an exclusion under section 104(a)(2) of $18,505 and

attached a schedule to the return explaining that the exclusion
                                - 4 -

of the backpay award was based on the decision in Bennett v.

United States, supra.    They also attached copies of the Bennett

decision and other documents supporting the exclusion to the

return.

     Prior to the expiration of the applicable period of

limitations on assessment, respondent conducted an examination of

petitioners’ 1993 Federal income tax return.   On December 31,

1996, respondent issued an examination report that determined the

entire settlement award received from Northwest Airlines was

fully taxable to petitioners, citing the United States Supreme

Court’s decision in Commissioner v. Schleier, 515 U.S. 323

(1995).2   The examination report was respondent’s first written

contact with petitioners.

     From the time petitioners received the examination report

until approximately February 25, 1997, petitioners considered the

report and consulted with their return preparer concerning it.

On February 25, 1997, petitioners signed Form 4549-CG consenting

to the assessment of the additional tax proposed in the

examination report and submitted it to respondent with a check in

the amount of $10,332.   On February 28, 1997, respondent received



     2
      The examination report also pointed out that the Bennett
case on which petitioners had relied was reversed in an
unpublished per curiam decision based on the Supreme Court’s
decision in Commissioner v. Schleier, 515 U.S. 323 (1995). See
Bennett v. United States, 30 Fed. Cl. 396 (1994), revd. without
published opinion 60 F.3d 843 (Fed. Cir. 1995).
                                - 5 -

Form 4549-CG and the check.    Respondent applied the payment to

petitioners’ 1993 account, allocating $8,031 to the income tax

deficiency and $2,301 to accrued interest.

     On March 5, 1997, petitioners filed a claim for refund and

request for abatement of interest assessed and paid with respect

to their 1993 income tax deficiency.       In their claim, petitioners

explained that, when their 1993 return was prepared and filed,

existing legal precedent supported the position taken on their

return.   Petitioners argued that it was only after the Supreme

Court decided Schleier on June 14, 1995, that the precedent on

which they reasonably relied was overruled.      Since, in their

view, they complied with the law as it existed when their 1993

return was filed, petitioners asserted that the income tax

deficiency was not their fault, and they should not have to pay

interest on the deficiency for the period prior to June 14, 1995,

when Schleier was decided.

     Respondent disallowed petitioners’ claim in a Notice of

Final Determination dated March 19, 1999, and this proceeding

followed.

                              Discussion

     Section 6404(e), as in effect for 1993, authorizes

respondent to abate all or any part of an assessment of interest

on (1) any deficiency attributable in whole or in part to any

error or delay by an employee of the Internal Revenue Service,
                              - 6 -

acting in his official capacity, in performing a ministerial act,

and (2) any tax payment to the extent that any error or delay in

the payment is attributable to the employee’s error or dilatory

conduct in performing a ministerial act.3    Under section 6404(e),

an error or delay is taken into account only if no significant

aspect of the error or delay can be attributed to the taxpayer

and only after respondent has contacted the taxpayer in writing

with respect to the deficiency or payment.    See sec. 6404(e)(1);

sec. 301.6404-2T(a)(2), Temporary Proced. & Admin. Regs., 52 Fed.

Reg. 30162 (Aug. 13, 1987); see also Krugman v. Commissioner, 112

T.C. 230, 238 (1999).

     We have jurisdiction to decide this case because petitioner

made a claim to abate interest under section 6404(e)(1),

respondent issued a final determination disallowing petitioners’

claim after July 30, 1996, and petitioners timely filed a

petition to review the failure to abate interest.    See sec.

6404(g)(1);4 Rule 280; Krugman v. Commissioner, supra at 239.



     3
      In 1996, sec. 6404(e) was amended by sec. 301 of the
Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. 104-168, 110 Stat.
1452, 1457 (1996), to permit respondent to abate interest
attributable to “unreasonable” error or delay resulting from
“managerial” and “ministerial” acts. The new provision applies
to interest accruing with respect to deficiencies or payments for
tax years beginning after July 30, 1996. The amended provision
is not applicable here. See Woodral v. Commissioner, 112 T.C.
19, 25 n.8 (1999).
     4
      Sec. 6404(g) was added to the Code by TBOR 2 sec. 302(a),
110 Stat. 1457-1458.
                                - 7 -

Our jurisdiction is limited, however, to deciding whether

respondent abused his discretion by refusing to abate interest.

See sec. 6404(g)(1).    As we evaluate respondent’s exercise of

discretion, we are mindful that Congress intended for respondent

to abate interest under section 6404(e) “where failure to abate

interest would be widely perceived as grossly unfair”, but that

the abatement provision should not “be used 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; see also Krugman v. Commissioner, supra.

     In this case, petitioners object to the assessment of

interest against them because they made a good faith effort to

comply with the law as it existed when their 1993 return was

filed.   They made full disclosure of their position and the legal

and factual basis for it on their 1993 return, even attaching

copies of the case on which they relied.    They contend that the

assessment of interest against them is unfair and, therefore,

should be abated.

     Although we understand petitioners’ frustration and

empathize with their position, petitioners have not argued that

any employee of respondent erred in performing a ministerial act

or delayed performing a ministerial act as required by section

6404(e)(1).   An examination of the facts in this case reveals

there was no such error.    The term “ministerial act” is defined
                                 - 8 -

as:5

       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. A decision
       concerning the proper application of federal tax law
       (or other federal or state law) is not a ministerial
       act. [Sec. 301.6404-2T(b)(1), Temporary Proced. &
       Admin. Regs., 52 Fed. Reg. 30162 (Aug. 13, 1987).]

The only actions on which petitioners’ claim could be based are

the decision to audit and the decision to disallow the exclusion

relying upon the Supreme Court’s decision in Commissioner v.

Schleier, 515 U.S. 323 (1995).    Respondent’s decision to audit

and the timing thereof    cannot be attacked using section 6404(e)

because section 6404(e) “applies only after respondent has

contacted the taxpayer in writing about the deficiency or payment

of tax.”    Krugman v. Commissioner, supra at 239.   Consequently,

section 6404(e) “‘does not * * * permit the abatement of interest

for the period of time between the date the taxpayer files a

return and the date the IRS commences an audit, regardless of the

length of that time period.’”     Id. (quoting H. Rept. 99-426,

supra, 1986-3 C.B. (Vol. 2) at 844).     Likewise, respondent’s

decision to apply Schleier to disallow petitioners’ exclusion


       5
      Sec. 301.6404-2T(b)(1), Temporary Proced. & Admin. Regs.,
52 Fed. Reg. 30162 (Aug. 13, 1987), was promulgated before sec.
6404(e) was amended in 1996 and was in effect during 1993. The
final regulation contains the same definition of ministerial act
and applies to tax years beginning after July 30, 1996. See sec.
301.6404-2T, Proced. & Admin. Regs., Fed. Reg. 30162 (Aug. 13,
1987).
                                 - 9 -

under section 104 cannot be attacked using section 6404(e)

because that decision was made before respondent contacted

petitioner in writing concerning the deficiency for the first

time, see sec. 6404(e), and involved the proper application of

Federal tax law, see sec. 301.6404-2T(b)(1), Temporary Proced. &

Admin. Regs., supra.   Any delay occurring after petitioners

received the examination report and prior to the payment of the

tax deficiency was due to petitioners’ understandable desire to

consult with their tax adviser regarding an appropriate response

to the report.

     Petitioners’ complaint is really one against fate-–they

filed their return just before the Supreme Court provided

definitive guidance on the correct tax treatment to be accorded

damages like those awarded here.    Section 6404(e) simply does not

reach this type of complaint.    Since there was no erroneous or

dilatory performance of a ministerial act, respondent lacked

authority to abate interest, and, therefore, his refusal to abate

interest in this case cannot be an abuse of discretion under

section 6404(e).   Accordingly, we must sustain respondent’s

determination.

     To reflect the foregoing,

                                              Decision will be entered

                                         for respondent.
