                        T.C. Memo. 2000-80



                      UNITED STATES TAX COURT



       FRANK J. GORGIE AND ROSALIA GORGIE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20572-98.                 Filed March 9, 2000.



     Frank J. Gorgie and Rosalia Gorgie, pro sese.

     Jordan S. Musen, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WELLS, Judge:   Respondent determined that petitioners are

not entitled to an abatement of interest pursuant to section

6404(e)1 for their 1986, 1987, and 1988 taxable years.


1
     Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
                                - 2 -

Petitioners meet the net worth limitations of section

7430(c)(4)(A)(ii) and timely filed their petition pursuant to

section 6404(i) and Rule 280.

     The only issue for decision is whether respondent's refusal

to abate interest for the period between May 8, 1989 to October

3, 1990, was an abuse of discretion.

                         FINDINGS OF FACT

     Some of the facts have been stipulated for trial pursuant to

Rule 91.   The parties' stipulations are incorporated into this

Memorandum Opinion by reference and, accordingly, are found as

facts in the instant case.   Petitioners resided in Huntington

Beach, California, when they filed their petition in the instant

case.

     On May 8, 1989, the examination of petitioners' 1986 and

1987 tax years was assigned to Internal Revenue Agent Patricia

Mazon.   The examination focused specifically on whether Frank

Gorgie (petitioner) reported all income received from his

employer National Energy Research Corp. (NERC).

     On May 12, 1989, Agent Mazon mailed an appointment letter to

petitioners.   Enclosed with the appointment letter was Form 4564,

Information Document Request Form (IDR) 1, which asked for, among

other things, books, records, bank statements and canceled checks

relating to income reported on petitioners' Schedule C, Profit or

Loss From Business, for the years under examination.    On May 22,
                                - 3 -

1989, petitioner responded to Agent Mazon's letter by telephone,

informing her that John Berg had a power of attorney from

petitioners.

     On May 24, 1989, Mr. Berg called Agent Mazon and left a

message, stating that he would be back on May 28, 1989.    After

trading telephone messages, on May 31, 1989, Agent Mazon spoke

with Mr. Berg and scheduled an appointment for June 27, 1989.      On

June 21, 1989, Mr. Berg called Agent Mazon to reschedule the

appointment for July 5, 1989.

     On July 5, 1989, Agent Mazon met with Mr. Berg and

petitioner at Mr. Berg's office.    At the meeting, petitioner

provided some, but not all, of the requested bank records.

Petitioner did not provide complete bank records for two savings

and loan accounts, which prompted Agent Mazon to tender IDR 2

requesting those documents.   They scheduled a second appointment

for July 6, 1989.

     On July 6, 1989, Agent Mazon met with Mr. Berg at Mr. Berg's

office.   Agent Mazon tendered IDR 3 asking for additional bank

and nonbank records relating to petitioners.

     On July 14, 1989, Agent Mazon called Mr. Berg and left a

message requesting an appointment with petitioner Rosalia Gorgie

and petitioners' return preparer.    Agent Mazon requested that the

appointment take place on August 1 and 2, 1989.   On July 27,
                               - 4 -

1989, Mr. Berg called Agent Mazon to cancel the proposed August

appointments.

     On August 28, 1989, Agent Mazon called Mr. Berg and proposed

a conference with petitioner Rosalia Gorgie for September 21,

1989.   On September 21, 1989, Agent Mazon met with Mr. Berg and

submitted IDR 4, requesting bank records for 1986 (which were the

subject of IDR 2, but which were still not received) as well as

other bank records and documentation supporting alleged loan

repayments and information on how petitioners arrived at their

income in their returns.   Because of her poor health, Rosalia

Gorgie did not attend the September 21, 1989, meeting.

     By letter dated October 28, 1989, Mr. Berg stated that

petitioners were unable to locate certain requested bank records.

Mr. Berg then requested that a 30-day letter be issued.

     Because petitioner did not provide all requested bank

statements, Agent Mazon had to obtain from NERC copies of NERC

checks that were deposited into petitioner's bank accounts.    In

July, September, and November of 1989, Agent Mazon compiled NERC

check summaries for the purpose of determining the total amounts

of NERC checks deposited into Frank Gorgie's accounts.

     On December 4, 1989, Agent Mazon discussed the case with her

manager, Ley Malilay.   Agent Mazon and Mr. Berg spoke on December

6, 1989, and scheduled an appointment for December 8, 1989.    On

December 6, 1989, petitioners' 1988 tax year was opened for
                                - 5 -

examination by Agent Mazon.   The examination for the 1988 tax

year concerned the same unreported income issue as the 1986 and

1987 years.

     On December 8, 1989, Agent Mazon met Mr. Berg and told him

that the 1988 tax year had been opened for examination.    Agent

Mazon tendered IDR 5, which asked, among other things, for

information supporting certain loan repayments.

     On December 19, 1989, Agent Mazon received a response to IDR

5.   The response dated December 13, 1989, also asked respondent

for a second time to issue a 30-day letter.

     During the course of her investigation, Agent Mazon believed

that some of what petitioner told her was not true.   In

particular, petitioner told Agent Mazon that he had an

outstanding loan on which he made payments and that there was no

unreported income for the years in issue.   Agent Mazon discovered

the opposite to be true–-there was no loan and there was

unreported income.   These inconsistencies led Agent Mazon to

speak with her manager and fraud coordinator about the proper

course of action.    She was given approval to forward the case to

respondent's Criminal Investigation Division (CID), which she did

on January 11, 1990.   On April 4, 1990, Agent Mazon received a

package from CID declining the fraud referral.

      On April 23, 1990, Agent Mazon mailed to Mr. Berg a Form

4549, Income Tax Examination Changes.   On June 1, 1990, Agent
                               - 6 -

Mazon requested transcripts from the Fresno Service Center in

order to reconcile and verify amounts shown on petitioners' tax

returns with amounts reflected in respondent's computer system.

     On July 19, 1990, Agent Mazon's manager, Ms. Malilay,

requested that work on the case be suspended pending resolution

of a related audit of NERC.   On September 19, 1990, Agent Mazon

wrote a report and attached Forms 886-A, Explanation of Items.

On October 3, 1990, Agent Mazon mailed out the 30-day letter to

petitioners and mailed a copy to Mr. Berg.    The 30-day letter

proposed adjusting unreported income for all 3 years at issue.

The 30-day letter also proposed the assertion of the fraud

penalty and, in the alternative, the negligence penalty.    By

cover letter dated October 26, 1990, petitioners filed a protest.

The protest letter was received on November 7, 1990.

     On December 4, 1990, the case file was transferred to

respondent's San Diego Appeals Office.    On February 13, 1991,

respondent mailed a letter to Mr. Berg notifying him that the

case was assigned to the San Diego Appeals Office.    On April 29,

1991, Appeals Officer Carol Holt wrote Mr. Berg informing him

that the case had been assigned to her.    On September 6, 1991,

petitioners executed a Form 870, settling the case.    In the Form

870, Waiver of Restrictions on Assessment and Collection of

Deficiency in Tax and Acceptance of Overassessment, petitioners

agreed to the additional income amounts that Agent Mazon
                                 - 7 -

determined for years 1986 and 1987 and to a portion of the

amounts determined for 1988.    The parties agreed to waive

application of the fraud penalty and agreed to the assertion of

the negligence penalty.

     On November 28, 1990, petitioners made a designated payment

of interest in the amount of $752.       Petitioners filed Form 843,

Claim for Refund and Request for Abatement, on or around January

23, 1997.   On August 28, 1998, respondent mailed petitioners'

Final Determination letter disallowing their claim to abate

interest for tax years 1986, 1987, and 1988.      As of the date of

the August 28, 1998, Final Determination letter, petitioners'

total interest and assessed interest for the years at issue was:

     Year            Total Interest           Assessed Interest

     1986                 $6,245.70               $1,961.83
     1987                 25,217.17                6,367.64
     1988                 13,551.06                3,235.92

                                OPINION

     Pursuant to section 6404(e)(1), the Commissioner may abate

part or all of an assessment of interest on any deficiency or

payment of tax if either:    (1) The deficiency was attributable to

an error or delay by an Internal Revenue Service (Service)

official in performing a ministerial act or (2) an error or delay

by the taxpayer in paying his or her tax is attributable to a

Service official's being erroneous or dilatory in performing a
                                 - 8 -

ministerial act.   See sec. 6404(e)(1).2   To obtain relief, the

taxpayer must not cause a significant aspect of the delay.      See

id.   Section 6404(e) is not intended to be routinely used to

avoid payment of interest; rather, Congress intended abatement of

interest only where failure to do so "would be widely perceived

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

(Vol. 2) 1, 844; S. Rept. 99-313, at 208 (1985), 1986-3 C.B.

(Vol. 3) 1, 208.   The standard for reviewing the Secretary's

decision is abuse of discretion.    See sec. 6404(i).

      The term "ministerial act" means 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.    See sec. 301.6404-2T(b)(1),

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




2
     Congress amended sec. 6404(e) in 1996 to permit abatement of
interest for "unreasonable" error and 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 amendment, however, applies to tax years beginning
after July 30, 1996. TBOR 2 sec. 301(c), 110 Stat. 1457.
                               - 9 -

1987).3   A decision concerning the proper application of Federal

tax law is not a ministerial act.    See id.

     Petitioners argue, notwithstanding the settlement they

entered into admitting a tax liability due and owing, as well as

agreeing to the imposition of a negligence penalty, that the

audit was "foisted" upon them by an "inexperienced, naive, and

zealous agent who pulled out all the stops" in an attempt to

develop a fraud case against them.     Petitioners also maintain

that, in any case, the audit should have been completed within a

couple of weeks despite the fact that Agent Mazon had been

required to examine three tax years and had been required to

analyze petitioners' numerous bank account records.     Petitioners'

arguments are without merit.

     Respondent had difficulty obtaining from petitioner certain

bank records, and petitioners, or their representative, canceled

or postponed at least two meetings with Agent Mazon.

Nonetheless, any delay caused by petitioners in the instant case

is secondary to our more fundamental conclusion that respondent's

3
     The final regulation under sec. 6404, sec. 301.6404-2,
Proced. & Admin. Regs., was issued on Dec. 18, 1998. See T.D.
8789, 63 Fed. Reg. 70012 (Dec. 18, 1998). The final regulation
generally applies to interest accruing on deficiencies or
payments of tax described in sec. 6212(a) for tax years beginning
after July 30, 1996. See sec. 301.6404-2(d)(1), Proced. & Admin.
Regs. Thus, the final regulation is inapplicable to the instant
case, and sec. 301.6404-2T, Temporary Proced. & Admin. Regs., 52
Fed. Reg. 30163 (Aug. 13, 1987), effective for taxable years
beginning after Dec. 31, 1978, but before July 30, 1996, does
apply. See sec. 301.6404-2T(c), Temporary Proced. & Admin.
Regs., supra.
                                - 10 -

acts were not ministerial.

     Petitioners are particularly upset by the initiation of the

criminal fraud investigation because the CID ultimately rejected

the instant case as a criminal fraud case.4   Petitioners also

believe that Agent Mazon relied too heavily on the

unsubstantiated allegations of fraud by an IRS informant.    At the

time, however, Agent Mazon found inconsistencies that she

believed were badges of fraud, causing her to suspect petitioner

of criminal wrongdoing.   Moreover, the decision to initiate the

fraud investigation was not hers alone.   After she consulted with

her supervisors, the agreed course was to send the case to the

CID, which was within Agent Mazon's province to do and was

certainly not a ministerial act.

     The time spent investigating whether to impose civil or

criminal fraud penalties, regardless of petitioners' guilt or

innocence, is not a ground under section 6404(e) that would allow

respondent to abate interest.    Moreover, this Court has held, in

Taylor v. Commissioner, 113 T.C. 206, 211-213 (1999), that the

Service's decision not to proceed with a civil tax examination

while a criminal tax investigation is pending is not a

ministerial act that would warrant the abatement of interest.

       In short, the decision to examine petitioners' 1986, 1987,

and 1988 taxable years, to conduct a bank deposits analysis on

4
       Referral of the case to CID extended the audit by 3
months.
                              - 11 -

petitioners' numerous bank accounts, to suspend petitioners'

audit until a related audit of NERC was completed, and to refer

the instant case to the CID are all acts requiring the exercise

of judgment and discretion and, therefore, are not ministerial

acts.   Because there is no ministerial act by respondent's

employees or officers that caused delay, respondent could not,

pursuant to section 6404(e), abate interest.   Accordingly, we

uphold respondent's final determination not to abate interest.

     To reflect the foregoing,

                                         Decision will be entered

                                    for respondent.
