Obtaining an abatement of interest reminds me of Paul Simon’s song 50 Ways to Leave Your Lover. Sure, the “50 ways” in the song title is misleading. By my count, Simon gives us only four. And some are singularly unhelpful for real life advice. I mean, “make a new plan, Stan”? Really? But the hyperbole does it’s job: it draws attention to idea there are the multiple ways to break off a relationship.
My Lesson title is also hyperbolic, but serves the same purpose. When a taxpayer wants the IRS to abate interest charges, there are lots of ways to lose. Jeremy Edwin Porter v. Commissioner, T.C. Memo 2022-23 (March 28, 2022)(Judge Greaves) gives us a nice review of some of them. There, the hapless taxpayer was trying to get interest abated for, among other periods, a 34 month period where the Tax Court did not rule on pending discovery motions. The Court sustained the IRS rejection of the abatement request because, even if the delay was unreasonable, and even if it was not attributable to Mr. Porter, it was caused by the Tax Court, not the IRS. Ouch.
This gives us a good excuse to review the many ways the IRS can reject an interest abatement request. And perhaps learn how to be a diligent litigant so as to keep your client’s case moving along during Tax Court litigation. I hope today’s lesson is more helpful than Simon’s song. At least it won't be an earworm. Details below the fold.
Law: Abating Interest
Only under certain narrow circumstances will the IRS abate an assessment of interest on an income, estate, or gift tax liability. Section 6601(a) imposes an interest charge on underpayments of all tax liabilities, running from the date the liabilities were supposed to have been paid until the date they are actually paid. Section 6404(e) authorizes the abatement of interest on income, estate, or gift tax liabilities, but only under certain narrow circumstances. See generally, Taxpayers request interest abatement by submitting Form 843. If the IRS denies the request, taxpayers can seek judicial review. §6404(h). That review, however, is only to see whether the IRS abused its discretion in rejecting the request.
Section 6404(e) gives four reasons for the IRS to reject a request for abatement. First, taxpayers must show there was an “unreasonable” delay. §6404(e)(1)(A). Second, they must show the delay occurred in the performance of a ministerial or managerial act. Id. Third, they must show they did not materially contribute to the delay. §6404(e) flush language. Fourth, they must show the delay happened after the IRS first contacted the taxpayer “in writing with respect to the deficiency or the payment.” Id. For example, the IRS is not permitted to abate interest accrued between the date a taxpayer files a return and the date the IRS starts an audit, regardless of the length of that time period. See Krugman v. Commissioner, 112 T.C. 230 (1999).
Failing to clear any one of these four hurdles will end the quest for abatement. See description in IRM 22.214.171.124.1 (11-13-2018)(“Criteria and Examples”). And each can be difficult to meet. For example, the regulations tell us that ministerial acts are procedural or mechanical acts that do not involve the exercise of judgment or discretion. Thus, a revenue agent's misapplication of Federal tax law is not a ministerial act. Urbano v. Commissioner, 122 T.C. 384 (2004). An example in the regulation of a ministerial act is the act of issuing an NOD, but only after all the proper sign-offs have been obtained. Treas. Reg. 301.6404-2(b)(2). So a delay during the review and approval process is not a ministerial act and thus does not qualify for abatement of the interest accruing during that process, even if the proposed NOD just sits in the supervisor’s inbox for what seems an unreasonably long time.
But wait, there’s a fifth reason for rejection, albeit it's not in the statute. Taxpayers seeking abatement must also link their assertions of delay to specific periods of time. They cannot simply request abatement of all interest during a general period; they must identify what part of the entire period is attributable to identified delays by the government. That requirement was created by the Tax Court. See Verghese v. Commissoner, T.C. Memo. 2021-70 at p. 33 (collecting cases).
If and when the IRS rejects the request, it gets a huge thumb on the scale of justice. Section 6404(h) says that the Tax Court will review the IRS rejection under a very lenient abuse-of-discretion standard of review. That means in order to prevail, "the taxpayer must demonstrate that in not abating interest the Secretary exercised his discretion arbitrarily, capriciously, or without sound basis in fact or law.” Lee v. Commissioner, 113 T.C. 145, 149 (1999).
Whew! While not 50 ways, these five ways to lose your interest abatement request, combined with the lenient standard of review, sure explain why taxpayers have a difficult time obtaining abatement of interest.
Today’s lesson shows us why. Let’s take a look.
In October 2013, the IRS selected Mr. Porter’s 2011 and 2012 returns for audit. He had filed those jointly with his wife. In November 2013, he and his wife signed a Form 2848 designating a Ms. Ogorek to be their representative. Accordingly, the IRS employee interacted with Ms. Ogorek, making the usual ask for documents to support the questionable positions under examination. After receiving some documents at a scheduled January meeting, the examiner asked for more, setting a deadline of April 16. When Ms. Ogorek did not respond, the examiner gave it another week, then closed her file, preparing an NOD to send up the review chain. It went up and out the door on Mary 13, 2014.
The Porters filed a petition in Tax Court on July 31, 2014. It appears they were now proceeding pro se with Mr. Porter doing the representation.
You can see the entire docket sheet here. It evidences a standard adversarial process. For example, you will see that when the government asked to file an amended Answer out of time (apparently to add an allegation of fraud), the Porters objected, natch! That required both sides to submit paper and required a Tax Court ruling, which came four weeks after the objection was filed. Pretty quick work. You will also see that both sides filed various discovery motions where they asked the Court for help or protection in the discovery process. That’s normal stuff for federal district court litigation, although it’s a bit unusual in Tax Court proceedings, where the emphasis is on cooperative information-sharing. See Branerton Corp. v. Commissioner, 61 T.C. 691 (1974).
Generally, the Court in this case was very responsive to developments in the case. We saw one example above. Here's another: Mr. Porter filed a motion to dismiss on May 15, 2015 to attack the validity of the NOD. The government replied on June 1, and the Court denied the motion in a 5-page Order on June 29, 2015. Pretty quick work.
Generally, too, the Court was very responsive to the wishes of the parties. Thus, the first scheduled trial date (April 27, 2015) was continued until March 14, 2016 at Mr. Porter’s request. Then that trial date was continued at request of the IRS on March 1, 2016. The second continuation was indefinite but required the parties to submit a status report to the Court in April 2016. Also in March, soon after the continuance, the parties filed a Stipulation of Settled Issues which represented a partial resolution of the case. However, both parties at that time still had various outstanding discovery motions that they apparently still wanted the Court to decide. At least they did not withdraw the motions.
On April 14, and 15, 2016 both parties submitted separate status reports to the Court reporting progress towards a complete resolution of the case. However, several discovery motions made by each party still remained outstanding. For example, on the same day in May Mr. Porter withdrew one discovery motion but then also supplemented another discovery motion.
That open-ended continuance seems to have created the opportunity for a problem.
Long time passed....some 19 months.
In November 2017, the IRS filed a supplement to its April 2016 Status Report. In it, the IRS reported that the parties were close to settlement, and that it no longer wanted to enforce its discovery motions.
Long time passed....some 15 months.
In February 2019, the Tax Court finally ruled on the pending discovery motions with this Order. It wrote: “On the basis of these filings, it appears to the Court that these discovery motions are unnecessary, moot, or without merit.” “These filings” refers to the status reports from 2016 and 2017.
The Court then calendared the case for a March 2019 trial, and the pace picked back up. The parties submitted additional stipulations in March and, on May 29, 2019, the Court entered a Stipulated Decision resolving the case. The agreed-upon liability was then assessed and Mr. Porter paid it, including some $3,000 in interest running from the due dates of the 2011 and 2012 returns until the dates of his payments (August 12, 2019 and then February 3, 2020).
Mr. Porter then asked the IRS to abate interest accrued during the period November 2013 through June 28, 2019. The IRS said no. Mr. Porter then petitioned the Tax Court, which held trial in Salt Lake City on January 21, 2022. Judge Greaves issued this opinion on March 28th. Pretty quick work!
Let’s see what we can learn.
Lesson: There Must Be 50 Ways to Lose Abatement Requests
(1) There Was No Delay, Ray. Mr. Porter never showed where there was any delay in the audit process. A selection for audit in October 2013 and NOD issued in May 2014 is arguably not a delay at all. Neither Judge Greaves nor the IRS addressed this directly, but I think that is because they just did not need to, because of the next reason.
(2) It's Your Own Fault, Walt. Here, the IRS decided that Mr. Porter’s representative’s failure to provide requested documents contributed to whatever delay there had been in the audit. Judge Greaves agreed: “Petitioners delayed the examination by failing to provide the records the examiner requested and did not provide any such records in the letter petitioner claimed to have sent the IRS on November 26, 2013.” Op. at 5.
(3) IRS Didn't Do It, Hewitt. This is the biggest reason for denying Mr. Porter’s abatement request. His best shot for interest abatement would be either (1) the 19 month period between the parties filing their first Stipulation of Settled Issues in March 2016 and IRS’s Supplemental Status Report in November 2017 or (2) the 15 month period between the IRS’s Supplemental Status Report and the Court’s February 2019 ruling on the pending discovery motions. Just for grins, let’s call both of those time periods “delay” (see Reason #1 above). Unfortunately for him, neither delay was caused by the IRS.
First, as to that first 19 month delay, it’s difficult to pin that on the IRS. It appears that Mr. Porter based his argument on his claim that the IRS did not respond to a settlement offer he had transmitted towards the end of that period, on November 5, 2017. Hokay. But that does not transform the IRS’s prior silence into a delay. Remember, both sides had pending discovery motions before the Court and, further, they still had not fully stipulated to all the facts and issues. In short, both sides were sitting on their hands for those 19 months. That is not a delay caused by IRS employees. And the IRS did respond to his offer. Just not to him directly. It filed its November 28, 2017 supplemental Status Report to the Court where it asked the Court to dismiss its pending discovery motions as moot.
Second, as to the 15 month delay, Mr. Porter has a stronger argument. It is possible that there was a managerial act that would qualify as a delay, if it in fact created a delay. That is, Mr. Porter claims that after he submitted his November 2016 offer, he learned that his the attorney on his case had been transferred and no new attorney assigned. He was in Chief Counsel limbo. If that is true, that could be the basis to attribute a delay to the IRS. Treas. Reg. 301.6404-2(c), Example 3, illustrates what a managerial delay could look like:
“A revenue agent is sent to a training course for an extended period of time, and the agent's supervisor decides not to reassign the agent's cases. During the training course, no work is done on the cases assigned to the agent. The decision to send the revenue agent to the training course and the decision not to reassign the agent's cases are not ministerial acts; however, both decisions are managerial acts. The Commissioner may (in the Commissioner's discretion) abate interest attributable to any unreasonable delay resulting from these decisions.”
The problem again, however, is causality. Even assuming Mr. Porter’s case remained unassigned, the resolution of the case at that point was not in the hands of the IRS. Mr. Porter was in Tax Court and resolution of his case still required a Tax Court decision on his own discovery motions, which he had never withdrawn. With pending motions, the ball to move the case forward does not rest exclusively with one party or the other but with both, to either come to a stipulation or to prompt the Court to go ahead and rule on the pending motions. Neither side did that although at least the IRS filed its Supplemental Status Report asking the Court to treat its discovery motion as moot in light of the parties’ progress.
To win here, Mr. Porter would need to fit himself into the facts of Mathia v. Commissioner, T.C. Memo 2009-120. There the IRS apparently received a fully prepared “decision document” from the taxpayers where the only act to be done before the document could be filed with the Tax Court was for IRS counsel to counter-sign it. The IRS attorney did not countersign the document. Five years later, the same attorney sent the exact same decision document to the taxpayer attorney for signature and, this time, the IRS attorney promptly countersigned an filed the document. In today's case, Mr. Porter did not send a fully prepared decision document but instead simply sent an offer. The IRS response was to tell the Tax Court a few weeks later that the parties were working on coming to a resolution.
(4) Tax Court Delay Not Track, Mac. To the extent that the 15 and 19 month delays can be attributed to the Tax Court itself, Mr. Porter’s request still gets rejected for the basic reason that the Tax Court is not the IRS. That may seem harsh but Congress did not see fit to provide relief to taxpayers for delays caused by the Tax Court. As Judge Greaves writes: “such delays [in ruling on pending motions] are not grounds for interest abatement because either they are not attributable to an IRS officer or employee, or a significant aspect of the delay can be attributed to the taxpayer.” Op. at 5-6.
The rule that Tax Court delays are not a basis for interest abatement is not as harsh as it may seem. That last phrase in Judge Greave’s sentence (“the delay can be attributed to the taxpayer”) goes to the concept of “unreasonable” delay. Section 6404(e) permits abatement only when the qualifying delay is unreasonable. That means if the inaction has a reasonable cause, the resulting delay is not unreasonable.
When taxpayers are in litigation in Tax Court, it’s not the Tax Court’s job to jolly them along. The Tax Court rightly depends on parties to pursue their cases and keep the Court appraised of developments. While some federal district courts are highly active managers of their dockets, such rocket dockets lead to results more dependent on procedure than merits and potentially obscure other values that we want to see in judicial resolution of disputes. See e.g. Mark Spottswood, The Perils of Productivity, 48 New Eng. L. Rev. 503 (2014).
The Tax Court has a particularly strong preference for the parties to reach agreed results. So when the message the Court receives from the parties is that the parties are working towards resolution, it give the Court good reason to give them space in which to do that. As best I can tell that is what happened here. The Court received word the parties were working it out and so had good reason to wait before ruling on the pending motions.
One of the ways to ensure that both the IRS and the Tax Court will give appropriate attention to their case is to ask for a trial date. Nothing like a trial date to get attention! Notice that in this case, the Court granted the second continuance without setting a new trial date. That is partly what allowed the case to sit. Taxpayers can also take action to press for resolution of their motions by submitting a status report to signal a breakdown in cooperation and ask for judicial action. And, of course, taxpayers who fear the accretion of interest during litigation can always make deposits to stop the running of interest.
Thus, as is my habit, I will finally conclude
hoping that my meaning won't be lost or misconstrued.
And I'll repeat myself, at the risk of being crude ...
There must be 50 ways to lose your interest abatement request.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each week for a new Lesson From The Tax Court, which may or may not contain dated or obscure pop cultural references.