Tax Court Upholds IRS Denial of Interest Abatement

Bench Opinion by Judge Ronald L. Buch

May 6, 2021

THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury regulations in effect during the year at issue, and Rule references are to the Tax Court Rules of Practice and Procedure.

This case concerns the Commissioner's determination to deny Mr. Hogan's request for interest abatement. Mr. Hogan contends that he is entitled to interest abatement because the Commissioner caused excessive interest to accrue because he made unreasonable errors or delays and issued erroneous refund checks for the years at issue. Section 6404(e) gives the Commissioner the authority to abate interest if the requesting party did not significantly contribute to the error or delay. Mr. Hogan did not establish that that any errors or delays were unreasonable, that excessive interest accrued, or that he did not contribute to any errors or delay. Accordingly, we will uphold the Commissioner's determination.

INTRODUCTION

The tax system can be complicated, and even something that should seem simple (like keeping track of when liabilities arise and are extinguished) can be complicated. For example, regardless of when you file a tax return, the liability for tax generally arises on the due date of the return without regard to extensions. Sec. 6151(a), (c). And if tax is not paid when the liability arises, interest runs from the date prescribed for payment until the amount is paid. Sec. 6601(a). Thus, for example, if a taxpayer files an untimely return, the untimeliness does not affect the amount of interest that accrues (although there may be additions to tax for late payment, but such additions are different from interest). Regardless of when a return is filed, interest runs from the due date of the return until when the tax is paid. Id. Likewise, if there is an IRS delay in processing a return, it does not affect the amount of interest that accrues; interest runs from the date the return was due until the tax is paid.

If there are unreasonable errors and delays by the IRS in performing ministerial acts, and those unreasonable errors or delays result in additional interest, the Commissioner may abate that additional interest. For a taxpayer to be entitled to interest abatement, any errors or delays must be unreasonable and must have resulted in additional interest.

Mr. Hogan alleges that there were various errors and delays in processing returns, applying payments to his liabilities, and issuing refunds. The Commissioner's determination denying interest abatement states that the IRS "did not find any errors or delays on our part that merit the abatement of interest. . . . " Based on his statements at trial, Mr. Hogan interprets the IRS's determination as the IRS saying that it did not make any errors. The IRS made errors, and the administrative record acknowledges as much. But Mr. Hogan has not established that those errors or delays were unreasonable or that they resulted in any additional interest. For these reasons, decision will be entered for the Commissioner.

BACKGROUND

Mr. Hogan late filed his individual income tax returns for 1994 and 1995 on September 2, 1997. Both returns reported no income tax liability.

Indictment & Plea

In 1998, Mr. Hogan was indicted for tax evasion.Mr. Hogan pled guilty to willfully attempting to evade tax under section 7201. In his plea agreement, Mr. Hogan agreed to file amended tax returns for 1994 and 1995.

On November 21, 2000, the District Court ordered Mr. Hogan to remit a cash bond of $691,314. Effective January 5, 2001, the Commissioner credited that bond against Mr. Hogan's tax liabilities. As is relevant here, the Commissioner twice applied amounts from the cash bond to 1994, first posting $61,459 and later posting an additional $96,668. Regardless of when those amounts were posted to his account, for interest computation purposes, the amounts were posted as of January 5, 2001. For 1995, the Commissioner posted $178,776 to Mr. Hogan's account. The remainder of the bond was posted to other years. Mr. Hogan alleges that some of those amounts were erroneously posted to other years and later transferred to 1995. He seems to allege that this was a delay resulting in additional interest cost. But notably for 1995, the Commissioner transferred amounts from 1990 and 1984 in the amounts of $962 and $2,318, with both transfers being effective for interest computation purposes on January 5, 2001, the same date as the payments posted directly from the cash bond.

Amended Returns

Pursuant to the terms of his plea agreement, Mr.Hogan filed amended returns for 1994 and 1995. The Commissioner received those returns on July 3, 2001, and September 13, 2001, respectively.

For 1994, Mr. Hogan reported a liability of $61,459. On September 30, 2002, the Commissioner assessed the tax, and on October 28, 2002, the Commissioner assessed corresponding penalties and additions to tax. Regardless of any delay in assessing those amounts, the Commissioner applied the cash bond as of January 5, 2001.

For 1995, Mr. Hogan reported a liability of $178,776. The transcript shows this amount being placed as an assessment on Mr. Hogan's account as of August 13, 2001, along with penalties and additions to tax. As with 1994, the Commissioner applied the cash bond as of January 5, 2001.

Examination

On January 24, 2002, the Commissioner initiated an examination of Mr. Hogan's 1994 return. On June 6, 2002, the Commissioner initiated an examination of Mr. Hogan's 1995 return. Those examinations began within a year of when Mr. Hogan filed his amended returns. On September 2, 2003, the Commissioner issued separate notices of deficiency for 1994 and 1995.

Tax Court Deficiency Case

Mr. Hogan filed a timely petition requesting review of the deficiencies determined by the Commissioner. That case was docketed in this Court at docket no. 20796-03, filed December 1, 2003. Mr. Hogan ultimately agreed to a stipulated decision that was entered by the Court on June 9, 2005. For 1994, the parties agreed that Mr. Hogan was liable for a deficiency of $64,977, a section 6651(a)(1) addition to tax of $16,244, and a section 6663 fraud penalty of $50,574. For 1995, the parties agreed that Mr. Hogan was not liable for a deficiency in tax or a section 6651(a)(1) addition to tax. But Mr. Hogan conceded that he was liable for a section 6663 fraud penalty of $105,589.

Collection Action

On March 1, 2004, the Commissioner issued a notice of intent to levy to Mr. Hogan for 1994 and 1995. Mr. Hogan initiated a collection proceeding. He asserted that he was entitled to a net operating loss (NOL) for 2001 of $1,714,840 and argued that the loss should be carried back to earlier years. On July 10, 2006, the Commissioner issued a notice of determination sustaining the proposed levy.

Tax Court Collection Case & Audit Reconsideration

Mr. Hogan filed a timely petition requesting review of the levy determination. That case was filed on July 31, 2006, at docket no. 14581-06L. At approximately the same time, the Commissioner granted audit reconsideration of Mr. Hogan's 2001 liability. The parties filed a joint motion to remand the case to the Office of Appeals, which the Court granted. After reevaluating Mr. Hogan's 2001 return, the Commissioner determined that Mr. Hogan had a $1,696,840 net operating loss (NOL) for 2001.

The Commissioner applied the NOL to Mr. Hogan's 1996 through 2000 liabilities and abated tax and interest for those years. This resulted in overpayments totaling $327,883. In 2008, the parties stipulated that the Commissioner would credit the overpayments against Mr. Hogan's 1994 and 1995 liabilities. However, the Commissioner ultimately refunded some of the overpayments directly to Mr. Hogan. In a subsequent stipulation in that same case, Mr. Hogan agreed that issuing the refunds "satisfy[ies] the corresponding terms of the 2008 stipulation regardless of whether certain overpayments were refunded to the petitioner rather than being credited to other liabilities. . . ." What Mr. Hogan did with those refunds, in his own words, was he sat on them.

That collection case also involved a claim by Mr. Hogan for litigation costs, which ultimately resulted in an opinion from this Court. See T.C. Memo. 2011-176. That opinion cites the Supreme Court for the observation that "Bad things happen if you fail to pay federal income taxes when due." Citing Hinck v. United States, 550 U.S. 501, 502 (2007). Our opinion goes on to recount the myriad ways in which Mr. Hogan contributed to whatever delays occurred in the processing of his interrelated cases and stating: "Mr. Hogan had the obligation to file the appropriate forms to seek the refunds and resolve this matter expeditiously, and Mr. Hogan was far from prompt in this regard." In denying Mr. Hogan's claim for litigation costs, we noted that Mr. Hogan's own actions resulted in any delays through June 2008 at the earliest. We concluded thusly: "We find that given the timing of Mr. Hogan's filings of the required documents in this case, Mr. Hogan's actions delayed the administrative processing of this collection matter and respondent's actions in the final months before the stipulation of settlement was filed were substantially justified." That stipulation was entered September 7, 2011.

Request for Abatement

On November 1, 2012, Mr. Hogan filed Form 843, Claim for Refund and Request for Abatement, requesting interest abatement for 1994 and 1995. His request for relief was based on what he believed were errors in the Commissioner's calculation of his remaining liability and interest, particularly concerning the application of the court-ordered cash bond; undue delay in the processing of his returns; and errors in issuing refund checks. His memorandum attached to his Form 843 contains several patently false statements. For example, he claims "he never received notice of the 1994 deficiencies until the review of taxes from 1984 to 2001 was addressed in the stipulation in 2008 and 2009 and actually not until the tax court approved the stipulation in August 2011." Yet in 2003, he received a notice of deficiency for 1994, he filed a petition from that notice that same year, and he stipulated to the liability in 2005. Likewise, he claimed "All of the proceedings that followed 1994, including discussions with the IRS and the Tax Court the Court held on 10/6/10 the taxpayer was found not to 'unreasonably protract the proceeding.' The delay in all these proceedings by Court decree is not contributed to the taxpayer (Exhibit A)." The exhibit A to which Mr. Hogan refers is an October 12, 2010, order of this Court that says no such thing. That order merely called for Mr. Hogan to respond to the Commissioner's allegations that he (Mr. Hogan) unreasonably protracted the proceedings.

On November 14, 2013, the Commissioner disallowed Mr. Hogan's claim for interest abatement, finding that there was "no error or delay relating to the performance of a ministerial act." Mr. Hogan administratively appealed that disallowance, and on October 28, 2014, the Commissioner issued a final determination denying relief, stating he "did not find any errors or delays on our part that merit the abatement of interest. . . ." Both the preliminary and final determination were accompanied by memoranda further explaining the Commissioner's determinations. Those explanations both highlighted, for a delay to potentially result in the abatement of interest, the delay must be attributable to a ministerial act. For example, audit decisions such as deferring action on a civil examination while a criminal case is pending, are not ministerial acts.

Tax Court Abatement Case

While residing in Florida, Mr. Hogan filed a petition challenging the Commissioner's determination to disallow interest abatement. His petition raised 1994 through 2014 and reiterated the grievances he'd expressed during his collection case.

Many of the issues in this case have been previously decided. We issued an order granting the Commissioner's motion to dismiss for lack of jurisdiction for all years except 1994 and 1995. We granted a motion for partial summary judgment determining that Mr. Hogan is not entitled to interest abatement for the periods of April 17, 1995, through September 2, 1997, for tax year 1994; and April 15, 1996, through September 2, 1997, for tax year 1995. We granted another motion for partial summary judgment determining that Mr. Hogan is not entitled to interest abatement for the period of September 3, 1997, through November 21, 2000, for 1994 and 1995.

Trial

Mr. Hogan's opening statement highlighted what he characterized as eleven areas of disagreement, although they can more succinctly be broken out into the following categories.

Mr. Hogan was displeased with having been labeled as a potentially dangerous taxpayer or PDT. The Commissioner uses the designation of PTD to "identify taxpayers who represent a potential danger to employees." Internal Revenue Manual, 25.4.1.1.1 (Oct. 31, 2018). Mr. Hogan learned of this designation through a request under the Freedom of Information Act. He argues that this designation resulted in unfavorable treatment during the appeal process. He did not direct us to any error or delay resulting from his designation as a potentially dangerous taxpayer.

Mr. Hogan argues that there were delays in the processing of his original and amended returns. Several years passed between the filing of Mr. Hogan's original 1994 and 1995 returns in 1997 and their processing and assessment by the Commissioner in 2001 and 2002. Mr. Hogan argues that this constitutes unreasonable delay, but he did not identify how this error or delay caused any increased interest.

Mr. Hogan argues that the Commissioner did not credit the court-ordered cash bond against his liability in a timely manner. He argues that this delay was unreasonable and led to the accumulation of additional interest. But given that the cash bond amounts were credited as of January 5, 2001, Mr. Hogan did not identify how any delay in posting the credit caused any increased interest.

Mr. Hogan argues that the Commissioner erred by issuing refunds from prior years to him rather than applying them to his 1994 and 1995 liabilities as had been agreed in a stipulation. In making this argument, Mr. Hogan did not address his subsequent stipulation that the Commissioner satisfied the prior stipulation by making the refund.

DISCUSSION

The petitioner bears the burden of proving that the Commissioner abused his discretion by denying a request for interest abatement. Lee v. Commissioner, 113 T.C. 145, 149 (1999).

Section 6404 authorizes the Commissioner to abate interest in situations where the Commissioner causes unreasonable errors or delays in the performance of a ministerial act or when the Commissioner erroneously issues a refund check. Sec. 6404(e)(1) and (2). A ministerial act is something that is "nondiscretionary" and "procedural" that the Commissioner is required to perform. Camerato v. Commissioner, T.C. Memo. 2002-28. To qualify for relief as a result of errors or delays, the taxpayer also must not have contributed to the error or delay. Sec. 6404(e)(1).

In Hornbacker v. Commissioner, T.C. Memo. 2016-65, *16-17, we described what a taxpayer must show in a challenge to the Commissioner's failure to abate interest. To be entitled to interest abatement, a taxpayer must first show that there was an assessment of interest that was attributable to an unreasonable error or delay in performing a ministerial act. Sec. 6404(e)(1)(A). The taxpayer must then show a correlation between the error or delay and a specific period for which interest should be abated. And lastly, the taxpayer must show that he would have paid his tax liability earlier but for such error or delay.

Turning to his specific allegations, it is clear that Mr. Hogan did not meet his burden.

Regarding his designation as a potentially dangerous taxpayer, Mr. Hogan failed to meet his burden at every level. He did not establish that there was an error in designating him as a PDT. Even if that were erroneous, he did not establish that the designation caused any error, delay, or additional interest. And given his repeated efforts to avoid payment, he clearly did not establish that he would have paid his tax earlier.

Regarding delays in processing Mr. Hogan's original and amended returns, we have previously held that those delays were of his own making. T.C. Memo. 2011-176. But even if we were to accept that there were delays, section 6404(e) requires that Mr. Hogan establish that the delays were both unreasonable and in the performance of ministerial acts. Mr. Hogan did not establish either. At the time Mr. Hogan filed his original returns, there was a criminal case pending against him to determine whether he willfully attempted to evade tax for the years at issue. It was not a ministerial act to delay processing returns until the criminal case reached a conclusion. And once the criminal case reached resolution, the Commissioner processed the amended returns that Mr. Hogan filed pursuant to the terms of his plea agreement. And even if there was a delay in processing these returns, and if the delay was in the performance of a ministerial act, Mr. Hogan did not establish that the delay resulted in any assessment of interest that was attributable to that delay or that he would have paid his tax earlier but for that delay. Simply put, he did not meet his burden as to any element he was required to establish.

Mr. Hogan alleges that the Commissioner delayed in applying the cash bond to his liability and in some instances applied it to the wrong year. But again, he did not establish that the delay resulted in any assessment of interest that was attributable to that delay or that he would have paid his tax earlier but for that delay. The records make clear that the Commissioner applied the cash bond as of January 5, 2001. To the extent the cash bond was applied to other years and then transferred to the years at issue, those amounts were also applied to Mr. Hogan's liability as of January 5, 2001. Thus, he did not establish that, even if there was a delay, there was any additional interest that accrued as a result of such delay.

Lastly, Mr. Hogan alleges that he is entitled to interest abatement as a result of erroneous refunds of overpayments from other years that he alleges should have been applied to the years before us. We must first note that section 6404(e)(2) does not apply to these refunds. To be eligible for relief under section 6404(e)(2), a refund must be of the type that is eligible for recovery under section 7405. In other words, it must be an erroneous refund of tax. The refunds made to Mr. Hogan were refunds of overpayments from other years. Thus, section 6404(e)(2) does not apply and the appropriate standard we are to apply is the unreasonable error or delay standard of section 6404(e)(1).

The Commissioner erred in making the refunds to Mr. Hogan rather than applying them to the other years as he had stipulated. But in a separate stipulation entered in Docket No. 14581-06 on June 15, 2010, Mr. Hogan agreed that the terms of the earlier stipulation were satisfied by the refund. But perhaps most importantly, Mr. Hogan did not establish that he would have paid his tax liability earlier but for this error. His own testimony was that he sat on the refund. Any interest that accrued as a result of the Commissioner's making these refunds was as a result of Mr. Hogan's own inaction.

CONCLUSION

Mr. Hogan failed to carry his burden of proof that the Commissioner caused unreasonable errors or delays leading to the accrual of additional interest. Decision will be entered for the Commissioner.

(Whereupon, at 11:31 a.m., the above-entitled matter was concluded.)