New 11/26/03

Harbaugh, Petitioners v. Comm., TC Memo 2003-316 (Nov. 13, 2003), the Tax Court held that no agreement to compromise taxpayers’ liability was reached, but taxpayers were entitled to partial abatement of interest.

The IRS filed a Notice of Federal Tax Lien for $9,536.28 against petitioner with respect to a trust fund recovery penalty under section 6672 for employment tax. Taxpayers also filed income tax returns without payment.

Taxpayer phoned the IRS automated collection site (ACS) and agreed with an employee to pay $225 per month to the IRS for 36 months, for a total amount paid of $8,100. The installment agreement was not put in writing. Taxpayer believed that, if he timely made all 36 payments and did not become delinquent with any of his other tax liabilities, his 1993, 1994, and 1995 income tax liabilities and the TFRP would be extinguished, including any interest and penalties thereon. after receiving a notice taxpayer made a second call and was told the statement was a reminder of his payment due date, that the old liabilities would be reflected on his statements in case of default, and that at the end of the 36 months the additional amounts would be removed.

The first 2 payments were credited to Taxpayers’ 1993 income tax deficiency, and the remaining 32 payments were credited to the Trust Fund Penalty. After Taxpayers’ 34th payment was credited in June 1999, Taxpayers’ accounts showed accrued interest on the TFRP and income taxes and interest thereon remained due. The interest on the TFRP was secured by the lien. On July 22, 1999, Taxpayers paid $1,345.84, and the lien securing the Trust Fund Penalty was released. After the July 22, 1999, payment Taxpayers continued to receive statements through March 15, 2000, showing amounts due with respect to their income taxes.

On June 14, 2000, Taxpayers filed Form 843, Claim for Refund and Request for Abatement, with the IRS, claiming a refund of $895.84 with respect to the TFRP, which was denied by the IRS. On April 23, 2001, Taxpayers filed additional Forms 843 with respect to their income taxes, which we3re denied by the IRS on May 3, 2001.

The Court found section § 7122 and the regulations thereunder provide the exclusive method of effectuating a valid compromise of assessed tax liabilities, and at the time of the calls a liability could be compromised only if there was doubt as to liability or doubt as to collectibility. The liability was not in doubt and Taxpayers did not demonstrate a valid basis existed for compromise, the form required by regulations was not submitted, and no written acceptance of the purported agreement was received form the IRS. Finally, the ACS employee did not have the authority to compromise petitioners’ liabilities.

The Court noted it had jurisdiction to order an abatement of interest only when the Commissioner has abused his discretion in denying a taxpayer’s request to abate interest. Sec. 6404(h). To show an abuse of discretion, a taxpayer must prove that the Commissioner exercised this discretion arbitrarily, capriciously, or without sound basis in fact or law. The Court found that the ACS employee did not clarify to petitioner that unassessed interest would continue to accrue during the installment period, but instead confirmed petitioner’s flawed understanding of the agreement, and that the act by the ACS employee of misinforming petitioners about what their total liability would ultimately be was ministerial and did not require any judgment or discretion on the part of the ACS employee.

The Court found that because Taxpayers were unable to pay the tax liabilities in August 1996 (the date of the first call), no erroneous or dilatory performance of a ministerial act by an employee of the IRS contributed to a delay or error in payment during the period between the first call and the date of the second call and interest should be abated. The Court also found that after Taxpayers received the August 11, 1999, statement they were on notice that their understanding of the installment agreement was incorrect and that some additional amounts were still due. Taxpayers’ failure to make any payments after that date was a result of their decision to challenge respondent’s position, and there was no erroneous or dilatory performance of a ministerial act on the IRS’s part to cause this delay. Therefore, the Court held that the IRS did not abuse its discretion in refusing to abate interest for the period after August 11, 1999.