[Federal Register Volume 63, Number 5 (Thursday, January 8, 1998)]
[Proposed Rules]
[Pages 1086-1089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-209276-87]
RIN 1545-AV32


Abatement of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
abatement of interest attributable to unreasonable errors or delays by 
an officer or employee of the IRS in performing a ministerial or 
managerial act. The proposed regulations reflect changes to the law 
made by the Tax Reform Act of 1986 and the Taxpayer Bill of Rights 2. 
The proposed regulations affect both taxpayers requesting abatement of 
certain interest and IRS personnel responsible for administering the 
abatement provisions.

DATES: Written comments and requests for a hearing must be received by 
April 8, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209276-87), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-209276-87), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington 
DC. Alternatively, taxpayers may submit comments electronically via the 
INTERNET by selecting the ``Tax Regs'' option on the IRS Home Page, or 
by submitting comments directly to the IRS Internet site at http://
www.irs.ustreas.gov/prod/tax__regs/comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, David 
Auclair, (202) 622-4910 (not a toll-free number). Concerning 
submissions, Michael Slaughter, (202) 622-7190 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Procedure and 
Administration Regulations (26 CFR Part 301) relating to the abatement 
of interest attributable to unreasonable errors or delays by an officer 
or employee of the IRS under section 6404(e)(1) of the Internal Revenue 
Code. Section 6404(e)(1) was enacted by section 1563(a) of the Tax 
Reform Act of 1986 (Pub. L. 99-514, 100 Stat. 2762 (1986)) (1986 Act) 
and amended by section 301 of the Taxpayer Bill of Rights 2 (Pub. L. 
104-168, 110 Stat. 1452 (1996)) (TBOR2).
    As enacted by the 1986 Act, section 6404(e)(l) provided that the 
IRS may abate interest attributable to any error or delay by an officer 
or employee of the IRS (acting in an official capacity) in performing a 
ministerial act. The legislative history accompanying the Act provided,

    The committee intends that the term ``ministerial act'' be 
limited to nondiscretionary acts where all of the

[[Page 1087]]

preliminary prerequisites, such as conferencing and review by 
supervisors, have taken place. Thus, a ministerial act is a 
procedural action, not a decision in a substantive area of tax law.

H.R. Rep. No. 426, 99th Cong., 1st Sess. 845 (1985); S. Rep. No. 313, 
99th Cong., 2d Sess. 209 (1986).
    Further, Congress did not intend that the abatement of interest 
provision ``be used routinely to avoid payment of interest.'' H.R. Rep. 
No. 426, 99th Cong., 1st Sess. 844 (1985); S. Rep. No. 313, 99th Cong., 
2d Sess. 208 (1986). Rather, Congress intended abatement of interest to 
be used in instances ``where failure to abate interest would be widely 
perceived as grossly unfair.'' Id.
    On August 13, 1987, the IRS published temporary regulations (TD 
8150) in the Federal Register (52 FR 30162) relating to the definition 
of ministerial act for purposes of abatement of interest. A notice of 
proposed rulemaking (LR-34-87) cross-referencing the temporary 
regulations was also published in the Federal Register for the same day 
(52 FR 30177). No public hearing regarding these regulations was 
requested or held. In this document, the IRS is reproposing a modified 
version of the earlier notice of proposed rulemaking to incorporate 
changes made by TBOR2. Therefore, the earlier notice of proposed 
rulemaking is withdrawn.
    The temporary regulations define ministerial act to mean 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. The temporary regulations also provide five 
examples to illustrate the definition of ministerial act.
    In TBOR2, Congress amended section 6404(e)(1) to permit the IRS to 
abate interest attributable to any unreasonable error or delay by an 
officer or employee of the IRS (acting in an official capacity) in 
performing a managerial act as well as a ministerial act. Thus, as a 
result of TBOR2, the IRS has the authority to abate interest in more 
situations than under prior law.
    Pursuant to the legislative history accompanying TBOR2, a 
managerial act is a loss of records or a personnel management decision 
such as the decision to approve a personnel transfer, extended leave, 
or extended training. See H.R. Rep. No. 506, 104th Cong., 2d Sess. 27 
(1996). TBOR2 distinguished a managerial act from a general 
administrative decision, such as a decision on how to organize the 
processing of tax returns or a decision regarding the implementation of 
an improved computer system. Id. A general administrative decision is a 
decision that impacts tax administration. The amendments to section 
6404(e)(1) are effective for interest accruing with respect to 
deficiencies or payments for taxable years beginning after July 30, 
1996.
    TBOR2 also added section 6404(g). Section 6404(g) grants the Tax 
Court jurisdiction to determine whether the IRS's failure to abate 
interest for an eligible taxpayer is an abuse of discretion. Tax Court 
review is available for requests for abatement of interest that are 
made after July 30, 1996, or that have not been denied prior to July 
31, 1996. See Banat v. Commissioner, 109 T.C. 92 (1997); White v. 
Commissioner, 109 T.C. 96 (1997).

Explanation of Provisions

    TBOR2 expanded the scope of abatement relief under section 
6404(e)(1). Consistent with congressional intent, the proposed 
regulations permit abatement of interest in more situations than under 
prior law. Nothing in the proposed regulations is intended to limit the 
extent to which the IRS could abate interest before the effective date 
of TBOR2.
    The proposed regulations define managerial act and incorporate 
other changes made by TBOR2. TBOR2 did not alter the definition of 
ministerial act under prior law. Accordingly, the proposed regulations 
retain the definition of ministerial act in the temporary regulations.
    Managerial act is defined as an administrative act that occurs 
during the processing of a taxpayer's case involving the temporary or 
permanent loss of records or the exercise of judgment or discretion 
relating to management of personnel. A decision concerning the proper 
application of federal tax law (or other federal or state law) is not a 
managerial act. Further, interest attributable to a general 
administrative decision, such as the IRS's decision on how to organize 
the processing of tax returns or its delay in implementing an improved 
computer system, cannot be abated under section 6404(e)(1).
    In addition, the proposed regulations provide examples to 
illustrate the definitions of ministerial act and managerial act. 
Examples 1, 2, 3, 7, and 8 of the proposed regulations are 
substantially similar to Examples 1 through 5 of the temporary 
regulations. However, in Example 3 of the proposed regulations (Example 
4 of the temporary regulations), a decision to approve extended 
training is a managerial act, and in Example 8 of the proposed 
regulations (Example 5 of the temporary regulations) the type of work 
priority is specified.
    The provisions of the regulations relating to a ministerial act 
apply to interest accruing with respect to deficiencies or payments of 
any tax described in section 6212(a) for taxable years beginning after 
December 31, 1978, for which the applicable statute of limitations has 
not expired. The provisions of the regulations relating to a managerial 
act are proposed to apply to interest accruing with respect to 
deficiencies or payments of any tax described in section 6212(a) for 
taxable years beginning after July 30, 1996.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. Chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. Chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. All comments will be available for public inspection and 
copying. A public hearing may be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place of the hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these regulations is David B. Auclair. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes,

[[Page 1088]]

Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 301.6404-2 is added to read as follows:


Sec. 301.6404-2  Abatement of interest.

    (a) In general. (1) Section 6404(e)(1) provides that the 
Commissioner may (in the Commissioner's discretion) abate the 
assessment of all or any part of interest on any--
    (i) Deficiency (as defined in section 6211(a), relating to income, 
estate, gift, generation-skipping, and certain excise taxes) 
attributable in whole or in part to any unreasonable error or delay by 
an officer or employee of the Internal Revenue Service (IRS) (acting in 
an official capacity) in performing a ministerial or managerial act; or
    (ii) Payment of any tax described in section 6212(a) (relating to 
income, estate, gift, generation-skipping, and certain excise taxes) to 
the extent that any error or delay in payment is attributable to an 
officer or employee of the IRS (acting in an official capacity) being 
unreasonably erroneous or dilatory in performing a ministerial or 
managerial act.
    (2) An error or delay in performing a ministerial or managerial act 
will be taken into account only if no significant aspect of the error 
or delay is attributable to the taxpayer involved or to a person 
related to the taxpayer within the meaning of section 267(b) or section 
707(b)(1). Moreover, an error or delay in performing a ministerial or 
managerial act will be taken into account only if it occurs after the 
IRS has contacted the taxpayer in writing with respect to the 
deficiency or payment. For purposes of this paragraph (a)(2), no 
significant aspect of the error or delay is attributable to the 
taxpayer merely because the taxpayer consents to extend the period of 
limitations.
    (b) Definitions. (1) Managerial act means an administrative act 
that occurs during the processing of a taxpayer's case involving the 
temporary or permanent loss of records or the exercise of judgment or 
discretion relating to management of personnel. A decision concerning 
the proper application of federal tax law (or other federal or state 
law) is not a managerial act. Further, interest attributable to a 
general administrative decision, such as the IRS's decision on how to 
organize the processing of tax returns or the IRS's decision on the 
implementation schedule for an improved computer system, cannot be 
abated under paragraph (a) of this section.
    (2) 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. A decision concerning the proper application of federal tax law 
(or other federal or state law) is not a ministerial act.
    (c) Examples. The following examples illustrate the provisions of 
paragraphs (b)(1) and (b)(2) of this section. For the purposes of the 
examples, no significant aspect of any error or delay is attributable 
to the taxpayer, and the IRS has contacted the taxpayer in writing with 
respect to the deficiency.

    Example 1. A taxpayer moves from one state to another before the 
IRS selects the taxpayer's income tax return for examination. A 
letter explaining that the return has been selected for examination 
is sent to the taxpayer's old address and then forwarded to the new 
address. The taxpayer timely responds, asking that the audit be 
transferred to the IRS's district office that is nearest the new 
address. The group manager approves the request. After the request 
for transfer has been approved, the transfer of the case is a 
ministerial act. The Commissioner may (in the Commissioner's 
discretion) abate interest attributable to any unreasonable delay in 
transferring the case.
    Example 2. An examination of a taxpayer's income tax return 
reveals a deficiency with respect to which a notice of deficiency 
will be issued. The taxpayer and the IRS identify all agreed and 
unagreed issues, the notice is prepared and reviewed (including 
review by District Counsel, if necessary) and any other relevant 
prerequisites are completed. The issuance of the notice of 
deficiency is a ministerial act. The Commissioner may (in the 
Commissioner's discretion) abate interest attributable to any 
unreasonable delay in issuing the notice.
    Example 3. 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.
    Example 4. A taxpayer appears for an office audit and submits 
all necessary documentation and information. The auditor tells the 
taxpayer that the taxpayer will receive a copy of the audit report. 
However, before the report is prepared, the auditor is permanently 
reassigned to another group. An extended period of time passes 
before the auditor's cases are reassigned. The decision to reassign 
the auditor and the decision not to reassign the auditor's cases are 
not ministerial acts; however, they are managerial acts. The 
Commissioner may (in the Commissioner's discretion) abate interest 
attributable to any unreasonable delay resulting from these 
decisions.
    Example 5. A taxpayer is notified that the IRS intends to audit 
the taxpayer's income tax return. The agent assigned to the case is 
granted sick leave for an extended period of time and the taxpayer's 
case is not reassigned. The decision to grant sick leave and the 
decision not to reassign the taxpayer's case to another agent are 
not ministerial acts; however, they are managerial acts. The 
Commissioner may (in the Commissioner's discretion) abate interest 
attributable to any unreasonable delay caused by these decisions.
    Example 6. A revenue agent has completed an examination of the 
income tax return of a taxpayer. There are issues that are not 
agreed upon between the taxpayer and the IRS. Before the notice of 
deficiency is prepared and reviewed, a clerical employee misplaces 
the taxpayer's case file. The act of misplacing the case file is a 
managerial act. The Commissioner may (in the Commissioner's 
discretion) abate interest attributable to any unreasonable delay 
resulting from the file being misplaced.
    Example 7. A taxpayer invests in a tax shelter and reports a 
loss from the tax shelter on the taxpayer's income tax return. IRS 
personnel conduct an extensive examination of the tax shelter, and 
the processing of the taxpayer's case is delayed because of that 
examination. The decision to delay the processing of the taxpayer's 
case until the completion of the examination of the tax shelter is a 
decision on how to organize the processing of tax returns. This is a 
general administrative decision. Consequently, interest attributable 
to this decision cannot be abated under paragraph (a) of this 
section.
    Example 8. A taxpayer claims a loss on the taxpayer's income tax 
return and is notified that the IRS intends to examine the return. 
However, a decision is made not to commence the examination of the 
taxpayer's return until the processing of another return, for which 
the statute of limitations is about to expire, is completed. The 
decision on how to prioritize the processing of returns based on the 
expiration of the statute of limitations is a general administrative 
decision. Consequently, interest attributable to this decision 
cannot be abated under paragraph (a) of this section.
    Example 9. During the examination of an income tax return, there 
is disagreement between the taxpayer and the revenue agent regarding 
certain itemized deductions claimed by the taxpayer on the return. 
To resolve the issue, Examination requests advice from the Office of 
Chief Counsel on

[[Page 1089]]

a substantive issue of federal tax law. The decision to request 
advice is a decision concerning the proper application of federal 
tax law; it is neither a ministerial nor a managerial act. 
Consequently, interest attributable to a delay resulting from the 
decision to request advice cannot be abated under paragraph (a) of 
this section.
    Example 10. The facts are the same as in Example 9 except the 
attorney who is assigned to respond to the request for advice is 
granted leave for an extended period of time. The case is not 
reassigned during the attorney's absence. The decision to grant 
leave and the decision not to reassign the taxpayer's case to 
another attorney are not ministerial acts; however, they are 
managerial acts. The Commissioner may (in the Commissioner's 
discretion) abate interest attributable to any unreasonable delay 
caused by these decisions.
    Example 11. A taxpayer contacts an IRS employee and requests the 
amount due to satisfy the taxpayer's income tax liability for a 
particular taxable year. Because the employee fails to access the 
most recent data, the employee gives the taxpayer an incorrect 
amount due. As a result, the taxpayer pays less than the amount 
required to satisfy the tax liability. Accessing the most recent 
data is a ministerial act. The Commissioner may (in the 
Commissioner's discretion) abate interest attributable to any 
unreasonable error or delay arising from giving the taxpayer an 
incorrect amount due to satisfy the taxpayer's income tax liability.
    Example 12. A taxpayer contacts an IRS employee and requests the 
amount due to satisfy the taxpayer's income tax liability for a 
particular taxable year. To determine the current amount due, the 
employee must interpret complex provisions of federal tax law 
involving net operating loss carrybacks and foreign tax credits. 
Because the employee incorrectly interprets these provisions, the 
employee gives the taxpayer an incorrect amount due. As a result, 
the taxpayer pays less than the amount required to satisfy the tax 
liability. Interpreting federal tax law is neither a ministerial nor 
a managerial act. Consequently, interest attributable to an error or 
delay arising from giving the taxpayer an incorrect amount due to 
satisfy the taxpayer's income tax liability cannot be abated under 
paragraph (a) of this section.

    (d) Effective date. The provisions of this section apply to 
interest accruing with respect to deficiencies or payments of any tax 
described in section 6212(a) for taxable years beginning after July 30, 
1996.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-19 Filed 1-7-98; 8:45 am]
BILLING CODE 4830-01-P