Verghese v. Comm'r
| Decision Date | 07 June 2021 |
| Docket Number | Docket No. 25757-15L.,T.C. Memo. 2021-70 |
| Parties | KANNARKAT P. VERGHESE, DECEASED, ANNIE P. VERGHESE, PERSONAL REPRESENTATIVE, AND ANNIE P. VERGHESE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
In 1997 and 1998 Ps held investments in partnerships that, unbeknownst to Ps, reported fraudulent charitable contributions on their partnership tax returns. The partnerships were subject to the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). On their returns for 1997 and 1998, Ps claimed charitable contribution deductions consistent with the partnership returns. The IRS audited the partnership returns and disallowed the charitable contribution deductions for tax years 1996 through 1998. In June 2000 the partnerships commenced the first of three TEFRA proceedings in the Tax Court that were ultimately consolidated for resolution.
Ps' investments in the partnerships had been actively solicited by promoters of the partnerships who were criminally prosecuted and ultimately convicted of crimes of fraud involving the partnerships, but the criminal prosecutions did not end until 2009. During these criminal proceedings, the TEFRA proceedings in the Tax Court were delayed after the parties to the TEFRA proceedings jointly moved for continuances. The TEFRA proceedings did not conclude until April 2013 when the Tax Court entered stipulated decisions under Tax Court Rule 248(b).
In May 2014 Ps received IRS Notices CP22E showing increases in income tax and interest for tax years 1996 through 1998. Ps thereafter filed Form 843, "Claim for Refund and Request for Abatement", requesting abatement of the interest for the years during which the TEFRA litigation was pending. Their claim was based on allegations of unfairness and unreasonable delay by the IRS. Ps did not receive any response from the IRS regarding their abatement request before the IRS issued a notice of intent to levy based on the liabilities assessed for tax years 1996 through 1998. Ps requested a Collection Due Process ("CDP") hearing before the IRS Office of Appeals ("Appeals") and asserted their abatement request in the context of the CDP hearing. Appeals erroneously determined that the abatement request could not be considered and issued a notice of determination denying abatement. Ps timely petitioned the Tax Court with respect to tax years 1997 and 1998, and the Tax Court subsequently remanded Ps' claim to Appeals for supplemental proceedings for consideration of Ps' abatement request. Appeals again denied Ps' request for abatement, determining that I.R.C. sec. 6404 did not permit abatement under any of the circumstances Ps alleged.
R moved for summary judgment, arguing that the notice of determination should be sustained because none of the grounds for abatement that Ps allege is valid under I.R.C. sec. 6404. Ps contend that under I.R.C. sec. 6404(a) they are entitled to abatement on the basis of principles of fairness and that under I.R.C. sec. 6404(e) the IRS engaged in ministerial or managerial acts that constituted unreasonable delay for which their abatement request should be granted.
Held: I.R.C. sec. 6404(b) precludes a claim under I.R.C. sec. 6404(a) for abatement of interest on income tax. Because Ps' request for abatement is for interest assessed on income tax, I.R.C. sec. 6404(a) is inapplicable.
Held, further, with the exception of one period of approximately five months, the administrative record shows that Appeals did not abuse its discretion when it determined that there was no ministerial or managerial act by the IRS sufficient to constitute unreasonable delay justifying abatement under I.R.C. sec. 6404(e). R's motion for summary judgment will be granted in large part but, as to that five-month period, will be denied in part.
Gerald W. Kelly, Jr., and Daniel S. Heller, for petitioners.
Bartholomew Cirenza and Ryan Z. Sarazin, for respondent.
Petitioner Annie P. Verghese and her late husband Kannarkat P. Verghese filed this suit, pursuant to section 6330(d),1 in response to the determination of the Office of Appeals ("Appeals") of the Internal RevenueService ("IRS") to (a) sustain the issuance to petitioners of a "Final Notice - Notice of Intent to Levy" with respect to petitioners' unpaid liabilities for tax years 1997 and 1998 and (b) deny petitioners' request for abatement of almost 13 years' worth of interest that the IRS assessed in respect of the tax liabilities for those long-past years. Respondent, the Commissioner of the IRS, has moved for summary judgment under Rule 121, and petitioners have filed an opposition. For the reasons explained below, we will grant the Commissioner's motion in part as to abatement of interest under section 6404(a) and, as to abatement under section 6404(e), will grant the motion as to most of the interest but will deny it as to nearly five months' worth of interest accrued from August 7, 2012, to January 2, 2013, because, under Rule 121(e), petitioners should be allowed to conduct some discovery as to that five-month period on the issue of whether Appeals abused its discretion by failing to consider circumstances showing delay by the IRS in arriving at a settlement with the partners of certain partnerships in which Mr. Verghese was a partner.
For purposes of the Commissioner's motion, we assume correct the facts asserted by petitioners that are supported by their filings, as well as the facts demonstrated by the Commissioner that petitioners did not dispute.2
The Heritage partnerships
Mr. Verghese was a partner in each of three different partnerships--Heritage Memorial Park Associates 1995-2, Heritage Memorial Park Associates 1995-3, and Heritage Memorial Park Associates 1995-4 ("the Heritage partnerships"), all of which used the partners' contributed capital to invest in cemetery plots. The Heritage partnerships donated the cemetery plots to charity and reported charitable contributions on their partnership tax returns for the amounts attributed to those plots. The charitable contributions were "passed through" to the partners of the partnerships to claim on their individual tax returns. The Heritage partnerships reported such charitable donations in 1996, 1997, and 1998, while Mr. Verghesewas an investor and partner in the partnerships. (Deductions for 1996 are not in dispute because petitioners raised in their petition only claims relating to tax years 1997 and 1998; but we make reference below to facts relevant here concerning Heritage Memorial Park Associates 1995-2, the partnership through which deductions were claimed for 1996.)
The investments in the Heritage partnerships were actively marketed to Mr. Verghese and the other partners who made similar investments. The person responsible for much of the direct correspondence and solicitation of partner investments was Paul V. Decker, an alleged investment adviser based in Bowie, Maryland. In the years at issue, Mr. Verghese purchased partnership interests that were advertised to him as "units", which corresponded to a fixed number of cemetery sites that the partnerships purchased, allowing him to report on his personal tax returns (jointly filed with Mrs. Verghese) certain shares of the charitable contributions reported by the partnerships on their returns, for which he claimed charitable contribution deductions. He and the other partners were repeatedly assured of the legitimacy of the transactions that generated the deductions claimed by the Heritage partnerships, as well as the accuracy of the appraisals that supported them. Such assurances came in the form of repeated correspondence from Mr. Decker (often advertising the sale of additional units of supposedly limited availability), as well as lengthy legal correspondence from the attorney who represented the Heritage partnerships in proceedings under the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). See infra p. 8, "TEFRA proceedings".
Tax returns for 1997 and 1998
Petitioners filed joint returns for tax years 1997 and 1998, on which they claimed charitable contribution deductions from their investments in the Heritage partnerships.
Civil audits of Heritage partnership returns
The IRS initiated in 1998 a civil audit of the return of Heritage Memorial Associates 1995-2 (regarding the charitable contribution deduction it reported for 1996). As of June 30, 2000, the IRS had commenced civil audits of the returns of all three of the Heritage partnerships. Petitioners assert, and we assume, that no one in the IRS ever informed them that, in connection with any tax liability that might eventually be determined against them, they could suspend the running of interest by making a "deposit in the nature of a cash bond" (discussed below in part I.B). The parties dispute whether, if they had been so informed, petitioners would have made such a deposit; but for purposes of the Commissioner's motion, we assume in their favor that they would have. Criminal investigation
A grand jury investigation into the activities of certain persons involved in the Heritage partnerships commenced while the civil audits of the Heritage partnership returns were still pending. The investors in the partnerships were aware of the grand jury investigation of at least two of the alleged co-conspirators in June 2001. The grand jury ultimately returned criminal indictments for four alleged co-conspirators on September 29, 2005. The four co-conspirators were convicted and sentenced throughout 2007 and 2008 for crimes relating to the investigation involving the Heritage partnerships, and not until 2009 did all of the criminal proceedings ultimately conclude.
TEFRA proceedings
For the two years at issue, the civil issues proceeded to litigation as follows:3
The Commissioner issued a "Notice of Final Partnership Administrative Adjustment" ("FPAA") to Heritage Memorial Park Associates 1995...
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