For Tax Professionals  
T.D. 8789 December 23, 1998

Abatement of Interest

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [TD 8789] RIN 1545-AV32

TITLE: Abatement of Interest

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

SUMMARY: This document contains final 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 final regulations reflect changes to the law
made by the Tax Reform Act of 1986 and the Taxpayer Bill of Rights
2. The final regulations affect both taxpayers requesting abatement
of certain interest and IRS personnel responsible for administering
the abatement provisions.

DATES: Effective Date: These regulations are effective December 18,
1998.

Applicability date: For dates of applicability, see 301.6404-2(d).

FOR FURTHER INFORMATION CONTACT: Michael L. Gompertz, (202) 622-
4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains 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 (1986 Act) (Public Law 99-514
(100 Stat. 2762) (1986)) and amended by section 301 of the Taxpayer
Bill of Rights 2 (TBOR2) (Public Law 104-168 (110 Stat. 1452)
(1996)).

Section 6404(e)(1) applies only to interest on taxes of a type for
which a notice of deficiency is required by section 6212, that is,
income tax, estate tax, gift tax, generation-skipping transfer tax,
and certain excise taxes. Requests for abatement of interest should
be made on Form 843, A Claim for Refund and Request for Abatement. @
For more information, see Publication 556, A Examination of Returns,
Appeal Rights, and Claims for Refund.

As enacted by the 1986 Act, section 6404(e)(1) 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 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.

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.

Pursuant to the legislative history accompanying TBOR2, a managerial
act includes 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). The legislative history of
TBOR2 distinguished a managerial act from a general administrative
decision and provided that interest would not be abated for delays
resulting from general administrative decisions. For example, the
taxpayer could not claim that the IRS's decision on how to organize
the processing of tax returns or its delay in implementing an
improved computer system resulted in an unreasonable delay in the
Service's action on the taxpayer's tax return, and so the interest
on any subsequent deficiency should be waived. 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.

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.

On January 8, 1998, the IRS published in the Federal Register a
notice of proposed rulemaking (REG-209276-87) under section 6404(e)
(1) withdrawing the prior notice of proposed rulemaking and
reproposing a modified version of the prior notice to incorporate
the changes made by TBOR2 (63 FR 1086).

One written comment was received on the proposed regulations. No
public hearing regarding these regulations was requested or held.
After consideration of the written comment, the proposed regulations
published on January 8, 1998, are adopted with minor changes by this
Treasury decision.

Public Comments

A comment letter was received proposing that a special effective
date rule be added to the regulations applicable to the abatement of
interest on estate tax. The comment letter noted that because estate
tax is not imposed with respect to a taxable year, it is difficult
to apply the effective date rule in the proposed regulations to
estate tax.

The comment letter also recommended that Example 11 be clarified to
provide more detailed guidance in determining the amount of interest
the IRS should abate. Further, the comment letter recommended that
Example 12 be eliminated because errors in performing all interest
computations should be considered ministerial. Finally, because it
may be difficult for taxpayers to determine whether there has been
delay by the IRS in performing a ministerial or managerial act, the
comment letter recommended that the regulations authorize the
Taxpayer Advocate to investigate on behalf of taxpayers the manner
in which the IRS processed their cases. The commentator believes
that this would assist taxpayers in filing requests for interest
abatement.

Explanation of Provisions

In accordance with the first recommendation made in the comment
letter, the final regulations include special effective date rules
applicable to the abatement of interest on estate tax, gift tax, and
generation-skipping transfer tax. The final regulations apply if the
death occurred after July 30, 1996, or if the gift was made or the
generation-skipping transfer occurred after December 31, 1996.

The other recommendations made in the comment letter are not
adopted. The Treasury Department and the IRS believe that Example 11
does not need any clarification and that Example 12 is essentially
correct as written (however, this Treasury decision makes minor
modifications to Example 12). Finally, the Treasury Department and
the IRS believe that it is not necessary for the regulations to
authorize the Taxpayer Advocate to assist taxpayers in regard to
interest abatement claims. Taxpayers who seek abatement of interest
should file Form 843. If the taxpayer believes the IRS has
improperly denied the request for abatement, the taxpayer may seek
the assistance of the Taxpayer Advocate without specific
authorization in the regulations. Also, the taxpayer may file a
petition in the Tax Court under section 6404(g) to obtain judicial
review of the denial of the request for abatement.

The final regulations add a new example (Example 13) to the
regulations. This example clarifies that if the examination of a
taxpayer's return is delayed, and both the actions of the taxpayer
and those of the IRS contribute to the overall delay, the IRS cannot
abate interest attributable to delay caused by the taxpayer.
However, the IRS may abate interest attributable to unreasonable
delay in the performance of a ministerial or managerial act if no
significant aspect of this delay is attributable to the taxpayer.

Finally, the final regulations make obsolete Rev. Proc.

87-42 (1987-2 C.B. 589). Rev. Proc. 87-42 provides instructions for
requesting interest abatement under section 6404(e) and examples
illustrating the definition of ministerial act. The guidance
provided by Rev. Proc. 87-42 is no longer needed. The instructions
for requesting interest abatement are included in the instructions
to Form 843.

Effect on Other Documents

Rev. Proc. 87-42 (1987-2 C.B. 589) is hereby terminated as of
December 18, 1998.

Special Analyses

It has been determined that this Treasury decision 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, the IRS submitted the notice of proposed rulemaking preceding
these regulations to the Chief Counsel for Advocacy of the Small
Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is David B.

Auclair of the Office of Assistant Chief Counsel (Income Tax &
Accounting). 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, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part
301 is amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by
adding an entry in numerical order for 301.6404-2 to read as
follows:

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

Section 301.6404-2 also issued under 26 U.S.C. 6404; * * *

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

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 unreasonable error or delay in payment is
attributable to an officer or employee of the IRS (acting in an
official capacity) being 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, 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, is not a managerial act for which
interest can 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 (2) of this section. Unless otherwise stated,
for 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 or payment. The
examples are as follows:

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 timely 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 a delay caused by 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 a delay caused by
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, advice is requested in a timely manner from
the Office of Chief Counsel on 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
information with respect to 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
information with respect to 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 complex
provisions of 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 in this situation cannot
be abated under paragraph (a) of this section.

Example 13. A taxpayer moves from one state to another after the IRS
has undertaken an examination of the taxpayer's income tax return.
The taxpayer asks that the audit be transferred to the IRS's
district office that is nearest the new address. The group manager
approves the request, and the case is transferred. Thereafter, the
taxpayer moves to yet another state, and once again asks that the
audit be transferred to the IRS's district office that is nearest
that new address. The group manager approves the request, and the
case is again transferred. The agent then assigned to the case is
granted sick leave for an extended period of time, and the
taxpayer's case is not reassigned. The taxpayer's repeated moves
result in a delay in the completion of the examination. Under
paragraph (a)(2) of this section, interest attributable to this
delay cannot be abated because a significant aspect of this delay is
attributable to the taxpayer. However, as in Example 5, the
Commissioner may (in the Commissioner's discretion) abate interest
attributable to any unreasonable delay caused by the managerial
decisions to grant sick leave and not to reassign the taxpayer's
case to another agent.

(d) Effective dates--(1) In general. Except as provided in paragraph
(d)(2) of this section, 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.

(2) Special rules--(i) Estate tax. The provisions of this section
apply to interest accruing with respect to deficiencies or payments
of--

(A) Estate tax imposed under section 2001 on estates of decedents
dying after July 30, 1996;

(B) The additional estate tax imposed under sections 2032A(c) and
2056A(b)(1)(B) in the case of taxable events occurring after July
30, 1996; and

(C) The additional estate tax imposed under section 2056A(b)(1)(A)
in the case of taxable events occurring after December 31, 1996.

(ii) Gift tax. The provisions of this section apply to interest
accruing with respect to deficiencies or payments of gift tax
imposed under chapter 12 on gifts made after December 31, 1996.

(iii) Generation-skipping transfer tax. The provisions of this
section apply to interest accruing with respect to deficiencies or
payments of generation-skipping transfer tax imposed under chapter
13--

(A) On direct skips occurring at death, if the transferor dies after
July 30, 1996; and

(B) On inter vivos direct skips, and all taxable terminations and
taxable distributions occurring after December 31, 1996.

301.6404-2T [Removed]

Par. 3. Section 301.6404-2T is removed.

Michael P. Dolan
Deputy Commissioner of Internal Revenue
Approved: October 20, 1998
Donald C. Lubick
Assistant Secretary of the Treasury


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