Delay in Civil Case While Criminal Investigation Was Pending Was Not Ministerial Act.

T filed returns for 1984-1988. In 1987, the IRS began an examination of his 1984 and 1985 returns; this was later expanded to include his 1986-1988 returns and the returns of his wholly owned corporation.

In 1988, T's case was referred to the Service's Criminal Investigation Division (CID) . While the criminal aspects of the case were being completed, the IRS suspended its civil,, investigation and allowed the limitations period for T's 1984-1987 tax years to expire.

In 1993, T was indicted for income tax evasion and he pled guilty. In 1994, after T's conviction, the IRS renewed its civil investigation and, after the parties were unable to settle, a deficiency notice was sent to T.

T then brought suit in Tax Court, claiming that the delay in proceeding with the civil case was the result of a "ministerial" act within the meaning of Sec. 6404(e)(1)(A) and seeking abatement of the interest for this period.

The Tax Court (opinion Dawson, J.) holds for the Service; the IRS decision not to proceed with the civil case while the criminal case was pending was not a ministerial act and Sec. 6404(e) (1) (A) did not apply.

Sec. 6404(e) provides:

(1) In general.--In the case of any assessment of interest on--

(A) any deficiency attributable in whole or in part to any error or delay by an officer or employee of the Internal Revenue Service (acting in his official capacity) in performing a ministerial act ... the Secretary may abate the assessment of all or any part of such interest for any period. For purposes of the preceding sentence, an error or delay shall be taken into account only if no significant aspect of such error or delay can be attributed to the taxpayer involved, and after the Internal Revenue Service has contacted the taxpayer in writing with respect to such deficiency.

Sec. 64040)(1) provides further that:

The Tax Court shall have jurisdiction over any action brought by a taxpayer ... to determine whether the Secretary's failure to abate interest was an abuse of discretion, and may order an abatement.

T has narrowed the scope of his request for abatement to the period between when the criminal investigation began (Oct. 13, 1988, the date of the referral to CID) to when the civil aspects resumed (April 15, 1994, the date the revenue agent's report was sent to T).

T argues that the delay during that period was the result of a delay by IRS employees acting in their official capacity, in performing ministerial acts. The Service contends that the delay was not the result of a ministerial act and, therefore, Sec. 6404(e) (1) (A) does not apply.

The Internal Revenue Code does not define a ministerial act. The report of the Senate Finance Committee accompanying the Tax Reform Act of 1986 states:

The committee does not intend that this provision will be used routinely to avoid payment of interest; rather, it intends that the provision be utilized in instances where failure to abate interest would be widely perceived as grossly unfair. The interest abatement only applies to the period of time attributable to the failure to perform the ministerial act.

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. For example, a delay in the issuance of a statutory deficiency notice after the IRS and the taxpayer have completed efforts to resolve the matter could be grounds for interest abatement. The IRS may define a ministerial act in regulations.

Temp. Regs. Sec. 301.6404-2T(b)(1) provides:

The term "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 and state law) is not a ministerial act.

T argues that the refusal to continue the civil investigation and proceeding, when the criminal investigation commenced, was the result of a ministerial act. Initially, we note that the assumption that the civil investigation terminated is incorrect. A tax fraud investigation contains both criminal and civil aspects. It is only when the criminal case is forwarded to the Department of Justice that the criminal and civil aspects of a tax fraud case begin to diverge.

In a joint investigation with the Examination Division and CID, the investigation is controlled by CID, and to that extent it may be said that the criminal-aspects dominate the investigation. But even then, the government does not sacrifice its interest in unpaid taxes just because a criminal prosecution begins. Moreover, the civil fraud additions to tax (Sec. 6653(b)), as a part of the civil tax liabilities, are very much a part of the investigation.

There is, however, a more fundamental error in T's reasoning. The argument from T's point of view is that the decision to hold in abeyance the civil tax resolution procedures is simply a ministerial act. As we have noted, the criminal and civil aspects of a tax fraud investigation are inextricably intertwined. But there is no question that, once the criminal investigation begins, there is a clear distinction between ultimate procedural avenues that each takes, and it has long been IRS policy to defer civil assessment and collection until the completion of criminal proceedings.

This policy is predicated on various considerations. The often-cited reason is potential conflict between avenues of civil and criminal discovery if parallel civil and criminal cases proceed. But there are other considerations, such as when a party or witness may be put in a situation of testifying when the testimony may be incriminating. There is also the confusion inherent in two cases proceeding concurrently. It is for these reasons that generally the courts have held the civil action in abeyance while the criminal prosecution goes forth.

While the Service's general policy may be not to proceed with the civil aspects, that policy must be implemented in each case.

Just as a trial judge must balance the competing interests, IRS officers must decide whether the civil aspects in a particular case outweigh the interests in the criminal aspects. The decision here was made by not issuing the deficiency notice and allowing the normal periods of limitations to expire. A decision is made after an evaluation of the criminal and civil aspects of the case and is not the processing of a taxpayer's case after all prerequisites to the act, such as conferences and review by supervisors, have taken place. Such a decision cannot be considered a "ministerial act."

JEFFREY R. TAYLOR, 113 TC NO. 16

REFLECTIONS: In 1996, Congress passed the Taxpayer Bill of Rights 2, which amended Sec. 6404(e) to permit abatement of interest for "unreasonable" error and delay by the IRS in performing "managerial" acts as well.

Under Regs. Sec. 301.6404-2(b)(1), a managerial act is "an administrative act that occurs during the processing of a taxpayers case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. A derision concerning the proper application of federal tax law (or other federal or state law) is not a managerial act. "In addition, a general administrative decision, "such as the IRS's decision on how to organize the processing of tax returns," is not a managerial act for which interest can be abated. Thus, current Sec. 6404(e) would probably not apply to the taxpayers situation in Taylor.