“Unfairness” Is Not a Criteria to Be Used to Determine if Interest is Excessive

The Seventh Circuit Court of Appeals decided that the IRS had not abused its discretion in denying an attorney’s request for abatement of interest, reversing the decision of the Tax Court in the case of King v. Commissioner, Case No. 15-2439, CA 7, 2016 TNT 141-12.

The taxpayer in this case had asked for an abatement of interest related to employment tax liabilities after the IRS had initially indicated they would grant him an installment agreement to pay his unpaid payroll taxes, but later determined that he was not eligible for such an agreement. The taxpayer claimed that had he known the IRS would not grant an installment payment plan he would have paid the balance earlier, avoiding the interest from that date until he actually paid the tax.

IRC §6404(a) provides that abatement may be granted under the following conditions:

(a) General rule. The Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which—

(1) is excessive in amount, or

(2) is assessed after the expiration of the period of limitation properly applicable thereto, or

(3) is erroneously or illegally assessed.

The Tax Court determined that, because of the unfairness of the situation, the interest in question was “excessive in amount” and the IRS had abused its discretion in failing to waive interest from the time they had told the taxpayer they would take an installment payment plan until the time he should have known of the requirements for qualifying for an installment arrangement, which amounted to only two months. The Seventh Circuit’s opinion notes that the amount of interest that ultimately ended up being abated was about $500.

As the panel notes, despite that small cost the IRS decided to appeal the findings to the Seventh Circuit. In the interim Mr. King died and his wife declined to file documents in the appeal—frankly, not unreasonably since it almost certainly would have cost her far more than $500 to participate. Nevertheless the Seventh Circuit concluded the IRS had a right to be heard since Mrs. King could file a claim for refund to obtain the abated interest in question.

The opinion concludes that the IRS is correct—the Tax Court had inappropriately ruled there was an abuse of discretion in this case. The panel found that the term “excessive” cannot be equated to “unfair” in the way the Tax Court did in its opinion.

The panel had three objections to the Tax Court’s ruling:

The Service in our view was on sound ground in refusing to abate (i.e., forgive) interest King owed the government on his overdue payroll taxes. There are three reasons for our conclusion. The first is the vagueness of “unfairness’ as a criterion for abatement; the word is an invitation to arbitrary, protracted, and inconclusive litigation. Second, extending as it does an invitation to taxpayers to delay paying taxes, the nebulous standard of “unfairness” could result in a significant loss of tax revenues. And third, we'll see that the Tax Court's approach is inconsistent with a valid regulation promulgated by the Treasury Department.

The last point is the one that the opinion spends the most time on, noting that the Supreme Court has held that generally IRS regulations interpreting terms that are ambiguous generally must be respected unless the IRS regulation itself is clearly an unreasonable interpretation. [Mayo Foundation for Medical Education & Research v. United States, 562 U.S. 44, 56 (2011)] The panel rejected the Tax Court’s view that “excessive” clearly encompasses an “unfair” result, finding rather the that IRS regulation should control.

As the opinion notes regarding that regulation:

...[A] tax regulation entitled “Abatements,” 26 C.F.R. § 301.6404-1(a), Treas. Reg. § 301.6404-1(a), while generally tracking 26 U.S.C. § 6404(a), restates “excessive in amount” as “in excess of the correct tax liability.” The restatement eliminates the vagueness of “excessive” and leaves no room for basing interest abatements on “unfairness.”

The fact that such a minor amount was appealed by the IRS clearly indicates the IRS was primarily troubled by the potential use of the original decision as a basis in granting relief in future cases.