Estate of Edward P. Roski, Sr., Edward P. Roski, Jr. v. Commissioner

128 T.C. No. 10UNITED STATES TAX COURT
ESTATE OF EDWARD P. ROSKI, SR., DECEASED, EDWARD P. ROSKI, JR.,
EXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5639-05. Filed April 12, 2007.
The estate elected to pay its tax in installments
under sec. 6166(a)(1), I.R.C. (the election). R
informed the estate that it would have to secure a bond
equal to twice the amount of tax deferred or provide a
special lien under sec. 6324A, I.R.C. (special lien),
in order to qualify for the election. R’s requirement
was based on a recent decision by R to make a bond or a
special lien a prerequisite of the election in all
cases. The estate sent R a detailed letter enumerating
reasons why it was impracticable for the estate to
secure a bond or a special lien and requested that R
exercise his discretion and find that it was not
necessary because of the minimal financial risk the
estate’s circumstances posed. R sent the estate a
notice of determination denying the election and
explaining that the estate failed to meet the
requirements for the election because it failed to
provide a bond or a special lien.
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The estate filed a petition with this Court
requesting relief under sec. 7479, I.R.C. The estate
alleged that R abused his discretion in denying the
election on the basis of the estate’s failure to
provide a bond. R moved for summary judgment on the
grounds that this Court does not have jurisdiction to
review R’s determination because the requirement of a
bond or a special lien is not within the scope of the
jurisdiction granted by sec. 7479, I.R.C. The estate
objected to R’s motion and filed a cross-motion for
summary judgment, asking this Court to find that R has
no authority to impose a bright-line security
requirement and that if R had exercised his discretion
properly, he would not have found a bond or a special
lien to be necessary in this case.
Held: We have jurisdiction under sec. 7479,
I.R.C., to review R’s determination. Nothing in the
statute or its legislative history restricts our review
of R’s denial of the election. R has failed to rebut
the strong presumption that an action of an
administrative agency is subject to judicial review.
Held, further, R has no authority to require a
bond or a special lien in every case. By doing so, R
is making the furnishing of security a substantive
requirement of sec. 6166, I.R.C., which Congress did
not intend. Further, R’s adoption of a standard that
precludes the exercise of discretion is grounds to set
aside R’s determination.
Robert T. Carney, for petitioner.
Scott A. Hovey, for respondent.
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OPINION
GOEKE, Judge: This matter is before the Court on the
parties’ cross-motions for summary judgment under Rules 121(a)
and 217(b)(2).1
Respondent issued a notice of determination denying the
Estate of Edward P. Roski (the estate) the election to pay
Federal estate tax in installments under section 6166. The
issues before us are: (1) Whether this Court’s jurisdiction
under section 7479 includes reviewing respondent’s determination,
which was based upon his imposition of a security requirement,
that an election may not be made under section 6166; and (2)
whether respondent abused his discretion by imposing a bright-
line requirement of a bond or a special lien for every estate
election under section 6166(a)(1). We hold that we have
jurisdiction under section 7479, and that respondent has abused
his discretion.
The following is a summary of the relevant facts that are
not in dispute. They are stated solely for purposes of deciding
the pending cross-motions for summary judgment and are not
1
All Rule references are to the Tax Court Rules of Practice
and Procedure, and all section references are to the Internal
Revenue Code in effect for the date of decedent’s death,
unless otherwise indicated.
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findings of fact for this case. See Estate of Kahn v.
Commissioner, 125 T.C. 227, 228 (2005) (citing Fed. R. Civ. P.
52(a) and Lakewood Associates v. Commissioner, T.C. Memo.
1995-552).
Background
Edward P. Roski (decedent) died on October 6, 2000. He was
a resident of Los Angeles, California, at the time of his death.
The executor resided in California when the petition was filed.
On January 4, 2002, the executor of decedent’s estate filed
a timely Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return (the estate tax return), reporting a balance
due of $32,778,372. Attached to the estate tax return was a
Notice of Election Under Section 6166 of the Internal Revenue
Code, in which the estate elected to defer payment of the balance
on the estate tax return. On June 17, 2003, the estate filed a
supplemental Form 706 reporting a liability of $28,901,454. The
estate also amended its section 6166 election to reflect the new
balance due. Pursuant to the election, if the estate were able
to obtain the full extension, it would pay the tax due in
installments as late as the 14th anniversary of the normal due
date, which would be in 2015.2
2
Sec. 6166(a) allows an estate electing under that section
to pay the tax due in installments over a 10-year period after a
5-year deferral.
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In September 2003, respondent notified the estate that he
had received the estate’s notice of election. Respondent stated
that because of the election, the estate was required to either
post a bond, or in lieu of a bond, elect to provide a special
lien under section 6324A. By letter dated September 8, 2004, the
estate requested that “the government exercise its
Congressionally mandated discretion and not require the posting
of a bond or the imposition of a Section 6324A lien in this
case.” The estate provided the following reasons.3
(1) The estate had explored the possibility of posting a
bond but was unable to find a bonding company willing to
underwrite the amount in question for the duration of the 10-year
installment payment period under section 6166(a). Further, even
if the estate were able to obtain a bond, the estate’s advisors
believed that the cost would be prohibitive.
(2) The assets of the estate are part of a well-established
family-owned business, and decedent’s only child has continued
the ownership and management of the business. The estate’s
assets consist of interests in valuable, well-managed, and
profitable active real estate and provide assurance that adequate
3
There is insufficient evidence in the record to permit the
Court to evaluate the merits of the arguments the estate makes in
the letter; the letter is reproduced only for purposes of
establishing what information respondent was presented with in
order to evaluate the necessity of a bond or a lien.
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funds will be available to pay the estate tax liability,
therefore mitigating any default risks.
(3) Edward P. Roski, Jr., the son of decedent and the
executor of the estate, is a highly respected businessman who at
all times has fulfilled his tax obligations.
(4) The Government already has security for the payment of
the estate’s deferred taxes in the form of the statutory lien
provided for under section 6324. The lien is in effect until
2010 and is a personal liability of the executor, as well as of
all the other transferees of the estate.
(5) The imposition of the special lien in lieu of a bond
would adversely affect the estate’s ability to carry on the
closely held businesses that ultimately are to provide the funds
from which the estate’s deferred taxes would be paid. Without
the interference of the special lien, the estate will have the
cashflow to pay the installments as they become due.
(6) The imposition of a special lien, in lieu of a bond,
against the estate’s assets would violate covenants in
partnership agreements that affect the estate’s interests in
those assets and could lead to litigation forcing the estate to
sell its properties. Such forced sales would frustrate the
purpose of section 6166, which is to avoid forced sales or other
actions that might jeopardize the continued operation of a
closely held business.
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On December 28, 2004, respondent issued to the estate a
notice of determination stating that the estate may not make an
election under section 6166. The notice of determination stated
in relevant part:
We have determined, as provided by
Section 7479 of the Internal Revenue Code of
1986, that an election may not be made under
Section 6166 of the Code by the above estate.
* * * If you want to contest this
determination in court, your petition must be
filed with the United States Tax Court * * *
Attached to the notice of determination was an Explanation for
Determination. The document contained the following explanation
in its entirety:
It is determined that the Estate failed to
fulfill the requirements for the election to
pay taxes in installments pursuant to IRC
Section 6166. The Estate failed to provide a
bond or IRC section 6324A lien per IRC
Sections 6166 and 6165.
Additionally, it is determined that the
estate failed to demonstrate why the
Commissioner should exercise his discretion
and waive the requirement of a bond or IRC
Section 6324A lien in this case.
Accordingly, the IRC Section 6166 election is
denied.
The estate filed its petition for a declaratory judgment
under section 7479 on March 23, 2005. In its petition, the
estate seeks a redetermination of respondent’s denial of the
election and a judgment that it was entitled to the election.
The petition, inter alia, alleges that respondent erred by
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determining not to exercise his discretion to allow an election
under section 6166. The estate also alleges that respondent
erred by requiring the estate to provide a bond or a special lien
in order to qualify for the election. The estate argues that
such a requirement was without basis in law, was arbitrary and
capricious, and constituted an abuse of discretion.
Respondent moved for summary judgment, arguing that section
7479 does not give this Court jurisdiction to review respondent’s
denial of the section 6166 election because of the estate’s
failure to fulfill respondent’s prerequisite of a bond or a
special lien under section 6324A. The estate objected to
respondent’s motion and filed a cross-motion for summary judgment
arguing that: (1) Respondent’s refusal to exercise his
discretion by requiring a bond in every case is an abuse of
discretion; and (2) the undisputed facts establish that if
respondent had properly exercised his discretion, no bond or
special lien should have been required.
Discussion
I. Background of the Relevant Statutes
A. Installment Payment Election
In general, Federal estate tax is due within 9 months of a
decedent’s death. Sec. 6075(a). Under section 6166(a)(1), a
qualifying estate may elect to pay the estate tax in installments
over an extended period. Section 6166(a) provides:
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SEC. 6166(a). 5-Year Deferral; 10-Year Installment
Payment.--
(1) In general.--If the value of an
interest in a closely held business, which is
included in determining the gross estate of a
decedent who was (at the date of his death) a
citizen or resident of the United States
exceeds 35 percent of the adjusted gross
estate, the executor may elect to pay part or
all of the tax imposed by section 2001 in 2
or more (but not exceeding 10) equal
installments.
(2) Limitation.--The maximum amount of
tax which may be paid in installments under
this subsection shall be an amount which
bears the same ratio to the tax imposed by
section 2001 (reduced by the credits against
such tax) as--
(A) the closely held business
amount, bears to
(B) the amount of the adjusted
gross estate.
(3) Date for payment of
installments.--If an election is made under
paragraph (1), the first installment shall be
paid on or before the date selected by the
executor which is not more than 5 years after
the date prescribed by section 6151(a) for
payment of the tax, and each succeeding
installment shall be paid on or before the
date which is 1 year after the date
prescribed by this paragraph for payment of
the preceding installment.
B. Bond Requirement
Section 6166(d) provides that “If an election under
subsection (a) is made, the provisions of this subtitle shall
apply as though the Secretary were extending the time for payment
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of the tax.” Section 6166(k) provides the following cross-
references:
SEC. 6166(k). Cross References–-
(1) Security.--For authority of the
Secretary to require security in the case of
an extension under this section, see section
6165.
(2) Lien.--For special lien (in lieu of
bond) in the case of an extension under this
section, see section 6324A.
Section 6165 provides:
SEC. 6165. BONDS WHERE TIME TO PAY TAX OR DEFICIENCY
HAS BEEN EXTENDED.
In the event the Secretary grants any
extension of time within which to pay any tax
or any deficiency therein, the Secretary may
require the taxpayer to furnish a bond in
such amount (not exceeding double the amount
with respect to which the extension is
granted) conditioned upon the payment of the
amount extended in accordance with the terms
of such extension.
Section 6324A provides in relevant part:
SEC. 6324A. SPECIAL LIEN FOR ESTATE TAX DEFERRED UNDER
SECTION 6166.
(a) General Rule.--In the case of any
estate with respect to which an election has
been made under section 6166, if the executor
makes an election under this section (at such
time and in such manner as the Secretary
shall by regulations prescribe) and files the
agreement referred to in subsection (c), the
deferred amount (plus any interest,
additional amount, addition to tax,
assessable penalty, and costs attributable to
the deferred amount) shall be a lien in favor
of the United States on the section 6166 lien
property.
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C. Judicial Review
Before the enactment of section 7479 in the Taxpayer Relief
Act of 1997, Pub. L. 105-34, sec. 505(a), 111 Stat. 854,
generally the only recourse estates had in a dispute over a
section 6166 election was to pay the tax first and seek a refund.
See, e.g., Estate of Meyer v. Commissioner, 84 T.C. 560, 562
(1985); cf. Snyder v. United States, 630 F. Supp. 182 (D. Md.
1986). However, Congress realized that this limited recourse
would often defeat the purpose of the relief section 6166
provided, which was to allow estates whose assets were mainly
composed of small businesses to defer payment of tax so they
could avoid having to liquidate their small businesses to fulfill
their obligation to pay the tax within 9 months. See H. Rept.
105-148, at 358 (1997), 1997-4 C.B. (Vol. 1) 319, 680. Section
7479(a) provides:
SEC. 7479(a). Creation of Remedy.--In a
case of actual controversy involving a
determination by the Secretary of (or a
failure by the Secretary to make a
determination with respect to)--
(1) whether an election may be
made under section 6166 (relating
to extension of time for payment of
estate tax where estate consists
largely of interest in closely held
business) with respect to an estate
(or with respect to any property
included therein), or
(2) whether the extension of
time for payment of tax provided in
section 6166(a) has ceased to apply
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with respect to an estate (or with
respect to any property included
therein),
upon the filing of an appropriate pleading,
the Tax Court may make a declaration with
respect to whether such election may be made
or whether such extension has ceased to
apply. Any such declaration shall have the
force and effect of a decision of the Tax
Court and shall be reviewable as such.
II. Evolution of the Commissioner’s Position
The Commissioner has changed his position regarding whether
a bond is required for a section 6166 election four times over
the last 15 years.
In a 1987 IRS General Litigation Bulletin (GLB),4 the
Internal Revenue Service (IRS) posed the question “Is a bond or
notice of lien required only if the personal representative seeks
discharge from personal liability for the estate tax?” IRS
General Litigation Bulletin No. 323 (Aug. 1987). The
Commissioner’s answer was that “An estate executor may elect to
extend the time for payment of the estate tax under IRC 6166
without either posting bond, or obtaining agreement to the
creation of an IRC 6324A lien. If neither is done, however, the
4
Although General Litigation Bulletins are not precedent,
sec. 6110(k)(3), they “‘do reveal the interpretation put upon the
statute by the agency charged with the responsibility of
administering the revenue laws’”, Thurman v. Commissioner, T.C.
Memo. 1998-233 (quoting Hanover Bank v. Commissioner, 369 U.S.
672, 686 (1962)).
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executor does not meet the requirements of IRC 2204 for a
discharge from personal liability.” Id.In a 1993 GLB, the IRS changed its position:
Advice was requested as to whether the division
would reconsider its position taken in a 1987
memorandum that the Service could not require a bond or
lien under I.R.C. § 6324A once a personal
representative requested to pay the estate tax in
installments pursuant to I.R.C. § 6166 and all the
requirements of section 6166 were met. Having
reconsidered the issue, we now take the view that the
Service may refuse to grant an extension of time for
payment of estate taxes where the personal
representative refuses to post a bond. [Ed. Note: This
bulletin item changes the position taken in
51.06.00-17, issue 3].
IRS General Litigation Bulletin No. 398 (Nov. 1993).
The IRS once again reversed itself in a 1997 GLB:
Nothing in section 6166 or the regulations
thereunder requires the executor to agree to the
section 6324A lien or to post a section 6165 bond as a
prerequisite to granting an extension of time to pay
estate tax under section 6166. In addition, the
legislative history behind section 6166, as last
amended, indicates that Congress intended to liberalize
the extension provisions. S. Rep. No. 938, 94th Cong.,
2d Sess. 18 (1976). Furthermore, the committee reports
specifically state that the section 6324A lien is
elective, and if elected, the lien is in lieu of the
executor’s personal liability and a bond. See H.R.
Rep. No. 1380, 94th Cong., 2d Sess. 33 (1976); Staff of
the Joint Committee on Taxation, 94th Cong., 2d Sess.,
General Explanation of Tax Reform Act of 1976 549
(Comm. Print 1976).
Although we believe the Service should not make a
section 6324A lien or a section 6165 bond a
prerequisite to granting an extension of time to pay
estate tax under section 6166, the Service may require
an executor of an estate to provide security after
granting the section 6166 election. However, in
situations where the estate's eligibility for section
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6166 installment treatment is questionable, the Service
should rely on the operative provisions of section 6166
to deny the election in the first instance. Memorandum
from Chief, Branch 1 (General Litigation) to Ohio
District Counsel, dated October 24, 1997.
IRS General Litigation Bulletin No. 447 (Dec. 1997).
The IRS reversed itself for the third time in 2000:
The Service may require a bond under I.R.C. § 6165, but
not the special lien under I.R.C. § 6324A, as a
prerequisite of granting a section 6166 election.
* * * * * * *
There are no statutory or regulatory provisions under
section 6166 covering the issue of the timing of the
Service's request for security nor is there any case
law. Since the law in this area is not well settled,
we recommend that the Service take a conservative
approach and establish standards for determining
whether a bond should be a condition to granting the
extension.
Chief Counsel Advice (CCA) 200027046 (Apr. 26, 2000) (emphasis
added).
Ultimately, the Commissioner did not adhere to the position
he took in 2000. In 2002, the Commissioner modified the Internal
Revenue Manual to announce his current position, which, unlike
any previous position, adopted a bright-line bond requirement:
The Service requires estates to furnish
a surety bond as a prerequisite for granting
the installment payment election. Instead of
furnishing a surety bond, the estate may
choose to elect the special lien provided for
in IRC 6324A that requires the estate to have
a lien placed on a specific property. This
property must have a value equal to the total
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deferred tax plus four years of interest and
must be expected to exist until the entire
tax is paid.
Internal Revenue Manual sec. 4.25.1.4.9(1).
The Commissioner’s determination to require security for all
section 6166 elections was made in response to the recommendation
of the U.S. Treasury Inspector General for Tax Administration
(TIGTA). See TIGTA Rept. 2000-30-059, The Internal Revenue
Service Can Improve the Estate Tax Collection Process (March
2000) (the TIGTA report). The TIGTA report found that 93 percent
of the total outstanding estate tax balances were not secured by
a bond or a special lien for the full term of the agreement. Id.
It also found that the Commissioner was attempting to collect
$177 million in overdue tax balances involving 187 defaulted
installment agreements that had not been secured by bonds or
liens and that $50 million due from 252 estates that had
defaulted on installment agreements not secured by bonds or liens
was no longer collectible. Id. On the basis of these default
rates, the TIGTA report recommended that the Commissioner secure
his interest in all section 6166 deferrals with either bonds or
special liens.
III. Jurisdiction Under Section 7479
There is a strong presumption that the actions of an
administrative agency are subject to judicial review. Abbott
Labs. v. Gardner, 387 U.S. 136, 140-141 (1967); United States v.
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Winthrop Towers, 628 F.2d 1028, 1032, 1035 (7th Cir. 1980);
Estate of Gardner v. Commissioner, 82 T.C. 989, 994 (1984)
(citing Dunlop v. Bachowski, 421 U.S. 560, 567 (1975)).
Respondent argues that his determination in this case is not
reviewable because the decision to require a bond or a special
lien is committed to agency discretion by law.5 See 5 U.S.C.
sec. 701(a)(2) (2000). Respondent supports his premise with the
following arguments: (1) Section 7479 limits review to the
eligibility requirements contained in section 6166 itself, which
do not include the requirement of a bond under section 6165; and
(2) even if the Court had jurisdiction to review respondent’s
exercise of discretion to require a bond, section 6165 provides
no standard for the application of respondent’s discretion and
therefore no criteria for the Court to judge whether respondent
has exceeded his authority. We shall address each of
respondent’s arguments individually.
A. Section 7479 Does Not Limit Judicial Review to the
Substantive Requirements of Section 6166
Ironically, respondent argues that we have jurisdiction over
only the eligibility requirements for the section 6166 election
while simultaneously taking the position that the provision of a
bond or a special lien is required for any estate to be eligible
for the election. Even if we ignore this glaring contradiction,
5
Respondent concedes that no statute prohibits judicial
review under 5 U.S.C. sec. 701(a)(1) (2000).
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we find respondent’s arguments based on the statutory scheme of
sections 6166 and 6165 to be unpersuasive.
1. “See” Cross-Reference in Section 6166(k)
Respondent’s first argument is that section 6166 itself
precludes judicial review, citing 5 U.S.C. sec. 701(a)(1).
Respondent argues that Congress did not intend to incorporate
section 6165 into section 6166 because section 6166 only cross-
references section 6165. Respondent contends that since there is
no legal effect to the cross-reference under section 7806(a),6
section 6165 is not part of section 6166, and therefore is
outside the scope of our review under section 7479.
Respondent’s argument overlooks section 6166(d), which
provides that once the executor elects the extension under
6166(a), the provisions of the subtitle shall apply as if the
Secretary were granting an extension. Section 6165 applies in
the event that the Secretary grants any extension within which to
pay tax. Therefore, section 6165 is incorporated as a
substantive part of section 6166(a) through (d).
2. Section 7479 and Accompanying Legislative History
Respondent argues that section 7479 gives the Court
jurisdiction to review only a determination with respect to the
6
Sec. 7806(a) provides that “The cross references in this
title to other portions of the title, or other provisions of law,
where the word ‘see’ is used, are made only for convenience, and
shall be given no legal effect.”
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substantive requirements of the election. To support his
argument, respondent cites the legislative history of section
7479, which states:
If the Commissioner determines that an estate
was not initially eligible for deferral under
section 6166, or has lost its eligibility for
such deferral, the estate is required to pay
the full amount of estate taxes asserted by
the Commissioner as being owed in order to
obtain judicial review of the Commissioner's
determination.
H. Rept. 105-148, supra at 358, 1997-4 C.B. (Vol. 1) at 680.
Respondent argues that this language tracks the language in
section 7479 that grants the Tax Court jurisdiction to issue
declaratory judgments as to whether an election “may be made” or
has “ceased to apply”. Sec. 7479(a). Respondent focuses on
section 6166(a) and (g), which provides that an executor “may
elect” to pay the tax in installments and that if certain
conditions occur, the election “shall cease to apply”.
Respondent concludes that this language is evidence of
congressional intent to limit our review to those particular
subsections.
Respondent’s attempt to selectively take phrases from the
statute and the legislative history to support his narrow reading
is unpersuasive. Section 7479 gives the Court authority to
review a determination by the Secretary of whether an election
may be made. The determination respondent made in this case is
not confined to an application of section 6166(a) and (g).
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Respondent determined that an election may not be made because
the estate was not initially eligible. There is nothing in the
statute or the legislative history that precludes our review of
the reasons. A narrow reading such as respondent’s would also
preclude our review of the denial of an election “‘if it were
made without a rational explanation, inexplicably departed from
established policies, or rested on an impermissible basis such as
an invidious discrimination against a particular race or group’”.
Estate of Gardner v. Commissioner, supra at 1000 (quoting Wong
Wing Hang v. INS, 360 F.2d 715, 719 (2d Cir. 1966)). “Such
allegations, if proved, would constitute the very essence of
arbitrary administrative action and an abuse of the discretion
granted.” Id. We cannot imagine that Congress intended to
eliminate review of determinations where such circumstances were
alleged to have existed.
Further, respondent’s interpretation would frustrate the
legislative purpose behind both sections 6166 and 7479. Congress
enacted section 7479 because “[it] believed that taxpayers should
have access to the courts to resolve disputes over an estate’s
eligibility for the section 6166 election, without requiring
potential liquidation of the assets that the installment
provisions of section 6166 are designed to protect.” Staff of
Joint Comm. on Taxation, General Explanation of Tax Legislation
Enacted in 1997, at 74 (J. Comm. Print 1997). The broad
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legislative purpose shows that Congress did not intend section
7479 to have the limited scope that respondent urges.
B. Respondent’s Arguments Concerning the Lack of
Judicially Manageable Standards in Section 6165 Are
Misdirected
In the absence of a specific statutory preclusion of
review,7 agency action may be determined to be “‘committed to
agency discretion by law’” only when a fair appraisal of the
entire legislative scheme, including a weighing of the practical
and policy implications of reviewability, persuasively indicates
that judicial review should be circumscribed. Estate of Gardner
v. Commissioner, 82 T.C. at 995 (quoting Local 2855, AFGE v.
United States, 602 F.2d 574, 578 (3d Cir. 1979)).
Respondent argues that because section 6165 provides that
he “may” require a bond, and provides no other conditions for
this authority, the decision to require security when granting a
section 6166 extension is “committed entirely to respondent’s
discretion.”
We rejected respondent's argument in the context of a
similar statute in Estate of Gardner v. Commissioner, 82 T.C. 989(1984). In Estate of Gardner, the estate elected under section
2032A to value its farm at its actual use rather than its best
use. However, section 6075 required that the timing of the
7
Respondent concedes that nothing in sec. 6165 expressly
precludes judicial review.
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election coincide with the 9-month period for filing an estate
tax return under section 2001. The estate requested that the
Commissioner exercise his discretion and extend the due date
under section 6081(a) because the estate’s tax return preparer
had died unexpectedly. The examining agent told the executrix in
a later meeting that the estate had made a good case for an
extension but that his supervisor had told him he must deny the
request for an extension because his supervisor disliked farmers,
believing farmers were too rich, got away with too much already,
and did not deserve any further breaks. The estate was not
thereafter afforded an Appeals Office conference.
The Government moved for summary judgment, arguing that
section 6081 was committed to agency discretion. Section 6081(a)
has language similar to that of section 6165, providing that “The
Secretary may grant a reasonable extension of time for filing any
return, declaration, statement, or other document required by
this title or by regulations.” The Government argued that
because the statute provided simply that the Commissioner “may”
grant an extension, the statute lacked ascertainable standards on
which the Court could base its review.
We rejected the Government's argument, first noting that the
“committed to agency discretion” exception to the general rule of
reviewability is a very narrow one. Estate of Gardner v.
Commissioner, supra at 995 (citing Citizens to Preserve Overton
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Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971)) (other citations
omitted). We also observed that we regularly review
discretionary acts of the Government. Id. at 997 n.11. We also
explained that nothing suggested that the Government’s exercise
of discretion under section 6081 involves any agency expertise
beyond the competence of courts and that “‘No delicate political
or economic questions present themselves. To the contrary, we
need only ask whether * * * [the Government exercised its
discretion] in a rational, nonarbitrary, and regular fashion’.”
Id. at 998 (quoting Hondros v. U.S. Civil Serv. Commn., 720 F.2d
278, 294 (3d Cir. 1983)).
In this case, we do not need to decide whether all
determinations under section 6165 are reviewable. We are not
reviewing a determination made under section 6165. We are
reviewing respondent’s determination under section 6166. See
sec. 7479(a). We have already held that we have jurisdiction to
review all reasons for respondent’s determination that the estate
may not make an election under section 6166. Therefore,
respondent’s arguments relating to section 6165 are not
applicable.
We conclude that we have jurisdiction under section 7479 to
review respondent’s determination that the estate does not
qualify for the section 6166 election because the estate did not
meet respondent’s requirement of a bond or a special lien.
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IV. Respondent’s Denial of the Section 6166 Election on the
Basis of Bright-Line Bond Requirement Is an Abuse of
Discretion
A. Standard of Review
When reviewing an agency action, a reviewing court shall
hold unlawful and set aside any agency action that is arbitrary,
capricious, or an abuse of discretion. See Keene v.
Commissioner, 121 T.C. 8, 17-18 (2003) (“when a taxpayer’s
underlying tax liability is not properly at issue in the
administrative hearing, we review the Appeals Office’s
determination for abuse of discretion”) (citing Lunsford v.
Commissioner, 117 T.C. 183, 185 (2001)). Respondent argues that
we do not have abuse of discretion review under section 6166
because section 7479 also gives us jurisdiction over eligibility
for the section 6166 election in the case of a “failure by the
Secretary to make a determination”. Sec. 7479(a). Thus,
respondent argues that Congress did not intend an abuse of
discretion standard. Contrary to respondent’s assertion, abuse
of discretion has been found in situations where the
Commissioner’s refusal to exercise discretion is arbitrary,
capricious, or unreasonable. See Greene v. Commissioner, T.C.
Memo. 1997-296 (citing Mailman v. Commissioner, 91 T.C. 1079(1988), Estate of Gardner v. Commissioner, supra, and Haught v.
Commissioner, T.C. Memo. 1993-58).
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B. The Commissioner’s Oscillating Position Is Entitled to
Less Deference
At the outset, we are wary of the Commissioner’s position
because of the oscillations in his interpretation of the bond
requirement demonstrated by his published guidance over the
years. Although the published guidance discussed earlier cannot
be cited as precedent under section 6110(k)(3), it highlights the
Commissioner’s confusion about the proper interpretation of the
bond requirement. The Commissioner’s current interpretation,
being in conflict with his initial position (and his penultimate
position), is entitled to considerably less deference. Watt v.
Alaska, 451 U.S. 259, 273 (1981) (citing Gen. Elec. Co. v.
Gilbert, 429 U.S. 125, 143 (1976)).
C. The Plain Language of Sections 6166 and 6165 Imposes a
Discretion That Respondent Failed To Exercise
The statutory scheme of sections 6166 and 6165 reveals that
the bond requirement is discretionary and was not intended to be
mandatory. The substantive requirements of section 6166 are
confined to section 6166(a) and (g). None of these requirements
include securing a bond or a special lien under section 6324A.
Rather than making security a substantive requirement, Congress
incorporated the Commissioner’s discretionary authority under
section 6165, which provides that the Secretary may require a
bond. Thus, section 6165 gives the Commissioner discretion to
require a bond for extension of time to pay tax, but it does not
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make it mandatory. Implicit in this grant of discretion is a
statutory obligation to exercise discretion. Respondent,
however, has not exercised discretion in spite of the fact that
he concedes in his memorandum that requiring a bond under section
6165 is “unquestionably a discretionary act that could only be
subject to an abuse of discretion review.” See also CCA
200027046 (Apr. 26, 2000) (“Although the Service can require a
section 6165 bond or accept a section 6324A lien agreement, such
action is discretionary and not a statutory or regulatory
requirement of section 6166.”).8
The notice of determination states that the estate failed to
demonstrate why respondent should exercise his discretion and
waive the bond requirement. Section 6165 does not give the
Commissioner the authority to waive a bond requirement--it gives
the Commissioner discretion to require a bond. This distinction
is elucidated by the legislative history, which states that “the
Internal Revenue Service may, if it deems it necessary, require
the executor to furnish a bond”. S. Rept. 94-938 (Part 2), at 17
(1976), 1976-3 C.B. (Vol. 3) 643, 659. Therefore, it is evident
that Congress envisioned the furnishing of a bond to be a
discretionary requirement that the Commissioner may impose in
certain cases, and did not intend it to be a universal
8
We are merely citing this Chief Counsel Advice as evidence
of respondent’s position. See Thurman v. Commissioner, T.C.
Memo. 1998-233.
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requirement that the Commissioner has discretion to waive.
However, regardless of this semantic difference, we focus our
criticism of the Commissioner’s position on his adoption of a
bright-line rule requiring a bond or lien in every case.
We are aware that a narrow construction should be applied to
the deferral benefit provisions of section 6166. Estate of Bell
v. Commissioner, 928 F.2d 901, 903 (9th Cir. 1991) (citing
Commissioner v. Jacobson, 336 U.S. 28, 49 (1949), and Helvering
v. Nw. Steel Rolling Mills, 311 U.S. 46, 49 (1940)), affg. 92
T.C. 714 (1989). However, even the strictest construction of
section 6166 does not give the Commissioner the authority to
impose a mandatory bond requirement without exercising any
discretion. Imposing such a requirement in every case would
rewrite the statute to make a bond a substantive requirement of
section 6166, which Congress did not intend. The deliberate
decision to incorporate section 6165 in such an intricate manner,
rather than simply make a bond requirement part of the
substantive requirements of the election, evidences that Congress
did not intend to make the securing of a bond or a special lien a
requirement in every case.
D. Legislative History
The legislative history of section 6166 shows that Congress
did not envision a mandatory bond requirement. Congress enacted
section 6166 because the existing law was “inadequate to deal
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with the liquidity problems experienced by estates in which a
substantial portion of the assets consist of a closely held
business”. H. Rept. 94-1380, at 30 (1976), 1976-3 C.B. (Vol. 3)
735, 764; and see Estate of Bell v. Commissioner, supra at 902
(“The purpose of section 6166 is to prevent the forced
liquidation of closely held businesses because substantial estate
taxes must be paid.” (citing H. Rept. 94-1380, supra at 30, 1976-
3 C.B. (Vol. 3) at 764, and S. Rept. 94-938 (Part 2), supra at
18-19, 1976-3 C.B. (Vol. 3) at 660-661). Congress was concerned
that “In many cases, the executor is forced to sell a decedent’s
interest in a farm or other closely held business in order to pay
the estate tax.” H. Rept. 94-1380, supra at 30, 1976-3 C.B.
(Vol. 3) at 764. Allowing the Commissioner to impose a mandatory
bond requirement exacerbates the problem that Congress was
dealing with in enacting the statute. Estates such as the one in
this case have liquidity problems that would make it difficult
not only to pay tax but also to secure a bond. Also, the closely
held nature of the small businesses that give rise to the
election may make it more difficult for these businesses to be
able to offer to secure their assets with liens. This does not
mean, however, that the financial risk is too great to allow the
estate to pay its tax in installments. The record in this case
suggests that the executor is a wealthy, well-respected
businessman; that the businesses giving rise to the election are
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extremely profitable and well managed; and that the nature of the
estate’s business assets ensures adequate cashflow to pay the
installments timely. There may be cases where the facts reveal
that collection is reasonably assured and a bond is not
necessary. We are not implying that a bond or a special lien is
not necessary in this case. We are merely stating that without
exercising his discretion and evaluating the facts diligently and
thoroughly, respondent is depriving the estate of the opportunity
to demonstrate why a bond is not necessary.
E. The Commissioner’s Uniform Requirement Precluding the
Exercise of Discretion Exceeds the Administrative
Authority Delegated to Him
By adopting a bright-line rule in every case, the
Commissioner has shirked his administrative duty to state
findings of fact and reasons to support his decisions that are
sufficient to reflect a considered response to the evidence and
contentions of the losing party and to allow for thoughtful
judicial review. Harborlite Corp v. ICC, 613 F.2d 1088, 1092
(D.C. Cir. 1979) (citing Secy. of Agric. v. United States, 347
U.S. 645, 652-654 (1954)). There is a recognized distinction in
administrative law between proceedings for the purpose of
promulgating policy rules or standards, on the one hand, and
proceedings designed to adjudicate disputed facts in particular
cases, on the other. Id. at 1092 n.5 (quoting United States v.
Florida E. Coast Ry., 410 U.S. 224, 245 (1973)). The
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Commissioner has used his adjudicative capacity to adopt a policy
that trumps the discretionary authority granted by section 6165
to require a bond. Although requiring a bond in this case may be
reasonable, respondent did not look at the facts of the case. If
respondent had exercised his discretion, the result might have
been reasonable; however, the means to the end was still
arbitrary.9
Respondent’s failure to exercise discretion is grounds to
set aside his determination. See Asimakopoulos v. INS, 445 F.2d
1362 (9th Cir. 1971) (citing United States ex rel. Accardi v.
Shaughnessy, 347 U.S. 260, 266-268 (1954)). An agency’s reliance
on a standard that prevents the exercise of discretion warrants
further proceedings. See id. at 1365. Respondent argues that
factors such as the estate's creditworthiness are not the only
factors he is able to consider in making his decision. He
contends that the difficulties in administering the deferrals
that were discussed in the TIGTA report were valid factors for
him to consider in the estate’s case. Respondent further argues
that there is always risk of default in a debtor-creditor
relationship and that IRS collection experience showed a high
9
We do not address in this Opinion whether the Commissioner
could have exercised his discretion through the promulgation of a
regulation. See, e.g., Fook Hong Mak v. INS, 435 F.2d 728, 730
(2d Cir. 1970). Here, he established his bright-line test
through insertion in the Internal Revenue Manual without any
opportunity for notice and comment.
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default rate in collection. We agree that respondent should be
able to consider factors such as administrative convenience and
revenue collection. However, considering these factors
exclusively precludes any exercise of discretion in a particular
case, which is what the Court of Appeals for the Ninth Circuit
eschewed in Asimakopoulos.
V. Conclusion
We have found that respondent has arbitrarily failed to
exercise his discretion and may not impose a bright-line bond
requirement. Therefore, for the above reasons, we will deny
respondent’s motion for summary judgment. However, we will not
adjudicate the merits of the dispute at this juncture as the
estate requests in its cross-motion for summary judgment. The
record does not contain sufficient facts for us to decide the
merits of the estate’s assertion that furnishing security is not
necessary in this case. The uncontested facts do not allow us to
resolve the matter in favor of the estate. Therefore, we shall
also deny the estate’s cross-motion for summary judgment to the
extent that it seeks a final disposition of the matter.
To reflect the foregoing,
An appropriate order will be
issued.