Nicholas J. and Diane L. Palihnich - Page 1

                                 T.C. Memo. 2003-297                                  

                               UNITED STATES TAX COURT                                

                 NICHOLAS J. AND DIANE L. PALIHNICH, Petitioners v.                   
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 10591-00.             Filed October 23, 2003.               

                    Petitioners (Ps) claimed deductions relating to                   
               White Rim, a limited partnership in which they owned an                
               interest in 1980-83.  Respondent (R) determined that Ps                
               were not entitled to deduct losses from White Rim.                     
                    In 1987, Ps filed amended returns for 1981-82.                    
               Without Ps’ knowledge, R lost those returns for almost                 
               11 years.  In March 1998, R found and processed those                  
               amended returns.  If R had timely processed those                      
               returns, overpayments from 1985-87 and a refund from                   
               1982 would have been available to pay Ps’ 1980 tax                     
               liability.  Ps believed in 1987 that, as a result of                   
               tax payments they had made and carrybacks to which they                
               were entitled, they had paid all or substantially all                  
               of the amounts R said Ps owed for 1980-83.                             
                    R abated interest for 1981-82 that accrued while                  
               the returns were lost, but did not abate interest for                  
               1980.  Ps filed a claim for R to abate interest on                     
               their income tax liability for 1980 and additional                     

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