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In the

Supreme Court of the United States

OctToBER TERM, 1978

NO. 78

RICHARD K. HALEY, Petitioner

VS.

THE UNITED STATES OF AMERICA, Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

LEONARD W. YELSKY,

Attorney for Petitioner

P.O. ADDRESS:

340 Leader Building

Cleveland, Ohio 44114

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APPENDIX:

I.

II.

IIT.

Judgment and Opinion of United States Court of

Re ee re App.

Opinion of United States District Court for the

Southern District of Ohio, Eastern Division . . App.

Denial of Petition for Rehearing En Banc ... App.

. Denial for Stay of Mandate Pending Filing of Pe-

tition for Writ of Certiorari in United States Su-

ERR Se ey arate Se Be App.

. Application and Acceptance for Extension of

Time to File Petition for Writ of Certiorari ...App. ‘

. Amendment V—United States Constitution . .. App.

Title 26 U.S.C. Section 6212 (a)(b)(1) 22... App.

Title 26 U S.C. Section @213 ..... 2)... 0. App. :

TABLE OF AUTHORITIES

Cases:

Federal:

Arlington Corporation v. Commissioner, 183 F.2d 448

cs TE ROA Aa nn per ee rea eee ee 8

Clodpelter v. Commissioner, 527 F.2d 754 (9th Cir.

EE STOUT they SHON WE ech oe ole kee steer 7

Commissioner v. Stewart, 186 F.2d 239 (6th Cir. 1951... 7

Delman v. Commissioner, 384 F.2d 929 (3rd Cir. 1967).. 8

Expanding Envelope & Folder Corp. v. Shotz, 385 ¥.2d

ee CO IPE ieikice es ch path face sine SOS pie S03 8

Estate of Francis P. McKaig Jr., 51 T.C. 331 (1968) .... 8

Flora v. United States, 357 U.S. 63 (1958) ............ S)

Laing v. United States, 423 U.S. 161 (1976) ........... 7

Tenzer v. Commissioner, 285 F.2d 956 (9th Cir. 1960)... 8

Statutes:

Federal:

er) Mee IS er She das ie hy es 3

me Was. SUPOOPE) oo5caeS iv ccThea kee 3, 5,6, 7,8

Be Ss PE hn eS vais 0g o00 0s bers ebees ane ae

RUSE. FIGs... eee 2

In the

Supreme Court of the United States

OctToBerR TERM, 1978

NO. 78

RICHARD K. HALEY, Petitioner

VS.

THE UNITED STATES OF AMERICA, Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

LEONARD W. YELSKY,

Attorney for Petitioner

P.O. ADDRESS:

340 Leader Building

Cleveland, Ohio 44114

OctoBer TERM, 1978

RICHARD K. HALEY, Petitioner,

VS.

THE UNITED STATES OF AMERICA, Respondent

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SIXTH CIRCUIT

Petitioner, Richard K. Haley, respectfully prays that a Writ

of Certiorari issue to review the judgment of the United States

Court of Appeals, Sixth Circuit, affirming the judgment of the

United States District Court for the Southern District of Ohio,

Eastern Division, which imposed an Internal Revenue Service

tax assessment contested by Petitioner as being invalid for fail-

ure to give the required statutory Notice of Deficiency.

2

OPINION BELOW

The opinion of the United States Court of Appeals, Sixth

Cirenit, was unreported at time of writ and appears in Appen-

dix (A) at page 1.

The opinion of the United States District Court: for the

Southern District of Ohio is reported in 76-2 U.S.T.C. 9683

(1976) and appears at 2.

JURISDICTION

The judgment of the United States Court of Appeals, Sixth

Cirenit, was entered July 6, 1978S (A-1). A) Petition for Re-

hearing en bane was denied August 15. L978 (A-1S). Motion

for Stay of Mandate Pending Filing of Petition for Writ of

Certiorari in United States Supreme Court was denied August

28, 19TS (A-19). The mandate of the United States Court of

Appeals, Sixth Circuit, was officially docketed September 6.

I9TS. Petitioner's request. to Certify. Entire Record to. the

United States Supreme Court was docketed ino the United

States Court of Appeals, Sixth Circuit, October 19, 1978.

Petitioners application to the United States Supreme Court

for an Extension of Time to File Petition for Writ of Certiorari

Was presented to Miro Justice Stewart on October 4, LOTS and

an Order was entered extending the time to and including De-

cember 5, LOTS ( A-20),

The jurisdiction of this Court is invoked under 28 U.S.C.

125401), Petitioner having received final judgment ina civil

case froma Courtof Appeals on an issue addressing the in-

lerpretation and application of federal law to the prejudice

Of Petitioner.

QUESTION PRESENTED

WHETHER THE INTERNAL, REVENUE SERVICE SAT-

ISEIES TES STATUTORY OBLIGATION TO GIVE NO-

TICK OF DEFICIENCY TO A TAXPAYER (26 U.S.C. §

3

6212(b)(1)), WHERE THE REVENUE AGENT IN

CHARGE OF AUDITING A TAXPAYER TAS ON FILE A

POWER OF ATTORNEY DIRECTING ALL CORRESPON-

DENCE BE SENT TO TIS ATTORNEY IN FACT AND

ACTUAL KNOWLEDGE OF TAXPAYER'S CURRENT AD-

DRESS. BUT SENDS NOTICE OF DEFICIENCY TOA

DEFUNCT MALLING ADDRESS AND PRIS RETURNED

UNDELIVERED?

CONSTITUTIONAL PROVISIONS

MIFTIL AMENDMENT. UNITED STATES CONSTETU-

TION (A-13),

STATUTES INVOLVED

TITLE 26 U.S.C. $ 6212 Gad and (bd 1) CA-2D). TELE

96. U.S.C), $ 6213 ( A-22).

STATEMENT OF THE CASE

The 1968 and 1969 Federal Income ‘Tax returns of Petitioner,

Richard K. Haley, D.O.. were simultaneously audited by rev-

enne agent. Kathryn Leggett. Petitioner retained Harold t.,

Libby. a certified public accountant and tay attorney, to rep-

resent hime in these matters. \ Power of Attorney was filed with

the Service. directing all correspondence addressed to. Peti-

tioner be sent to Miro Libby as his designated attorney-in-fact,

\ tay deficiency determined by agent Leggett for the vear 1969

was contested by Miro Libby by Appeal to the Internal Revenue

Service. A substantial settlement was reached on Petitioner's

purported 1969 tay liability. Htis the L9GS deficiency which is

the subject matter of this Petition.

Revenue agent Leggett informed Vio Libby that she would

contact him regarding her conclusions on the L968) audit.

Though agent Leggett did contact Vivo Libby with regard to

the 1969 audit. she did not do so reqarding any 1968 tax Ti-

ability. Nov did agent Leggett. or any member of the Internal

4

Revenue Service, give actual notice to Petitioner of a tax de-

ficiency for 1968.

Petitioner's personal residence was located at 5025 Warner

Road, Westerville, Ohio. This location is also known as 5858

Edlor Drive, Westerville, Ohio. In 1968 and 1969, Petitioner

had experienced vandalism problems with his mailbox at his

home residence. His postman suggested the use of his office

address. In 1969, Petitioner filed the appropriate form with the

Westerville Postmaster to have all of his mail delivered to his

office address at 1248 S. High Street, Columbus, Ohio. Revenue

agent Leggett was knowledgeable of this address. She knew

Petitioner conducted an active medical practice at the S$. High

Street office. Agent Leggett had physically conducted part of

her investigation at Petitioner's office address.

In the fall of 1972, Petitioner executed a waiver extending

the statute of limitations for the Internal Revenue Service to

contest his tax liability for the year 1968 until June 30, 1973.

Petitioner did not receive the waiver in the mail. His accoun-

tant, Mr. Libby, delivered it to his office on S. High Street.

On June 14, 1973, a statutory notice of deficiency for the

vear 1968 was mailed to Petitioner at 5858 Edlor Drive, West-

erville, Ohio, The notice was returned to the Internal Revenue

Service marked, “No Mail Receptacle, Order Expired 6-16-73.”

On June 20, 1973, the International Revenue Service official

charged with mailing such notices, Mir. Spaeth, called Revenue

Agent Leggett for a better address. Agent Leggett testified be-

fore the District Court that “normally we would give the busi-

ness address if we don't have a good residence address.” In the

case of Petitioner. she provided the Warner Road address only.

A second notice was sent to 5025 Warner Road. [t was un-

disputed that the Warner Road and Edlor Drive addresses are

in fact the same residence. Consequently, the second notice

was also returned to the Service marked, “No Mail Receptacle,

Order Expired.” The statute of limitations for initiating a tax

5

liability against Petitioner, addressing the vear 1968, termi-

nated on June 30, 1973.

It was stipulated by the parties that Petitioner never re-

ceived actual notice of deficiency within the time prescribed by

law. The Internal Revenue Service never sent a statutory No-

tice of Deficiency to Mr. Libby although a Power of Attorney

had been filed by him with the Service. The Internal Revenue

Service never sent a statutory Notice of Deficiency to Peti-

tioner’s business office on S. High Street, or made any attempt

to contact him at his office regarding the purported deficiency.

Petitioner did not know the government was deposing a

deficiency for 1968 until well after the time for petitioning

the United States Tax Court had expired. A formal assessment

was entered against Petitioner rendering him a tax debtor sub-

ject to collection process. The Internal Revenue Service used

Petitioner's business address for the assessment. The Internal

Revenue Service also used the S. High Street address to per-

fect service on the Complaint issued against Petitioner in the

herein matter.

The United States of America, Respondent, initiated civil

action in District Court to collect the assessed income tay li-

ability against Petitioner, The matter was tried on January 5,

1976. Petitioner argued that the assessment for additional tax

due for the calendar vear 1968 was not lawful; that he never

received the statutory Notice required to be sent to his “last

known address” under 26 U.S.C. § 6212(19) (1): that a proper

notice of deficiency would have enabled him to contest the al-

leged tax liability on the merits in the United States Tay Court

as he had successfully done with his alleged 1969 deficiency:

and that through no fault of his own, he was rendered a tay

debtor for the sums purportedly owed without benefit of pe-

tition to the Tax Court under 26 U.S.C. § 6213(a). Petitioner

also contended that the failure of the Internal Revenue Service

to give statutory notice of deficiency within the time allotted

6

by the statute of limitations rendered a deficiency suit for 1968

time-barred,

The District Court found that the Internal Revenue Service

complied with its minimum statutory duty under 26 U.S.C,

» 6212 b)( 1); that statutory notice of deficiency did not re-

quire notice to be sent to a taxpayer's best address, but only

to the address which, under the circumstances, the Internal

Revenue Service reasonably understood the taxpayer wished

the notice to be sent.

The Court of Appeals affirmed the District Court's determi-

nation. It is from these adverse decisions that Petitioner seeks

reliet,

REASONS FOR GRANTING WRIT

i), The Sixth Circuit has interpreted and applied the sta-

tutory obligation of the Internal Revenue Service to give No-

tice of Deficiency to a taxpayer (26 U.S.C. § 6212(b)(1)) in

a manner which conflicts with the policy of law construed by

other Circuit Courts; and,

ii). The interpretation and application of 26 U.S.C. $6212

(bi( 1) addresses an important question of federal law which

has not been, but should be, settled by this Court.

ARGUMENT

THE INTERNAL REVENUE SERVICE DOES NOT SAT-

ISEY TES STATUTORY OBLIGATION TO GIVE NOTICE

OF DEFICIENCY TO A TAXPAYER, UNDER 26 U.S.C. §

6212;b). 1), WHERE THE REVENUE AGENT IN CHARGE

Ok AUDITING A TAXPAYER HAS ON FILE A POWER

OF VEPORNEY DIRECTING ALL CORRESPONDENCE

Blo SENT TO HUIS ATTORNEY IN FACT AND ACTUAL

KNOWLEDGE OF TAXPAYER'S CURRENT ADDRESS,

BUT SENDS NOTICE OF DEFICIENCY TO A DEFUNCT

7

MAILING ADDRESS AND IT IS RETURNED UN-

DELIVERED.

The Sixth Circuit's interpretation and application of 26

U.S.C. § 6212(b)(1) held that the Internal Revenue Service

satisfied its statutory obligation to give a taxpayer Notice of

Deficiency where such notice was not sent to the taxpayer's

“best” address, known to the Service, but was sent to a de-

funct mailing address previously used by the taxpayer and re-

turned to the Service undelivered. The Sixth Circuit's con-

struction of 26 U.S.C. § 6212(b)(1) conflicts with the in-

terpretation and application found by other Circuit Courts and

is contrary to the policy of law suggested by the United States

Supreme Court regarding a taxpayer's opportunity to petition

the Tax Court for redetermination prior to assessment of a tax

liability,

The legislative plan for notifying a taxpayer of deficiency

has been found to contemplate that actual notice of the de-

ficiency should be given where such can reasonably be

achieved Clodpelter v. Commissioner, 527 F.2d 754 (9th Cir.

1975).

The purpose of the actual notice contemplated by the leg-

islative plan is to allow for application for redetermination

under 26 U.S.C, § 6213, and thereby give the taxpayer the

opportunity to have the Commissioner's ruling reviewed by the

Tax Court before it becomes effective, Commissioner v. Ste-

wart, 186 F.2d 239 (6th Cir, 1951). As the High Court noted in

Laing v. United States,

“Denial of an opportunity to litigate in the Tax Court is

out of keeping with the thrust of the code, which general-

lv allows income taxpavers access to that court.” 423

U.S. 161 (1976),

In keeping with the statutory purpose, it has been generally

held that the words “last Known address” in Subsection (b) (1)

of 26 U.S.C. § 6212, should not be construed as creating a

8

mandatory address to which Notices of Deficiency must be

sent. Delman v. Commissioner, 384 F.2d 929 (3rd Cir. 1967).

Where a taxpayer files with the Internal Revenue Service a

Power of Attorney directing all correspondence be sent to his

designated attorney-in-fact, it has been found that the tax-

payer gave his “last known address” for.purposes of 26 U.S.C.

§ 6212 (b)(1). Expanding Envelope & Folder Corp. v. Shotz,

385 F.2d 402 (3rd Cir. 1967).

“We think that when a taxpayer, through a duly executed

and filed power, gives instructions such as those here

given, he is in effect giving the Service a last known ad-

dress for Section 6212 purposes. It is an address where he

explicitly indicates he is likely to receive the notice,” Id

at 404,

Similarly, technical construction against the taxpayer has

been found to be inappropriate where the purposes of the

statutes have not been fulfilled through no fault of the tax-

payer. Tenzer v. Commissioner, 285 F.2d 956 (9th Cir. 1960).

A statutory duty has been imposed on the Commissioner to

exercise reasonable care and diligence in ascertaining and mail-

ing a deficiency notice to the correct address of the person or

persons to whom the statutory notice must be sent. Arlington

Corporation v. Commissioner, 183 F.2d 448 (5th Cir. 1950);

Estate of Francis P. McKaig Jr., 51 T.C. 331 (1968).

In the case at bar, the decision of the Sixth Circuit does not

comply with the policy of law mandated in other circuit courts,

or that suggested by the United States Supreme Court, re-

garding the statutory obligation of the Internal Revenue Serv-

ice effecting notice of deficiency to a taxpayer. Contrary to

the findings in other circuits, the Six Circuit held that 26 U.S.C.

§ 6212(b)(1) did not require notice of deficiency be sent

to the “best” known address of a taxpayer or to the taxpayer's

attorney-in-fact, even though the notice was returned to the

Service undelivered. The holding is clearly at odds with the

legislative plan of affording a taxpayer procedural due process

9

by way of petition to the Tax Court before a deficiency ruling

becomes an effective tax assessment.

In Flora v. United States, 357 U.S. 63 (1958), the High

Court noted the clear and distinct line between Tax Court

jurisdiction and District Court jurisdiction in a refund suit.

While the facts are not controlling in the herein matter, the

Court’s holding is instructive for purposes of construing the

legislative intent of affording a taxpayer procedural due pro-

cess in the Tax Court prior to effecting a tax assessment against

him. The Court’s narrow holding of law provided that full pay-

ment of a tax assessment may be compelled only where a de-

ficiency had been noticed, that is, only where the taxpayer

had access to the Tax Court for redetermination prior to pay-

ment.

CONCLUSION

Based on all of the foregoing arguments, Petitioner, Richard

K. Haley, respectfully requests that his Petition be granted.

Respectfully submitted,

LeonaARD W. YELSKY,

Attorney for Petitioner

340 Leader Building

Cleveland, Ohio 44114

(216) 781-2550

10

PROOF OF SERVICE

The undersigned certifies that a true and correct copy of

the within Petition for Writ of Certiorari has been served upon

William W. Milligan, United States Attorney, $5 > Marconi

Blvd. Columbus, Ohio 44315, the Solicitor General, United

States Dept. of Justice, Washington, D.C, 20530, and Scott

Crampton, United States Dept. of Justice, Washington, D.C.

20530, and Phillip [. Brennan, United States Dept. of Justice,

Washington, D.C, 20530, postage prepaid, on this --— day

of December, 1978.

Leonanp W. YELSKY

Counsel for Petitioner

340 Leader Building

Cleveland, Ohio 44114

(216) 781-2550

APPENDIX

76-2679

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

UNITED STATES OF AMERICA,

Plaintiff-Appellee

Vs.

RICHARD K. HALEY,

Defendant-Appellant

Before; EDWARDS, LIVELY and ENGEL, Circuit Judges

Richard K. Haley, an osteopathic physician, appeals from a

judgment entered against him and in favor of the United States

in the district court for income tax deficiencies for the years

1968 and 1969, and interest and penalties accruing thereon, In

his appeal Haley asserts that the assessment for additional tax

due for the calendar year 1968 was not lawful since he failed

to receive the statutory notice which was required to be sent

to him at his last known address. 26 U.S.C. 86212(b)(1). He

claimed that a proper notice would have enabled him to have

pursued relief in the United States Tax Court without first pay-

ing the sums claimed due, instead of being required to pursue

the allegedly impossible task of paying the monies due to the

Internal Revenue Service as a condition precedent to his right

to an action in the district court for refund. See generally 26

U.S.C. §§ 6213, 7422.

In his opinion accompanying the final judgment, the district

court found that the defendant's residence was at all relevant

times 5025 Warner Road, Westerville, Ohio, which was also

described from time to time as 5858 Edlor Drive. The defen-

dant consistently employed these addresses in his correspon-

dence with the government regarding the 1968 tax vear, in-

cluding the waiver forms which extended the limitations on

any government deficiency action to fine 30, 1973.

It appeared from the proots, as found by the district court,

App. 2

that a statutory notice of deficiency for 1968 was mailed on

June 14, 1973 to Haley at the 5858 Edlor Drive address and

pon its return by the post office, was readdressed and remailed

to him in timely fashion on June 20, 1973 at the 5025 Warner

Road address. Neither attempt was successful in giving actual

notice to the taxpayer, who argues that the suit for deficiency

for 1968 is time-barred. The district judge, while holding that

each case must necessarily rest pon its own facts, found gui-

dance in this court's decision in Williams v, United States, 264

F, 2d 227 (6th Cir.), cert. denied, 361 U.S, 862 (1959), and

correctly held that there was a sufficient compliance with the

mailing procedures authorized by the Internal Revenue Code.

Appellant claims that the Service improperly disallowed cer-

tain deductions for the calendar years 1971 and 1972 and their

carry-back to 1968 and 1969. The deductions represented al-

leged net operating losses incurred in the operation of a farm

and a private flying service. Upon review it is apparent that

these claims are entirely without merit. Accordingly,

IT IS ORDERED that the judgment of the district court is

affirmed,

ENTERED BY ORDER OF THE COURT

John P. Helman

Clerk

App. 3

In The

UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF

OHIO, EASTERN DIVISION

NO, C-2-74-488

UNITED STATES OF AMERICA, Plaintiff

VS.

RICHARD Kk. HALEY, Defendant

[* 9683] United States of America, Plaintiff v. Richard K.

Haley, Defendant. U.S. District Court, So. Dist. Ohio, East.

Div., C-2-74-488, 9 14/76.

(Code Secs. 172, 6213 and 7401)

Suits by U. S. Prima facie correctness of assessment: Notice

of deficiency: Last known address; Net operating loss: In-

active business.—In mailing deficiency notices to both addresses

provided (without clear indication that another address was

preferred) by the taxpayer with respect to the year in question,

the IRS complied with its statutory duties, and the deficiency

assessment for the tax year 1968 was effective. The statute does

not require that notice be sent to taxpayer's best address, but

only to that which, under the circumstances, the IRS reason-

ably understood that the taxpayer wished the notice to be sent.

The Court held further that taxpayer was not entitled to a net

operating loss for his farming or aviation activities since

neither activity constituted a trade or business, and may not

serve to reduce taxpayer's tax liability for the tax years 1968

and 1970, Therefore, the Court concluded that the taxpayer

had failed to establish by a preponderance of the evidence that

the deficiency, assessment for the taxable vear levied against

him was factually incorrect. Back references; § 1921,5043,

59322.5218 and 5752.53.

App. 4

OPINION AND ORDER

Kinneary, District Judge: This is a civil action brought by

plaintiff, the United States of America, pursuant to Title 26.

United States Code, Section 7401, to reduce to judgment the

assessed income tax liability of the defendant, Richard K.

Haley, for the tax years 1968 and 1969. The matter was tried

to the Court on January 5, 1976 and, in accordance with Rule

52 of the Federal Rules of Civil Procedure, the Court makes

the following findings of fact and conclusions of law.

FINDINGS OF FACT

The defendant, Richard K. Haley, is a practitioner of osteo-

pathic medicine with a specialization in endocrinology. Many

of Dr. Haley's patients suffer from obesity, for which Dr.

Haley offers treatment.

The plaintiff claims that the defendant is indebted to it in

the amount of $126,724.39, plus interest and penalties for un-

paid federal income taxes by virtue of admitted liabilities on

his 1968 and 1969 income tax returns, and by virtue of a de-

ficiency for the year 1968. A delegate of the Secretary of the

Treasury made assessments against the defendant for unpaid

federal income taxes, for a deficiency with respect to income

taxes for the year 1968 and for penalties and interest. Notice

of assessment and demand for payment were made upon the

defendant, but the amount remains unpaid.

The defendant's residence address was, during all relevant

times, 5025 Warner Road, Westerville, Ohio. This location is

also known as 5858 Edlor Drive, Westerville, Ohio. The de-

fendant testified, however, that his mailing address was at all

relevant times 1248 South High Street, Columbus, Ohio—the

location of his office.

The defendant explained that his mailing address differed

from his residence address because it was more convenient to

receive mail at his office and because vandals had destroyed

his residence mailbox twice. After once replacing the mailbox

7

App. 5

at his residence address, the defendant decided to change his

mailing address. He filed a change of address form with the

Westerville post office in 1969 and he testified that, to the best

of his knowledge, it was current in June of 1973.

The defendant testified that he received mail at his office

address and that, to his knowledge, he never received any mail

at his residence address after filing the change of address form.

Further, he testified that he received other mail from the In-

ternal Revenue Service at his office address.

The government introduced into evidence a waiver form

extending the statute of limitations for the year 1968 to De-

cember 31, 1972, signed by the defendant, and dated March,

1972. The address indicated on this waiver form was 5858 Ed-

lor Drive, Westerville, Ohio. Also introduced into evidence

was another waiver form extending the statute of limitations to

June 30, 1973 executed by the defendant in the fall of 1972.

The address indicated on that form was 5025 Warner Road,

Westerville, Ohio. The defendant testified that he did not re-

ceive the second waiver form in the mail but that his accoun-

tant, Mr. Harold Libby, delivered it personally to defendant's

office and that the defendant then signed it.

On June 14, 1973 a statutory notice of deficiency for the tax

vear 1968 was mailed to the defendant at 5858 Edlor Drive,

Westerville. Ohio. That notice was returned to the Internal

Revenue Service in Cincinnati marked “No Mail Receptacle.

Order Expired 6-16-73,”

On June 20, 1973 a second statutory notice of deficiency for

the year 1968 was sent to the defendant at 5025 Warner Road,

Westerville, Ohio. This notice was returned marked “No Mail

Receptacle, Order Expired.”

Revenue Agent Kathryn Leggett testified that when the

first notice was returned a member of the technical review staft

of the Internal Revenue Service in Cincinnati contacted her

for a better address, Not realizing that the Warner Road ad-

App. 6

dress was the same as the Edlor Drive address, Ms. Leggett

suggested the Warner Road address and the second statutory

notice of deficiency was [were] sent. After the second notice

of deficiency was returned, Ms. Leggett apparently did not sug-

gest the defendant's business address, although she testified

that it is her normal practice to provide a business address if a

yood residence address is not available.

The defendant testified that he never received a statutory

notice of deficiency for the tax year 1968.

The defendant introduced into evidence copies of his income

tax returns for the years 1971 and 1972, the first listing his ad-

dress as South High Street, Columbus, Ohio and the second

indicating the Warner Road address. Also introduced into evi-

dence by the defendant is the notice sent to the defendant by

the Internal Revenue Service indicating the inceme tax audit

changes for the tax year 1968, That notice, dated April 6, 1972,

lists the defendant's address as 5858 Edlor Drive, Westerville,

Ohio.

At trial, the defendant also introduced into evidence several

hundred cancelled checks claimed by him to reflect deductible

expenses incurred in connection with his medical practice dur-

ing the vear 1968. The defendant failed to produce invoices

evidencing the usderlying obligations for which each check

was issued, claiming that most of his records were subsequently

destroyed through no fault of his own, More importantly, how-

ever, the defendant failed to testify with respect to the purpose,

payee or circumstances surrounding the overwhelming ma-

jority of claimed deductions.

On cross-examination, it became clear that not every check

repreyented legitimate business deductions and that at least

certain purchases expensed in the vear 1968 would more prop-

erly be characterized as capital items subject to depreciation

over the useful life of the items,

In 1965 the defendant purchased a one hundred acre tract

App. 7

of land located in Delaware County, Ohio. From the date of

purchase until 1968, the defendant cut weeds on the property

in order to keep the land presentable. He testified that although

he purchased the property for the purpose of engaging in the

business of farming, he did not have the farm equipment

needed to properly farm the land.

In 1968, the defendant purchased a three hundred acre tract

of land also located in Delaware County, Ohio, During that

same vear, he also purchased large farm equipment.

During his spare time in 1969, the defendant and his eight

vear old son planted sovbeans on two hundred and ten acres

of the three hundred acre tract of land. The defendant har-

vested the crop which vielded over 5,000 bushels of soybeans,

The crop was stored in a metal bin on the property and was

sold the following summer to a mill in Delaware County for

approximately $7,200.00,

In 1970 the defendant again planted the same acreage with

soybeans, He testified that he hired a man to harvest the crop

and had given the man orders to store the soybeans in. the

metal bin for storage. The defendant testified that he did not

know the vield of the crop that vear and that the hired man

stole the entire crop. The defendant has been unable to recover

either the crop or its proceeds,

The defendant testified that only two hundred and ten acres

of the one farm were tilled because, with his medical practice,

he did not have enough time to farm more acreage, Te also

testified that he visited the farm only once every couple of

months, He testified that he kept records of purchases and

sales but that he was unable to produce them at trial,

The defendant testified that he was born and raised ona

farm, and that before purchasing the acreage he consulted

several sources as to the profitability of the farms, Tle insisted

that his intent in purchasing the farms was to operate them: as

App. 8

a business and to make a profit. The defendant testified that

although the one farm produced a cash income, neither farm

produced a profit during the period that he owned them, He

further testified that, had he been able to continue to operate

the farms, he expected to make a profit,

The one hundred acre tract of land was foreclosed upon in

1971. No crops had ever been planted on the property by the

defendant.

The three hundred acre tract of land was foreclosed upon

by the mortgagee in 1972, It was defendant's recollection that

only one payment had been made on the loan,

In 1966 the defendant purchased and financed a one pro-

peller aircraft capable of seating six persons, The aircraft was

modified by the addition of certain navigational instruments

in order to make the aircraft serviceable for charter,

The defendant made arrangements with local pilots to char-

ter the plane in exchange for an hourly rate of pay, This charter

service was not incorporated but was a sole proprietorship, The

defendant apparently took no active part in the operations of

the charter service and no attempts were ever made to attract

business beyond those made by the various pilots, The charter

‘ate was $.25 per mile, which amount was paid to the pilot by

the person chartering the aircraft, Sometime after the initial

purchase of the original aircraft, according to the defendant,

he instituted a flying school comprised of a number of aireratt

kept in rental space in the terminal at Port Columbus, Tnstrac:

tors were made available to teach students,

The defendant was unable to recall at trial how many char

tered flights were made during the time that he carried on this

activity, although he did state that some chartered fights were

made, He stated that he did keep records of the charter ac

tivities, but he was unable to reeall even generally either the

income generated by the wetivity or the expenses incurred,

App. 9

The defendant testified that, at the time of the purchase of

the aircraft, he was not a qualified pilot, Sometime after the

purchase, however, he obtained his pilot's license, The de-

fendant stated that there were occasions on which he used the

aircraft for personal reasons, However, on such occasions, ac:

cording to the defendant, he paid rent (presumably to himself)

for the use of the aircraft,

In 1971 the finance company foreclosed upon the aircraft.

The defendant testified that had he continued to operate the

airplane charter service, he believed that he could have made

a profit,

DISCUSSION

A, The Deficiency Notice for the Tax Year 1968. The parties

to this action have stipulated that two notices of deficiency for

the tax year 1968 were mailed to the defendant, Both were re-

turned undelivered and the defendant now argues that neither

notice constituted an effective statutory notice of deficiency,

Title 26, United States Code, Section 6212 does not require

that notice of deficiency actually be received by the taxpayer

Hut, rather, merely requires that the notice be sent to the tax:

paver’s last known address by certified ov registered mail, Lul-

ring v. Glotsbach [62-2 usc '9548), 304 F, 2d (Ath Cir,

1962), 5 Rabkin & Johnson, Federal Income, Gift and Estate

Taxation 97105 (1976), Although the term “list known ad-

dress” is not statutorily defined, many courts have attempted

to give the term: substantive meaning, The court in Berger ev.

Commissioner (69-1 este ©9103] 404 FB, 2d BBS (3d Cir, 1968),

for example, defined the term as “an address to which the

Commissioner in all cireumstinees may reasonably believe the

taxpayer wishes the notice sent.” Accord, Kennedy ev, United

States [76-1 usve £9229) 408 FP) Supp. 619 CW. D. Mich,

1975),

The determination of a taxpayer's last known address must

App. 10

necessarily depend upon the facts of each case. Butler v. Dis-

trict Director of Internal Revenue [74-1 ustc 9113], 369 F.

Supp. 1281, 1283 (S. D. Tex. 1973). Ordinarily, a notice of de-

ficiency is sent to the address of the taxpayer as shown on his

return for the year in question, Luhring v. Glotzbach, supra,

304 F, 2d at 558, “However, if after the return is filed, the Gov-

ernment learns that the taxpayer has moved and has acquired

a new address the notice must be sent to that address,” Butler

tv, District Director of Internal Revenue, supra, 369 F. Supp.

at 1283,

In his tax return for the year 1968—the tax year in question

=the defendant used 5858 Edlor Drive as his address, Ordi-

narily, this address would be the proper address to which the

statutory notice of deficiency is sent. Indeed, the first notice

of deficiency was sent to this address, Subsequent to the filing

of that return, however, the defendant used other addresses in

his dealings with the Internal Revenue Service, For example,

defendant's tax return for the year L971 listed South High

Street in Columbus as his address, but both of the waiver forms

relating to the tax year 1968 and signed by the defendant indi-

cated a Westerville address,

The defendant argues that, when the Internal Revenue Serv:

ice learned that neither of its prior mailings of the deficieney

notice reached him, it should have sent vet a third notice of

deficieney to defendant at his business address,

It is undisputed that the Warner Road and Edlor Drive ad-

dresses are the same and that the defendant not only did reside

at those addresses at the time the notices were mailed, but that

he still resides there, Tt appears that none of the government

personnel were aware, at the time of the mailing of the notices,

that the two addresses were for the same residence, Delivers

was attempted at the defendant's home, but because the de-

lendant had earlier voluntarily removed the mail receptacle

from his residence, delivery could not be completed, Further,

the defendant's use of three different addresses in his dealings

App. ll

with the Internal Revenue Service served to obscure his de-

sired mailing address rather than to clarify it, While knowing

that mail would not be delivered to his residence address, the

defendant continued to use it in his dealings with (he govern-

ment without informing its agents of the situation, In all of

his correspondence with the Internal Revenue Service with re-

spect to the tax year 1968, it appears that the defendant con-

sistently used either the Warner Road or the Edlor Drive

addresses,

The parties have not directed this Court's attention to a

single authority in which this precise factual situation is pre:

sented and the Court, in its own research, has found none, Al-

though the determination of the issue of a taxpayer's “last

known address” must necessarily turn upon the facts presented

in each case, this Court finds some guidance in Williams e,

United States [59-1 usre £9282), 264 F. 2d 227 (6th Cir,

1959), In that case, the Commissioner had sent the notice of

deficiency to the taxpayer in care of and at the address of the

attorney in fact as required and directed in the power of at-

torney on file with the Service, The attorney returned the notice

to the District Director, advising him that the attorney's

power had been revoked by the death of the taxpayer, The

Court of Appeals held the notice to be effective despite the fact

that the District Director had in his files a residence address

and a business address of the taxpayer, 264 F, 2d at 228,

While we must agree with appellants that here the Di-

rector did not exert himself to see that the notice of de-

ficiency reached proper hands, still we cannot say there

was not minimum compliance with the mailing procedure

authorized by 9621200), Cb) C1) of the Toternal Revenue

Code,

264 F. 2d at 229,

This Court is of the opinion that the government met the

statutory requirements in mailing the notices of deficiency, The

statute does not require that notice be sent to taxpaver's Dest

App. 12

address, but only to that which, under all the circumstances, the

Internal Revenue Service reasonably understood that the tax-

payer wished the notice to be sent. In mailing the notice of de-

ficiency to both of the addresses provided (without clear in-

dication that another address was preferred) by the taxpayer

with respect to the tax year in question, the Internal Revenue

Service complied with its statutory duties, and the deficiency

assessment for the tax year 1968 is therefore effective.

B. The Deficiency Assessment for the Tax Year 1968. The

deficiency assessment levied against the defendant for the tax

vear 1968 is presumptively correct and certification of the as-

sessment to the Court establishes a prima facie case of the li-

ability reflected therein. Gromacki v. Commissioner [66-1 ustc

“9414], 361 F. 2d 727 (7th Cir. 1966). The burden is placed

upon the taxpayer to establish, by a preponderance of the evi-

dence, that the assessment is erroneous. Bar L Ramch, Inc. t.

Phinney [70-1 ustc 9399], 426 F. 2d 995 (5th Cir. 1979);

Rogers v. Commissioner [40-1 ustc 19459], 111 F. 2d 987 (6th

Cir. 1940); J. Mertens, The Law of Federal Income Taxation

§ 49.218; 5 Rabkin & Johnson, supra §73.03.

The defendant introduced into evidence over five hundred

checks reflecting expenditures by him in excess of $110,000.00

(most, but not all of which related to 1968). The defendant

testified that each check relates expenses incurred in the course

of his medical practice during the tax year 1968, and he argues

that the deficiency assessment is erroneous. The defendant

further contends that, since the government did not introduce

any contradictory evidence at trial, the facts supported by the

defendant's evidence must be regarded as established,

As the defendant correctly argues, unchallenged evidence

presented by the taxpayer is sufficient to overcome the pre-

sumption of correctness enjoyed by the government's deficiency

assessinent, Llowever, merely because the government does not

affirmatively refute each item claimed by the taxpayer as a

App. 13

deduction, this Court is not compelled to accept the taxpayer's

claims.

We have repeatedly held that the taxpayer has made out

his case when he has put in proofs, “clearly and distinctly

tending to show” a determinating fact. . .. The presump-

tion that the Commissioner is right is procedural and can-

not survive such proofs unless they are challenged by con-

trary proofs, or destructive analysis and we have gone so

far as to say that the taxpayer’s affirmative evidence may

itself contain the necessary challenge and furnish the ma-

terial for such analysis.

Lunsford v. Commissioner [3 usre © 1037], 62 F. 2d 740, (6th

Cir. 1933).

While the plaintiff did not accomplish, or even attempt, the

virtually impossible task of presenting affirmative evidence

tending to directly contradict each of the defendant's multi-

tudinous claimed deductions, cross-examination of the de-

fendant revealed that not every item claimed by the defendant

on direct examination represented a legitimate business de-

duction. For example, the defendant admitted that checks

made payable to the Westerville Jaycees and to Playboy Mag-

azine were for personal use, although they are included in the

group of checks claimed by him on direct examination to rep-

resent payment of dues and subscriptions incident to his medi-

cal practice. Likewise admitted to be a personal expense is a

check made in payment for defendant's eyeglasses but included

in the group of checks claimed by the defendant on direct ex-

amination to represent expenses for the purchase of drugs and

professional service. Thus the cross-examination of the de-

fendant cast a severe doubt upon the accuracy and reliability

of defendant's claims. Further, the character, demeanor and

answers of the defendant while on the witness stand lead this

Court to find that the defendant's testimony is entitled to little

credibility. Finally, the testimony of Revenue Agent Leggett,

both on direct and cross-examination, failed to undermine the

App. 14

procedures followed by her in her determination of the de-

fendant’s tax liability for the year 1968. Other than the can-

celled checks and stubs, the defendant failed to produce any

records whatsoever in support of his claims, and his recollec-

tion of the circumstances surrounding the issuance of each

check was minimal, at best.

In short, it is the view of this Court that the defendant has

tailed to establish by a preponderance of the evidence that

the deficiency assessment is incorrect.

C. Carryback Losses for the Tax Years 1968 and 1969. The

defendant argues that he experienced net operating losses for

the tax years 1971 and 1972, due primarily to the losses arising

from the forced dispositions of his two farms and airplane, and

that such losses must be carried back to the tax years 1968 and

1969, respectively, and thus serve to reduce his tax liability for

those two years.

Title 26, United States Code, Section 172(a) allows as a de-

duction for the taxable year:

an amount equal to the aggregate of (1) the net operating

loss carryovers to such year, plus (2) the net operating

loss carrybacks to such year.

Section 172(b) provides in relevant part that “a net operating

loss... shall be a net operating loss carryback to each of the 3

taxable vears preceding the taxable year of such loss.” It is

clear, however, that before the defendant's argument can pre-

vail, it must be established that his losses arose from the dis-

position of property or realty used in a trade or business con-

ducted by him. Section 172(c), (d).

The defendant's returns for the tax vears 1971 and 1972

reflect net operating losses which evidently were not disallowed

by the Internal Revenue Service. However, the Service's fail-

ure to disallow such losses in 1971 and 1972 does not operate

to preclude either the plaintiff or this Court from redetermin-

App. 15

ing the nature of those losses for purposes of the establishing

of defendant's tax liability for the years 1968 and 1969. Iloward

v. United States [74-1 ustc £9455], 497 F. 2d 1270 (7th Cir,

1974).

In Penton v. United States [58-2 ustc £ 9852], 259 F. 2d

536 (6th Cir. 1958), the Court of Appeals for this Circuit found

important to the determination of whether the loss sought to

be carried back occurred in the operation of the taxpayer's

trade or business:

(1) the continuity of the business, (2) the amount of

time and energy devoted thereto by the taxpayer, and (3)

whether the taxpayer is engaged in the business for the

purpose of earning a livelihood or merely as an avoca-

tion.

259 F. 2d at 539. Se also Title 26, Code of Federal Regulations

Section 1.183-2; 5 J. Mertens, The Law of Federal Income Tax-

ation, supra § 28,75.

The overwhelming burden of the evidence adduced at trial

is that the defendant devoted extraordinarily little time to his

extra-professional farming and aviation activities. While a por-

tion of one farm was cultivated two of the five years that de-

fendant owned it, the other farm was cultivated not at all. It is

further evident that the defendant paid little personal attention

to these activities. He admitted that he visited the farms only

once every couple of months, explaining that his very busy

medical practice did not leave him much spare time, Despite

his inability to devote what would ordinarily be considered

sufficient time to operate a farm in business-like manner, the

defendant did not resort to qualified assistance in this opera-

tion, relying instead upon the additional efforts of his cight-

vear-old son and a man who was apparently not to be trusted

without the close supervision that the defendant was unable

to provide.

Although the evidence relating to defendant's aviation ac-

tivities is quite sketchy, it appears that the defendant devoted

App. 16

no more personal attention or time to this activity than he did

to his farms. He evidenced at trial a surprising unfamiliarity

with the operation of the “charter service” and “aviation

school”, ignorant even of the income produced and expenses

incurred, Although the defendant claims to have lost the rec-

ords kept in the course of these activities, this Court has no

means of evaluating the defendant's method of conducting

these “businesses”,

This Court recognizes that there exist on the record facts

tending to support the defendant's claim in this regard, yet.

on balance and considering all the circumstances surrounding

these activities, this Court concludes that neither the farming

nor the aviation activities of the defendant constituted a trade

or business.

This Court therefore concludes that the losses suffered by

the defendant in 1971 and 1972 did not arise from the dispo-

sition of property used in a trade or business conducted by

him and are therefore not subject to the net operating loss car-

rvback provision of the Internal Revenue Code.

CONCLUSIONS OF LAW

This Court has jurisdiction over the subject matter of the ac-

tion pursuant to Title 28, United States Code, Sections 1340,

1345, and Title 26, United States Code, Section 7402.

This Court has jurisdiction over the parties to this action.

This Court concludes that the deficicney assessment for the

tax year 1968 levied against the defendant by the government

was timely and legally made.

This Court concludes that the defendant has failed to es-

tablish by a preponderance of the evidence that the deficiency

assessment for the 1968 taxable year levied against him is

factually incorrect,

oe

App. 17

This Court concludes that neither the defendant's farming

nor his aviation activities constituted a trade or business within

the meaning of Title 26, United States Code, Section 172, and

the losses arising out of such activities in L97TL and 1972 are

therefore not subject to the net operating loss carryback pro-

visions of that section and may not serve to reduce defendant's

tax liability for the tax vears 1968 and 1969.

The defendant remains indebted to the United States for

the tax years 1968 and 1969 in the amount of $126,724.39, plus

additional interest and penalties according to law.

WHEREUPON, the Court determines that judgment shall

be entered in favor of the plaintiff, the United States of Amer-

ica, in the amount of One Hundred Twenty-Six Thousand

Seven Hundred Twenty-Four Dollars and Thirty-Nine Cents

($126,724.39), plus interest and penalties according to law,

as well as costs,

The Clerk shall enter judgment accordingly,

JUDGMENT

This action came on for consideration before the Court, Hon-

orable Joseph P. Kinneary, United States District Judge, pre:

siding, and the issues having been duly considered and a de

cision having been duly rendered,

It is Ordered and Adjudged that judgment is in favor of the

plaintiff, the United States of America, in the amount of One

Hundred Twenty-Six Thousand Seven Hundred Twenty-Four

Dollars and Thirty-Nine Cents ($126,724.39), plus interest aud

penalties according to law, and costs.

App. 18

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

76-2679

UNITED STATES OF AMERICA,

Plaintiff-Appellee

VS.

RICHARD K. HALEY,

Defendant-Appellant

Before: EDWARDS, LIVELY and ENGEL, Circuit Judges

No judge in regular active service of the court having re-

quested a vote on the suggestion for a rehearing en banc, the

petition for rehearing filed herein by the defendant-appellant

has been referred to the panel which heard the original ap-

peal. Upon consideration, and noting that the petition con-

tains no issue which was not fully addressed in its earlier order,

the court concludes that it is without merit. Accordingly,

IT IS ORDERED that the petition for rehearing is hereby

denied,

ENTERED BY ORDER OF THE COURT

John P. Hehman, Clerk

By Grace Keller

Grace Keller, Chief Deputy

App. 19

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

76-2679

UNITED STATES OF AMERICA,

Plaintiff-Appellec

VS.

RICHARD K. HALEY,

Defendant-Appellant

This cause is now before the court on motion of the appel-

lant to stay the mandate of this court.

Upon due consideration,

IT IS ORDERED that the motion of appellant to stay the

mandate be and it is hereby denied,

ENTERED BY ORDER OF THE COURT

John P. Hehmian

Clerk

——

App. 20

SUPREME COURT OF THE UNITED STATES

OFFICE OF THE CLERK

WASHINGTON, D.C, 20543 |

October 6, 1978

Ronald A. Marks, Esquire

Phillips & Marks

1421 East Market Street

Warren, Ohio 44483

Re. RICHARD K. HALEY ws. UNITED STATES

A-302

Dear Mr. Marks:

Your application for an extension of time in which to file a

petition for a writ of certiorari in the above-entitled case has

heen presented to Mr. Justice Stewart who, on October 4, 1978.

signed an order extending vour time to and including De-

cember 5, 1978. |

A copy of the Justice’s order is enclosed.

Very truly yours,

MICHAEL RODAK, JR., Clerk

By

Patricia A. Dean

Assistant Clerk

th

Ene,

cc, Hon, Wade H. MeCree, Jr.

Solicitor General of the United States

Clerk, U.S. Court of Appeals for the

Sixth Cirenit (Your No, 76-2679 )

App. 21

CONSTITUTION

of the

UNITED STATES OF AMERICA

AMENDMENT 5

No person shall be held to answer for a capital, or otherwise in-

famous crime, unless on a presentment or indictment of a

Grand Jury, except in cases arising in the land or naval forces,

or in the Militia, when in actual service in time of War or pub-

lic danger; nor shall any person be subject for the same offense

to he twice put in jeopardy of life or limb; nor shall be com-

pelled in any criminal case to be a witness against himself, nor

he deprived of life, liberty, or property, without due process

of law; nor shall private property be taken for pubhe use, with-

out just compensation.

26 United States Code §§6212(a) and (hb),

6212. Notice of Deficiency. (Sec. 1906(h)(13)(A) of

P. L. 94-455, 90 Stat. 1834, amended this section by deleting

“or his delegate” each place it appears therein. J

(a) In general.—

If the Secretary determines that there is a deficiency in re-

spect of any tax imposed by subtitle A or Boor chapter 41, 42.

43, or 44, he is authorized to send notice of such deficiency to

the taxpaver by certified mail or registered mail,

(b) Address for notice of deficiency

(1) Income and gift taxes and taxes imposed by chapter 41,

[sie] chapter 42. In the absence of notice to the Secretary

under section 6903 of the existence of a fiduciary relationship,

notice of a deficiency in respect of a tax imposed by subtitle A,

chapter 12, chapter 41, chapter 42. chapter 43. or chapter 44,

if mailed to the taxpayer at his last known address, shall be

sufficient for purposes of subtitle A, chapter 12, chapter 41,

chapter 42, chapter 43, chapter #4. and this chapter even if

App. 22

such taxpayer is deceased, or is under a legal disability, or, in

the case of a corporation, has terminated its existence.

26 United States Code §§6213(a),

6213. Restrictions Applicable to Deficiencies—Petition

to Tax Court. [Sec. 1906(b) (13) (A) of P. L, 94-455, 90 Stat.

1834, amended this section by deleting “or his delegate” each

place it appears therein.]

(a) Time for filing petition and restriction on assess-

ment.—Within 90 days, or 150 days if the notice is addressed

to a person outside the United States, after the notice of de-

ficiency authorized in section 6212 is mailed (not counting

Saturday, Sunday, or a legal holiday in the District of Columbia

as the last day), the taxpayer may file a petition with the Tax

Court for a redetermination of the deficiency. Except as other-

wise provided in section 6851 or section 6861 no assessment of

a deficiency in respect of any tax imposed by subtitle A or B,

chapter 41, 42, 43, or 44 and no levy or proceeding in court for

its collection shall be made, begun, or prosecuted until such

notice has been mailed to the taxpayer, nor until the expiration

of such 90-day or 150-day period, as the case may be, nor, if a

petition has been filed with the Tax Court, until the decision

of the Tax Court has become final. Notwithstanding the pro-

visions of section 7421(a), the making of such assessment or

the beginning of such proceeding or levy during the time such

prohibition is in force may be enjoined by a proceeding in the

proper court.