Petition for Writ of Certiorari — Spector v. Commissioner

a

e Supreme Court, U.S

86.210 FILED

AUG F% 1986

No. _t JOSEPH F. SPANIOL, UR,

[as Bada VV

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

W. M. SPECTOR, et al.,

Petitioners,

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

MARTIN A. SCHAINBAUM

A PROFESSIONAL LAW CORPORATION

MARTIN A. SCHAINBAUM

KATHLEEN A. MILLER

One Market Plaza

Steuart Street Tower, Suite 2310

San Francisco, CA 94105

(415) 777-1040

JAMES E. RITCHIE

Ore Market Plaza

Steuart Street Tower, Suite 2310

San Francisco, CA 94105

(415) 777-1040

ATTORNEYS FOR PETITIONERS

BEST AVAILABLE COPY

QUESTIONS PRESENTED

i. Whether the Tax Court committed

error as a matter of law in

granting Respondent=-Appellee's

Motion to Dismiss for Lack of

Jurisdiction.

2. Whether the notification letters,

issued by Respondent-Appellee

pursuant to Revenue Procedure 83-

78, 1983-2 C.B. 595 constitute

"notices of deficiency" within the

contemplation of 26 U.S.C. Section

6212 and 6213.

wins

TABLE OF CONTENTS

)

REPORTS OF OPINIONS....... eecee

PUMLSOLCTION 006 eee eee eee ewene

STATUTES INVOLVED. «.ccccsccecves

STATEMENT OF THE CASE..cccssees

ROSIE 6.6 6 & 4 Oe KHER eee

THE TAX COURT COMMITTED

ERROR AS A MATTER OF LAW

BY GRANTING THE GOVERNMENT'S

MOTION TO DISMISS TAXPAYER'S

CONSOLIDATED PETITION FOR

LACK OF JURISDICTION........

THE IRS LETTERS, DATED

NOVEMBER 2, 1984, ARE

"POST-FILING" RATHER THAN

"PRE-FILING" NOTIFICATION

LBTIORM ec cccecvevewentssaecwe

IRS REVENUE PROCEDURE 83-78,

1983-2 C.B. 595 (MODIFIED

BY REV. PROC. 84-84, 1984-2

C.8. ‘968bi<ccuceaee

aides

Page

17

18

APPELLEE IS ARGUING FORM vs.

SUBSTANCE WITH RESPECT TO

WHETHER THE NOTIFICATION

LETTERS CONSTITUTE NOTICES

OF DEFICIENCY... ---seeeceeeces 30

NEW PENALTY PROVISIONS

ASSERTED IN NOTICEDS OF

DEFICIENCY DO NOT ASSERT

EXACT AMOUNTS ..-.--eceeececee 39

APPELLANTS ARE ENTITLED TO

DUE PROCESS OF THE LAWS AND

JUDICIAL DETERMINATION OF THE

NOTIFICATIONS RECEIVED WITH

RESPECT TO THEIR 1983

TAXABLE YEARS......... ceccece 41

THE GOVERNMENT MAY BE SUBJECT

TO DAMAGES AS IN THE CASE OF

MID-SOUTH MUSIC CORPORATION v.

UNITED STATES OF AMERICA.... 44

CONCLUSION...... correc cccccce = 32

-i1i-

TABLE OF CITATIONS

Cases Page

Barth Foundation, 77 T.cC. 1008,

1012-13 CLPPA ce ccrcesoseansyese 25

Barnes v. Commissioner, 644 F.2d

1383, AFee (Fem Cake. 2981). 220% a2, 24

Barnes Theatre Ticket, v.

ee NFER ER ee TOETee rere 35

Commissioner v. Forest Glen

Creamery Co., 98 F.2d 968,

O7R Crem Ger. BPO) . Wicccvedics 12

Commissioner of Internal Revenue

v. Court Holding Company, 324

B.6, Sh THe 6 vhs dba te ecceoss 30

Commissioner v. Stewart, 186

F.2d 239, 241 (6th Cir. 1951.... 12

Corbett v. Frank, 193 F.2d 501,

SOR {Guhe BO, JZPGRs ce eesvvanedteevs 11

DaBoul v. Commissioner, 429 F.2d

38 (9th cir. Sos | eee ee ee ee 9

Estate of Adamczyk, T.C. Memo

1981-259 41 T.C.M. 1596 (1981).. 26

~_ iv-

Cases Page

Estate of Eversole v.

Commissioner, 39 T.C. 1113

(1963) -cccccccccccccsercescsoces 34

Foster v. Commissioner, 80 T.C.

34, 229-230 (1983)....eeeceeeeee 13,37

Greenberg's Express, Inc. V.

Commissioner, 79 T.C. 324,

sar (1974)... eee? eeeeeeeeee8e8 88 @ 34,213

Gregory v. Helvering, 293 U.S.

465 (1935) - cee ee cece eereeresesess 30

Hannan v. Commissioner, 52 T.C.

787 (1969) . cee ee ne re rere reseesess 13

Jarvis v. Commissioner, 78 T.C.

646, 655-656 (1982)...-eeeeeeeeee 12,33,

Jones v. Commissioner, 62 T.C. l

(1974) - cece eer cccvrecereseresesecs os

Llorente v. Commissioner, 649 \

F.2d 152, 155, n. 4, 157

(2d Cir. 1981) eeese+vees8se8eeee8@ eee#ee#e#@# 15

Laing v. United States, 423 U.S.

161 (1976) we cee rcreeeseseessvesce 10,23

Cases

Mayerson v. Commissioner, 47 T.C.

340, 349 (1966) ~..ccccvevescccecee

Mid-South Music Corporation v.

Kolak, et al., 579 F.2d 23

(6th Car... 1984) ~ccccccccccccccce

Mid-South Music Corporation v.

United States, F. Supp. ;

56 AFTR 2d 85-6250

(USDC, M.D. Tenn., 1985) .ccccevee

Olsen v. Helvering, 88 F.2d 650,

651 2da og to 1937) cccccccscccecces

Pietz v. Commissioner, 59 T.C.,

207, 213-214 (1972) weccccvecsecvece

Riland v. Commissioner, 79 T.C.

185, 201 (19E2) wcccccvcccccccececs

Howard S. Scar, et al., 81 T.C.

855 (1983) ~cccrcccvcrcccccccccecs

Standard Oil Co. v. Commissioner,

43 ac othe ee 988 (1941) ~cccccce

United States v. Cumberland

Public Service Company, 338 U.S.

451 (1950) ccc crc cccccccccccvcvece

-vi-

33,34

48

44,45,

19,34,

30,31

Cases Page

United States v. Mid-South

Music Corporation, et al.,

___F. Supp. __, 56 AFTR 2d

85-6002 (USDC M.D. Tenn. 1985)... 49,50

\

STATUTES AND REGULATIONS Page

Title VeseGe 612541) 26% eeeeee eee 2

Internal Revenue Code (26

CBS ck. Beene cao noob kes eewks 16,18

Internal Revenue Code (26

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Internal Revenue Code (26

Maes SECTS CH) 6 «soc anaes’ rrr 25

Internal Revenue Ccde (26

U.S.C.) §6081 e*eeee#e#e#ee#ee#e#@# e*eee#ee#e#e#e#@*# 16,18

Internal Revenue Code (26

Wutbotese) BOROGRER) 6 cc cncvsesaseceas 48,50

Internal Revenue Code (26

Vee Gs yd SOREACH) « ce cccdeeneevces 11,14

Internal Revenue Code (26

WelbeGe) SESENsc cc cccstesedceecvecves 3,6,

29,33

38,41

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STATUTES AND REGULATIONS

Internal Revenue Code (26

U.§.C.) §6212(a) we ee eecvees

Internal Revenue Code (26

U.8.6.} 86222 (DB) (3)occccess

Internal Revenue Code (26

C.0:6.) PORES CA 6 oo 0 cece

Internal Revenue Code (26

U.8.C,) OOBES. .00008 ites ss

Internal Revenue Code (26

U.S.C.) §6213 (a) -. eee eeceee

Internal Revenue Code (26

U.S.C.) §6411(D) ..cccvccaece

Internal Revenue Code (26

U.S.C.) S650L ccccccscvceccer

Internal Revenue Code (26

U.S.C.) §6501(a) . eee eecves

Internal Revenue Code (26

U.S.C.) §6501(b) (1).....6-.

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eeEeEeE SSS

6,29,

33,39,

3,27,

38,39,

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25

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STATUTES AND REGULATIONS

Internal Revenue Code (26

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Internal Revenue Code (26

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Internal Revenue Code (26

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Internal Revenue Code (26

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Internal Revenue Code (26

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Internal Revenue Code (26

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10,39,

STATUTES AND REGULATIONS Page

Internal Revenue Code (26

U.S.C.) nt . .- kb 6b ae ewe 6 6b owe 45

Rev. Proc. 83-78, 1983-2, C.B.

595 eo Pree TTT TT EETTT Tee 18,20,

Rev. Proc. 84-84, 1984-2, C.B.

782 fo (verre rrerrererrrTrrrerrr re 18,29,

MISCELLANEOUS Page

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— X=

No.

In The

Supreme Court of the United States

October Term, 1986

W.M. SPECTOR , et al.,

Petitioners,

Vv.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

This is a case of first impression

involving a question of procedural due

process affecting the uniform administration

of the Internal Revenue laws. Petitioners

hereby respectfully pray a Writ of Certiorari

issue to review the decision of the United

States Court of Appeals for the Eighth

-2-

Circuit, which sustained the decision of the

United States Tax Court dismissing

Petitioners' Consolidated Petition.

PARTIES

The parties in this case are

Petitioners-Appellants:

W.M. Spector and James M. Stokes

REPORT OF OPINION

The Judgment and Opinion of the Eleventh

Circuit Court of Appeals in this case and the

Judgment and Opinion of the U. S. Tax Court

are reproduced in the Appendix.

JURISDICTION

The decision sought to be reviewed

herein was entered by the Eighth

Court of Appeals on May 7, 1986 , Docket No.

85-2133, Tax Court Docket No. 2645-85.

The jurisdiction of this Court is

invoked under Title 28 U.S.C. § 1254(1).

a ete naa nadaincia ait

STATUTES INVOLVED

The following statutes are involved in

this case:

26 U.S.C. (Internal Revenue Code of

1954, as amended) §6212(a):

(a) IN GENERAL. ---If the Secretary

sntenninns that there is a deficiency in

respect of any tax imposed by subtitle A or B

or chapter 41, 42, 43, 44, or 45, he is

authorized to send notice of such deficiency

to the taxpayer by certified mail oor

registered mail.

26 U.S.C. §6213(a):

(a) TIME FOR FILING PETITION AND RESTRICTION

ON ASSESSMENT.--Within 90 days or 150 days if

the notice is addressed to a person outside

the United States, after the notice of

deficiency authorized in section 6212 is

mailed (not counting Saturday, Sunday, or a

legal holiday in the District of Columbia as

ain

the last day?) the taxpayers may file a

petition with the Tax Court a redetermination

of the deficiency. Except as otherwise

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, 44, or 45 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, 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

provisions of section 7421l(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.

-5-

STATEMENT OF THE CASE

On Novenber 2, 1984, the Internal

Revenue Service issued "Post-Filing

Notification Letters" to the Taxpayers-

Appellants herein. Said notices advised that

with respect to Appellants' investment with

Liberty Financial in 1983, the Internal

Revenue Service believes "that the purported

tax deduction and/or eres are not

allowable." These notices purported to

disallow deductions taken, or refunds claimed

based on the Liberty Financial 1983

Government Securities Trading Strategy.

Pursuant to the determination evidenced

by the notices, all that remains for the

Internal Revenue Service ("Service" or "IRS")

to do is merely calculate the exact amount of

the deficiency for each of the taxpayers

having received the notices and who claimed

the deduction. In addition, the

hoked

aforementioned IRS notices indicate

appropriate penalties are to be imposed. The

Service did not propose to allow. the

deduction in any respect, or issue a refund

based on the deduction in any amount. All

that the IRS proposed, is an administrative

effort to easily collect the deficiency is to

have each of the taxpayers voluntarily amend

their, her or its own income tax return.

Appellants filed a Consolidated Petition

in the United States Tax Court on January 28,

1985 in response to said notices, alleging

therein that the notices constitute notices

of deficiency within the contemplation of 26

U.8.C. Sections 6212 and 6213, thus

fulfilling the prerequisite for each of the

taxpayers receiving said notice to petition

the United States Tax Court for judicial

review.

aFe

Thereafter, on April 4, 1985, Appellee

(Respondent-Commissioner of Internal Revenue

Service) filed a Motion to Dismiss

Appellants' Consolidated Petition for Lack of

Jurisdiction. The Appellee failed to

properly serve Appellants (taxpayers) or

Appellants' counsel with copies of said

motion. The Tax Court granted the

Government's motion on April 12, 1985 without

allowing the taxpayers an opportunity to

respond either orally, or in writing, to the

Internal Revenue Service's motion to dismiss.

Judge Dawson vacated his order of

dismissal on April 16, 1985 and directed that

the parties file memoranda of points and

authorities on or before May 15, 1985. The

matter was also set for hearing in

Washington, D.C. on May 22, 1985.

On May 15, 1985, both the Appellants and

the Appellees filed their respective

-8-

memoranda of points and authorities with the

Tax Court. Thereafter, on May 22, 1985, the

hearing was held before Judge Dawson.

On June 17, 1985, Judge Dawson filed his

opinion holding for the Government and

dismissing the case without a judicial review

of the underlying merits of the issues

presented by the "Post-Filing Notification"

notices (hereinafter PFN). The following

day, June 18, 1985, ' Judge Dawson's order

dismissing taxpayers' consolidated petition

for lack of jurisdiction was entered in the

Tax Court's records.

On June 18, 1985, taxpayers filed a

motion for reconsideration of the findings of

fact or opinion. This motion was denied by

the Tax Court on July 29, 1985.

Subsequently, on August 29, 1985, Appellants

renewed their motion for reconsideration

based upon the receipt of a notice by one of

-G-

the 111 co-petitioners that said taxpayer's

refund for his 1984 income tax year was being

withheld solely due to the prior issuance of

the "pre-filing notification letter." The

Tax Court denied Appellants' renewal of their

motion for reconsideration on September ll,

1985.

ARGUMENT

THE TAX COURT COMMITTED ERROR AS A MATTER OF

LAW BY GRANTING THE GOVERNMENT'S MOTION TO

DISMISS TAXPAYERS' CONSOLIDATED PETITION FOR

LACK OF JURISDICTION

The court's Order of Dismissal prior to

its vacation contained the following

citations: DaBoul v. Commissioner, 429 F.2d

38 (9th Cir. 1979); Jones v. Commissioner, 62

T.C. 1 (1974); Rule 13, Tax Court Rules of

Practice and Procedure. Rule 13 restates the

basic principle that issuance of a notice of

deficiency is the condition precedent to Tax

Court jurisdiction. Both DaBoul and Jones

are distinguishable from the facts and

-10-

circumstances herein. In those cases no

notice was issued. Further, the situation in

Jones was subsequently overruled by the

United States Supreme Court in Laing v.

United States, 423 U.S. 161 (1976).

Thereafter, the Tax Reform Act of 1976 added

a provision now known as 26 U.S.C. Section

7429, granting a taxpayer falling within that

provision administrative and judicial review.

Here notices were issued. such notices set

forth the taxable year and item questioned by

the IRS. the exact amount of the deficiency

for the taxpayers is a mere arithmetic

mechanical function, no different than the

mechanics attributable to determining certain

additions to the tax now being asserted by

the Internal Revenue Service in certain

notices of deficiency (see 26 U.S.C. Section

6653(a) (2), 6653(b) (2), 6659(b), and 6621(d).

Thus, the notices at bar, while not in the

-ll-=-

standard form for notices of deficiency, are

nevertheless in substance notices of

deficiency granting the Tax Court

jurisdiction with respect to the

determination contained in such notices. The

reasons follow.

It is unquestioned that the Tax Court's

jurisdiction to determine a tax liability

prior to payment is’ predicated upon the

existence of a "deficiency" within the

meaning of 26 U.S.C. Section 6211(a).

Further, it is necessary that the IRS issue a

notice of deficiency within the contemplation

of 26 U.S.C. Section 6212(a). Consequently,

notices of deficiency have been characterized

as "tickets to the tax court." Corbett Vv.

Frank, 293 F.2d 501, 502 (C.A. 9, 1961);

Laing v. United States, supra at 206.

In the 1983 Tax Court case of Howard S.

Scar, et al., 81 T.C. 855 (1983), the court

-12-

addressed the issue of whether a writing

issued to the taxpayers stating that a

deficiency had been determined for their 1978

taxable year in a specified amount

constituted a statutory notice of deficiency

pursuant to 26 U.S.C. 6212(a

The Court expounded on the requisites of

a notice of deficiency at 860-861) as

follows:

® * —

We start from the established

principle that no particular

form is requiréd for a

etatutory notice of deficiency.

Creamery ;

(7th Cir. 1938); Jarvis Vv.

Commissioner, 78 T.C. 646, 655=-

656 (1982). As Judge Learned

Hand stated in Olsen v. Helvering,

88 F.2d 650, 651 (2d Cir.

1937), “the notice is only to

advise the person who is to pay the

deficiency that the Commissioner

means to assess him; anything that

does this unequivocally is good

enough." See also Commissioner

v. Stewart, 186 F.2d 239, 241 (6th

Cir. 1951), revg. a Memorandum

Opinion of this Court.

-13-

The requirements of section

6212(a) are met if the notices

of deficiency sets forth the

amount of the deficiency and

the taxable year involved.

See Foster v. Commissioner, 80

T.C. 34, 229-230 (1983). It

need not contain any particulars

or explanations as to how the

deficiencies were determined.

See Barnes v. Commissioner,

644 F.2d 1385, 1389 (9th

Cir. 1981), revg. on other

grounds a Memorandum of this

Court. (Footnote omitted.)

(Emphasis supplied.)

The Tax Court in Scar, supra, went on to

articulate its jurisdictional basis at page

861:

* * *

We are satisfied that

the deficiency notices herein

meets the aforementioned

standards insofar as any

question of our jurisdiction

is concerned. The fact that is

subsequently develops even

prior to trial that there was

no deficiency on the basis of

the grounds set forth in

the deficiency notice is

irrelevant. See Hannan v.

-14=

Commissioner, 52 T.C. 787

(1969). The definition of a

"deficiency" contained in

section 621l1(a) does not require

a different conclusion. As we

see it, this definition simply

outlines the method by which

the notices of deficiency

should be constructed and do

not affect the jurisdiction

of this Court. To conclude

otherwise would make it

mandatory for the Court to go

behind the deficiency notice

where the petitioner raises the

question of whether respondent

utilized their tax return in

constructing the notice. Such

a procedure would fly in the

fact of the long-established

principle this Court will

ordinarily not look behind a

deficiency notice. Riland v.

Commissioner, 79 T.C. 185, 201

(1982); Greenberg's Express,

Inc. v. Commissioner, 62 T.C.

324, 327 (1974). Clearly, no

constitutional considerations are

involved herein which might

justify an exception to this

general rule. Riland v.

Commissioner, supra; Greenberg's

Express, Inc. v. Commissioner,

Supra at 328. Moreover, we

note that, even in situations

where the courts have gone behind

a deficiency notice, they

have not ruled that such notice

was null and void, which would

be the result herein if we

-15-

accepted petitioners' conten-

tions. See Greenberg's Express,

Inc. v. Commissioner, supra at

328. But cf. Llorente v.

Commissioner, 649 F.2d 152, 155,

n. 4, 157. (2 Cir. 1961),

modifying 74 T.C. 260 (1980).

Emphasis added.)

. * «

As the Tax Court stated in Scar, supra,

it will not look behind a deficiency notice.

Here, Appellee is requesting that the court

do just that by stating that the Commissioner

of Internal Revenue intended the PFNs to be

merely advisory. Thus, if the intent in

issuing the notices as a notice of deficiency

rather than the substantive impact of such

hotices is the standard, then the Tax Court

is therefore required to look behind the

notices to determine the intent. This

examination, rather than analyzing the four

corners of the notices, is contrary to the

existing law as postulated to date by the Tax

Court.

Te

Respondent issued the "post-filing"

notification letters on November 2, 1984, a

date subsequent to the time Appellants' 1983

tax returns were required to have been filed.

(26 U.S.C. Sections 6072 and 6081.) It is

therefore clear that Appellee's' Internal

Sevenue Service had, by such notices,

determined that additional tax was due and

owing from the Appellants based upon their

1983 investment with Liberty Financial. A

Simple numerical calculation is all that

remains to be done to determine the amount of

the additional tax for each taxpayer.

That the Appellee's Internal Revenue

Service had, at the time of mailing said

notices, determined tax deficiencies is

further evidenced by the fact that’ the

Internal Revenue Service has withheld a 1984

tax refund of one of the taxpayers-

petitioners. The Service made the

-17-

determination that said refund was being

withheld solely based on the prior issuance

of the post-filing notification letter dated

November 2, 1984, relative to the Liberty

Financial deduction. The notice of

withholding of refund, dated August 8, 1985

is Exhibit A to Renewal of Petitioners'

Motion for Reconsideration of Findings of

Facts or Opinion.

THE IRS LETTERS, DATED NOVEMBER 2, 1984, ARE

"POST-FILING" RATHER THAN “PRE-FILING"

NOTIFICATION LETTERS

The Tax Court's Opinion in this case,

dated June 17, 1985, contains a very glaring

error. It repeatedly refers to the November

2, 1984 letters to Appellants as "pre-filing"

notification letters; in fact, such letters

are "post-filing" notification letters. The

distinction is dramatic inasmuch as_ the

deduction, relative to Appellants' 1983

investment with Liberty § Financial, had

@ige@

already been claimed on their tax returns

when said notices were mailed. The latest

possible valid extension of time to file the

1983 Form 1040 would have expired on October

15, 1985. (26 U.S.C. Sections 6072 and

6081). The notification letters were based

on: actual deductions claimed and not the

potentiality or probability that such

deductions would be claimed on returns to be

filed for the taxable year at issue.

Consequently, the amounts of the deductions

were certain, and the amounts additional tax

due pursuant to a disallowance of said

deductions are easy to calculate.

IRS REVENUE PROCEDURE 83-78, 1983-2 C.B. 595

(MODIFIED BY REV. PROC. 84-84, 1984-2 C.B.

782)

Revenue Procedure, 83-78, 1983-2 C.B.

595, sets forth the procedure by which the

Internal Revenue Service may issue pre and

post-filing notification letters.

-19-

Furthermore, Revenue Procedure 84-84, 1984-2

C.B. 782, at Section 1.01 describes:

- . . the Abusive Tax

Shelter Detection Program

implemented by the

Internal Revenue Service

at Internal Revenue

Service Centers. Under

this program the Service

will detect and identify

those returns that

claimed benefits from

abusive tax shelter

promotions before

processing and before

refunds are paid (front-

end identification), will

reduce refunds of

investors when

appropriate, and will

offset deficiencies

assessed under the

provisions of section

6212(b) (3) of the

Internal Revenue Code

against scheduled refunds

resulting from tentative

carryback adjustments

under section 6411(b).

Returns subject to review

under this program

include those in which

pre-filing notification

letters have been

issued to the investors

and returns that are

selected based upon

-20-

certain criteria with

emphasis on identifying

particularly abusive tax

shelter promotions. For

purposes of this revenue

procedure, an income tax

return showing a refund

due is considered a claim

for refund.

* * *

Counsel for Appellee explains the

background and reason for Revenue Procedure

83-78, supra (modified by Rev. Proc. 84-84,

supra) as follows:

* * *

Subsequently, the

Service issued Revenue

Procedure 83-78, in which

it outlined three steps

that it would be taking

with regard to abuse of

tax shelters, namely, the

assertion of monetary

penalties under section

6700, injunction

procedures under section

7408, and the issuance of

prefiling notification

letters to investors in

shelters which the

Service had determined

were abusive. (Emphasis

supplied.)

-2l1-

(R.T., page 3, lines 14-24.)

Government counsel proceeded to state

that the gotification letters are merely

"advisory" inasmuch as it only alerts the

taxpayers that the Service will audit their

returns based upon their deduction with

respect to the “abusive shelter." Counsel

articulates three situations which’ she

perceives as consequences of a judicial

determination that the notification let rs

constitute notices of deficiency. pe

noteworthy that not one of the initial

alternative consequences contemplated by the

Internal Revenue Service, even after further

examination of the taxpayers' returns,

results in ultimately allowing the

deduction.1l

The three consequences are discussed

below.

First, it is argued that the Internal

Revenue Service will assume the burden of

proof in Tax Court if other issues are

subsequently raised upon further scrutiny of

the return. This is correct. However, it is

not unfair to have the Government assume the

1 However, the Court should compare

Government Counsel's additional, and

apparently inconsistent remarks, as follows

(R.T., page 24, lines 1-6):

MS. WHATLEY:

Your Honor, it is quite

possible that upon

examining the returns in

question, the Service

could conclude that it

was a no change

situation. It is quite

possible that, upon an

examination, the Service

could determine that

there are other items on

the return that would

entitle the taxpayer to a

refund.

o2%e

burden of proof if, as between the taxpayers

and the Internal Revenue Service, the latter

implemented a procedure which allowed

taxpayers an opportunity for judicial review

of the Government's action, and the

Government during that judicial proceeding

added new issues. The Tax Court's Rules of

Practice and Procedure, Rule 142(a) provides

for this situation as follows:

* * *

(a) General: The

burden of proof shall be

upon the petitioner,

except as otherwise

provided by statute or

determined by the Court;

and except that, in

respect of any new

matter, increases in

deficiency, and

affirmative defenses,

pleaded in their answer,

it shall be upon the

respondent. As to

affirmative defenses, see

Rule 39.

* * *

-24-

Second, Government Counsel argues that

if the Court determines the notification

letters to be notices of deficiency, then

others who received such notices without

petitioning the Tax Court will be subjected

to collection actions. This is not correct.

The Internal Revenue Service can issue

additional notices of deficiency, which are

not duplicative, for a particular tax year up

to the time the statute of limitations

expires for that year. (26 U.S.C. Sections

-25-

6501 and 6212(c)(1). 2 Cf. Barth Foundation

ee. ‘SsGe 1008, 1012-13 (1981). In the

circumstance at bar, the 1983 income tax year

statute of limitations for assessment would,

for individuals, nat expire at the earliest

until April 15, 1987 (26 U.S.C. Sections

6072(a), 6501 (a) and (b) (1) and for

corporations not until March 15, 1987 (26

U.S.C. Sections 6072(b), 6501(a) and (b) (1).

Third, a determination that notices of

deficiency were in facts issued does not

2 Note Section 6212(c)(1) prohibits

additional notices of deficiency for a given

income tax year, if a notice has been sent

and the taxpayer files a timely petition in

the Tax Court. The PFN creates a "catch 22"

situation if the IRS succeeds in its

position. Under the IRS approach a PFN is

not a notice of deficiency, but it is IRS

will attempt collection as to taxpayers who

did not timely petition the Tax Court. The

IRS, apparently, is not considering the more

fair procedure of issuing a timely

traditional notice of deficiency prior to the

expiration of the statute of limitations for

assessment.

~y =

conflict with the holding in Estate of

Adamczyk, T. C. Memo 1981-259, 41 T.C.M. 1596

(1981). The letters herein are not akin to

"30 day letters," which Appellants agree do

not constitute notices of deficiency. There

is a significant due process distinction

between the so called "30 day letters' and

the PFN herein. The reason the PFN is

different from a "30 day letter" is that a

"30 day letters" gives a taxpayer an

opportunity administratively to protest the

IRS adjustments, after having proceeded

through a revenue agent's examination,

presenting evidence and argument as to items

scrutinized by the revenue agent during the

examination. Further, the "30 day letter" is

a product of the net proposed adjustment

after the give and take of a revenue agent

examination of the mertis. By way of

contrast, the PFN is a gross determination,

-27-

without the taxpayers first having 9 an

opportunity to present evidence to the IRS at

the individual level. Instead, the PFN, as

in fact utilized by the IRS herein, has

determined on its own that the particular tax

benefit is disallowed. Thereafter, the

determination made is used as a basis, ina

substantive manner, to impose penalties or

withhold refunds, without first permitting

the taxpayers administrative or judicial

review. This procedure smacks of

unfairness, as it is simply without due

process, repugnant to the guarantees provided

by 26 U.S.C. Section 6213(a), which states

inter alia:

* * *

- « « Except as otherwise

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, 44, or 45 and

-28-

no levy or proceeding in

court for its collection

shall be made, begun, or

prosecuted until such

notice has been mailed

to the taxpayers, not

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

provisions of section

7421(a), the making of

such assessment or the

becinning of such

preceeding or levy during

the time such prohibition

is in force may be

enjoined by a proceeding

in the proper court.

* a «

It is noteworthy at least one refund has been

withheld pursuant to the PFN without the

taxpayers first having an opportunity to be

heard, solely on the basis that a PFN had

-29=-

been issued. 3 The conduct of the Internal

Revenue Service in issuing the PFNs at bar

demonstrates clearly that the notices are

utilized by the Service, unlike the

classical, i.e., "90 day letters," to deprive

taxpayers of concurrent administrative review

as well as the actual taking of property, to

wit: refusal to pay refunds based solely on

the issuance of PFNs. It is submitted that

this IRS course of conduct is unfair and

denies taxpayers due process of the law.

The Internal Revenue Service by the

procedures, articulated in Rev. Proc. 83-78,

supra, and Rev. Proc. 84-84, supra, is

attempting to vitiate Appellants' legal and

3 The essence of this action clearly

demonstrates that the PFN is in fact being

used in a substantive manner as a "notice of

deficiency," outside the established

statutory procedure of 26 U.S.C. Section 6212

and 6213, enacted by Congress to protect

taxpayer rights.

-30-

administrative rights, without affording due

process to permit judicial review of its

action by the Tax Court. The essence of the

Government's position is that for judicial

review purposes the PFNs are not notices of

deficiency or "tickets of admission" to the

Tax Court, but for collection of the

additional revenue it alone believes due, the

IRS considers PFNs as "notices of

deficiency."

APPELLEE IS ARGUING FORM vs. SUBSTANCE WITH

RESPECT TO WHETHER THE NOTIFICATION LETTERS

CONSTITUTE NOTICES OF DEFICIENCY

The Supreme Court has, in many cases,

utilized the “form vs. substance" doctrine in

determining whether a particular situation or

transaction is proper and valid under the tax

laws. Gregory v. Helvering, 293 U.S. 465

(1935); Commissioner of Internal Revenue v.

Court Holding Company, 324 U.S. 331 (1945);

United States v. Cumberland Public Service

-3l-

Company, 338 U.S. 451 (1950). Basically,

this doctrine looks behind the form of the

transaction to determine whether its actual

substance, and not the apparent form, is in

accordance with the tax laws. By analogy,

this doctrine can be applied to the situation

at bar. The "form" of the PFN letters is not

the form that a notice of deficiency usually

takes, but the substantive impact is the

same. Counsel for the Internal Revenue

Service argues (R.T., pages 4-5) that said

notification does not contain the requisite

elements to be "notice of deficiency."

However, the notification letters set forth

the following:

l. Taxpayer,

2. Year; and

3 Adjustment.

All that remains is a simple mathematical

calculation to determine the dollar amount of

-32-

the deficiency. The notification letters

clearly states, inter alia:

We plan to review your

return to determine

whether you claimed such

deductions and/or

credits. If you did so,

we will examine your

return and reduce the

portion of any refund due

to you which is

attributable to the tax

shelter promotion.

(Emphasis supplied.)

In substance, the notices which contains

the above statement, effectively disallows

Appellants' deduction relative to the Liberty

Financial investment. The amounts can be

clearly determined upon a brief analysis of

the individuals' tax return, who have

received the PFN, after such PFN letters are

not in the classical form a notice of

deficiency traditionally takes, st, in

substance, does qualify as a notice of

deficiency, since it contains the judicially

recognized elements necessary for such a

-33-

notice of deficiency as contemplated by 26

U.S.C. Sections 6212 and 6213:

Neither section

6212(a), which authorizes

the sending of the notice

of deficiency, nor any

other section of the

Internal Revenue Code

prescribes the form of a

notice of specifies the

contents or information

required to be included

therein. Jarvis v.

Commissioner, 78 T.C.

646, 655-656 (1982). The

Treasury regulations are

also silent. See, e.g.,

Sec. 301.6212-1, Proced.

& Admin. Regs. All that

we have required is that

the notice fulfill its

purpose of providing

formal notification that

a deficiency in tax has

been determined. Pietz

v. Commissioner, 59 T.C.

207, 213-214 (1972);

Mayerson v. Commissioner,

47 T.C. 340, 349 (1966);

Standard Oil Co. v.

Commissioner, 43 B.T.A.

973, 998 (1941), affd.

129 F.2d 363 (7th Cir.

1941). Accord Olsen v.

Helvering, 88 F.2d 650,

651 (2d Cir. 1937).

-34-

In Jarvis v. Commissioner, 78 T.C. 646,

655-656 (1982) which is cited in the

Government's Motion to Dismiss, the Tax Court

was called upon to determine the sufficiency

of the "notices of deficiency." The Court

analyzed the facts and articulated its

position as follows:

* * *

The principal

contention raised in the

petition is that the

notice of deficiency is

"defective and

unenforceable cause the

Respondent does not cite

which statutory law the

Petitioner violated."

The Internal Revenue Code

of 1954 in neither

section 6212(a) nor

elsewhere prescribes the

form of a notice or the

specifics to be contained

therein. Mayerson v.

Commissioner, 47 T.C.

340, 348 (1966); Estate

of Eversole v.

Commissioner, 39 T.C.

1113, 1119-1120 (1963);

Barnes v. Commissioner,

-35-

408 F.2d 65, 68 (7th Cir.

1969), affg. Barnes

Theatre Ticket Service,

Inc. v. Commissioner, a

Memorandum Opinion of

this Court. The notice

of deficiency herein

involved was sufficient

to fairly advise

petitioner that

deficiencies in income

taxes and additions to

the tax had been

determined and the years

and amounts thereof. See

Olsen v. Helvering, 88

F.2d 650, 651 (2d Cir.

1937), where the court

cogently stated, "the

notice is only to advise

the person who is to pay

the deficiency that the

Commissioner means to

assess him; anything that

does this unequivocally

is good enough." Thus,

the Commissioner was not

required to cite the

statutory law which

petitioner had violated.

The notice is not invalid

and does not deprive

petitioner of due process

of law and equal

protection of the law 16

or violate the Fifth

Amendment.17 (Footnotes

omitted) (Emphasis

supplied)

-36-

Here the notification letters do in fact

advise the taxpayers that the Internal

Revenue Service means to assess a _ tax,

inasmuch as it states that any refund due

pursuant to a deduction claimed with respect

to the Liberty Financial investment will be

reduced by such amount. The Internal Revenue

Service has also unequivocally demonstrated

its actual position, and true intent, by

withholding the 1984 refund of one of the

taxpayers-co-petitioners, based solely on

receipt of the PFN letter, without first

granting such taxpayer the opportunity to

have the IRS assertion administratively or

judicially reviewed. Thus, the Government's

position at bar contemplates no

administrative or judicial review, but is

summary unilateral action. This new

procedure denies due process.

-37-

Similarly, in Foster v. Commissioner,

supra at 229-230, the petitioners argued that

the notice of deficiency was invalid because

it failed to specify the corporate and

partnership expenses which were being

disallowed. The Tax Court stated that all

the notices is required to do is: oh

fairly advise the taxpayers that the

Commissioner has, in fact, determined a

deficiency and (2) specify the year and

amount." Taxpayers further submits that the

notification herein meet these requirements,

for all that remains to determine the precise

dollar amount of the deficiency is a simple

mathematical calculation.

In addition, taxpayers submit that in

"substance," the notification letters contain

the same required information and has the

same effect as "traditional" notices of

deficiency, for it is clear that no

-38-

particular form is required for a notices of

deficiency. Consequently, as a matter of

substance in the context of protecting

taxpayers' due process rights as provided by

26 U.S.C. Section 6213(a), the "post-filing

notification" letters at bar contain all the

necessary elements of notices of deficiency

granting taxpayers the right to have the IRS

assertions presently judicially reviewed.

Further indication that such notices are

equivalent to notices of deficiency is the

Commissioner's act of withholding taxpayers’

subsequent year's tax refund based solely on

such notices. Consequently, the doctrine of

substance versus form, when applied in the

due process context, dictates that this Court

determine that notwithstanding the new forn,

the notification letter at bar is in

substance notices of deficiency as

contemplated by 26 U.S.C. Sections 6212 and

-39-

6213. Given this view, taxpayers would be

assured of their due process rights, since

the Tax Court would have jurisdiction of

their 1983 income tax deficiency case. (26

U.S.C. Section 6213(a).)

NEW PENALTY PROVISIONS ASSERTED IN NOTICES

OF DEFICIENCY DO NOT ASSERT EXACT AMOUNTS

The Internal Revenue Service would like

to have it both ways. On the one hand, the

Service contends that the notification

letters do not qualify as notices of

deficiency as they do not assert a deficiency

or specify the amount of tax due. On the

other hand, the IRS is also presently

asserting penalties, for example, in

deficiency notices pursuant to Sections

6621(d) and 6653(a)(2) (26 U.S.C.) without

specifying the amount(s) cf the penalties and

simply stating that the penalties asserted

are in "amounts to be determined." As to

these notices, the IRS has- not_ been

-40-

contending any legal infirmity as a notice of

deficiency for each of taxpayers-appellants

based on the disallowance of their 1983

deduction relative to their Liberty Financial

investment as it is for the IRS to calculate

the amounts of the penalties, such as the one

determined in Sections 6621(d) and

6653(a) (2), by way of example.

Obviously, such amounts -cannot_ be

calculated until it is determined (1) that

such penalties are applicable, (2) the amount

of each adjustment, and (3) the total amount

of tax due. These simple mathematical

calculations are made either when the case is

settled with the Appeals Office of Appellees'

Internal Revenue Service or by judicial

decision. Thus, if the Government's theory

as to why the PFN at bar are not notices of

deficiency are applied to notices of

deficiency actually being issued in the

-4l1-

classical form with such penalties being part

of the notices, those notices would also not

be notices of deficiency as contemplated by

26 U.S.C. Sections 6212 and 6213. The

Government is making no such argument in the

non PFN notice situations.

APPELLANTS ARE ENTITLED TO DUE PROCESS OF THE

LAWS AND JUDICIAL DETERMINATION OF THE

NOTIFICATIONS RECEIVED WITH RESPECT TO THEIR

1983 TAXABLE YEARS

By issuing the post-filing notification

letters, but denying that such notices

constitute notices of deficiency within the

contemplation of Section 6213(a), from which

a taxpayer may seek immediate judicial review

in the Tax Court, such procedure denies

taxpayers due process. This procedure, if

allowed to stand, is therefore violative of

the guarantees provided by the United States

Constitution in Amendments 5 and 14.

Appellee in essence argues that the

notification letters were intended as other

=%2=

than notices of deficiency. This is contrary

to the evidence. One of the taxpayers-

petitioners received a notice from the IRS

advising him that their 1984 refund was being

withheld because he "should have received a

pre-filing notification letter regarding the

Liberty Financial Services." His refund is

not being frozen or placed in suspense, it

actually has been taken (denied) pursuant to

Rev. Proc. 84-84, supra, solely on the basis

of issuance of a PFN.

The Government is attempting to create a

no-win situation for taxpayers. If the

letter is a "pre-filing" notification,

taxpayers would more than likely be chilled

from claiming the subject deduction. In

fact, counsel for the Internai Revenue

Service indicated at the oral hearing that

the Internal Revenue manual states that one

of the purposes of the letter is to

-43-

"encourage investors to file a correct

return" (R.T., page 3, lines 21-24). 4 The

consequence is that if no deduction is

Claimed, then no administrative or judicial

redress is afforded the taxpayers, since the

IRS will deem such a return is correct and no

examination is necessary. Consequently, the

IRS has achieved by this procedure what it

could not otherwise achieve if it had used

traditional procedures, as contemplated by 26

U.S.C. Section 6213(a). In the traditional

situation, the IRS would have first examined

the return, permitting the taxpayers

administrative review and then issued a

classical form notice of deficiency

permitting the taxpayers to petition the Tax

Court. The Government argues that “post-

4 Apparently, a "correct return" as

determined by the Internal Revenue Service is

one where no deduction for the Liberty

Financial Investment is claimed.

-44=-

filing notification" does not permit

taxpayers immediate right of judicial review.

Rather, in the Internal Revenue Service's

version of due _ process, taxpayers can

challenge its actions sometime in the future,

when it resumes adhering to the usual

procedures. In the meantime, under the new

procedures provided by Rev. Proc. 83-78,

supra, and Rev. Proc. 84-84, supra,

taxpayers' due process is suspended and not

operative since the PFN is not considered as

a notice of deficiency because the IRS did

not intend that result. The actual net

result, however, is a subjugation of

taxpayers' rights and a disregard of fair

play and due process.

THE GOVERNMENT MAY BE SUBJECT TO DAMAGES AS

IN THE CASE OF MID-SOUTH MUSIC CORPORATION V.

UNITED STATES OF AMERICA

This case is particularly important in

light of the case of Mid-South Music

—hatepuiilll

-45-

Corporation v. United States of America,

___F. Supp.__, 56 AFTR 2d 85-6250 (USDC,

M.D. Tenn. 1985) on remand from C.A. 6, 756

F.2d 23 (1984). In said case, Mid-South was

awarded general damages of $174,000.00 and

punitive damages of $1,000.00 from the United

States of America. In Mid-South, as in the

case at bar, the Government issued pre-filing

notification letters prior to a

determination, as a matter of law, that Mid-

South was an abusive shelter.

The District Court, upon remand from the

Sixth Circuit, awarded the plaintiff

compensatory damages in the amount of

$174,000.00 and punitive damages in the

amount of $1,000.00 for disclosure of

plaintiff's tax return information in pre-

filing notification letters (PFNS) issued to

customers of the plaintiff-taxpayers,

pursuant to the authority of 26 U.S.C.

Section 7431.

-46-

The history of the case is as follows.

Initially, Mid-South brought suit in

District Court against the United States and

various officials of the Internal Revenue

Service, claiming (1) deprivation of due

process of law pursuant to the Fifth

Amendment of the Constitution, and (2) that

the IRS violated the non-disclosure

provisions of Internal Revenue Code Section

6103(a). As in the case at bar, the IRS had

issued PFN's to Mid-South's clients prior to:

(1) determining that Mid-South was-= an

"abusive" tax shelter, (2) determining

promoter penalties pursuant to Section 6700,

or (3) initiating injunction proceedings

against Mid-South pursuant to Section 7408.

In its initial opinion, found at 579 F.

Supp. 481 (1983), the District Court held

that Mid-South had no valid constitutional

claim against the IRS agents for their

al

-47=-

failure to follow mandate, procedures as set

forth in the Internal Revenue Code. 5 The

Court was of the view that nothing precluded

the Service from issuing the PFNs rather than

utilizing the injunction procedure. The

Court further held that plaintiff was

foreclosed from suing the individual agents

of the United States' Internal Revenue

Service, as the only proper entity to sue was

the United States. Finally, the Court held,

as a matter of law, that the PFNs did not

disclose return information of the plaintiff,

or otherwise indicate whether plaintiff's

return was the subject of examination or

5 However, footnote 4 of its opinion

states:

"The Court expresses no opinion as

to whether any failure of the IRS

to have followed any prescribed

statutory procedures would have

amounted to a deprivation of the of

the plaintiff's right to due

process of law under the Fifth

Amendment of the Constitution."

-48-

investigation.

Taxpayer appealed this decision to the

Court of Appeals for the Sixth Circuit. See

Mid-South Music Corporation v. Kolak, et al.,

756 F.2d 23 (6th Cir., 1984). That Appellate

Court upheld the District Court decision

insofar as it held that Mid-South had no

Fifth Amendment property interest and that

the United States was the proper party-

defendant. However, it remanded to the

District Court the issue of whether issuance

of the PFNs violated the non-disclosure

provisions of Internal Revenue Code Section

6103(a). The Appellate Court held that Mid-

South's allegations that the PFNs revealed

its identity as a taxpayer and that it was

under IRS investigation, stated a colorable

claim.

Thereafter, the Government, initiated an

action for an injunction against Mid-South

-49-

and its president, pursuant to Section 7408

and sought promoter penalties pursuant to

Section 6700. See United States v. Mid-South

Music Corporation, et al., F.

Supp. , 56 AFTR 2d 85-6002 (USDC M.D.

Tenn. 1985) The District Court determined

that Mid-South and its president had made

gross valuation overstatements of its master

sound recordings and enjoined Mid-South and

its president from further engaging in

conduct subject to penalties pursuant to

Sections 6700 and 7408. The impact of this

determination is that it was not until 1985,

some two years after the PFNS had been

issued, not it was determined as a matter of

law that Mid-South Music Corporation promoted

an “abusive tax shelter," as contemplated by

26 U.S.C. Sections 6700 and 7408.

In the fourth proceeding of the case

concerning Mid-South, found at F.

-50—

Supp. , 56 AFTR 2d 85-6250 (USDC, M.D.

Tenn., 1985), upon remand from the Sixth

Circuit, the District Court held that the

Government had in fact violated the non-

disclosure provisions of Section 6103(a) vis

a vis issuance of the PFNs prior to a

judicial determination that Mid-South was a

so-called "abusive tax shelter." The

District Court stated in its Findings of

Fact, paragraph 13, inter alia:

",..personnel of the Internal

Revenue Service acted in bad

faith in sending such letter for

the intended purpose of

destroying the tax shelter

promotion of Mid-South before its

abusiveness was established as a

matter of law."

The language and effect of the PFNs

issued to the clients of Mid-South and those

issued to Appellants herein are nearly

identical. Further, the PFNs here were

issued in the same manner, i.e., before a

atl

ae

determination had been made as a matter of

law as to whether Liberty Financial violated

Section 6700, or any other provision of the

Internal Revenue Laws, in any manner.

Indeed, the | harshness of the

Government's course of conduct against the

Appellant-Taxpayer is revealed by the fact

that to date there has been no formal

determination as a matter of law that Liberty

Financial is an “abusive tax shelter" within

the contemplation of 26 U.S.C. Sections 6700

and 7408. Notwithstanding this lack of

determination, as a matter of law, that

Liberty Financial is an "abusive tax

shelter," the IRS unilaterally initiated the

issuance of the PFNs at bar purporting to

Gisallow deductions, tax refunds and other

benefits, without the benefit of judicial

review.

CONCLUSION

-52-

For the foregoing reasons, this petition

should be granted and a writ of certiorari

should be issued to review the decisions

below.

Respectfully Submitted,

MARTIN A. SCHAINBAUM

A Professional Law Corporation

Martin A. Schainbaum

Kathleen A. Miller

One Market Plaza

Steuart Street Tower, Suite 2310

San Francisco, Ca 94105

(415) 777-1040

JAMES E. RITCHIE

One Market Plaza

Steuart Street Tower, Suite 2310

San Francisco, CA 94105

(415) 777-1040

Attorneys for Petitioners

a ey

-53-

CERTIFICATE OF SERVICE

This is to certify that three (3) copies

of: PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE EIGHTH

CIRCUIT were served by mail, on the |ith day

August 1986,

in an envelope with postage

prepaid, to Counsel for Respondent-Appellee,

as follows:

and

Michael L. Paup, Esq.

Richard Farber, Esq.

Gary D. Gray, Esq.

Tax Division

U. S. Dept. of Justice

Washington, D.C. 20530

Solicitor General

U. S. Department of Justice

Washington, D.C. 20530

Lo»

CATHEY E. YLOR

APPENDIX

Rab:

sence

“1?

‘

Se ee

-la-

84 T. C. No. 71

UNITED STATES TAX COURT

RICHARD L. ABRAMS, ET AL.,+ Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2645-85 Filed June 17, 1985.

A pre-filing notification letter was

sent by a district director for respondent to

each taxpayer who had invested in a certain

tax shelter. The letter stated that the

taxpayer's return would be reviewed and any

deductions taken in regard to the shelter

would be disallowed, with consideration given

1 There are 110 additional petitioners

listed in the caption of the consolidated

petition filed in this case.

-2a-

to the determination of appropriate

"penalties". The taxpayers filed a

consolidated petition with this Court on the

ground that the pre-filing notification

letter constitutes a notice of deficiency.

Respondent filed a motion to dismiss for lack

of jurisdiction. Held, the pre-filing

notification letter is not a notice of

deficiency within the meaning of secs.

6212(a) and 6213(a), I.R.C. 1954. Therefore,

this Court lacks jurisdiction. Respondent's

motion will be granted.

Martin A. Schainbaum and Kathleen A.

Miller, for the petitioners.

Kathleen E. Whatley and Elizabeth I.

Abreu, for the respondent.

OPINION

DAWSON, Judge: This case is before the

Court on respondent's Motion to Dismiss for

Lack of Jurisdiction filed on April 4, 1985.

See. rl d

-3a-

Without a hearing an order was entered on

April 12, 1985, granting respondent's motion.

This order was vacated and set aside on April

16, 1985, and a hearing on the motion was

held on May 22, 1985, at the Motions Session

in Washington, D.C. The parties filed

memoranda of points and authorities. After

considering the memoranda and the arguments

made by the parties at the hearing, the Court

took respondent's motion under advisement.

On November 2, 1984, the District

Director of the Laguna Niguel District sent a

letter to each of the petitioners herein

which provided, in pertinent parts, as

follows:

Re: Liberty Financial 1983 Government

Securities Trading Strategy

Dear Taxpayer:

Our information indicates that you

invested in the above tax shelter during the

-4a-

above tax year. Based upon our review of

that promotion, we believe that the purported

tax deductions and/or credits are not

allowable.

We plan to review your return to

determine whether you claimed such deductions

and/or credits. If you did so, we will

examine your return and reduce the portion of

any refund due to you which is attributable

to the above tax shelter promotion. If an

examination results in adjustments to your

return, you will be afforded the opportunity

to exercise your appeal rights. The Internal

Revenue Code provides, in appropriate cases,

for the application of the negligence penalty

under section 6653(a), the overvaluation

penalty under section 6659 and/or the

substantial understatement of income tax

penalty under section 6661 of the Internal

Revenue Code and other appropriate penalties.

«Sie

Our examination will determine whether these

penalties are appropriate. See the back of

this letter for an explanation of these

penalties.

If you claimed deductions and/or credits

on a return already filed, you may wish to

file an amended tax return.

The letter was signed by the District

Director.

In response to such letters, petitioners

on January 28, 1985, filed a consolidated

petition in this Court. They contend that

the letters are notices of deficiencies

because the language indicates that any

daauctions taken with respect to Liberty

Financial Government Securities Trading

Strategy would be disallowed. As support for

their contention, petitioners argue that all

respondent needs to do is make a mathematical

-~6a~-

computation. Hence, they assert that the

prerequisites for invoking the jurisdiction

of this Court were satisfied when they filed

a timely petition in this case?

Respondent explains that the

issuance of pre-filing notification

(PFN) letters is a practice begun by the

Internal Revenue Service to combat the

increasing number of abusive tax

shelters. See Rev. Proc. 83-78, sec.

6.02 1983-2 C.B. 595, 597; and Rev.

Proc. 84-84, sec. 3.01 I.R.B. 1984-52,

77, 78. He contends that the PFN letter

sent to each of the petitioners is not a

notice of deficiency because the letter

does not set forth an amount of tax due

2 Petitioners have presented other

arguments that we have not addressed because

we view them as tangential to the ‘crucial

issue of whether the letters they received

are notices of deficiencies.

-7a-

or make a final determination, citing

Foster v. Commissioner, 0 T.C. 34, 229-

230 (1983), affd. on this issue 756 F.2d

1430 (9th Cir. 1985), and Scar v.

Commissioner, 81 T.C. 855, 860-861

(1983). He argues that the letter does

not purport, nor was it intended, to be

a notice of deficiency.

Section 6212(a)3 authorizes the

issuance of a notice of deficiency. No

particular form is required. Scar v.

Commissioner, supra at 860; Jarvis v.

3 Section 6212(a) provides as follows:

(a) IN GENERAL.--If the Secretary

determines that there is a deficiency in

respect of any tax imposed by subtitle A or B

or chapter 41, 42, 43, 44, or 45, he is

authorized to send notice of such deficiency

to the taxpayer by certified mail or

registered mail.

All section references are to the

Internal Revenue Code of 1954, as amended,

unless otherwise indicated.

-8a-

Commissioner, 78 T.C. 646, 655-656

(1982). However, the notice must

fulfill the purpose of providing formal

notification that a deficiency in tax

has been determined. oster v.

ommissioner, supra at 229. The notice

is “only to advise the person who is to

pay the deficiency that the Commissioner

means to assess him; anything that does

this unequivocally is good enough."

Olsen v. Helvering, 88 F.2d 650, 651 (2d

Cir. 1937) (emphasis added). The notice

must (1) advise the taxpayer that the

Commissioner has, in fact, determined a

deficiency and (2) specify the year and

the amount of the deficiency. Foster v.

Commissioner, supra at 2229-230.

The PFN letters do not satisfy

these requirements. They do not rise to

the level of notices of deficiencies.

-9a-

They do not state that they are notices

of deficiencies. They do not state that

a determination has been made.4 They

do not specify an amount. The language

of the letters is tentative. It says

that respondent plans to examine

petitioners' returns in the event

petitioners claim the specified

deductions. And, as respondent has

pointed out, the letters were not

4 See Terminal Wine Co. v. Commissioner,

1 B.T.A. 697, 701 (1925), where it was

stated:

The determination from which a

taxpayer may appeal is one which fixes

the amount of deficiency in tax. It is

the final decision by which the

controversy as to the deficiency is

settled and terminated, and by which a

final conclusion is reached relative

thereto and the extent and a measure of

the deficiency defined.

-108-

intended > to be notices of

deficiencies. See Leher v.

Commissioner, 52 T.C. 358, 363-365

(1969).

We do not agree with petitioners

that all that remains for respondent to

do is to make a mathematical

5 Petitioners argue that our opinion in

Scar v. Commissioner, 18 T.C. 855 (1983),

requires that the letters in this case be

treated as notices of deficiencies. In Scar

the taxpayer received a letter that was

intended by the Commissioner to be a notice

of deficiency. The letter stated clearly

that it was a notice of deficiency and that

determination had been made. The letter also

provided an amount. The issue in Scar

involved whether the notice was valid because

of the errors contained in it. We held that

the notice was valid because it was proper in

form although it contained substantive

errors. In contrast, the letters received by

petitioners here were not intended by

respondent to be notices of deficiencies. In

addition, as stated previously, the letters

did not purport to be notices of deficiencies

and they did not state that a determination

had been made or provide an amount. We think

our Scar opinion provides no support for

petitioners' position in this case.

-lia-

calculation. Subsequent to the issuance

of the PFN letters, respondent may

decide that other adjustments should be

made to petitioners' returns and may

even decide that petitioners are

entitled to overpayments; or respondent

may decide upon audit of the returns

that no adjustments should be made. The

bottom line is that respondent has not

yet examined petitioners' returns and

has not made any determination.

This case is not controlled by

Laing v. United States, 423 U.S. 161

(1976). The Supreme Court held in Laing

that taxpayers who are subject to a

termination assessment must receive a

notice of deficiency. It said that a

taxpayer should be afforded access to

the courts when the termination occurred

because substantial rights were

-l2a-

affected. Under section 6851, as it

existed for the years covered by Laing,

when a termination occurs, the

taxpayer's taxable year is closed and

the tax is due immediately. In sharp

contrast, PFN letters have no immediate

effect upon the substantial rights of

petitioners except to warn them of the

possible disallowance of deductions and

to encourage them to reevaluate the

propriety of any deductions they may

clain.

In Estate o c Vv.

Commissioner, T.C. Memo. 1981-259, the

taxpayers received a "30-day letter"

which informed them of adjustments to

their tax return. They were given the

opportunity to agree to the adjustments,

to provide aaditional information, or to

request a conference. They were also

-l13a-

informed that if they did not respond

within 30 days, a notice of deficiency

would be issued. This Court concluded

that a 30-day letter merely proposes

adjustments and is therefore not a

notice of deficiency because it is not a

final determination. PFN letters do

not even rise to the level of a 30-day

letter. They certainly do not

constitute notices of deficiencies.

Accordingly, we hold that the pre-

-l4a-

filing notification letters® in this

case are not notices of deficiencies, ’”

which are required by sections 6212(a)

and 6213(a) as prerequisites to this

Court's jurisdiction. Therefore, we

6 PFN letters were recently discussed in

Mid-South Music Corp. v. U.S. Dept. of the

Treasury, 579 F. Supp. 481 (M.D. Tenn. 1983).

In that case the taxpayer sued the Government

and the District Director for civil damages.

The taxpayer alleged that the issuance of a

PFN letter was not procedurally correct and

therefore deprived him of due process. It

also alleged that the issuance of the letter

violated the nondisclosure provisions of

section 6103(a). The District Court granted

the government's motion to dismiss, stating

that it was unaware of any provision in the

Internal Kevenue Code that precluded the

issuance of PFN letters, and that the letters

were a reasonable method utilized by the

Secretary as part of his broad latitude to

collect taxes.

7 To hold otherwise would open the

floodgates for almost any communication

between the Internal Revenue Service and a

taxpayer to be treated as a notice of

deficiency. With regard to PFN letters

alone, as of April 30, 1985, approximately

22,629 have been issued by the Internal

Revenue Service.

-15a-

will grant respondent's motion to

dismiss for lack of jurisdiction.

An_ appropriate order

wil: d.

-l6a-

UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

No. 85-2133

W. M. Spector and

James M. Stokes,

Appellants, Appeal from the

United States Tax Court

Ve.

Commissioner of

Internal Revenue,

+e eee + + + +

Appellee.

Submitted: April 15, 1986

Filed: May 7, 1986

Before LAY, Chief Judge, McMILLIAN, Circuit

Judge, and HANSON,! Senior District Judge.

1 The Honorable William C. Hanson,

United States Senior District Judge for the

Northern and Southern Districts of Iowa,

sitting by designation.

PER CURIAM.

W.M. Spector and James Stokes appeal

from an order of the Umited States Tax Court

dismissing for lack of jurisdiction a

consolidated petition for determination of

purported deficiencies. We affirm.

On November 2, 1984, the Internal

Revenue Service (IRS) sent appellants a

letter notifying them of the IRS' belief that

any deductions or credits derived from

investments in a tax shelter known as the

"Liberty Financial 1983 Government Securities

Trading Strategy" would not be allowable.

The letter indicated that the IRS had not yet

reviewed appellants' tax returns to determine

whether appellants had claimed such

deductions or credits.

-18a-

Because the tax court is a court of

limited jurisdiction, Page v. Commissioner,

297 F. 2d 733, 734 (8th Cir. 1962) (per

curiam), the determination of a deficiency

and the issuance of a notice of deficiency is

an absolute precondition to tax court

jurisdiction. Laing v. United States, 423

U.S. 161, 165 n.4 (1976).

In this case, the tax court properly

dismissed the petition because the

notification letter was not a notice of

deficiency. We note that the Fourth Circuit

has recently rejected arguments identical to

appellants' arguments in the present case

that the letters constituted notices of

deficiencies raised by other taxpayers

appealing the consolidated tax court

petition. Eggleston v. Commissioner, No. 85-

1966 (4th Cir. Apr. 9, 1986). As the Fourth

Circuit noted:

a

-19a-

Converting a sow's ear into a

silk purse is acknowledgedly

difficult. Seeking to convert

into a notice of deficiency an

Internal Revenue Service

letter warning the petitioners

that an attempt to utilize,

for income tax purposes, a

specific "tax shelter" would

result in a redetermination

leading to an assessment of a

deficiency or a reduction or

elimination of a refund

amounts to an effort of equal

audacity and equal futility.

Eggleston v. Commissioner, slip op. at 3.

We have reviewed the record and find no

error. Accordingly, we affirm on the basis

of the tax court opinion. ee 8th Cir. R.

14.

A true copy.

ATTEST:

CLERK, U.S. COURT OF APPEALS,

EIGHTH CIRCUIT

-20a-

[To be published. ]