Petition for Writ of Certiorari — Donley v. Commissioner

Supreme Court, U.S,

FILED

86-292

= ‘yee

| AUG 25 1966

JOSEPH F. SPANIOL, JR,

i CLERK

No. (

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

STEVEN E. DONLEY,

. Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH 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

One Market Plaza

Steuart Street Tower, Suite 2310

San Francisco, CA 94105

(415) 777-1040

ATTORNEYS FOR PETITIONER

QUESTIONS PRESENTED

1.

tw

Whether the Tax Court committed

error as a matter of

law in granting Respondent-

Appelise's Motion to Dismiss for

Lack of* Jurisdiction.

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.

f-

TABLE OF CONTENTS

REPORTS OF OPINIONS....--ee-se0.

JURISDICTION... . cc cece vveccece

STATUTES INVOLVED.....-eeeeevees

STATEMENT OF THE CASE.......e--

ARGUMENT... cc cccccccvccsccevcens

THE TAX COURT COMMITTED

ERROR AS A MATTER OF LAW

BY GRANTING THE GOVERNMENT'S

MOTION TO DISMISS TAXPAYER'S

CONSCLIDATED PETITION FOR

LACK OF JURISDICTION........

THE IRS LETTERS, DATED

NOVEMBER 2, 1984, ARE

"POST-FILING" RATHER THAN

"PRE-FILING" NOTIFICATION

LETTERS... cccccccccccccccces

IRS REVENUE PROCEDURE 83-78,

1983-2 C.B. 595 (MODIFIED

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

C.B. TB2) ccccvccsescssesss

APPELLEE IS ARGUING FORM vs.

SUBSTANCE WITH RESPECT TO

WHETHER THE NOTIFICATION

LETTERS CONSTITUTE NOTICES

OE WP SCEENCE ccc cc cccccccecs 30

NEW PENALTY PROVISIONS

ASSERTED IN NOTICEDS OF

DEFICIENCY DO NOT ASSERT

Bee MPPOUNAB ewe ccccccsesces 39

APPELLANT IS ENTITLED TO

DUE PROCESS OF THE LAWS AND

JUDICIAL DETERMINATION OF THE

NOTIFICATIONS RECEIVED WITH

RESPECT TO THEIR 1983

py 8 es ag 2 | 41

THE GOVERNMENT MAY BE SUBJECT

TO DAMAGES AS IN THE CASE OF

MID-SOUTH MUSIC CORPORATION v.

UNITED STATES OF AMERICA.... so

PUPS Se 6 bb Sc reccresecceces 52

iii

TABLE OF CITATIONS

Barth Foundation,

BOLZ@LS (LEOEL) cccocvsevsecesvens

Barnes v.

1385, 1385S

Commissioner,

(9th Cir.

644 F.2d

1981)...

Barnes Theatre Ticket, v.

NN ee ee eae ee ee eee

Commissioner v. Forest Glen

Creamery Co., 98 F.2d 968,

re 42ee Cale JOG) wc chncewdeons

Commissioner of Internal Revenue

v. Court Holding Company, 324

Mo@e 2am CAPES) occ sbeebs svsnvecinc

Commissioner v. Stewart, 186

FueG 239, 241 (608 Cir. 1981...

Corbett v. Frank,

502 (C.A. 9,

193 F.2d 501,

DaBoul v. Commissioner, 429 F.2d

i Ee ae oo eee

Estate of Adamczyk, T.C. Memo

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

iv

13,34

35

12

30

12

Cases

Estate of Eversole v.

Commissioner, 39 T.C.

PRG) 6-6 6-b 5 66 06 8) be 8 oes OS

Foster v. Commissioner,

24, 289794230 (1983) cvcssesces

Greenperag's Express,

Commissioner, 79 T.C.

ae? - Ces ba cows ecee tie

Gregory v. Helvering,

293 U.S.

BGS SamOe eee re cerca cs keees

Hannan v. Commissioner,

o2 T.C.

7B7 (L969) w-ccces te oo PRMD OO BS

Jarvis v. Commissioner,

646, 655-656 (1982).........

Jones v. Commissioner,

G62 7T.C.

(40 78) 60 40:0 cae p eee eh ees haces

Llorente v. Commissioner,

F.2G@ 352, 155, nn. 4,

(24 Cir. 29043.6 05604

Laing v. United States,

423 U.S.

AGL (ERTS 2 6 cco ves ereaesvscvnse

Page

34

a3,37

30

10,11

Cases Page

Mayerson v. Commissioner, 47 T.C.

340, 349 (1966) -cccvccccvcecceves sa,a4

Mid-South Music Corporation v.

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

Peet CAE.» SESE cece aststvaelons oe 48

Mid-South Music Corporation v.

United States, F. Supp. ;

56 AFTR 2d 85-6250

(USDC, M.D. Tenn., 1985) ..csesecs 44,45,

46

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

GSl 20 Cif. ASST) ce sckcvatsovenses + PP ee

Kh

Pietz v. Comnissioner, 59 T.C.,

207, 21392146 (ADT7SZ) cocsvcveccasss 33

Riland v. Commissioner, 79 T.C.

aD, 201 (IBGR) céaades eoesece ease 14

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

are ts eee rere re eee ee ot

pe

Standard Oil Co. v. Commissioner,

43°8.7.A. O73, O08 €3960ticiicaes S28 |

United States v. Cumberland

Public Service Company, 338 U.S.

ae | ge ee ee 360.33

vi

Cases

United States v. Mid-South

Music Corporation, et al.,

F. Supp. , 56 AFTR 2d

85-6002 (USDC M.D. Tenn. 1985)...

STATUTES AND REGULATIONS

Internal Revenue Code (26

Ve sal COI ee hee Kee aren eee see

Internal Revenue Code (26

eS er ar

Internal Revenue Code (26

Re PEA oi oc cans ivdeccccs

Internal Revenue Code (26

Weems) BORO Rebckereeherectesiss

Internal Revenue Code (26

ee ee ae ere

Internal Revenue Code (26

pee ee ae ere eee

Internal Revenue Code (26

Vie) BOREE Ce ke bie d leew seve ess

Vil

STATUTES AND REGULATIONS Page

Internal Revenue Code (26

U.S.C.) $6212 (8) eececccccccvcces >

a3, 22

13,34

Internal Revenue Code (26

RP ee tet aie ) errr rere 19

Internal Revenue Code (26

U.B.C.) §$6212(C) (1) ccc vccaccece 25

Internal Revenue Code (26 i

U.B.C.) FSZAD sc ceeccccccccscstvce 6,23,

he)

41

Internal Revenue Code (26

Pe es eee a eee 2.37;

38,39,

41

Internal Revenue Code (26

a ee) eee ee 19

Internal Revenue Code (26

U.S.C.) $6501... ccccves TerTTrT Ts 25

Internal Revenue Code (26

U.6.C.) §6501L(E) we ccccvecses coccee 25

Internal Revenue Code (26

U.8.C.) $6501 (BD) (1) ecevccscacsecs 25

vili

STATUTES AND REGULATIONS

Internal Revenue Code (26

Webeis) BOSSI) +6 6h sok ew oc bee es

Internal Revenue Code (26

Mec Os }: SOCRS TR) (a) oa es 6a Kees ess

Internal Revenue Code (26

Use.) PEGSI (HO) C2) wc cccccccsccs

Internal Revenue Code (26

VeBeluy BOSPOCH) vc ceesecescvcss

Internal Revenue Code (26

eave) eo Mie Kc ke ho ale ee dace dks

Internal Revenue Code (26

Vemutee) “See ba os 44s Oe 0 ee wee a 8s

Internal Revenue Code (26

ore Pe) eS ee eee

Internal Revenue Code (26

Cid Gries 8 5 6 656 be Ke eee

Internal Revenue Code (26

Was Ge) Bree tl 65 66 bese eee baw s

Internal Revenue Code (26

Use Gas OF 6 hd eee eae ee ee wwe ‘

1x

10,39,

20,36,

STATUTES AND REGULATIONS Page

Internal Revenue Code (26

U.S.C.) §7431 e*eeeee#s#*¢ eeeeeeee#eee#e#e#*# 45

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

sk 6 iw « oe 4 sw bres 18,20,

29,44

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

CURE 4 as OMe eed 0048 0A KO ee oe 18,29, ,

42,44

MISCELLANEOUS Page

5 Gg ER Gy er 8

RR Ge i 23

-, ~ : o ae k! GE > Se 23

Tax Reform Act of 1976. .cccccccs 10

x

aha

No.

In the

Supreme Court of the United States

October Term, 1986

Steven E. Donley,

Petitioner,

Vv.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

This is a case of first impression

involving a question of procedural due

process affecting the uniform administration

f the Internal Revenue laws. Petitioner

hereby respectfully prays a Writ of

Certiorari issue to review the decisions of

the United States Court of Appeals for the

:

~~

Fifth Circuit, which susv.*»ined the decision

of the United States Tax Court dismissing

Petitioner's Consolidated Petition.

PARTIES

The parties in this case are Petitioner-

Appellant:

STEVEN E. DONLEY

REPORT OF OPINION

The Judgment and Opinion of the Fifth

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 Fifth Circuit Court

of Appeals on June ll, 1986, Docket No. 85-

4663, Tax Court Docket No. 2645-85.

The jurisdiction of this Court is

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

STATUTES INVOLVED

The following statutes are involved in

this case:

26 6 -U.8.€. (Internal Revenue Code of

1954, as amended) §6212(a):

(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.

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

-4i-

the last day) the taxpayer 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 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.

<~Pepe ae

-5-

STATEMENT OF THE CASE

On November ay 1984, the Internal

Revenue Service issued "Post-Filing

Notification Letters" to the Taxpayer-

Appellant herein. Said notices advised that

with respect to Appellant's investment with

Liberty Financial in 1983, the Internal

Revenue Service believes "that the purported

tax ded'ctions and/or credits 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 notice, all that remains for the

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

to do is merely calculate the exact amount of

the deficiency for the taxpayer having

received the notices and who claimed the

deduction. In addition, the aforementioned

~

IRS notices indicate appropriate penalties

are to be imposed. The Service @id 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 the

taxpayer voluntarily amend their, her or its

own income tax return.

Appellant filed a Consolidated Petition

in the United States Tax Court on January 28,

1985 in response to said notice, 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 the taxpayer

receiving said notice to petition the United

States Tax Court for judicial review.

Thereafter, on April 4, 1985, Appellee

(Respondent-Commissioner of Internal Revenue

-J=

Service) filed a Motion to Dismiss

Appellant's Consolidated Petition for Lack of

Jurisdiction. The Appellee failed to

properly serve Appellant (taxpayer) or

Appellant's counsel with copies of said

motion. The Tax Court granted the

Government's motion on April 12, 1985 without

allowing the taxpayer 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 Appellant and

the Appellees filed his respective memoranda

of points and authorities with the Tax Court.

Thereafter, on May 22, 1985, the hearing was

held before Judge Dawson.

-8-

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 taxpayer's consolidated petition

for lack of jurisdiction was entered in the

Tax Court's records.

On June 18, 1985, taxpayer 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, Appellant

renewed his motion for reconsideration based

upon the receipt of a notice by one of the

111 co-Petitioner that said taxpayer's refund

for his 1984 income tax year was being

withheld solely due to the prior issuance of

-9=

the "pre-filing notification letter." The

Tax Court denied Appellant's renewal of his

motion for reconsideration on September 11,

1985.

ARGUMENT

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 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

Circumstances herein. In those cases no

notice was issued. Further, the situation in

Jones was subsequently overruled by the

-10—

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 taxpayer 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(a).

Thus, the notices at bar, while not in the

standard form for notices of deficiency, are

nevertheless in substance notices of

deficiency granting the Tax Court

2 an 8 A BER

ore

-ll-

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,8,¢: Section 621l(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 v.

Frank, 293 F.2d $012, S02 (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

addressed the issue of whether a writing

issued to the taxpayer stating that a

deficiency had been determined for his 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 required for a

statutory notice of deficiency.

Commissioner v. Forest Glen

Creamery Co., 98 F.2d 968, 971

(7th Cir. 1938); Jarvis v.

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.

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.

-13-

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.

Commissioner, 52 T.C. 787

(1969). The definition of a

"deficiency" co.cained in

section 6211(a) does not require

a different conclusion. As we

-14=-

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

accepted Petitioner's conten-

tions. See Greenberg's Express,

Inc. v. Commissioner, supra at

328. But cf. Llorente v.

Commissioner, 649 F.2d 152, 155,

-15-

n. 4, 157 (2a Cir. 1981),

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

notices 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.

Respondent issued the "post-filing"™

notification letters on November 2, 1984, a

-16-

date subsequent to the time Appellant's i983

tax returns were required to have been filed.

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

therefore clear that Appellee's Internal

Revenue Service had, by such notices,

determined that additional tax was due and

owing from the Appellant based upon his 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 taxpayer-

Petitioner. The Service made the

determination that said refund was being

withheld solely based on the prior issuance

-17-

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 Petitioner's

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 Appellant as "pre-filing"

notification letters; in fact, such letters

are "“post-filing" notification letters. The

distinction is dramatic inasmuch as the

deduction, relative to Appellant's 1983

investment with Liberty Financial, had

already been claimed on his tax returns when

said notices were mailed. The latest

-18-

possible valid extension of time to file the

1983 Form 1040 would have expired on October

4

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, 1i9 . &

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

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.

Furthermore, Revenue Procedure 84-84, 1984-2

C.B. 782, at Section 1.01 describes:

-19-

- . » 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

certain criteria with

emphasis on identifying

particularly abusive tax

shelter promotions. For

-20-

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.)

* * *

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

-2 l-

Government counsel proceeded to state

that the notification letters are merely

"advisory" inasmuch as it only alerts the

taxpayer that the Service will audit his

returns based upon his deduction with respect

to the "abusive shelter." Counsel

articulates three situations which she

perceives as consequences of a judicial

determination that the notification letters

constitute notices of deficiency. ze 6is

noteworthy that not one of the initial

alternative consequences contemplated by the

Internal Revenue Service, even « cer further

examination of the taxpayer's return,

results in ultimately allowing the

-22-

deduction.1

The three coametieasianin 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.

ieee

=290

burden of proof if, as between the taxpayer

and the Internal Revenue Service, the latter

implemented a procedure which allowed

taxpayer 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.

* * *

i

-24-

Sécond, 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

REE I me

-25-

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

47 B.Ce 1008, 1012-13 (1981). In the

circumstance at bar, the 1983 income tax year

statute of limitations for assessment would,

for individuals, not 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.

-26-

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 Appellant agrees 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

trrough 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 taxpayer first having 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 cwn 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 taxpayer 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

beginning of such

proceeding or levy during

the time such prohibition

is in force may be

enjoined by a proceeding

in the proper court.

* * *

It is noteworthy at least one refund has been

withheld pursuant to the PFN without the

taxpayer 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

classi¢al, i.e., "90 day letters," to deprive

taxpayer 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 taxpayer 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 Appellant's 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:

1. Taxpayer,

2. Year; and

: 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

Appellant's 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, (26: 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

¥.20. 660, 651 (2¢d 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 letter did in fact

advise the taxpayer 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 taxpayer-co-

Petitioner, 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 Petitioner 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: ag ©

fairly advise the taxpayer that the

Commissioner has, in fact, determined a

deficiency and (2) specify the year and

amount."' Taxpayer 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, taxpayer submits that in

"substance," the notification letters contain

the same required information and has the

same effect as "traditional" notices of

deficiency, for pK 2 is clear that no

-38-

particular form is required for a notice of

deficiency. Consequently, as a matter of

substance in the context of protecting

taxpayer's 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 ef notices of deficiency

granting taxpayer 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 taxpayer's

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, taxpayer would he

assured of his due process rights, since the

Tax Court would have jurisdiction of his 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) of the penalties and

simply stating that the penalties asserted

are in “amounts to be determined." As to

these notices, the IRS has not been

=46-

contending any legal infirmity as a notice of

deficiency for taxpayer-appellant based on

the disallowance of his 1983 deduction

relative to his 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

agi

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.

APPELLANT IS ENTITLED TO DUE PROCESS OF THE

LAWS AND JUDICIAL DETERMINATION OF THE

NOTIF.CATIONS 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

taxpayer 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

-42<

than notices of deficiency. This is contrary

to the evidence. One of the taxpayer-

Petitioner received a notice from the IRS

advising him that his 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 taxpayer. If the letter

is a "pre-filing" notification, taxpayer

would more than likely be chilled from

claiming the subject deduction. in fact,

counsel for the Internal Revenue Service

indicated at the oral hearing that the

Internal Revenue manual states that one of

the purposes of the letter is to "encourage

-43-

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 taxpayer, 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 taxpayer

administrative review and then issued a

classical form notice of deficiency

permitting the taxpayer 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 taxpayer

immediate right of judicial review. Rather,

in the Internal Revenue Service's version of

due process, taxpayer 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, taxpayer's 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 taxpayer's 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

Corporation v. United States of America,

-45-

F. Supp. , 56 AFTR 2a 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 Cizcuit, 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-taxpayer, pursuant

to the authority of 26 U.S.C. Section 7431.

The history of the case is as follows.

-46-

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 his failure

to follow mandatory procedures as set forth

7

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

> 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

-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 a r.

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.

(ee

-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 Appellant herein are nearly

identical. Further, the PFNs here were

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

-5l=-

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 or 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

disallow deductions, tax refunds and other

benefits, without the benefit of judicial

review.

-52-

CONCLUSION

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 Streat 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 Petitioner

-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 APPEAL FOR THE FIFTH

CIRCUIT were served by mail, on the 22nd day

of August, 1986, in an envelope with postage

prepaid, to Counsel for Respondent-Appellee,

as follows:

Michael L. Paup, Esq.

Richard Farber, Esq.

Gary D. Gray, Esq.

Tax Division

U. S. Dept. of Justice

Washington, D.C. 20530

and

Solicitor General

U. S. Department of Justice

Washington, D.C. 0

\

CATHEY E. TAYLOR §#£#$'|!

APPENDIX

-la-

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

STEVEN E. DONLEY,

Petitioner-Appellant,

Vv. No. 85-4663

COMMISSIONER OF INTERNAL

REVENUE,

OPINION

Respondent-Appellee.

me ee ee ee ee ee ee ee”

Filed June 11, 986

Before: John R. Brown, Thomas M. Reavley and

Edith H. Jones, Circuit Judges.

Per Curiam

Appeal from the Decision of the United States

Tax Court

SUMMARY

-2a-

Taxation

Appeal from a Tax Court decision.

Affirmed.

The appeal arises from a letter sent to

appellant Donley by the Internal Revenue

Service (IRS) notifying him that it believed

certain tax deductions, which it did not

specify, were not allowable. The letter gave

him opportunity to adjust his return before

the review so as to avoid any penalties. The

Tax Court dismissed his suit for lack of

jurisdiction.

(1] Before a taxpayer can invoke the

jurisdiction of the Tax Court he must have

been notified by the IRS that his return is

deficient. Notice must at a minimum (1)

advise the taxpayer that the IRS has

determined that a deficiency exists for a

particular year, and (2) specify the amount

-3a-

of the deficiency or provide the information

necessary to compute the deficiency.

OPINION

PER CURIAM:

The Internal Revenue Service (IRS) sent

petitioner Steven E. Donley a letter

notifying him that it believed certain tax

-4a-

deductions were not allowable.! The letter

1 The letter, also sent to a number of

other taxpayers, read 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

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 adjustment 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

Code and other appropriate penalties. 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.

-5a-

stated that the IRS was planning on reviewing

his tax return in the future to determine if

he claimed such deductions, and it gave him

the opportunity to adjust his return before

the review so as to avoid any penalties. The

letter did not refer to any specific

deficiency in Donley's tax return or suggest

in any way the IRS had already determined

that Donley had miscalculated the tax due.

Donley, along with other taxpayers,

challenged the letter by filing suit in the

Tax Court of the United States, which

dismissed the suit for lack of jurisdiction.

Abrams v. Commissioner 84 T.C. 1308 (1985).

Donley now appeals that dismissal.2 We

affirn.

2 Other taxpayers filed appeals in the

Second, Fourth, Sixth, Seventh, Eighth,

Ninth, Tenth and Eleventh Circuits.

-6a-

[1] The United States Tax Court is a

court of limited jurisdiction. 26 U.S.c. /§

7442 (1982). Before a taxpayer can invoke

the jurisdiction of the Tax Court he must

have been notified by the IRS that his tax

return is deficient. DaBoul v. Commissioner,

429 F.2d 38 (9th Cir. 1970). Although there

is no prescribed form for a deficiency

notice, the notice must at a minimum (1)

advise the taxpayer that the IRS has

determined that a deficiency exists for a

particular year, and (2) specify the amount

of the deficiency or provide the information

necessary to compute the deficiency. Cf.

Commissioner v. Stewart, 186 F.2d 239, 242

(6th Cir. 1951). The Second, Fourth, Eighth |

and Eleventh Circuits have determined that

letters identical to the one received by

Donley meet none of these requirements. See

Spector v. Commissioner, No. 85-2133 (8th

-J7a=-

Cir. May 7, 1986); Benzvi v. Commissioner,

787 F.2d 1541 (llth Cir. 1986); Eggleston v.

Commissioner, 787 F.2d 939 (4th Cir. 1986);

Neal v. Commissioner, No. 85-4147 (2nd Cir.

March 17, 1985) (unpublished order). We

agree. The Tax Court properly dismissed

Donley's suit for lack of jurisdiction.

AFFIRMED.

-8a-

84 T. C. No. 71

UNITED STATES TAX COURT

RICHARD L. ABRAMS, ET AL.,1 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.

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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.

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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

ee ee ee ee ee ee

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above tax year. Based upon cur 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.

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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

deductions taken with respect to Liberty

Financial Government Securities Trading

Strategy would be disallowed. As support for

their contention, petitioners argue that ail

respondent needs to do is make a mathematical

sal aia ae

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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.

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or make a final determination, citing

Foster v. Commissioner, 80 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.

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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. Foster v,

Commissioner, 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.

-l6a-

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.

-l7a-

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

> 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.

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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

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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 tc reevaluate the

propriety of any deductions they may

Claim.

In Estate of Adamczyk v.

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 additional information, or to

request a conference. They were also

-20a-

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- |

-2la-

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 Revenue 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 communicaticn

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.

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will grant respondent's motion to

dismiss for lack of jurisdiction.

mn appropriate orde

will be entered.

-23a-

UNITED STATES TAX COURT

WASHINGTON, D.C. 20217

RICHARD L. ABRAMS,

ET AL.,

Petitioners.

Vv. Docket No. 2645-85

COMMISSIONER OF

INTERNAL REVENUE,

Respondent.

ee ee ee eee eee

ORDER OF DISMISSAL FOR LACK OF JURISDICTION

On April 4, 1985, respondent filed a

motion to dismiss for lack of jurisdiction.

The Court entered an order on April 12, 1985

granting respondent's motion. On April 16,

1985, the order was vacated and set aside,

and a hearing was set for May 22, 1985.

After review and consideration of the

parties' positions and pursuant to the

-24a-

Opinion 84 T.C. No. 71, filed herein on June

iv, aeee, 26 36

ORDERED: That respondent's motion is

granted. It is further

ORDERED: That this case is dismissed

for lack of jurisdiction.

Howard A. Dawson, Jr.

Judge

Entered: Jun 18, 1985

*