T.C. Memo. 1998-314

UNITED STATES TAX COURT

JEFFREY C. AND KELLY O. STONE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 3812-97. Filed August 31, 1998.

Jeffrey C. and Kelly O. Stone, pro se.

Joan S. Dennett, for respondent.

MEMORANDUM OPINION

COLVIN, Judge: This matter is before the Court on

petitioners' motion for summary judgment. For reasons stated

below, we deny petitioners' motion. 

Respondent determined a deficiency in petitioners' Federal

income tax for 1994 of $10,959 and an accuracy-related penalty

for negligence under section 6662(a) in the amount of $2,192.
2

Neither party requested a hearing, and we conclude that none

is necessary to decide petitioners' motion. 

Petitioners' motion for summary judgment raises

the following issues:

1. Whether the sharing of tax return information between

respondent and the State of Montana violated section 6103(d) or

the Privacy Act of 1974, 5 U.S.C. sec. 552a (1994). We hold that

it did not.

2. Whether the notice of deficiency issued to petitioners

is invalid because respondent either (a) did not make notice and

demand for tax under section 6303, or (b) did not sign it in pen

and ink. We hold that these circumstances do not invalidate the

notice of deficiency. 

References to Mr. Stone are to petitioner Jeffrey Stone. 

References to Mrs. Stone are to petitioner Kelly Stone. Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the year in issue. All Rule

references are to the Tax Court Rules of Practice and Procedure.

Background

A. Petitioners

Petitioners are married and lived in Belgrade, Montana, when

they filed their petition.
3

Petitioners own and operate Stone's Appliance Repair, an

appliance repair business in Belgrade. Mr. Stone does the

repairs. Mrs. Stone is the office manager and bookkeeper. She

kept the books and performed other office duties from

petitioners' home until late 1994, when petitioners hired a

secretary.

B. Montana's Audit of Petitioners

Petitioners were clients of James Otis & Co. (Otis), a tax

consulting firm based in San Mateo, California. Otis retained

Cody & Co. to prepare some of its clients' tax returns, including

petitioners' returns. Cody & Co. prepared petitioners' 1994

Federal and State returns. The Internal Revenue Service (IRS)

and the Montana Department of Revenue (Department of Revenue) had

audited returns prepared by Cody & Co. A joint IRS/Department of

Revenue project identified Federal and State income tax returns

that had been prepared by Cody & Co. for possible audit. As a

result of the joint project, in 1994, the Department of Revenue

audited the deductions petitioners claimed on the schedule C

attached to their State income tax return. The Department of

Revenue gave petitioners' audit results to respondent pursuant to

the Implementation Agreement on Coordination of Tax

Administration Between the Montana Department of Revenue and the

IRS (Implementation Agreement).
4

C. Notice of Deficiency

On January 29, 1997, respondent sent a notice of deficiency

to petitioners in which respondent determined a deficiency and

stated:

We have received information from the State of Montana

Department of Revenue regarding an examination of your

1994 state income tax return. In conjunction with a

joint Federal/State tax agreement between the State of

Montana and the Internal Revenue Service, we have

received a copy of the State Department of Revenue

audit report. We will proceed with our examination

based on the same information you have provided to the

State of Montana Department of Revenue.

On July 6, 1998, petitioners filed a motion for summary

judgment. On July 21, 1998, respondent filed an objection to

petitioners' summary judgment motion.

Discussion

Petitioners contend that we should grant their motion for

summary judgment because the sharing of their tax return

information between respondent and the Department of Revenue

violated section 6103(d) and the Privacy Act, respondent made no

notice of demand, and the notice of deficiency lacked an original

signature in pen and ink.

A. Whether the Information Sharing Agreement Between Respondent

and the Montana Department of Revenue Violated Section 6103

or the Privacy Act

1. Section 6103

Petitioners argue that respondent violated section 6103 and

the Privacy Act, 5 U.S.C. sec. 552a(b) (1994), by unlawfully

disclosing information about their taxes to the Department of
5

1 Sec. 6103(a) and (d) provides as follows:

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS

AND RETURN INFORMATION.

(a) General Rule.--Returns and return information shall

be confidential, and except as authorized by this title--

(1) no officer or employee of the United States,

(2) no officer or employee of any State, any local

child support enforcement agency, or any local agency

administering a program listed in subsection (1)(7)(D) who

has or had access to returns or return information under

this section, and

(3) no other person (or officer or employee

thereof) who has or had access to returns or return

information under subsection (e)(1)(D)(iii), paragraph (2)

or (4)(B) of subsection (m), or subsection (n), shall

disclose any return or return information obtained by him in

any manner in connection with his service as such an officer

or an employee or otherwise or under the provisions of this

section. For purposes of this subsection, the term "officer

or employee" includes a former officer or employee.

* * * * * * *

(d) Disclosure to State Tax Officials and State

(continued...)

Revenue. Petitioners point out that they were first notified by

a January 26, 1996, letter from James Moody, Revenue Agent,

Income Tax Division, Montana Department of Revenue, that their

file had been referred for audit to the Department of Revenue in

conjunction with a joint project between the Department of

Revenue and respondent. Petitioners further contend that the

Department of Revenue did not make a written request to

respondent to disclose petitioners' return information and that

this violates section 6103(d).1
6

1(...continued)

and Local Law Enforcement Agencies.--

(1) In General.--Returns and return information

with respect to taxes * * * shall be open to inspection

by, or disclosure to, any State agency, body, or

commission, or its legal representative, which is

charged under the laws of such State with

responsibility for the administration of State tax laws

for the purpose of, and only to the extent necessary

in, the administration of such laws * * *. Such

inspection shall be permitted, or such disclosure

made, only upon written request by the head of such

agency, body, or commission, and only to the

representatives of such agency, body, or commission

designated in such written request as the individuals

who are to inspect or to receive the returns or return

information on behalf of such agency, body, or

commission. Such representatives shall not include any

individual who is the chief executive officer of such

State or who is neither an employee or legal

representative of such agency, body, or commission nor

a person described in subsection (n). * * *

We disagree that respondent violated section 6103. An

officer or employee of the United States may not disclose returns

or return information unless disclosure is authorized under

section 6103. Sec. 6103(a); Martin v. IRS, 857 F.2d 722, 724

(10th Cir. 1988). However, the Commissioner may disclose returns

and return information to State tax officials upon written

request by the head of the State tax agency for the purpose of,

and to the extent necessary in, the administration of State tax

laws. Sec. 6103(d)(1). The written request must: (a) Be made

by the head of the State agency charged under State law with

responsibility for the administration of State tax laws; (b)

designate representatives of the State tax agency as the
7

individuals who are to inspect or receive the returns or return

information; and (c) not designate as a representative any person

who is the chief executive officer of the State or is not an

employee or a legal representative of the tax agency. Id.

The IRS has coordination and implementation agreements with

each State and the District of Columbia. The Implementation

Agreement between the Department of Revenue and the IRS satisfies

section 6103(d) because it (a) is signed by the head of the State

tax agency, (b) designates the individuals who are to inspect or

to receive the returns or return information on behalf of the

agency, and (c) does not designate as a representative the chief

executive officer of the State or any person who is not an

employee of the tax agency. Taylor v. United States, 106 F.3d

833, 836 (8th Cir. 1997) (agreements between Iowa and the IRS

satisfy section 6103(d)); Long v. United States, 972 F.2d 1174,

1179 (10th Cir. 1992) (agreements between Colorado and the IRS

satisfy section 6103(d)); Smith v. United States, 964 F.2d 630,

633-634 (7th Cir. 1992) (agreements between Illinois and the IRS

satisfy section 6103(d)). In Taylor v. United States, supra at

836 the Court of Appeals for the Eighth Circuit stated:

Congress clearly recognized the need for disclosure of

such information in certain carefully delineated

circumstances. Disclosure of individual taxpayer

information by the IRS to a state taxing authority via

a standing written agreement that is carefully crafted

to satisfy concerns for confidentiality implements

rather than "eviscerates" the will of Congress.
8

Petitioners contend that the sharing of information between

the Department of Revenue and respondent violated section 6103

because no written requests were made for petitioners' return

information. We disagree. The Implementation Agreement was

similar to the agreements in Taylor, Long, and Smith, and

constitutes the required written request.

We conclude that the Implementation Agreement satisfied

section 6103(d) and that the sharing of information between the

Department of Revenue and respondent was not an unauthorized

disclosure.

2. The Privacy Act

Petitioners allege that on June 6, 1994, respondent raided

the offices of American Mutual Investment Co. in Billings,

Montana. Petitioners further allege that respondent took all of

the client files of Otis. Petitioners allege that respondent

visited all of the Otis clients and asked for all of their tax

and trust materials. Petitioners contend that they were audited

as a result of the raid and that the audit violated the Privacy
9

2 5 U.S.C. sec. 552a(a) and (b) (1994) provide as follows:

(a) Definitions.--For purposes of this section--

* * * * * * *

(7) the term "routine use" means, with

respect to the disclosure of a record, the use of such

record for a purpose which is compatible with the

purpose for which it was collected; 

* * * * * * *

(b) Conditions of Disclosure.--No agency shall

disclose any record which is contained in a system of

records by any means of communication to any person, or

to another agency, except pursuant to a written request

by, or with the prior written consent of, the

individual to whom the record pertains, unless

disclosure of the record would be--

(1) to those officers and employees of the

agency which maintains the record who have a need for

the record in the performance of their duties;

* * * * * * *

(3) for a routine use as defined in

subsection (a)(7) of this section and described under

subsection (e)(4)(B) of this section;

* * * * * * *

(7) to another agency or to an

instrumentality of any governmental jurisdiction within

or under the control of the United States for a civil

or criminal law enforcement activity if the activity is

authorized by law, and if the head of the agency or

instrumentality has made a written request to the

agency which maintains the record specifying the

particular portion desired and the law enforcement

activity for which the record is sought;

Act,2 5 U.S.C. section 552a. We disagree. As discussed next,

the disclosures of information here comply with the Privacy Act.
10

Petitioners argue that respondent violated the Privacy Act

because respondent did not make a written request, or obtain the

written consent, of petitioners to disclose their tax records to

the Department of Revenue. Petitioners also contend that the

State of Montana violated the Privacy Act.

We disagree. The Privacy Act prohibits Federal agencies

from disclosing any record unless the disclosure would be for a

routine use as defined in 5 U.S.C. section 552a(a)(7). 5 U.S.C.

sec. 552a(b)(3). A use of the record is routine if it is for a

purpose which is compatible with the purpose for which it was

collected. 5 U.S.C. sec. 552a(a)(7). The agency must timely

publish in the Federal Register a notice of each routine use of

the records contained in the system, including the categories of

users and the purpose of such use. 5 U.S.C. sec. 552a(e)(4)(D). 

In July 1985, the Commissioner published notices as required by 5

U.S.C. section 552a(e)(4)(D) in the Federal Register for its

Individual Returns Files, Adjustments and Miscellaneous Documents

Files and its Examination Administrative File records systems. 

See 50 Fed. Reg. 29821, 29857 (July 22, 1985) (providing that

disclosure of returns and return information may be made only as

provided by 26 U.S.C. section 6103). The disclosure of taxpayer

information collected for the purpose of Federal tax

administration to State tax officials for the purpose of State

tax administration is a use of the record compatible with the

purpose for which it was collected. 5 U.S.C. sec. 552a(a)(7);
11

3As a result of our conclusion, we need not consider whether

summary judgment would be appropriate if there had been a

violation of sec. 6103 or the Privacy Act.

Taylor v. United States, supra (court rejected the taxpayer's

argument that the IRS may disclose Federal tax information only

for the purpose of Federal tax administration). We conclude

that the disclosures of information here met 5 U.S.C. section

552a.3

B. Whether the Notice of Deficiency Is Invalid Because

Respondent Did Not Make Notice and Demand

Petitioners argue that the notice of deficiency is invalid

because respondent did not make notice and demand. We disagree.

The mailing of the notice of deficiency is generally a

prerequisite to assessment and collection of the deficiency. 

Sec. 6213(a); United States v. Zolla, 724 F.2d 808, 810 (9th Cir.

1984); Meyer v. Commissioner, 97 T.C. 555, 560 (1991). The

Commissioner may send a notice of deficiency to a taxpayer by

certified or registered mail. Sec. 6212(a). In general, the

Commissioner may not assess income taxes before issuing a notice

of deficiency and, if a taxpayer files a petition in the Tax

Court, until the decision of the Tax Court becomes final. Sec.

6213(a). Thus, respondent may not make an assessment against

petitioners for 1994. Without an assessment, respondent may make

no notice and demand for payment.

Petitioners point out that the notice of deficiency sent in

this case states that petitioners can consent to the immediate
12

assessment and collection of their deficiencies and contend that

the amount described as due in the notice of deficiency is an

assessment. We disagree. The notice of deficiency includes a

waiver petitioners could have signed if they had wanted to agree

to the immediate assessment and collection of any deficiencies. 

Respondent has made no assessment in this case. Respondent

cannot make notice and demand until respondent makes a valid

assessment against petitioners, and no assessment may be made

during the pendency of this case. We conclude that the notice of

deficiency is valid.

C. Whether the Notice of Deficiency Is Invalid Because It Does

Not Contain an Original Signature in Pen and Ink

Petitioners contend that the notice of deficiency is invalid

because the deficiency notice does not contain an original

signature in pen and ink. Petitioners point out that 8 Appeals,

Internal Revenue Manual, section 512, states that the notice

is signed in pen and ink, on behalf of the

Commissioner, by the approving Appeals officer * * *. 

Any copies of the statutory notice letter which are

used for the originals or duplicate originals should

have a handwritten signature and not a facsimile or

reproduced signature * * *.

Petitioners point out that the notice of deficiency: (a) Was

signed by the District Director and not an Appeals officer, (b)

was not signed in pen and ink but with a rubber stamp, and (c)

was not signed under penalty of perjury, which petitioners

contend is required by section 6065. They argue that the notice

of deficiency is therefore invalid. We disagree.
13

Respondent need not sign the notice of deficiency to

validate it. Sec. 6212; Fox v. Commissioner, T.C. Memo. 1993-

277, affd. without published opinion 69 F.2d 543 (9th Cir. 1995). 

Also, section 6065 does not require that the notice of deficiency

be signed under penalties of perjury. Section 6065 applies to

returns and other documents filed with respondent; it does not

apply to notices of deficiency. Scruggs v. Commissioner, T.C.

Memo. 1995-355; Spencer v. Commissioner, T.C. Memo. 1977-145; see

sec. 6212. The Internal Revenue Manual directs that the delegate

authorized to sign notices of deficiency will either sign,

initial, or have a machine imprint the Director's signature on

the notice of deficiency. 4 Examination, Internal Revenue

Manual, sec. 4(13)14.3(2). Respondent's failure to comply with

the Internal Revenue Manual does not invalidate a notice of

deficiency or confer substantive rights upon taxpayers. Cf.

Vallone v. Commissioner, 88 T.C. 794, 808 (1987) (failure to

comply with Internal Revenue Manual procedure for obtaining

extension of period of limitation did not necessitate suppression

of evidence obtained after extension obtained); Epstein v.

Commissioner, T.C. Memo. 1989-498 (failure to follow Internal

Revenue Manual procedure did not invalidate the notice of

deficiency). Internal Revenue Manual procedures are directory

and not mandatory; the alleged procedural violations herein do

not invalidate respondent's determinations. See United States v.

Horne, 714 F.2d 206, 207 (1st Cir. 1983); Vallone v.
14

Commissioner, supra at 806-808; Levy v. Commissioner, T.C. Memo.

1987-609, affd. without published opinion 884 F.2d 574 (5th Cir.

1989).

D. Conclusion

We conclude that the notice of deficiency issued in this

case is valid. For the reasons stated above, we deny

petitioners' motion for summary judgment. 

An order will be issued

denying petitioners' motion

for summary judgment.