Court Opinion

ID: 9475976
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:44:21.313439+00
Date Added: 2024-06-11T17:45:03.668097
License: Public Domain

CYNTHIA HOLCOMB HALL, Circuit Judge,
dissenting:
Today, the majority fortifies the impediments to tax collection on behalf of errant taxpayers seeking “no taxation without litigation.” R. Jackson, Struggle for Judicial Supremacy 141 (1941). I believe the majority undermines the jurisdiction of the Tax Court by constructing a superfluous yet substantial hurdle to its jurisdiction. In reaching the conclusion that section 6212(a) of the Internal Revenue Code, 26 U.S.C. § 6212(a), imposes a substantive requirement on the Commissioner of the Internal Revenue Service to prove that he has reviewed specific data before making a determination, the majority eagerly expands jurisdictional requirements while discarding the carefully-honed and expedient jurisdictional rules that exist.
I
The majority first turns a blind eye to reality when it finds that the incorrect explanation for the deficiency “[makes] it patently obvious that no determination has in fact been made.” See ante at 1367. The 1978 tax return of taxpayers Howard and Ethel Scar was hardly an unlikely object of the Commissioner’s suspicion. In 1977 the taxpayers participated in a videotape tax shelter, investing $6,500 in cash, signing a promissory note for $93,500, and then deducting over $15,000 in depreciation and other expenses from their 1977 tax return based on their “investment.” The Commissioner audited this 1977 return and determined a deficiency of $15,875, finding that the taxpayers’ “purchase of the film was lacking in profit motive and economic substance other than the avoidance of tax.” The Commissioner mailed a notice of deficiency to the taxpayers, who responded by filing a petition for redetermination of the deficiency with the Tax Court on June 30, 1981.
The taxpayers’ 1978 return included additional deductions totaling $27,040 based upon the now suspect videotape shelter. In all likelihood, the Commissioner’s decision to issue a second deficiency notice regarding this 1978 return resulted from the continuation of the audit process which began with the previous year’s tax return. This second deficiency notice, however, incorrectly explained the deficiency in terms of a Nevada mining venture in which the taxpayers had never participated. At the Tax Court hearing on March 21, 1983, counsel for the Commissioner explained that this misdescription resulted from a technical error: an IRS employee had transposed a code number, resulting in the incorrect identification of the basis of the deficiency as being the Nevada mining project instead of the videotape tax shelter. The Commissioner argues that a witness able to testify to this numerical error was present at the hearing, but was not called since the taxpayers did not object to this explanation of the IRS’ mistake.
The procedural history of the taxpayers’ efforts to challenge the 1978 deficiency consists largely of motions attempting to exploit this apparent mishap. These motions evince the tactics of delay employed by “every litigious man or every embarrassed man, to whom delay [is] more important than the payment of costs.” Tennessee v. Sneed, 96 U.S. (6 Otto) 69, 75, 24 L.Ed. 610 (1877).
II
The majority correctly recognizes that section 6212(a) authorizes the Commissioner to send a notice of deficiency only if he first determines that there is a deficiency. The taxpayers themselves concede that the notice of deficiency in this case satisfied section 6212(a)’s formal requirements of stating the amount of the deficiency and the taxable year involved. See Stamm International Corp. v. Commissioner, 84 T.C. 248, 253 (1985); Foster v. Commis*1372sioner, 80 T.C. 34, 229-30 (1983), aff'd in part and vacated in part, 756 F.2d 1430 (9th Cir.1985), cert. denied,—U.S.-, 106 S.Ct. 793, 88 L.Ed.2d 770 (1986); Ziegler v. Commissioner, 49 T.C.M. (CCH) 182,189 (1984); Stevenson v. Commissioner, 43 T.C.M. (CCH) 289, 290-91 (1982) (citing Commissioner v. Stewart, 186 F.2d 239, 242 (6th Cir.1951)). See also Andrews, The Use of the Injunction as a Remedy for an Invalid Federal Tax Assessment, 40 Tax L. Rev. 653, 661 n. 39 (1985).
The majority then proceeds to overload the statutory requirement of a “determination” of a deficiency with burdensome substantive content. First, the majority ignores the rule that a deficiency notice need not contain any explanation whatsoever. Abatti v. Commissioner, 644 F.2d 1385, 1389 (9th Cir.1981); Barnes v. Commissioner, 408 F.2d 65, 69 (7th Cir.), cert. denied, 396 U.S. 836, 90 S.Ct. 94, 24 L.Ed.2d 86 (1969); Stevenson, 43 T.C.M. (CCH) at 290. See also B. Bittker, Federal Taxation of Income, Estates and Gifts ¶ 115.2.2 at 115-14 (1981) (“Federal Taxation”).
Second, the majority fails to grasp the function of the deficiency notice. It is nothing more than “a jurisdictional prerequisite to a taxpayer’s suit seeking the Tax Court’s redetermination of [the Commissioner’s] determination of the tax liability.” Stamm, 84 T.C. at 252. “[T]he 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 (2nd Cir.1937).1 Nothing more is required as a predicate to Tax Court jurisdiction.2 In fact, this Circuit has recognized that “ ‘it is not the existence of a deficiency that provides a predicate for Tax Court jurisdiction.’ ” Stevens v. Commissioner, 709 F.2d 12, 13 (5th Cir.1983) (quoting Hannan v. Commissioner, 52 T.C. 787, 791 (1969) (emphasis in original)). The Stevens court lucidly commented:
That seems obvious: the very purpose of the Tax Court is to adjudicate contests to deficiency notices. If the existence of an error in the determination giving rise to the notice deprived the Court of jurisdiction, the Court would lack power to perform its function.
709 F.2d at 13.
Therefore, the deficiency notice is effectively the taxpayer’s “ticket” to the Tax Court. This “ticket” gives the taxpayer access to the only forum where he can litigate the relevant tax issue without first paying the tax assessed. If a properly-addressed deficiency notice states the amount of the deficiency, the taxable year involved, and notifies the taxpayer that he has 90 *1373days from the date of mailing in which to file a petition for redetermination, then the notice is valid. The merits of the Commissioner’s deficiency should not be litigated in the form of a motion to dismiss for lack of jurisdiction; once jurisdiction has been established, both sides will have the opportunity to press their views before the Tax Court.
The majority escapes from under the undesirable weight of authority requiring that the validity of a deficiency notice be determined primarily by its form by distinguishing these cases as not addressing the challenge that no determination was made by the Commissioner. In light of the emphasis of this authority on the form of the deficiency notice, I cannot agree with such a strained interpretation of these cases. See B. Bittker, Federal Taxation If 115.2.2 at 115-12 (“[t]he requirement of an IRS determination coalesces with the requirement of a notice of deficiency, since the usual evidence that a deficiency has been ‘determined’ is the notice”) (emphasis in original).
For example, in Hannan v. Commissioner, 52 T.C. 787 (1969), the Tax Court concluded that there was a valid notice of deficiency, despite the Commissioner’s contentions that he neither determined a deficiency nor sought to collect one.3 The Tax Court rejected the Commissioner’s position and found it had jurisdiction:
Here petitioners were sent a letter which admittedly meets all the formal requirements of a statutory notice of deficiency, notifying them that “We [respondent] have determined the income tax deficiencies shown above” and listing tax deficiencies and additions to tax under section 6651(a). This was a determination of a deficiency in tax, even though, as respondent argues, on trial it may develop that there is in fact no deficiency.
Id. at 791 (footnotes omitted).
The majority misreads Hannan in denying that Hannan stands for the proposition that deficiency notices are to be judged on their face, rather than on the substance of the Commissioner’s determination. See ante at 1367 n. 7. It is true that the Tax Court partly explained its decision by stating that there was no proof that the Commissioner was not in fact asserting a deficiency and that the taxpayers could only protect their interests by filing a petition. Although one might read this statement as implying that the Tax Court based its decision on more than a facial examination of the deficiency notice, I understand the Tax Court to mean that because the notice was ambiguous, the taxpayers had no alternative but to file a petition. This concern does not detract from the court’s emphasis on the form of the deficiency notice.
Judging the deficiency notice in this case by the standards discussed above, I believe that the notice warned the taxpayers that the Commissioner had, rightly or wrongly, determined a deficiency and that the notice complied with the formal requirements of section 6212(a). The Commissioner clearly *1374determined that the taxpayers had invested in a tax shelter without economic substance in order to avoid taxes. The inclusion of an erroneous explanation of the basis of the deficiency should not in itself deprive the Tax Court of jurisdiction to decide the question of whether the Commissioner can sustain the asserted deficiency.
The majority contends that here, it “need not look beyond the notice sent to the taxpayers to determine its invalidity.” See ante at 1368. This, however, is exactly what the majority requires when it concludes that the “determination” requirement is only satisfied where the Commissioner shows he has determined a deficiency with respect to a particular taxpayer beyond the notice itself.4
As a matter of tax policy, the rule against looking behind the deficiency notice appears to be well-grounded in the administrative necessities of the Commissioner’s job. The Commissioner must administer tens of thousands of deficiency notices per year. A requirement that he prove the basis of his determination before the Tax Court can assert jurisdiction would unduly burden both the Commissioner and the Tax Court.
In addition, the majority’s ruling that the inclusion of an erroneous explanation invalidates a deficiency notice creates an incentive for the Commissioner not to disclose his theory for asserting a deficiency when he sends the deficiency notice. If the Commissioner discloses his theory at this stage, the majority’s rule invites every taxpayer to litigate whether the Commissioner has made a determination before litigating the merits.5 Because it is to the taxpayer’s *1375advantage that the Commissioner disclose his theory when the notice is sent, I believe it is undesirable to establish a rule which would discourage him from doing so. See Stewart v. Commissioner, 714 F.2d 977, 986 (9th Cir.1983).
I view this case as presenting two related policy goals. One goal is to ensure that early in the assessment procedure each individual taxpayer receives fair notice as to the theory on which the Commissioner based his deficiency. The other goal is to encourage the Commissioner to disclose the theory on which he intends to rely in the deficiency notice whenever possible. However, because the Commissioner is not required to disclose his theory in the notice, the majority’s rule that invalidates a deficiency notice accompanied with an erroneous description encourages the Commissioner to issue deficiency notices without any explanation. Such a rule detracts from the goal of early notice and taxpayers, on the whole, will suffer because the Commissioner is likely to use the deficiency notice solely for jurisdictional purposes and only thereafter reveal his reasons for issuing the notice. I believe that preserving the Tax Court tradition of not looking behind the deficiency notice promotes the goal of ensuring early notice to the taxpayer.
Finally, alternative remedies exist to protect the taxpayer’s interests besides dismissal of the case for lack of jurisdiction. If the taxpayers are confused by the Commissioner’s theory or explanation supporting the deficiency, they may seek clarification prior to trial. The Tax Court Rules “contemplate that after the case is at issue the parties will informally confer in order to exchange necessary facts, documents, and other data with a view towards defining and narrowing the areas of dispute. Rules 38, 70(a)(1), 91(a).”6 Foster, 80 T.C. at 230. See also Stevenson, 43 T.C.M. (CCH) at 291. Here, the informal contacts between the parties resulted in the Commissioner’s disclosure of his mistake within two months of when the taxpayers filed their petition for redetermination in the Tax Court.
Furthermore, the presumed correctness of the Commissioner’s deficiency notice disappears if the deficiency is arbitrary or capricious, since the burden of proof then shifts to the Commissioner. Helvering v. Taylor, 293 U.S. 507, 513-16, 55 S.Ct. 287, 290-91, 79 L.Ed. 623 (1935); Weimerskirch v. Commissioner, 596 F.2d 358, 362 & n. 8 (9th Cir.1979); Jackson v. Commissioner, 73 T.C. 394, 401 (1979). See also Rule 142(a).
These measures are more than adequate to prevent the Commissioner from littering the country with baseless deficiency notices. Scar, 81 T.C. at 869 (Sterratt, J., dissenting). The precedent holding that the validity of the deficiency notice is to be determined on its face was effective in furthering policy goals which benefit the taxpayer and the public. The majority’s opinion sabotages the machinery of tax collection, thereby portending injury to the taxpayer and to the public. I therefore dissent.

. The notice of deficiency mailed to the taxpayers included two forms: Form 892 and Form 5278. Form 892 is the basic deficiency notice. It includes the taxpayer’s name, social security number, amount of the deficiency for the taxable year, and a short explanation of the taxpayer’s options. Here, the Commissioner properly completed the Form 892. If the Commissioner had mailed only the Form 892, and nothing else, it is clear that this would have been a valid deficiency notice. Abatti, 644 F.2d at 1389; Barnes, 408 F.2d at 69; Stevenson, 43 T.C.M. (CCH) at 290. The Tax Court’s jurisdiction would have been established, even though the Commissioner relied on the wrong tax shelter in making the determination.

. "It may well be true that the [Commissioner] erred in his determination that a deficiency existed for this period. But when he once determined that there was a deficiency, that fact gives us jurisdiction to determine whether or not it was correctly arrived at.” H. Milgrim & Bros. v. Commissioner, 24 B.T.A. 853, 854 (1931).
The key question is whether the inclusion of an erroneous Form 5278, which purports to explain the deficiency in terms of an unrelated tax shelter, invalidates the deficiency notice. I believe the inclusion of the wrong Form 5278 constitutes a preparation error which does not invalidate the deficiency notice. "An error in a notice of deficiency, which otherwise fulfills its purpose, will be ignored where the taxpayer is not misled thereby and is provided by it with information sufficient for the preparation of his case for trial.” Meyers v. Commissioner, 81 T.C.M. (P-H) 276, 278 (1981). Here, the taxpayers were not misled by the stray Form 5278 because they had notice from the IRS that a mistake had been made before the Tax Court had set a trial date for either the 1977 or 1978 disputes concerning the videotape tax shelter.

. In Hannan, the Commissioner assessed additions to tax for late filing. Under 26 U.S.C. § 6662 (formerly section 6659), if additions to tax are not attributable to a deficiency, the Commissioner can immediately assess and collect the additions. On the other hand, if the additions are attributable to a deficiency the Commissioner is required to follow statutory deficiency procedures. In Hannan, the Commissioner sent taxpayers a letter, on the form used for deficiency notices, setting forth amounts referred to as "deficiencies” in one column, together with the "additions to tax” in the next column.
The Commissioner argued in the Tax Court that no deficiency actually existed and therefore the Tax Court lacked jurisdiction. The Commissioner’s attorney stated that the notice of deficiency was issued in error. The figures listed in the “deficiency” column correspond to the figures that the taxpayers had reported as tax due on their returns. The Commissioner presumably was contending that he had used the notice of deficiency form in order to collect additions to tax, and not to notify taxpayers of the existence of deficiencies. Because the Commissioner was not imposing taxes in excess of what taxpayers showed on their returns (i.e., he used the wrong form), he argued there was no deficiency.

. The majority in footnote 6 makes much of the government’s statement that, "In order to protect the government’s interest and since your original income tax return is unavailable at this time, the income tax is being assessed at the maximum rate of 70%.” The majority points to this statement as evidence supporting their conclusion that the Commissioner did not make a determination. I disagree.
Although the "unavailability” of the Scars’ return may indicate that the Scars’ original paper return was not before the Commissioner, it does not show that specific data on that return or relating to the video-tape tax shelter was not considered. Due to the computerization of the IRS, the Commissioner no longer operates from original paper returns. See, e.g., Murphy, Glitches and Crashes at the IRS, TIME, Apr. 29, 1985, at 71; New Machines Helping IRS, Dun’s Business Month, Jan. 1984, at 24; IRS, 1980 Annual Report, 9, 14, 42-43 (1981). With well over 100 million income tax returns plus an even larger number of information returns, such as Forms W-2’s and 1099's, being filed annually, it is no wonder the Commissioner has turned to the computer. See Klott, Fewer IRS Workers to Process Tax Returns, N.Y. Times, Dec. 24, 1986, at 30, col. 3; IRS, 1981 Annual Report 5, 42-43 (Table 6) (1982). When a return is filed in a Service Center, pertinent summary data is entered into the computer system. 1980 Report at 14; Quaglietta, How IRS Service Centers Process Returns, 16 Prac.Acct. 63 (1983). Such summary data includes the fact that a return was filed, whether the tax was paid or a refund check was mailed, and other data needed to match information returns with the taxpayer’s return. See 1980 Report at 4, 14; Cloonan, Compliance Programs, 16 Prac.Acct. 67 (1983). This matching is done by computer. 1980 Report at 4, 14; Walbert, A Net Too Wide, FORBES, Mar. 12, 1984, at 154. It is conceivable that the Commissioner had enough information on the computer to match information regarding both the tax shelter promoted by Executive Productions, Inc. and the Scars’ suspect 1977 return to their 1978 income tax taxpayer’s return, but not enough to determine the exact amount of a deficiency without calling up from storage the actual return. Thus, the Commissioner assessed the Scars at the 70% rate.
As of 1980, the Commissioner had identified approximately 27,000 abusive tax shelters. 1980 Report at 3. In light of this number, the punching of the wrong computer key during an audit at the partnership level is a viable explanation for the unfortunate error of one of the 26,999 inapplicable tax shelters popping up and then being entered on the Scars’ Form 5278.
So, as a result of the need to computerize information regarding the millions of filed returns and the huge number of tax shelters, we have a reasonable explanation for the two errors on the gratuitously prepared Form 5278 (the wrong shelter and the wrong tax rate of 70%). The taxpayer could have contested these errors and probably would have settled the amount of the tax due promptly. The importance of these errors is further undermined by the fact that they are found in Form 5278, which the Commissioner is not required to send with the basic deficiency notice. Form 892. See ante n. 1.

. This "invitation to litigation” represents a major step backward for those of us who believe that litigation should be streamlined, attorneys’ fees should be kept within reasonable bounds, and courts should not be further over-burdened.

. Any citation to a Rule refers to the Tax Court Rules of Practice and Procedure (codified at 26 U.S.C. § 7453).