Clark v. Campbell

• Decision Date: 12 September 1974
• Docket Number: No. 73-2147,73-2147
• Citation: 501 F.2d 108
• Parties: 74-2 USTC P 9687 Elzie C. CLARK, Gwendolyn Clark, Willie Stovall and Gwendolyn Stovall, Plaintiffs-Appellees-Cross Appellants, v. Ellis CAMPBELL, Jr., Dist. Director of Internal Revenue, Lewis Giles, Revenue Officer, and United States of America, Defendants-Appellants-Cross Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

Page 108

501 F.2d 108

74-2 USTC P 9687

Elzie C. CLARK, Gwendolyn Clark, Willie Stovall and Gwendolyn Stovall, Plaintiffs-Appellees-Cross Appellants, v. Ellis CAMPBELL, Jr., Dist. Director of Internal Revenue, Lewis Giles, Revenue Officer, and United States of

America, Defendants-Appellants-Cross Appellees.

No. 73-2147.

United States Court of Appeals, Fifth Circuit,

Sept. 12, 1974.

Scott P. Crampton, Asst. Atty. Gen., Richard Farber, Ernest J. Brown, Attys., Tax Div., Dept. of Justice, Lee H. Henkel, Jr., Acting Chief Counsel, I. R.S., Washington, D.C., Frank D. McCown, U.S. Atty., Kenneth J. Mighell, Asst. U.S. Atty., Dallas, Tex., for defendants-appellants.

Merle R. Flagg, Dallas, Tex., for plaintiffs-appellees.

Before BROWN, Chief Judge, and GODBOLD and SIMPSON, Circuit Judges.

JOHN R. BROWN, Chief Judge:

A weapon, little known and previously not too often employed, having atomic potentialities in the arsenal of the tax gatherer is the power of IRS to order quick termination of a taxpayer's tax year with summary demand for immediate full payment with the sanctions of levy, seizure and sale. The issue in this appeal in a now much contested area ¹ as this technique is found to be an effective tool in the relentless struggle against the traffic in drugs, is whether these awesome consequences can be consummated without a deficiency notice. If one is required, the present appellee taxpayer wins at least for the time being. But the result far transcends immediate relief to this litigant. For a holding against the necessity for a deficiency notice deprives the 'victim' of this summary administrative procedure of any right of prepayment judicial review by petition to the Tax Court and remits him to payment, filing of claim for refund and suit in the District Court for refund.

We hold that in the intricate structure of the Tax Act-- which we painstakingly, perhaps painfully painstakingly dissect, since the Circuits are divided on it ² -- Congress could, and did, not have any such discriminate purpose and consequently a proper construction is to require the deficiency notice. ³ Consequently we affirm.

On June 11, 1969, the BNDD, pursuant to a warrant searched two buildings in Dallas, Texas seizing a substantial amount of property belonging to appellee (Elzie Clark) in the process. Appellee was notified by letter dated July 14, 1969 that his taxable period had been immediately terminated pursuant to the quick termination procedure of 6851(a) ⁴ of the Internal Revenue Code and that a tax of $104,697.20 for this period had been assessed and was immediately due and payable. The IRS posted notices of levy on and filed federal tax liens against real estate owned by appellee and served notices of levy on three Dallas banks, the Dallas Sheriff's Department and the Regional Director of the BNDD requesting that any property or monies of appellee should be surrendered to cover the alleged tax liability. ⁵

On November 10, 1969 appellee brought this suit in the District Court pursuant to 6213(a) ⁶ seeking to remove clouds on the title and to enjoin the levy on and seizure of his property on the grounds that the District Director should have, but had not issued a notice of deficiency to appellee. Finding that a deficiency notice was required, the District Court ordered that the assessment and levy would be enjoined unless the IRS issued a notice within 60 days. ⁷ The IRS has appealed.

The Procedure-- Ordinary And Jeopardy

Ordinarily, if, after the taxpayer has filed a return following the close of the tax year, the IRS has reason to believe that a taxpayer has failed to pay a portion of or the entire tax due, it will determine that a deficiency exists. ⁸ In order to commence proceedings to recover the deficiency, the IRS is required to send the taxpayer a formal notice of deficiency by secured mail. ⁹ The taxpayer may then contest liability in either of two alternate forums. The taxpayer may file a petition for redetermination in the Tax Court within 90 days of receipt of the deficiency notice (hence in the parlance of the taxwise the deficiency notice has become known as a '90-day letter') pursuant to 6213 ¹⁰ or the taxpayer may choose to pay the alleged deficiency, file a claim of refund, and bring a suit for refund in the District Court in six months. ¹¹

The jurisdiction of the Tax Court to redetermine tax liability prior to payment is explicitly based on the issuance of a deficiency notice. ¹² Concomitantly, 6213(a) ¹³ permits the taxpayer to obtain an injunction against the assessment or levy of a deficiency in the absence of the requisite deficiency notice and opportunity to petition the Tax Court.

Of course, even in the idyllic state of self-imposed taxation, the Congress long ago recognized that the ordinary procedures will at times prove inadequate. Thus two separate provisions of the Code grant the IRS special powers and procedures where there is reason to believe that the collection of the revenue is in jeopardy. Section 6861 authorizes the IRS to immediately assess a deficiency and demand immediate payment where the Secretary or his delegate ¹⁴ believes that the assessment or collection of the deficiency would be jeopardized by delay. ¹⁵ However, under 6861(b) ¹⁶ the Secretary is required to mail a notice of deficiency to the taxpayer within 60 days of the jeopardy assessment. Therefore, despite the summary assessment authority, the taxpayer retains the right to petition the Tax Court for a redetermination. ¹⁷ But despite assessment, levy and seizure, the IRS is prohibited from disposing of the taxpayer's assets during the time in which the taxpayer may petition the Tax Court or during the pendency of the Tax Court proceedings. ¹⁸

In addition to 6861, the IRS is given the 6851 ¹⁹ quick termination power to terminate the taxpayer's taxable period 'if the Secretary . . . finds that (the) taxpayer designs quickly to depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual proceedings to collect the income tax . . ..' The IRS may then serve notice and demand payment of any tax determined to be owing for that year or the preceding tax year. Under 6851(b) ²⁰ the taxpayer may reopen his taxable period after it has been terminated by filing a true and accurate return of income tax for the taxable period in question or the IRS may open the tax period as often as necessary if it discovers additional income earned within the taxable period.

Unlike 6861, however, 6851 makes no mention of deficiencies or Tax Court review nor does it explicitly provide assessment authority.

This focuses on the issue in this litigation of whether a quick termination taxpayer whose taxable year has been terminated pursuant to 6851 is entitled to the same procedural safeguards which are available to the taxpayer who is the subject of a 6861 jeopardy assessment. Specific protections in issue have been recently summarized as follows:

1. The IRS is required to send a deficiency notice within sixty days after the assessment, thus enabling the jeopardy taxpayer to litigate in the Tax Court. 6861(b). If the IRS does not comply with this requirement, the assessment and levy (or seizure) may be enjoined by the federal courts. 6213(a); United States v. Ball (4 Cir., 1964, 326 F.2d 898), supra.

2. The jeopardy taxpayer can stay all collection action pending the Tax Court's decision if he is able to post an adequate bond. 6863(a).

3. Property seized pursuant to the assessment may not, in general, be sold during the pendency of litigation in the Tax Court. 6863(b)(3)(A).

4. The IRS 'may' abate the jeopardy assessment if it 'finds' that jeopardy does not exist. 6861(g). ²¹

The Developing Case Law

Until quite recently there has been a paucity of litigation on the issue before this Court despite the lengthy codal coexistence of 6851 and 6861. The emergence of the issue seems primarily attributable to the Service's recent pattern of its willingness to utilize 6851 in conjunction with requests from BNDD in narcotics enforcement activities. ²²

Genesis: In The Beginning

It all started back in 1938 when in Ludwig Littauer & Co. v. Commissioner, 1938, 37 B.T.A. 840, appeal dismissed, 2 Cir., Dec. 31, 1938 (unpublished), the Board of Tax Appeals (the predecessor of the Tax Court) had occasion to consider whether the procedural safeguards provided by 273 of the Revenue Act of 1936 (the predecessor of 6861) were applicable to a termination of the taxable year under 146 of the Revenue Act of 1936 (the predecessor of 6851). The BTA recognized that both 273 (6861) and 146 (6851) were concerned with the collection of jeopardized revenue. However, reasoning that '146(a) (6851), presupposes a more exigent situation of jeopardy than that covered by a 273 (6861),' the BTA concluded that the deficiency notice procedure of 273 (6861) did not apply to 146 (6851) in the absence of an explicit statutory mandate to that effect. 37 B.T.A. at 842. Pointing out that the taxpayer could avoid immediate payment by posting a bond and citing a Revenue Ruling that referred to the taxpayer's ability to file a full year return after having been subjected to a short year termination-- the BTA concluded that a statutory deficiency could only be created by 'a determination of correct tax liability' at the expiration of the full taxable year. 37 B.T.A. at 843. Having determined that the 'thing' created by 146(a) (6851) was not a deficiency, the BTA concluded that it 'is but a provisional statement of the amount which must be presently paid as against the impossibility of collection'. 37 B.T.A. at 842.

Littauer was followed without further elaboration in Puritan Church of America v. Commissioner, 1951, 10 TCM 485, aff'd per curiam, 1953, 93 U.S.App.D.C. 129, 209 F.2d 306, cert. denied, 1954, 347 U.S. 975, 74 S.Ct. 787, 98 L.Ed....