Scar v. C.I.R.

• Decision Date: 14 April 1987
• Docket Number: No. 85-7212,85-7212
• Citation: 814 F.2d 1363
• Parties: -950, 87-1 USTC P 9277 Howard S. SCAR and Ethel M. Scar, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1363

814 F.2d 1363

59 A.F.T.R.2d 87-950, 87-1 USTC P 9277

Howard S. SCAR and Ethel M. Scar, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 85-7212.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 6, 1986.

Decided April 14, 1987.

Mark Bernsley, Los Angeles, Cal., for petitioners-appellants.

Francis Allegra, David I. Pincus, Washington, D.C., for respondent-appellee.

Petition to Review a Decision of the Tax Court of the United States.

Before FLETCHER, NELSON and CYNTHIA HOLCOMB HALL, Circuit Judges.

FLETCHER, Circuit Judge:

Taxpayers Howard and Ethel Scar petition for review of the Tax Court's denial of their motion to dismiss for lack of jurisdiction and denial of their two summary judgment motions. Taxpayers argue that the Tax Court lacked jurisdiction because the Commissioner of the Internal Revenue Service (IRS) issued an invalid notice of deficiency. Alternatively, they argue that the Tax Court incorrectly denied their motions for summary judgment and should not have granted the Commissioner's request to amend his answer. We reverse.

BACKGROUND

On September 3, 1979, petitioners Howard and Ethel Scar filed a joint return for tax year 1978. ¹ The Scars claimed business deductions totaling $26,966 in connection with a videotape tax shelter, ² and reported total taxes due of $3,269.

On June 14, 1982, the Commissioner mailed to the Scars a letter (Form 892); it listed taxpayers' names and address, the taxable year at issue (the year ending December 31, 1978), and specified a deficiency amount ($96,600). The body of the letter stated in part:

We have determined that there is a deficiency (increase) in your income tax as shown above. This letter is a NOTICE OF DEFICIENCY sent to you as required by the law.

It informed the taxpayers that if they wished to contest the deficiency they must file a petition with the United States Tax Court within 90 days.

Attached to the letter was a Form 5278 ("Statement--Income Tax Changes") purporting to explain how the deficiency had been determined. It showed an adjustment to income in the amount of $138,000 designated as "Partnership--Nevada Mining Project." The Form 5278 had no information in the space on the form for taxable income as shown on petitioners' return as filed. It showed as the "total corrected income tax liability" the sum of $96,600 and indicated that this sum was arrived at by multiplying 70 percent times $138,000.

Another attached document, designated as "Statement Schedule 2," with the heading "Nevada Mining Project, Explanation of Adjustments," stated as follows:

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 tax rate of 70%.

The tax assessment will be corrected when we receive the original return or when you send a copy of the return to us.

The increase in tax may also reflect investment credit or new jobs credit which has been disallowed.

Also attached to the letter was a document, designated as "Statement Schedule 3," with the heading "Nevada Mining Project, Explanation of Adjustments." This document explained why the Nevada Mining Project deductions were being disallowed.

On July 7, 1982, the taxpayers filed a timely petition with the Tax Court to redetermine the deficiency asserted. In their petition, they alleged that they had never been associated with the "Nevada Mining Project Partnership" and had not claimed on their 1978 return any expenses or losses related to that venture. The Commissioner, on August 30, 1982, filed an answer denying the substantive allegations of the petition.

Sometime in September 1982, the Commissioner conceded in a telephone conversation with the taxpayers that the June 14 notice of deficiency was incorrect because it overstated the amount of disallowed deductions and wrongly connected taxpayers with a mining partnership. Nevertheless, the Commissioner maintained that the notice of deficiency was valid. The Commissioner confirmed his position in a letter dated November 29, 1982, stating "the taxpayers should not be surprised by the fact that the Commissioner means to disallow the deductions claimed in 1978 for Executive Productions, Inc." because similar objections had been made to the deductions claimed for the same tax shelter on taxpayers' 1977 return. The Commissioner enclosed with this letter a revised Form 5278, which contained the appropriate shelter explanation and decreased the amount of tax due to $10,374, and notified the taxpayers that he intended to request leave from the Tax Court to amend his answer.

On December 6, 1982 the taxpayers filed a motion to dismiss for lack of jurisdiction, claiming that the June 14 notice of deficiency was invalid because the Commissioner failed to make a "determination" of additional tax owed before issuing the notice of deficiency. The Commissioner filed a response which conceded the inaccuracy of the notice of deficiency but maintained that it was sufficient to give the Tax Court jurisdiction. On March 21, 1983, the Tax Court held a hearing on the taxpayers' motion to dismiss. At the hearing, counsel for the Commissioner attempted to explain why the Form 5278 sent to the taxpayers contained a description of the wrong tax shelter. He stated that an IRS employee transposed a code number which caused the IRS to assert the deficiency on the basis of the Nevada mining project instead of the videotape tax shelter. No witness, however, testified to this fact at the hearing, ³ and no explanation was ever offered for the discrepancy of over $80,000 between the deficiency notice assessment and that later conceded to be the correct amount.

Following the March 21 hearing, the taxpayers filed a motion for summary judgment based on the Commissioner's concession that they had not been involved in any mining partnerships. The Commissioner shortly thereafter filed his motion to amend his answer to correct the error made in the notice of deficiency and accompanying documents. On November 17, 1983 the Tax Court, in an opinion reviewed by the full court, ruled on these various motions. The Tax Court majority upheld the validity of the June 14 notice of deficiency, finding that it satisfied section 6212(a), ⁴ which states the formal requirements for a deficiency notice. The Tax Court further ruled that the Commissioner could amend his answer as requested, and denied taxpayers' motion for summary judgment. The reviewed opinion contained several concurring and dissenting opinions. Five dissenting judges would have denied jurisdiction on the basis that the deficiency notice was invalid and four dissenting judges would not have permitted the Commissioner to amend his answer.

The Commissioner amended his answer and asserted in it, despite the patent incorrectness of the notice of deficiency and the acknowledgment of error by the Service, that the taxpayer had the burden of disproving the correctness of the Commissioner's revised determinations. The taxpayers renewed their motion for summary judgment. The Tax Court denied this second motion for summary judgment on the ground that triable issues of fact remained concerning whether the taxpayers' primary motivation for entering the videotape venture was the prospect of earning a profit or avoiding tax. On February 22, 1985, the Tax Court entered a decision, pursuant to a stipulation, that taxpayers owed $10,377 in additional tax. ⁵ The stipulation afforded the taxpayers the right to file a petition for review of the Tax Court's adverse rulings.

DISCUSSION

In order to decide whether the Tax Court had jurisdiction we review de novo the Tax Court's interpretation of section 6212(a). Orvis v. Commissioner, 788 F.2d 1406, 1407 (9th Cir.1986); Ebben v. Commissioner, 783 F.2d 906, 909 (9th Cir.1986).

Section 6212(a) states in part: "If the Secretary determines that there is a deficiency in respect of any tax imposed ... he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail." Section 6213(a) provides in part: "Within 90 days ... after the notice of deficiency authorized in section 6212 is mailed ... taxpayer may file a petition with the Tax Court for a redetermination of the deficiency." The Tax Court has jurisdiction only when the Commissioner issues a valid deficiency notice, and the taxpayer files a timely petition for redetermination. "A valid petition is the basis of the Tax Court's jurisdiction. To be valid, a petition must be filed from a valid statutory notice." Stamm International Corp. v. Commissioner, 84 T.C. 248, 252 (1985). See Midland Mortgage Co. v. Commissioner, 73 T.C. 902, 907 (1980).

The taxpayers correctly note that section 6212(a) authorizes the Commissioner to send a notice of deficiency only if he first "determines that there is a deficiency." Because the deficiency notice mailed to the taxpayers contained an explanation of a tax shelter completely unrelated to their return, contained no adjustments to tax based on their return as filed, and stated affirmatively that the taxpayers's return is "unavailable at this time," taxpayers maintain that the Commissioner could not have "determined" a deficiency with respect to them. The taxpayers assert that, in the absence of a determination, the deficiency notice was invalid and therefore the Tax Court lacked jurisdiction.

The Tax Court rejected this argument, finding that "[t]he requirements of section 6212(a) are met if the notice of deficiency sets forth the amount of the deficiency and the taxable year involved." Scar v. Commissioner, 81 T.C. 855, 860-61 (1983).

We agree with the Tax Court that no particular form is required for a valid notice of deficiency, Abrams v. Commissioner, 787 F.2d 939, 941 (4th Cir.), cert. denied, --- U.S. ----, 107 S.Ct. 271, 93 L.Ed.2d 248 (1986); Benzvi v. Commissioner, 787 F.2d 1541, 1542 (11th Cir.), ...