Scar v. Comm'r of Internal Revenue
| Decision Date | 17 November 1983 |
| Docket Number | Docket No. 16586–82. |
| Parties | HOWARD S. SCAR AND ETHEL M. SCAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Respondent issued to petitioners a purported deficiency notice for the taxable year 1978. Although the first page, on a standard form, contained the statement that respondent had determined a deficiency of $96,600, in fact the amount of the purported deficiency was arrived at by applying the maximum tax rate in effect for 1978 —70 percent — to an adjustment in the amount of $138,000 indicated as being related to petitioners' partnership interest in a “Nevada Mining Project.” Petitioners had previously filed a 1978 return showing a tax liability of $3,269, but respondent did not, in connection with the purported deficiency determined, consider or take into account the tax liability admitted by petitioners on their return. The petition alleged that petitioners had at no time during the taxable year 1978 or otherwise had any interest whatsoever in a “Nevada Mining Project.” Respondent filed an answer denying the substantive allegations of the petition. Thereafter, respondent conceded that petitioners had no association with the “Nevada Mining Project” and that his purported deficiency determination was in error in this regard. Subsequently, petitioners moved for summary judgment, after which respondent moved to amend his answer and raise an unrelated issue. Held, petitioners' motion to dismiss for lack of jurisdiction is denied because the purported deficiency notice was a valid notice of deficiency. Held further, respondent's motion for leave to file an amendment to answer is granted. Held further, petitioners' motion for summary judgment is denied. Mark Bernsley, for the petitioners.
Charles W. Jeglikowski and Marc J. Winter, for the respondent.
This case is before the Court on petitioners' motion to dismiss for lack of jurisdiction, petitioners' motion for summary judgment, and respondent's motion for leave to file amendment to answer.1
Petitioners filed a joint income tax return for the tax year 1978 with the respondent's Service Center at Fresno, Calif., on or about September 3, 1979 (having previously obtained an extension of time to file the return through September 17, 1979). The return disclosed a tax liability of $3,269.
On June 14, 1982, respondent mailed to petitioners what purported to be a notice of deficiency. The first page is a standard form letter 892, with petitioners' names and address and a statement that respondent had determined a deficiency with respect to petitioners' taxable year ending December 31, 1978, in the amount of $96,600. An attached Form 5278 entitled “Statement — Income Tax Changes” purports to explain how the indicated deficiency was arrived at. This form shows an adjustment to income in the amount of $138,000 designated as “Partnership — Nevada Mining Project.” The Form 5278 has no information in the appropriate space for taxable income as shown on petitioners' return as filed. It shows as the “Total corrected income tax liability” the sum of $96,600 and indicates 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,” states 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 purported notice of deficiency is a document designated as “Statement Schedule 3,” with the heading “Nevada Mining Project, Explanation of Adjustments” and the following statement:
It is determined that the alleged losses claimed by you in your income tax return for the taxable year(s) 7812 with respect to an alleged partnership known as NEVADA MINING PROJECT are not allowable because you have not established that the transactions in which the partnership was involved or in which you were involved with respect to the partnership were bona fide arm's length transactions at fair market value, that such transactions were entered into for profit, or that such transactions had any economic substance other than the avoidance of taxes.
If the determination as set forth above is not sustained, then it is determined in the alternative that the partnership loss is not allowed for the following reasons:
(1) It has not been established that partnership expenses have been incurred, or, if incurred, were ordinary and necessary business expenses.
(2) In addition, you have failed to establish any adjusted basis in the NEVADA MINING PROJECT partnership by way of capital investment, partnership indebtedness, or otherwise. To the extent that you do have any adjusted basis, the claimed loss(es) in excess thereof are not allowable.
(3) In any event, any loss is limited to the amount you had at risk as defined in Section 465 of the Internal Revenue Code, which amount has not been established.
Therefore, your taxable income is increased as shown below.
+------------------------------+
¦Taxable Year(s): ¦7812 ¦
+--------------------+---------¦
¦Loss(es) Reported: ¦($96,600)¦
+--------------------+---------¦
¦Loss(es) Corrected: ¦0 ¦
+--------------------+---------¦
¦Adjustment: ¦96,600 ¦
+------------------------------+
Petitioners timely filed a petition with this Court on July 7, 1982. In their petition, they allege that they have never been associated with the “Nevada Mining Project Partnership” and did not claim on their 1978 return any expenses or losses related to this venture. Respondent filed an answer denying the substantive allegations of the petition.
On December 6, 1982, petitioners filed their motion to dismiss for lack of jurisdiction. In support of their motion, petitioners contend: (1) A determination, the prerequisite of a valid notice of deficiency, was never made by respondent; (2) if a determination was made, no meaningful notice thereof was sent to the petitioners as required; (3) the notice sent to petitioners advises of an assessment of tax concurrently with the notice, which action is inconsistent with the issuance of a notice of deficiency and fatal to its validity.
In his memorandum filed on February 4, 1983, in connection with his opposition to petitioners' motion, as well as at the hearing held on March 21, 1983, respondent agreed with petitioners' statement that petitioners
On March 25, 1983, petitioners filed a motion for summary judgment based upon respondent's concession.
On April 5, 1983, respondent filed a motion for leave to file amendment to answer. In his proposed amendment to answer, respondent seeks to disallow deductions claimed by petitioners with respect to a videotape production on their 1978 return and assert a resulting deficiency in the amount of $10,374. A letter dated November 29, 1982, from respondent's counsel to petitioners' counsel attached to respondent's memorandum sets forth a revised calculation of the asserted deficiency for the taxable year 1978 based on such disallowance in the amount of $10,374 and indicates that, prior to that time, a statutory notice of deficiency had been issued to petitioners disallowing such deductions for the taxable year 1977. At the hearing on March 21, 1983, petitioners' counsel admitted contact with respondent with respect to the taxable year 1977. The Court's records reveal that a statutory notice of deficiency for the taxable year 1977 disallowing deductions in respect of a videotape production was issued to petitioner on April 9, 1981, and that a petition was filed by petitioners on June 30, 1981.
At the hearing on petitioners' motion to dismiss for lack of jurisdiction, respondent's counsel explained the circumstances leading to the issuance of the purported notice of deficiency to petitioners and its erroneous association of petitioners with the Nevada Mining Project. Petitioners' 1978 return was placed in a “suspense status” by the Los Angeles district director because of the district director's association of the return with a tax shelter project. The tax shelter project was identified only by a “freeze code” number. In using respondent's computer, respondent's agents in the Los Angeles district transposed digits in the freeze code number and obtained proposed adjustment language for the Nevada Mining Project which was being audited by the Reno district director. The correct freeze code number would apparently have produced information concerning Executive Productions, Inc., a videotape tax shelter which respondent now contends petitioners were involved in and with respect to which petitioners claimed deductions on their 1978 return. At no time prior to the issuance of the purported deficiency notice for the taxable year 1978 did respondent's agents make an effort to obtain petitioners' 1978 return or to contact petitioners.
Petitioners' primary position with respect to their motion to dismiss for lack of jurisdiction is founded on the assertion that respondent has not “determined that there is a deficiency” within the meaning of section 6212(a). 2 Petitioners argue that it is apparent from the face of the attachments to the purported notice of deficiency that the alleged “determination” bears no relationship to the return which the petitioners filed or should have filed and that respondent's “determination” did not satisfy the definition of “deficiency”...
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