Where the IRS satisfies the Code requirement of an explanation, there are some practical pressures to force the IRS to make it a reasonably good explanation. As noted above, the statute does require that the IRS determine a deficiency. One court has held that where the notice of deficiency explains the deficiency based on facts that patently do not exist, then the IRS has not met the requirement that it make a deficiency determination. In that case, Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), the notice of deficiency said that it was disallowing a deduction for certain tax shelter partnership items with respect to a named partnership. The taxpayer was not a partner in the named partnership. The taxpayer was a partner in a tax shelter partnership with another name, and it is likely that the IRS just plugged in the wrong name on the notice of deficiency. Moreover, the notice of deficiency indicated that the IRS had not actually examined the taxpayer’s return but just calculated the tax proposed in the notice at the highest marginal rate rather than the progressive income tax rates. The Ninth Circuit held that, on these facts on the face of the notice of deficiency, the IRS had made no determination as required by § 6212. The result was that the notice of deficiency was invalid. The invalidity of the notice of deficiency meant that the statute of limitations on assessment was not suspended under § 6503 and, by the time the IRS realized the error (i.e., when the Court of Appeals pronounced the notice invalid), the statute of limitations on assessments had likely expired. Cases since Scar have read the holding narrowly; a notice of deficiency will be not honored “only where the notice of deficiency reveals on its face that the Commissioner failed to make a determination.” As a result, Scar is an outlier, with its analysis and holding rarely invalidating a notice of deficiency.The foregoing paragraph is a revision of the one currently appearing the 2012 versions as follows: footnoted version at pp. 450-451; and nonfootnoted version pp. 332-333.
Friday, December 14, 2012
Tax Court Rejects Scar Attack on Validity of Notice of Deficiency (12/14/12)
In Cross v. Commissioner, T.C. Memo. 2012-344, here, the Tax Court rejected a Scar claim that a notice of deficiency was invalid. The holding is consistent with the trend to limit the application of the Scar analysis to invalidate notices of deficiency. Students of tax procedure should know the background of Scar which is covered ably in the Cross opinion. I offer here my shorter summary from the Federal Tax Procedure Book (footnotes omitted):