The Notice of Deficiency (11/8/19)

Tax Procedure fans should follow Bryan Camp's weekly offerings on the Tax Prof Blog, here (the link is to the cover page for the blog).  Bryan's offering this week is titled Lesson From The Tax Court: No Jurisdiction Over Ambiguous NOD, here.  In the blog, Bryan reviews a recent case,  U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (review opinion), here.  In that case, the Tax Court judges get all worked up over a confusing notice of deficiency where the cover letter (that many of us think of as the actual notice of deficiency) is not consistent with the enclosures or attachments intended to explain the deficiency amounts asserted in the letter.

Before reading Bryan's offering, I had just completed a submission draft of an article in which I addressed in a footnote exactly what a notice of deficiency was and referred to the U.S. Auto Sales case.  For those wanting a detailed and thoughtful analysis, please go to Bryan's blog linked above.  But, for a less detailed analysis dealing with just a high level overview of what a notice of deficiency is, I offer the following:

In the article, I discuss the use of ranges in valuation and the interplay with the burden of persuasion.  One topic I address is the common Helvering v. Taylor, 293 U.S. 507 (1935), here, issue of what happens when a notice of deficiency is shown to be arbitrary and excessive.  In addressing that issue, I needed to establish exactly what the notice of deficiency is.  This is what I say in a footnote in the final draft I submitted:

When I use the term notice of deficiency, I mean the (i) cover letter itself which states the amount of deficiencies and tax years and (ii) the enclosures with the cover letter that provide the explanations.  § 7522(a); e.g., IRM 8.17.4.8.13 (09-27-2013), Including Enclosures in the Notice of Deficiency; IRM 8.17.4.10 (09-27-2013), Parts of the Notice of Deficiency Statement.  For an example, see U.S. Auto Sales, Inc. v. Commissioner, 153 T.C. ___, No. 5 (2019), Slip Op. at 2-3, 9 (saying that the “notice encompasses” the “ cover” letter which states the deficiency and years, and the enclosures:  Form 4089, Notice of Deficiency Waiver (permitting a taxpayer to waive the restrictions on assessment), Form 5278 Statement of Income Tax Changes; and Form 886-A Explanation of Adjustments).

There is nothing startling there.  But, at least in the context of valuation, the notice of deficiency package should provide the valuation which is the target of the Helvering v. Taylor inquiry.  As is common in valuation, each party backs off the initial claims of value by the time the case gets to trial.  It is thus not uncommon for the IRS to claim a value in the notice of deficiency and then adjust the value that will, if accepted, reduce the deficiency in the Tax Court litigation.  The question is whether that reduction, without more, means that the original deficiency valuation is arbitrary and excessive in the Helvering v. Taylor sense, so that, if, after the adjustment, the IRS wants any deficiency with respect to valuation, it bears the burden of persuasion.  In that discussion, I review the Cavallaro line of cases (linked below) where the IRS did adjust its valuation quite substantially but the Helvering v. Taylor issue was avoided because persuasive evidence was in the record that established the value.  That persuasive evidence was the IRS's own expert testimony (report) as adjusted on remand from the First Circuit.  So, in that sense, the IRS's evidence did meet its burden of persuasion if indeed the IRS had the burden of persuasion because of the Helvering v. Taylor.  But the First Circuit had already held in the case remanding Cavallaro to the Tax Court that mere adjustments to value do not invoke Helvering v. Taylor.  ("Without more, however, the fact that the Commissioner later conceded a portion of the original deficiency does not compel a conclusion that the initial assessments lacked a rational foundation.") On remand, regardless of which party actually had the burden of persuasion, the Court found the evidence persuasive.  (This is just to say that if evidence is persuasive as to a fact issue as to which some party bears the burden of persuasion, it does not matter who put the evidence in the record and, since the evidence is persuasive, it makes no difference who had the burden of persusasion.) 

Those wanting to pursue this digression further should read Helvering v. Taylor, the First Circuit opinion in Cavallaro, Cavallaro v. Commissioner, 842 F.3d 16 (1st Cir. 2016), here, (referred to as Cavallaro III because of the history of the case), and the Tax Court opinion on remand, T.C. Memo. 2019-144, here (Cavallaro IV).

Finally, if you really want a better--dare I say more holistic--understanding of Helvering v. Taylor, I recommend that you read Judge Learned Hand's decision in the Second Circuit that preceded the Supreme Court case.  Taylor v. Commissioner, 70 F.2d 619, 620-621 (2d Cir. 1934), here, aff’d Helvering v. Taylor, 293 U.S. 507 (1935). And, if you don't know who Judge Learned Hand was, you should.  See Wikipedia entry here.