McGee v. Commissioner

T.C. Memo. 1997-221

UNITED STATES TAX COURT

WALTER T. McGEE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25430-95. Filed May 12, 1997.

T. Scott Tufts and Brian F. D. LaVelle, for petitioner.

Frank C. McClanahan, for respondent.

MEMORANDUM OPINION

COLVIN, Judge: This case is before the Court on

petitioner's motion to dismiss for lack of jurisdiction on the

grounds that the notice of deficiency issued to petitioner is not

valid under section 6212. Petitioner also requests that we
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certify this case for immediate appeal if we do not grant his

motion.

Respondent determined that petitioner had an income tax

deficiency of $369,390 for 1987 and was liable for additions to

tax for 1987 of $92,348 for failure to timely file under section

6651(a)(1) and $92,348 for substantial understatement of tax

under section 6661.

A hearing was held on petitioner's motion in Winston-Salem,

North Carolina.

We must decide the following issues:

1. Whether respondent's deficiency determination is valid

for jurisdictional purposes. We hold that it is.

2. Whether it is appropriate in this case to certify

denial of petitioner's motion for interlocutory appeal. We hold

that it is not.

Section references are to the Internal Revenue Code. Rule

references are to the Tax Court Rules of Practice and Procedure.

Background

A. Petitioner

Petitioner lived in Asheville, North Carolina, when he filed

the petition in this case. In 1985, 1986, and 1987, petitioner

lived in Europe. He owned several businesses that sold resort

time shares. He was a director of A.T.O. Marketing Limited

(A.T.O.) in 1987. A.T.O., an Isle of Man entity, sued Kenning

Atlantic Iberica, NV (Kenning), a former partner. The case was
 - 3 -

settled. Petitioner received a settlement payment in the form of

a £570,000 (570,000 pounds sterling) bank draft payable to Swiss

Bank Corp. on or about May 7, 1987.

Petitioner filed his 1987 individual income tax return on

September 15, 1989. He did not report as income the $965,425

determined by respondent to be the dollar equivalent of £570,000

on May 7, 1987.

B. Respondent's Examination and Activities Before Respondent
Issued the Notice of Deficiency

Respondent examined petitioner's 1987 income tax return.

Respondent concluded that petitioner was a director and an owner

of A.T.O., and that he received a £570,000 bank draft payable to

Swiss Bank Corp.

On April 28, 1994, petitioner's counsel sent respondent's

counsel a letter protesting the audit. Petitioner's counsel

contended that petitioner should not have to prove that he did

not receive income and that respondent should not be allowed to

rely on the presumption of correctness. Petitioner's counsel

also objected to the fact that respondent helped the Office of

Child Support Enforcement in Fort Pierce, Florida, to collect

$87,516 in past due child support from petitioner through the

Federal Tax Refund Offset Program.

Petitioner gave respondent a written statement (not under

oath) in which petitioner denied receiving any personal benefit
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from the £570,000 or that he was an owner of A.T.O. Respondent

had petitioner's statement before March 3, 1995.

On March 3, 1995, respondent sent a letter to petitioner in

which respondent proposed to include the $965,425 in petitioner's

1987 income and asked for a response in 15 days (15-day letter).

In the letter, respondent explained the proposed adjustments to

petitioner's 1987 income tax as follows:

In July 1987, Walter T. McGee (taxpayer) moved to
his residence in Asheville, North Carolina; having
resided the three previous years in Europe where he was
in the business of marketing time shares in various
resort areas. On form 2555, "Foreign Earned Income"
attached to his 1987 return, the taxpayer indicated
that he resided in England and was employed by T.S.
Holdings, Ltd. for the period 7/1/86 through 6/30/87.
During the years that the taxpayer resided in Europe,
he was the beneficial owner of several companies which
included, but were not limited to T.S. Holdings
Limited, A.T.O. Marketing Limited (ATO), and United
Timeshare Group (UTG). UTG was formed in May 1986
between H.E.I.L. Ltd. and T.S. Holdings Ltd. H.E.I.L.
Ltd. was represented by Jack Petchey and T.S. Holdings
was represented by the taxpayer, who also served as a
director of T.S. Holdings Ltd. which in turn was the
beneficial owner of ATO. The taxpayer was the
beneficial owner of ATO. At the time that UTG was
formed, one of its purposes was to consolidate the
timeshare marketing and sales interests of T.S.
Holdings Ltd. and the timeshare interests of H.E.I.L.
Ltd. into a single holding company to be known as UTG.
At the time of the formation of UTG, ATO owned a 50%
interest in a timeshare development called Club San
Antonio along with Kenning Atlantic Iberica (Kenning).
ATO and Kenning were not related to one another.
Sometime after the formation of UTG, taxpayer and
Kenning suffered irreconcilable differences which
resulted in the taxpayer filing a lawsuit against
Kenning. Kenning entered into a settlement with A.T.O.
Marketing Ltd. (ATO) on or about May 07, 1987 whereby
it purchased ATO's interest in Club San Antonio for the
settlement amount of 575,000 pounds sterling. At the
US exchange rate on that date, the amount would have
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been approximately $965,425.00 (see exhibit A).
Throughout the negotiations ATO was represented by the
taxpayer, as director of the company, and the attorney
instructed by ATO, Mr. Danny Glasner. Mr. Glasner
accepted a non-negotiable check in the sum of 575,000
pounds sterling payable to Maxwell Glasner & Company
client account. The check was handed to Mr. Glasner,
who accepted the check on behalf of ATO. On May 7,
1987, the taxpayer instructed Mr. Glasner to obtain, on
behalf of ATO, a bankers draft drawn in favor of the
Swiss Bank Corporation. The draft was to be in the sum
of 570,000 pounds sterling with 5,000 pounds sterling
having been deducted from the settlement figure and
retained by Maxwell Glasner & Company. Later the same
date the taxpayer, as director of ATO, confirmed by
letter to Maxwell Glasner & Co. the receipt of a
bankers draft in the sum of 570,000 pounds sterling
payable to the Swiss Bank Corporation in accordance
with previous instructions from ATO the same date. The
accounts of ATO included no receipt of the 570,000
bankers draft or any reference whatsoever to the
settlement reached with Kenning, or to the 570,000
received in settlement. Likewise, the taxpayer's
personal individual income tax return for the 1987 tax
year includes no receipt of the same or reference
whatsoever to the settlement. The government has made
an adjustment to the taxpayer's 1987 gross income in
the amount of $965,425.00 reflecting his receipt of the
lawsuit settlement.

Respondent also gave petitioner a detailed analysis of

respondent's position on the facts and law in the 15-day letter.

On March 17, 1995, petitioner filed an Application for

Taxpayer Assistance Order, Form 911, in which petitioner asked

respondent to show that he received any economic benefit from the

settlement funds and that he be given an Appeals Office

conference. Petitioner asked for an investigation for violations

under Bivens v. Six Unknown Named Agents, 403 U.S. 388 (1971)
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(Federal agents may be sued in their individual capacity),1 and

possible recovery under section 7433, which provides for civil

damages for certain unauthorized collection actions.

C. Notice of Deficiency

Respondent concluded that petitioner did not comply with

respondent's requests to provide information about what happened

to the £570,000. Respondent also concluded that the £570,000

settlement did not appear on the books and records of A.T.O.

Respondent also concluded that petitioner directed Maxwell

Glasner & Co. to deposit the £570,000 in a Swiss bank.

On September 8, 1995, respondent mailed a notice of

deficiency to petitioner in which respondent determined that

petitioner was liable for a deficiency in income tax of $369,390

for 1987 and additions to tax of $92,348 under section 6651(a)(1)

and $92,348 under section 6661. In the notice of deficiency,

respondent determined that the settlement proceeds of $965,425

were income to petitioner. Respondent explained that

determination as follows:

It is determined that you received $965,425.00
(which is the dollar equivalent of 570,000 pounds
sterling on May 7, 1987) on May 7, 1987, which amount
was not reported on your return filed for the taxable
year 1987. This amount represents cash proceeds from

1
The plaintiff in Bivens v. Six Unknown Named Agents, 403
U.S. 388 (1971), complained that an agent of the Federal Bureau
of Narcotics, acting under a claim of authority, entered the
plaintiff's apartment and arrested him for alleged narcotics
violations. The Court found that the search was unlawful and
unreasonable.
 - 7 -

Kenning Atlantic Iberica, NV, in settlement of
litigation instituted by you, allegedly on behalf of
A.T.O. Marketing Limited, an Isle of Man entity of
which you were a director. You received this amount on
May 7, 1987, in the form of a Bank Draft from Lloyd's
Bank, Plc payable to the Swiss Bank Corporation,
through your solicitors, Maxwell, Glasner & Co., and
you acknowledged receipt of the Bank Draft by letter to
Maxwell, Glasner & Co. dated May 7, 1987. On that date
you also advised Danny Glasner, Esq., of Maxwell,
Glasner & Co. that "The Banker's Draft will be
collected by Mr. Walter T. McGee a director of A.T.O.
Marketing Limited."

The foregoing amount is determined to be your
income for the reasons set forth above, as well as the
following reasons:

(1) You were the last identifiable person in
possession of the Bank Draft, and you have failed to
document its subsequent disposition;

(2) You have stated that "The check [Bank Draft]
was deposited in the Swiss Bank Corporation for the
benefit of A.T.O. Marketing Limited," but you have
failed to provide any documentation, such as a deposit
slip or an account reference in support of this
contention;

(3) The books and records of A.T.O. Marketing
Limited do not reflect the receipt of the 570,000 pound
sterling Bank Draft in 1987 or at any subsequent time,
nor do they reflect the settlement with Kenning
Atlantic Iberica, NV, in 1987, or any account in the
name or for the benefit of A.T.O. Marketing Limited at
the Swiss Bank Corporation in 1987;

(4) You have stated "I was not a shareholder or
owner of A.T.O. Marketing Limited," but your
solicitors, Scates, Rosenblatt, admitted in August of
1989 that you were the "beneficial owner" of TS
Holdings, and TS Holdings, in turn, was the registered
50% owner of A.T.O. Marketing Limited;

(5) When you were contacted by a representative
of the Petchey Group of Companies (the corporate group
which was the successor in interest to TS Holdings and
to A.T.O. Marketing Limited) and were asked to account
for the disposition of the 570,000 pounds sterling, you
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merely stated that the funds had been disbursed and
declined to comment further;

(6) When agents of the Internal Revenue Service
attempted to contact your solicitors, Maxwell, Glasner
& Co., with respect to their involvement in the A.T.O.
Marketing Limited settlement, they refused to provide
information unless you agreed to waive the attorney-
client privilege, which you have refused to do; and

(7) Since you directed the disposition of the
settlement funds, and were the last person in
possession, custody and control of the Bank Draft
payable to the Swiss Bank Corporation on May 7, 1987;
since you have declined to further document is [sic]
disposition, which disposition cannot be documented
beyond your receipt; and since the entity for whose
benefit it was allegedly applied denies receipt or any
benefit from the Bank Draft, it is determined that the
entire amount of the Bank Draft is income to you for
the taxable year 1987.

Accordingly, your taxable income is increased in
the amount of $965,425.00 for the taxable year ending
December 31, 1987. See the schedule below for this
computation.

Proceeds from settlement 575,000 pounds sterling
Exchange rate 1.6790 dollars to pounds
Proceeds from settlement
in U.S. dollars $965,425

In the notice of deficiency, respondent also stated (and

petitioner does not dispute) that petitioner reported $29,577 in

income for 1987.

Discussion

Petitioner contends that this Court lacks jurisdiction to

decide this case because respondent's notice of deficiency is

invalid. Petitioner contends that (a) respondent failed to make

the required determination of an actual deficiency, (b) the

notice was prepared with gross ineptitude, and (c) respondent is
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trying to circumvent the statute of limitations. We disagree for

reasons stated next.

A. Whether Respondent's Notice of Deficiency Is Valid

Petitioner contends that we lack jurisdiction because

respondent's notice of deficiency is invalid.

1. Effect of Petitioner's Denial That He Received Any
Economic Benefit From the £570,000 Settlement

Petitioner received a £570,000 bank draft payable to Swiss

Bank Corp. from Kenning on or about May 7, 1987. Petitioner

contends that respondent knew that the payment from Kenning was

made in settlement of A.T.O.'s lawsuit with Kenning, and that

petitioner was a director of A.T.O. Before respondent issued the

proposed adjustment letter on May 3, 1995, petitioner gave

respondent a written statement (not under oath) in which

petitioner denied receiving any personal benefit from the

£570,000. Petitioner contends that respondent had no basis for

determining that petitioner benefited personally from the

settlement funds. Petitioner points out that respondent did no

net worth analysis. Petitioner contends that respondent based

the notice of deficiency on mere suspicion and that the notice of

deficiency is invalid.

We disagree. To be valid, a notice of deficiency must

fairly advise the taxpayer that the Commissioner has actually
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determined a deficiency and specify the year and amount.2 Sealy

Power Ltd. v. Commissioner, 46 F.3d 382, 386 (5th Cir. 1995),

affg. in part and revg. and remanding on other issues T.C. Memo.

1992-168; Abrams v. Commissioner, 787 F.2d 939, 941 (4th Cir.

1986), affg. 84 T.C. 1308, 1310 (1985); Mayerson v. Commissioner,

47 T.C. 340, 348-349 (1966). The notice of deficiency here

clearly shows that respondent determined that petitioner had an

income tax deficiency of $369,390 for 1987 and was liable for

additions to tax for 1987 of $92,348 for failure to timely file

under section 6651(a)(1) and $92,348 for substantial

understatement of tax under section 6661. The explanation that

respondent attached to the notice of deficiency stated that

petitioner had received the £570,000 in a settlement; that

respondent asked petitioner and his counsel for information about

petitioner's disposition of the settlement, but they refused to

provide it; that respondent was unable to trace the settlement

proceeds to anyone other than petitioner; that respondent checked

the books and records of A.T.O. and found no reference to the

£570,000; and that petitioner had told a successor to A.T.O. that

the £570,000 settlement had been disbursed, but petitioner

provided no further information to A.T.O.'s successor.

2
We discuss sec. 7522 below at par. A-5.
 - 11 -

2. Case Law Upon Which Petitioner Relies

Petitioner contends that the facts here are similar to those

in Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), revg. 81

T.C. 855 (1983). We disagree. In Scar, the Commissioner

disallowed a deduction from a partnership with which the

taxpayers had no connection. Statements attached to the notice

of deficiency showed that the Commissioner had issued it without

reviewing the tax return that the taxpayers had filed. Id. at

1365. The U.S. Court of Appeals for the Ninth Circuit held that

the notice of deficiency was invalid under section 6212(a)

because the Commissioner had not reviewed the taxpayers' return

or otherwise actually determined the taxpayers' liability for a

particular taxable year. Id. at 1370. The notice of deficiency

in the instant case shows that respondent examined petitioner's

tax return for 1987 and adjusted items on that return. There is

no statement in the notice of deficiency which suggests that

respondent did not actually determine a deficiency in

petitioner's income tax for 1987.

Petitioner contends that, as in Portillo v. Commissioner,

932 F.2d 1128 (5th Cir. 1991), affg. in part and revg. in part

and remanding T.C. Memo. 1990-68, respondent incorrectly

determined that petitioner received unreported income. In
 - 12 -

Portillo v. Commissioner, supra, the Commissioner issued a notice

of deficiency based on a Form 1099 filed with the Commissioner.

The U.S. Court of Appeals for the Fifth Circuit held that the

notice of deficiency was arbitrary because the Commissioner

failed to show the requisite indicia that the taxpayer received

unreported income, and the Commissioner knew that the employer

who issued the Form 1099 to the taxpayer lacked records to

support the amounts contained in the Form 1099. Id. at 1131,

1133-1134. Portillo is distinguishable from the instant case

because here petitioner concedes that he received the £570,000

bank draft; respondent checked A.T.O.'s books and records, which

did not show that A.T.O. had received the settlement, and

petitioner was the last person to whom respondent could trace the

settlement funds.

We have considered the other cases that petitioner cites in

his motion, reply to respondent's objection, and statement under

Rule 50(c), including Sealy Power Ltd. v. Commissioner, supra,

(we may shift burden to Commissioner if notice of deficiency is

arbitrary); Powers v. Commissioner, 100 T.C. 457 (1993), affd. in

part, revd. in part and remanded in part 43 F.3d 172 (5th Cir.

1995) (litigation costs awarded to taxpayer); and Durkin v.

Commissioner, 87 T.C. 1329, 1402 (1986), affd. 872 F.2d 1271 (7th
 - 13 -

Cir. 1989) (Commissioner's subpoenas were burdensome and late).

The cases petitioner cites do not support his contention that we

lack jurisdiction.

3. Whether the Notice of Deficiency Is Invalid Because It
Did Not State That Respondent Had 6 Years To Assess Tax

Respondent mailed the notice of deficiency more than 3 and

less than 6 years after petitioner filed his return for 1987.

Respondent contends that respondent has 6 years to assess tax

under section 6501(e)(1)(A) because petitioner omitted more than

25 percent of his gross income. Petitioner contends that

respondent must assert grounds in the notice of deficiency to

support respondent's reliance on section 6501(e)(1)(A).

Petitioner contends that Portillo v. Commissioner, supra; Reis v.

Commissioner, 1 T.C. 9 (1942), affd. 142 F.2d 900 (6th Cir.

1944); and Stoller v. Commissioner, T.C. Memo. 1983-319,

establish that the notice of deficiency is invalid because

respondent did not state grounds for relying on the 6-year period

to assess tax. We disagree.

In the notice of deficiency, respondent determined that

petitioner reported income of $29,577 for 1987 and failed to

report income of $965,425. It is clear from the notice of

deficiency that respondent determined that petitioner's

unreported income exceeded 25 percent of his gross income. Thus,
 - 14 -

the notice of deficiency plainly shows grounds for application of

the 6-year period to assess tax.3

Petitioner contends that, because respondent relies on the

6-year period to assess tax, the notice of deficiency must, but

does not, include an indirect method of proof of unreported

income, such as a net worth, source and application, or bank

deposits analysis. Petitioner cites Sutherland v. Commissioner,

T.C. Memo. 1996-1, and Arendt v. Commissioner, T.C. Memo. 1994-

443, to support petitioner's contention that if respondent relies

on the 6-year period to assess tax, the notice of deficiency must

apply such a method or other proof of receipt of unreported

income. We disagree that Sutherland or Arendt supports

petitioner's contention. In Sutherland, we rejected the

taxpayer's contention that the Commissioner mailed the notice of

deficiency too late. We concluded that the 6-year assessment

3
Secs. 6212 and 7522 do not specifically require the
Commissioner to state in the notice of deficiency whether the
Commissioner relies on sec. 6501(e)(1)(A). Petitioner recognizes
that the statute of limitations is an affirmative defense and
does not affect the jurisdiction of this Court. Rule 39;
Robinson v. Commissioner, 57 T.C. 735, 737 (1972); Badger
Materials, Inc. v. Commissioner, 40 T.C. 1061, 1063 (1963).
Thus, petitioner's reliance on Reis v. Commissioner, 1 T.C. 9
(1942), affd. 142 F.2d 900 (6th Cir. 1944), and Stoller v.
Commissioner, T.C. Memo. 1983-319, is misplaced because, in those
cases, we decided whether the time to assess tax had expired, not
whether we had jurisdiction.
 - 15 -

period applied because the taxpayer reported gross income of

$66,022 and failed to report $408,318. In Arendt, we held that

the notice of deficiency was arbitrary because the Commissioner

failed to produce substantive evidence linking the taxpayer to

the tax-generating act of receiving income from the sale of

illegal drugs. Here, petitioner admitted that he received the

bank draft for £570,000. Cf. Tokarski v. Commissioner, 87 T.C.

74 (1986).

Petitioner contends that it is improper for respondent to

determine a deficiency merely because the time to assess tax was

about to expire. We disagree. If the notice of deficiency is

otherwise valid, it is not invalidated merely because the time to

assess tax has almost passed.

4. Petitioner's Documentary Evidence

Petitioner received a letter dated February 17, 1994, from

Banks & Co., Chartered Accountants. The letter states that the

Board of A.T.O. did not want Jack Petchey and his companies to

know what happened to the £570,000, so they placed those funds

out of his control until they could reach a settlement with him.

Petitioner contends that this letter supports his position that

respondent's notice of deficiency is invalid because it shows

that he did not personally benefit from the settlement funds. We
 - 16 -

disagree. Petitioner first provided this letter to respondent in

his reply to respondent's objection to his motion to dismiss,

well after respondent mailed the notice of deficiency.

5. Whether the Notice of Deficiency Complies With
Section 7522

Petitioner cites section 7522,4 which requires that a notice

of deficiency describe the basis for a deficiency and identify

4
Sec. 7522 was originally enacted as sec. 7521(2) by sec.
6233(a) of the Technical and Miscellaneous Revenue Act of 1988,
Pub. L. 100-647, 102 Stat. 3342, 3735, applicable to mailings
made on or after Jan. 1, 1990, and was redesignated as sec. 7522
by sec. 11704(a)(30) of the Omnibus Budget Reconciliation Act of
1990, Pub. L. 101-508, 104 Stat. 1388, 1388-519. It provides:

SEC. 7522(a) General rule. -- Any notice to which
this section applies shall describe the basis for, and
identify the amounts (if any) of, the tax due,
interest, additional amounts, additions to the tax, and
assessable penalties included in such notice. An
inadequate description under the preceding sentence
shall not invalidate such notice.

(b) Notices to which section applies. --

This section shall apply to --

(1) any tax due notice or deficiency
notice described in section 6155, 6212, or
6303,

(2) any notice generated out of any
information return matching program, and

(3) the 1st letter of proposed
deficiency which allows the taxpayer an
opportunity for administrative review in the
Internal Revenue Service Office of Appeals.
 - 17 -

the amounts of tax due, interest, and any additional amounts,

additions to tax, and assessable penalties. Sec. 7522(a) and

(b). An inadequate description does not invalidate the notice.

Sec. 7522(a).

Here, the notice of deficiency clearly describes the basis

for respondent's determination. Respondent's basis for the

determination is that petitioner received the £570,000, A.T.O.

records do not show that A.T.O. received the funds, and

petitioner refused to give respondent information showing that he

did not benefit from the settlement funds. We conclude that the

notice of deficiency describes the basis for and amounts of tax

and penalties due as required by section 7522.

6. Conclusion

We conclude that the notice of deficiency is valid.

B. Judicial Notice of Writ of Summons

Petitioner asks us to take judicial notice of a Writ of

Summons issued by a British court which notifies Kenning that

A.T.O. has filed a claim and that Kenning may pay or contest the

claim within 14 days. Petitioners ask us to take notice of this

document to prove that A.T.O. sued Kenning. We need not do so

because the parties do not dispute the fact that A.T.O. sued

Kenning. Thus, this issue is moot.
 - 18 -

C. Certification for Appeal

Petitioner asks us to certify this case for immediate appeal

if we do not grant his motion. We decline to do so.

We will certify an interlocutory order for an immediate

appeal if we conclude that (1) a controlling question of law is

present, (2) substantial grounds for difference of opinion are

present, and (3) an immediate appeal from the order may

materially advance the ultimate termination of the litigation.

Sec. 7482(a)(2)(A); Rule 193. Failure to meet any one of the

three requirements is grounds for denial of certification.

General Signal Corp. & Subs. v. Commissioner, 104 T.C. 248, 251

(1995); Kovens v. Commissioner, 91 T.C. 74, 77 (1988), affd.

without published opinion 933 F.2d 1021 (11th Cir. 1991). Only

exceptional circumstances justify a departure from the policy of

postponing appellate review until after entry of final judgment.

Coopers & Lybrand v. Livesay, 437 U.S. 463, 475 (1978);

Klinghoffer v. S.N.C. Achille Lauro, 921 F.2d 21, 25 (2d Cir.

1990); General Signal Corp. & Subs. v. Commissioner, supra at

251.

Petitioner has not stated reasons for us to certify this

case for interlocutory appeal. There is not a substantial ground

for difference of opinion as to the question of law present in
 - 19 -

this case; i.e., whether the notice of deficiency is valid. We

decline to certify denial of this motion for interlocutory

appeal.

To reflect the foregoing,

An Order will be

issued denying petitioner's

Motion To Dismiss For Lack Of

Jurisdiction.