Whittington v. Commissioner

T.C. Memo. 1999-279

UNITED STATES TAX COURT

DALE L. WHITTINGTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 18229-98. Filed August 23, 1999.

Glen A. Stankee, for petitioner.

Leonard T. Provenzale, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: This case is before the

Court on petitioner's Motion to Dismiss for Lack of Jurisdiction.

The issue for decision is whether the notice of deficiency issued

in this case is invalid because respondent failed to determine a
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deficiency as required by section 6212(a).1 A hearing was held

on petitioner's motion in Miami, Florida.

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time the petition

was filed, petitioner resided in Orlando, Florida.

In 1998, respondent examined the U.S. Corporate Income Tax

Return, Form 1120, of Levitz Mobile Home Brokers, Inc. (Levitz)

for the fiscal year ending September 30, 1994. Though the

examination resulted in a "no-change" report to Levitz, a

subchapter C corporation, respondent believed it had uncovered

facts which would result in changes to the income tax liability

of petitioner, who was the sole shareholder of Levitz during

1994.

Respondent found that petitioner had drawn total funds in

the amount of $356,124.922 from Levitz several times during the

1994 fiscal year and that the funds were used to pay petitioner's

personal expenses. Respondent concluded that the withdrawals may

have constituted constructive dividends from Levitz to

petitioner.

1
All section references are to the Internal Revenue Code in
effect for the years in issue.
2
The funds were disbursed in the form of checks made payable
to petitioner.
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On September 9, 1997, as part of his examination of Levitz,

respondent's examining agent requested petitioner's account

transcript for the year in issue. The transcript, known to

respondent as a writ-view (RTVUE), was ordered by the examining

agent to determine whether petitioner had filed a 1994 tax

return. The RTVUE is a summary of petitioner's individual tax

return and the various attached schedules.3 The RTVUE showed

that petitioner had filed a 1994 tax return with respondent on

October 15, 1995.

The examining agent examined the RTVUE for large, unusual,

or questionable items. The RTVUE showed that petitioner had: (1)

reported business income in the amount of $232,216; (2) claimed

itemized deductions in the amount of $23,404; (3) claimed capital

losses in the amount of $3,000; (4) claimed net operating losses

in the amount of $1,795,146; and (4) claimed Schedule E losses in

the amount of $973,006. The examining agent determined that the

net operating loss deductions and Schedule E losses were

questionable and requested the petitioner's 1994 income tax

return from respondent's service center on September 29, 1997.4

3
A RTVUE is a record of line items from Forms 1040, 1040A,
and 1040EZ and their accompanying schedules. The RTVUE is
created as the returns are processed at the service center.
4
For whatever reasons, the examining agent never received the
original of petitioner's 1994 income tax return from the service
center.
 - 4 -

The RTVUE showed that petitioner reported negative adjusted

gross income in the amount of $2,235,940 and a total tax

liability in the amount of $13,733. The parties do not dispute

that the amounts listed on the RTVUE correctly reflect the

amounts reported on petitioner’s 1994 return. Petitioner did not

report any dividend income for the 1994 tax year.

On October 7, 1997, respondent sent petitioner a Form 4549-

CG, Income Tax Examination Changes, together with a Form 4564,

Information Document Request, requesting copies of petitioner's

1993 and 1994 tax returns. At that time, respondent also

requested that petitioner verify the net Schedule E losses in the

amount of $973,006 and net operating losses in the amount of

$1,795,146. Even though the examining agent contacted both

petitioner and petitioner's counsel several times, neither

provided copies of petitioner’s 1993 and 1994 tax returns nor

verified the losses as requested.

Respondent mailed a notice of proposed income tax changes

(30-day letter) to petitioner on November 6, 1997. Respondent

concluded that petitioner had received $356,124.92 from Levitz

and that only $47,579.12 of this amount was a nontaxable return

of capital. Respondent also concluded that petitioner had

overstated his net Schedule E losses in the amount of $973,006

and net operating loss deductions in the amount of $1,795,146.

Respondent calculated that petitioner had a corrected taxable
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income of $835,768. The proposed adjustments were explained on

Form 886-A, Explanation of Items, included by respondent in the

30-day letter.

Petitioner filed a protest on December 5, 1997 and requested

that the case be referred to respondent's Appeals Office for a

hearing. On April 16, 1998, the Appeals officer sent a letter to

petitioner's counsel stating that the case had been received for

consideration and that a conference would be scheduled.

On May 18, 1998, the Appeals Office sent a letter and Form

872, Consent to Extend the Time to Assess Tax, to petitioner's

counsel requesting an extension of the statute of limitations for

the assessment of tax for the 1994 tax year.

The Appeals officer received no reply to the letter

requesting an extension of the statute of limitations nor to his

attempts to contact petitioner's counsel by phone. Since

petitioner would not extend the statute of limitations, the

Appeals officer concluded that a notice of deficiency should be

issued and that the notice of deficiency should not deviate from

the 30-day letter. A notice of deficiency was duly issued by

respondent on August 18, 1998.

In the notice of deficiency, respondent determined a

deficiency of $311,604 in petitioner's 1994 Federal income tax

and an addition to tax pursuant to section 6662 in the amount of

$62,321.
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In making the adjustments, respondent's examining agent used

the RTVUE containing information from petitioner's 1994 tax

return as a substitute for the original of petitioner's 1994

individual tax return. Respondent adjusted petitioner's income

to take into account: (1) Distributions to petitioner by Levitz;

(2) certain disallowed itemized deductions; (3) disallowed

Schedule E losses; (4) disallowed net operating loss deductions;

and (5) computational adjustments.

On November 16, 1998, petitioner filed a Motion to Dismiss

for lack of Jurisdiction. Petitioner alleges that the notice of

deficiency is invalid because respondent failed to examine

petitioner's 1994 income tax return. Petitioner alleges that the

adjustments relate to items which either: (1) Were not disclosed

on petitioner's 1994 return; (2) were automatic; (3) were

determined from respondent's own databases; or (4) were based on

information obtained solely from third party sources, such as

Levitz.

This Court's jurisdiction to redetermine a deficiency

depends upon the issuance of a valid notice of deficiency and a

timely filed petition. See Rule 13(a), (c); Levitt v.

Commissioner, 97 T.C. 437, 441 (1991).

Section 6212(a) expressly authorizes respondent, after

determining a deficiency, to send a notice of deficiency to the

taxpayer by certified or registered mail. At a minimum, a notice
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of deficiency must indicate that respondent has determined a

deficiency in tax in a definite amount for a particular taxable

year and that respondent intends to assess the tax in due course.

See Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir. 1937);

Perlmutter v. Commissioner, 44 T.C. 382, 400 (1965), affd. 373

F.2d 45 (10th Cir. 1967); see also sec. 7522.

Petitioner, in his Motion to Dismiss for Lack of

Jurisdiction, contends that respondent failed to make a

"determination" because respondent: (1) Failed to examine

petitioner's 1994 income tax return in determining a deficiency;

(2) failed to explain proposed adjustments in the 30-day letter;

(3) failed to hold an appeals conference; (4) failed to consider

evidence which may have reduced the amount of the deficiency; and

(5) did not vary the adjustments in the notice of deficiency from

those in the 30-day letter. Petitioner relies mainly on Scar v.

Commissioner, 814 F.2d 1363 (9th Cir. 1987), revg. 81 T.C. 855

(1983).

In Scar, the taxpayers received a notice of deficiency that

disallowed a loss deduction from a partnership which the

taxpayers had no connection with, and the notice computed a tax

due using the then-highest marginal rate. The taxpayers argued

that the Commissioner failed to determine a deficiency as

contemplated under section 6212(a). A review of various

statements attached to the notice of deficiency revealed that the
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Commissioner had issued the notice "to protect the government's

interest". See Scar v. Commissioner, supra at 1365. The

taxpayers filed a motion to dismiss for lack of jurisdiction.

This Court held the notice of deficiency to be valid and

denied the taxpayers' motion to dismiss. See Scar v.

Commissioner, 81 T.C. 855 (1983). On appeal, the Court of

Appeals for the Ninth Circuit concluded that the Commissioner

must consider information relating to a particular taxpayer

before it can be said that the Commissioner determined a

deficiency with respect to that taxpayer. See Scar v.

Commissioner, 814 F.2d at 1368. With this standard in mind, the

court found the notice of deficiency to be invalid under section

6212(a) because the notice on its face revealed that the

Commissioner had not reviewed information relating to the

particular taxpayer or otherwise made a determination respecting

the taxpayers' liability for the particular taxable year. See

Scar v. Commissioner, supra at 1370.

Significantly, the courts applying Scar have limited the

rule established in that case to its facts. See Sealy Power,

Ltd. v. Commissioner, 46 F.3d 382, 387-388 (5th Cir. 1995), affg.

in part, revg. in part and remanding T.C. Memo. 1992-168; Kantor

v. Commissioner, 998 F.2d 1514, 1521-1522 (9th Cir. 1993), affg.

in part and revg. in part T.C. Memo. 1990-380; Bokum v.

Commissioner, 992 F.2d 1136, 1139 (11th Cir. 1993), affg. T.C.
 - 9 -

Memo. 1990-21; Clapp v. Commissioner, 875 F.2d 1396, 1402 (9th

Cir. 1989); Campbell v. Commissioner, 90 T.C. 110, 114-115

(1988).

Simply stated, the rule set forth in Scar v. Commissioner,

supra, applies in the narrow set of circumstances where the

notice of deficiency on its face reveals that respondent failed

to make a determination. See Campbell v. Commissioner, supra at

112-113.

The facts of the present case are readily distinguishable

from the facts in Scar. In the instant case, the notice does not

state that the income tax is being assessed at the maximum rate

to protect the governmental interest, nor does it misidentify

Levitz. The notice has no defects which make it incorrect on its

face. Additionally, Petitioner does not dispute that the amounts

appearing on the RTVUE are the same as the amounts appearing on

his 1994 income tax return. In sum, the notice does not reveal

on its face that respondent failed to determine adequately a

deficiency.

The information examined by respondent was taxpayer

specific. It was information taken directly from the tax return

of petitioner's wholly owned corporation and from petitioner's

own return when it was first processed by the service center.

Petitioner alleges that Levitz's return clearly shows that

current and accumulated earnings and profits did not exceed
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$173,729, and it was therefore unreasonable for respondent to

determine that petitioner received distributions taxable as

dividends from Levitz in the amount of $308,545 that same tax

year. Petitioner contends that this shows that respondent failed

to make an adequate determination based on information respondent

possessed.

Respondent concluded that petitioner had received

$356,124.92 from Levitz and that only $47,579.12 of this amount

was a non-taxable return of capital. Respondent then examined

the RTVUE and established that petitioner had not reported

dividends on his 1994 return. Respondent requested information

concerning the withdrawals, information which petitioner failed

to provide. The possibility that the determination in the notice

of deficiency may ultimately be held to be erroneous does not

invalidate the notice of deficiency. See Stevens v.

Commissioner, 709 F.2d 12, 13 (5th Cir. 1983), affg. per curiam

T.C. Memo. 1982-352.

Petitioner was given the opportunity to provide respondent

with the necessary documentation concerning the proposed

adjustments but failed to do so. Petitioner also failed to meet

with an Appeals officer in an attempt to resolve the matter prior

to the issuance of the notice of deficiency.

Petitioner's chief contention is that respondent is required

to examine petitioner's actual income tax return, or a copy
 - 11 -

thereof, and cannot rely on information contained in respondent's

records in determining a deficiency. Relying on Kong v.

Commissioner, T.C. Memo. 1990-480, petitioner alleges that this

Court held in that case that respondent was required physically

to examine a taxpayer's return in determining a deficiency and

was not entitled to rely on information recorded in its

databases. We disagree.

In Kong, as in Scar v. Commissioner, supra, respondent had

computed the tax due in the notice of deficiency at the maximum

rate. In Kong, respondent contended that it relied on the

taxpayer's administrative file, which also included a transcript

of account, in computing the tax due in the notice of deficiency.

This Court, however, found that respondent disregarded the

transcript of account in determining the deficiency because

respondent had merely multiplied the disallowed deduction by the

maximum rate and ignored other information available in the

transcript of account. In short, respondent in Kong, was not

prohibited from using information stored in its databases, but he

was prohibited from misusing or disregarding such stored

information. This Court stated:

Respondent did not use the return information to determine
the deficiency. * * * He ignored the relevant tax and income
data in the transcript of account. Indeed, all respondent
determined was that he did not have sufficient information
to avoid sending a notice of deficiency based upon
disallowance of a presumed loss claimed, utilizing the
maximum tax bracket. Kong v. Commissioner, supra.
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In the instant case, respondent used a line-by-line

compilation of petitioner's tax return information. Petitioner

does not dispute that the amounts appearing on the RTVUE are the

same as the amounts appearing on his 1994 return. Additionally,

respondent did not merely utilize the maximum tax bracket in this

case.

Therefore, it is clear in this case that a valid

determination was made. The RTVUE records allowed respondent to

consider taxpayer specific information and reconstruct

petitioner's return for the purposes of the examination. The

RTVUE was used as a substitute for petitioner's 1994 return as it

was a line-by-line summary of the actual return. Not only did

respondent examine the return information, there were

communications between respondent's examining agent and

petitioner with respect to the adjustments at issue.

Petitioner's other contentions contained in his motion are

not based on the validity of the notice or the attached schedules

but are directed at perceived problems with the appeals and audit

process which we need not address and which do not deprive this

Court of jurisdiction. We find that the notice of deficiency in

this case was valid and hold that this Court
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therefore has jurisdiction. Petitioner's motion to dismiss for

lack of jurisdiction will be denied.

An appropriate order

will be issued.