*1 impact verse on reputation, his business The decision of the Tax Court is af- nor has he demonstrated that it could harm firmed.
his filtration business. sum, the Tax Court’s conclusion that taxpayer’s “primary motive paying Composite’s expenses was to establish a is, new business” at the very least, plau- light sible of the record considered as a whole. Thus Tax finding Court’s taxpayer’s payment Composite’s ex- INVESTMENTS, INC., PLANNED penses did not serve “protect to pro- Michigan Corporation, mote” his own business was “clearly not Plaintiff-Appellee, erroneous.” v. We turn now to the Tax Court’s America, UNITED STATES of finding that the advances Composite efendant-Appellant. D to taxpayer were not loans. “[T]he No. 88-1668. parties intention of the is the controlling factor in determining whether or not ad United States Appeals, Court of vances should be termed as loans.” Bert Sixth Circuit. Commissioner, hold v. 404 F.2d Argued May (6th Cir.1968). The Tax Court bases its Aug. Decided finding that parties intended the ad vance in this case be reimbursement for
expenses paid, a loan not to the taxpayer (1) the fact that no note was executed parties; (2) the fact that taxpay obligated er was interest; pay (3) fact that no time was set for repayment of “loan”; (4) incongruity corpo of a desperate ration in need of financing mak ing loan; large (5) the fact that there was no securing collateral the “loan”
other than taxpayer’s shares corporation; (6) the fact that the 1979 of fering circular indicated that the taxpayer would be reimbursed for expenses he
paid on behalf corporation; (7) fact taxpayer that the indicated that he
may not have repay the “loan” if Com posite failed. All of these factors
considered fact finder in determin ing whether or not an advance may be
considered a loan. Alterman Foods v.
United
(5th
505 F.2d
878-79
Cir.1974); Berthold,
ment for the paid by taxpayer and not as a plausible loan is light these facts. *2 Reve- the Internal
$64,000 6700 of under § 6700, for (“Code”), 26 U.S.C. § nue Code tax an shelter. promotion of abusive Pi’s Court, finding that the notice The District it did inadequate and unfair because involved, period the time clearly specify and plaintiff summary judgment ap- The Government abated PI summary judgment grant peals the of of its later denial District Court’s and the grant for reconsideration motion complied The notice summary judgment. statutory form and with unfairness, specify failure to any, if by the period cured correctly the time parties which dealings prior between exactly what PI knew show Accord- to cover. notice was intended ingly, we reverse.
I. dispute. PI was not in facts are 10, 1982, with on December
incorporated
evaluating
business
purpose
stated
for those
finding investors
ventures
1982, PI,
December,
During
ventures.
in a
sold 115 interests
agent,
an
through
Clas-
“Children’s
as the
known
“product”
recording tax shelter
Series,” a master
sics
published
organized,
lease, which was
Okemos,
(argued),
Klug
A.
Thomas
Corpora-
Productions
by Oxford
produced
Mich.,
plaintiff-appellee.
from
of commissions
As a result
tion.
$64,000.
gross income
sales, PI realized
Smietanka,
Atty., Grand
U.S.
A.
John
effort, PI furnished
its sales
part of
As
(argued),
Mich.,
S. Cohen
Jonathan
Rapids,
materials, pre-
promotional
investors
Appellate
Justice, Tax Div.
Dept,
U.S.
alleg-
Publications, which
by Oxford
pared
Allen,
D.C., Gary R.
Section, Washington,
overstatements
gross
edly contained
Jr.,
Rose,
Asst.
Chief,
S.
Acting
William
PI
recordings.
filed
of the master
value
Kimball, Dept, of Jus-
Gen.,
S.
Atty.
Jane
December
tax
for the
tax return
D.C., Hollis
S.
Div., Washington,
tice, Tax
1983,'
through November
D.C.,
defendant-
Fleischer, Washington,
$64,000.
reflected
appellant.
attorney
advised
Pi’s
January,
Judge,
ENGEL, Chief
penal-
Before:
potential
corporation
KRUPANSKY, Circuit
MERRITT
the tax shelter.
sales of
of its
ties because
Judges.
ac-
sales
thereafter,
PI ceased
Shortly
had no income
PI has
tivities.
MERRITT,
Judge.
December,
Circuit
shelter since
tax
sale
aware
became
During late
adequacy
case is
The issue
investiga-
an
conducted
IRS had
Revenue
by the Internal
sent
of the notice
fact,
had, in
treated
Oxford
“Government”)
tion of
to inform
(“IRS” or
Service
an abusive
Series as
Classics
Investments,
(“PI”) Children’s
Inc.
Planned
plaintiff,
shelter.
had been
Pursuant
an
letter
IRS
dated Febru-
Penalty”
Shelter
correctly
stated the
ary
attorney
and an account-
amount of
$64,000.
representing
ant
letter,
PI met with an
agent
however, incorrectly stated: “Tax
*3
regarding Pi’s
involvement
the
Period
Chil-
Ended:
Related
to
dren’s Classics Series.
Form
September 10,
On
1040.”
1985, PI received a second letter from the
6, 1986,
On October
timely
PI
filed its
IRS which informed PI that the IRS was
complaint in
Court,
the District
seeking a
considering recommending the assessment
refund
the
$150
and an abate-
penalty
of a
under
6700 and which
invit- ment of the penalty. Cross-motions for
ed PI
present
to
any
legal
facts or
argu-
summary judgment
filed,
were eventually
ments before a final decision
made.
was
parties
and the
entered
stipulation
into a
Pi’s counsel met with an
agent again
the material facts.
September
on
18, 1985. At this meeting
The District
Court
summary
Pi’s involvement in the Children’s Classics
judgment
for PI. Houston v. United
Series tax
again
shelter was
discussed.
F.Supp.
(W.D.Mich.1988).
3, 1986,
On March
the IRS sent PI writ- Acknowledging that
the notice need not
ten notification that
assessing
it was
a
take any particular form, the court held
$64,000 penalty
promotion
for the
of an that the notice must meet certain minimum
abusive
shelter. The notice erroneous-
requirements”
“substantial
sufficient
to
ly stated that the “Tax Period”
Decem-
was
impart the taxpayer with “fair notice.” Id.
ber
incorrectly
stated the for-
Relying
on a line of cases defining
mula that had been used to calculate the
the
for a
of deficiency,
notice
penalty.1 The notice also
pro-
outlined the
the court said that a correct statement of
cedures for contesting the assessment but
the tax
involved must be included in
did not
any
contain
description
spe-
of the
the notice. Id. Concluding that PI did not
activity upon
cific
which the penalty was
any guidance
receive
the
from notice of the
based.
period involved,
time
the court ruled that
the notice
by PI
received
was invalid. Id.
On March
1986, PI, pursuant
at 341-42.
Code,2
6703 of the
paid
the IRS $1503
and filed a claim with the IRS for abate-
The District Court
rejected
the
ment of the penalty and a refund of the Government’s contention that the Decem-
IRS, by letter,
$150. The
disallowed
ber
1985 date on the
represented
notice
September
claim on
16, 1986. The letter
the end date
of the
period.
time
denying the claim bore the heading: “In Id. at 342. The court reasoned
PI
that
Re: Section 6700: Promoting Abusive Tax
could not have reasonably
expected
been
1. The notice
penalty
stated that the
was
person
“the
pays
an amount which is not less
greater
$1,000
gross
or
of the
20%
income
percent
than
of the
penalty
amount of such
derived or to be derived
activity.”
from the
At
and files a claim for refund of the
so
amount
alleged
occurred,
however,
conduct
paid....
penalty
promoting
for
abusive
shelter
6703(c)(1).
6703(c)(2)
pro-
Section
greater
$1,000
was the
gross
or 10% the
levy
vides that such
may
collection
be de-
income derived or to be derived
activi-
layed
brought
if suit is
in the district court
ty.
gross
The
language
"20%"
income
thirty days
before the earlier of
after the claim
was
substituted
1984 amendment and did
thirty
refund is
days
denied or
after the
not become
July
effective until
1984. Pub.L.
expiration of six
day
months after the
the claim
143(a),
(1984).
No.
98 Stat. 682
for refund
6703(c)(2).
was filed. 26
U.S.C.
penalty
concededly
amendment’s
inap-
is
plicable to Pi’s 1982 conduct.
3.PI
figure by
arrived at
treating
$150
$64,000
6703(c)(1)
Section
provides
assuming
divisible
the Code
penalty
assessment and
that
levy
$1,000
or
collection
that was
delayed
PI
assessed
for each of 64 differ-
pending the resolution
By
ent
treating
matter
activities.
the assessment as
divisible,
court:
required
only
was
pay
15% the
[i]f,
days
penalty ($1,000)
within 30
day
after the
for one of the 64 activ-
ities,
notice and
demand of
government
under
$150.
sec-
does not contest
tion 6700
against
...
is
any person,
made
treating
manner of
penalty.
of the abu-
for assessment
was
the mechanism
that
date
out from
figure
shelter
espe-
sive tax
being penalized
notice stated
that
considering
cially
for two modes of
provides
upon which
statute
deficiency procedure
special
assessment —a
in 1984.
passed
was
premised
amount
used for
Subchapter B to be
assessment
Id.
taxes, and a
income,
gift
estate and
Subchapter A for as-
rejected
procedure
general
Court
the District
Finally,
if the
taxes.
Section
even
of other
argument
sessment
Government’s
deficien-
special
defective,
provides
PI was
*4
knew,
B,
Subchapter
actually
established
procedures
it
of
thereby
cy
because
or misled
IRS,
income,
gift
exactly
estate and
of
the
assessment
dealings with
for
prior
from
to the assessment
taxes,
apply
and when
not
shall
charged conduct
the
what
26 U.S.C.
penalties.
to con-
opportunity
of
6700
full
collection
had a
§
and
occurred
penalties,
there-
6703(b).
The
Id.
at 342.
court
Section
charge.
the
§
test
proce-
under the
fore,
Pi’s sub-
not allow
be assessed
it should
must
reasoned that
Subchapter
the IRS
A.
excuse
forth
knowledge to
dures set
jective
notice, especially
fair
give
obligation
its
Subchapter
provides
A
6203 of
Section
“not
here was
the IRS’s
since
recording the
made
be
that assessment
Id.
slipshod.”
neglectful, but
merely
regulations
with the
in accordance
liability
District Court
Accordingly,
the
342-43.
Secretary.
26 U.S.C.
by the
promulgated
unenforceable.
and
invalid
the notice
found
taxpayer may
a
Upon request,
§
penalty and
the
abated
The Court further
Id.
of the assessment.
copy
a
obtain
plus interest.
of $150
refund
PI a
the as-
provide that
Treasury regulations
summary
contends
by signing the
the Government
made
appeal,
be
On
sessment
(1)
finding that
CFR
erred
of
assessment.
District
record
the
Court
record,
it did
summary
because
insufficient
The
301.6203-1.
the notice was
§
documents,
of
con-
the
must
correctly
supporting
state
clearly
through
and
not
penalized conduct
following:
the
during which
tain the
argument
(2)
the
rejecting
and
occurred
taxpayer;
1)
identification
insufficient
notice was
if
that even
assessed;
liability
2)
character
PI was
because
enforced
notice should
and
applicable;
if
3)
period,
taxable
by the defect
prejudiced
misled or
not
4)
amount
assessment.
notice.
that,
provide
regulations
Id.
The
obtain
taxpayer may
request,
upon
II.
the assess-
parts of
“pertinent”
copy of the
imposes the Code
forth the
ment, i.e.,
set
parts
Section 6700
which
those
tax shel-
an abusive
date of assess-
person
promotes
who
taxpayer,
name of
reference
liability,
calculated with
ment,
ter
the character
derived
or to be
if
period,
derived
gross income
taxable
“the
assessed and
amount
activity.”
from such
person
by such
Id.
applicable.
provides
6700(a).
Section
U.S.C. §
6671(a) man
accord
§
Subchapter B
provided
penalties
that all
and
penalties be
date that §
6700)
(which includes
Chapter 68
§
sets
taxes,
collected
...
and demand
upon notice
paid
“shall be
taxes, gov
collection
rules for
forth the
as tax-
collected
and
shall be assessed
penalties.
the collection
erns
6671(a).
26 U.S.C.
es.”
provides
Chapter 64
Section
demand
rule for the
general
Code, 26 U.S.C.
Chapter 63
tax:
of taxes.
assessment
governs
§§
aof
an assessment
6671(a)
making
after
instruc
given the
Accordingly,
to section
pursuant
[the
penalty be
an abusive
shelter
tion that
person liable
each
give notice
provides
taxes,” Chapter 63
shall]
assessed “as
unpaid tax,
stating the amount
IV.
demanding payment
thereof.
inquiry, however,
Our
does not end here.
6303(a).
notice must
general
meet the
“fair-
6303 does
Section
not
ness”
process.
of due
prescribe
any particular form of notice.
rejected
District Court
the Government’s
Treasury Regulations promulgated under
argument that the court need not reach the
the authority of
merely parrot
process
due
question because, notwith-
statutory language
notice shall
standing any
notice,
defects in the
the no-
state the amount of the tax and demand
tice was “fair” since PI had been informed
301.6303-l(a).
thereof. 26 CFR §
through
dealings
with the IRS of the
particular conduct that
being penalized
III.
was, therefore,
or mis-
led. The District Court held that
in no
Construing
plain
language of
subjective
event could Pi’s
knowledge cure
regulations
statutes
outlined
the defect in notice.
above, it becomes evident that the form of
*5
notice of assessment of a
Again,
6700 penalty
§
District Court erred.
requires only a
Notices containing
statement of the amount of
technical defects are
valid
taxpayer
where the
and a
has
payment.
prej
demand for
not been
It
by
udiced misled
is
error
also clear
and is afford
the notice sent to the
meaningful
ed a
opportunity
litigate
plaintiff in
his
this case complied with these
claims.
States,
Marvel v. United
719 F.2d
requirements as the notice identified the
(10th Cir.1983)(notice
1507
contained name
amount assessed and
payment.
demanded
corporation
rather than names of individ
In holding that
period
the tax
involved ual taxpayers);
States,
Allan v. United
should
notice,
be included in
F.Supp.
(N.D.Tex.),
386
499
aff'd, 514 F.2d
applied
District Court
regard
the rules
(5th Cir.1975) (notice
1070
contained name
ing
deficiency
notices of
to the
no
instant
wrong
corporation); and Wood Harmon
tice
Indeed,
of assessment.
all the cases Corp.
v. United
F.Supp.
206
773
cited
the District
proposi
Court for the
(S.D.N.Y.1962),
(2d
aff'd,
F.2d 918
Cir.
tion that the
involved must be
1963)(notice did not state
peri
correct time
included
63,
notice were
od).
Subchapter
See,
B cases.
Scar v. Commis
In this case it
undisputed
is
that PI
sioner,
(9th
Cir.1987);
F.2d 1363
Benz
apprised by
the IRS long before the
Commissioner,
vi v.
(11th
V. America, UNITED STATES reasons, reverse we foregoing For Plaintiff-Appellee, and re- of the District Court the decision v. proceedings. further this case mand
BARBER, B. David Defendant-Appellant. concurring.
ENGEL, Judge, Chief concise Judge Merritt’s 88-2912. Nos. fully I concur explains, As he opinion. and well balanced Appeals, States Court United tax shel- for abusive penalties section Circuit. Seventh “as collected be assessed are to ters Moreover, 6671(a). taxes.” Argued Feb. regulations the Code July Decided such assess- notices of only that require Rehearing Rehearing En Banc the amount include ments 18,1989. Denied Oct. thereof. 26 a demand Thus, extent 6303(a). to the U.S.C. § re- itself held that Code court more, something agree I
quires erred. below court emphasize that because only to I write *6 was neither assessee believe that we misled, reach the do not we nor ultimately raised question process due I, statutory scheme. like res- however, serious some entertain judge, validity if not the concerning the ervations apparently bare bones wisdom the cases. in these by Congress required statutory framework is in There through mistake or potential for abuse because even, purpose perhaps, vindictive assessee there is no exact nature and notified Whether, in challenged conduct. case, remedies post-assessment will be pre-assessment notice even the process due satisfy procedural sufficient day for left, to another can be here. I certainly no such evil occurred we do make it clear that simply write constitution- that kind of preclude intend to date. scrutiny a later al