UNITED STATES v. AHRENS

OPINION

JOHN E. MILLER, Senior District Judge.

This is a suit to collect an alleged income tax deficiency brought by the Government against the defendant, Edward J. Ahrens, as authorized by 26 U.S.C.A. (1954) § 6502, and by 28 U.S.C.A. §§ 1340 and 1444.

The suit was commenced October 10, 1972, seeking to recover $152,151.55, plus additional interest, for income taxes allegedly due for the taxable year 1967, which complaint was later amended to strike out the year 1967 and insert in lieu thereof the year 1961.

On October 31, 1972, defendant filed his answer in which he denied the various allegations of the complaint and prayed that the complaint as amended be dismissed.

No other pleadings were filed until February 7, 1974, when the plaintiff filed its first motion for summary judgment supported by a memorandum brief. When that was done, the proceeding was assigned to the writer. By correspondence and otherwise the court urged the parties to prepare the case for trial or other disposition. On February 19, 1974, the defendant filed his response to the motion of plaintiff for summary judgment. In his response the defendant contended and alleged that the motion for summary judgment should be dismissed for the reason that the issues of fact yet to be determined are as follows:

The motion of plaintiff was overruled on April 2, 1974.

Following the entry of the order overruling said motion, the parties proceeded with their discovery procedure and, after completion, the plaintiff requested that the case be set for a pretrial conference. The court entered an order on November 5, 1974, fixing November 20, 1974, as the date for such conference.

However, on November 19, 1974, one day prior to the pretrial hearing, the plaintiff filed its second motion for summary judgment together with brief in support thereof. At the hearing it developed that the defendant had had no opportunity to file a response to the second motion for summary judgment or to submit brief in opposition thereto.

The parties were in agreement that the discovery proceedings were complete on the questions then before the court, subject to the right of the defendant to file response to the motion of plaintiff. Therefore, the defendant asked and was granted time in which to file his response to the second motion above referred to and also to file motion for judgment on the pleadings, motion to strike, and motion for summary judgment, which response and motions referred to were filed by defendant on December 29, 1974, and supported by brief. On January 22, 1975, the plaintiff submitted its reply to the defendant's brief of December 29, 1974.

In the reply the plaintiff reiterates to a great extent its contentions made in its memorandum filed in support of its second motion for summary judgment on November 19, 1974. It further states: "There is no question in this case but that the defendant is trying to escape from the liability assessed against him on the sole grounds that there cannot be produced either by the defendant or the United States a copy of the deficiency notice sent to him and his attorney with respect to the year 1961." The Government also contends that the notice of deficiency was included in its communication of June 22, 1966.

On March 20, 1962, the defendant and his wife signed their joint tax return for 1961, and the return was apparently filed immediately showing a total tax for the year 1961 of $7,687.42.

It is the contention of the defendant that the IRS did not comply with the established procedures in making the alleged assessment of taxes against him and that he was not given an opportunity to contest the merits of the alleged assessment of the taxes in the Tax Court since he was not issued a timely notice of the alleged deficiency and assessment and that the complaint should be dismissed.

The plaintiff contends that the IRS properly followed the correct procedures and that its second motion for summary judgment should be granted and judgment entered for plaintiff in accordance with its complaint.

The court believes that the decisive questions may best be answered by first stating the law applicable to the issues, and then applying the law to the facts as established in the record.

Jurisdiction of the controversy is granted by 26 U.S.C.A. § 7402, Internal Revenue Code of 1954.

The taxing system of the United States is premised on self-assessment, and taxes in excess of those voluntarily returned by the taxpayer can be assessed by the IRS only under the procedure provided in the Code except in certain situations not here applicable. This procedure is designed to give the taxpayer the opportunity to appeal to the Tax Court the Service's determination that a deficiency exists. 9 Mertens, Law of Federal Income Taxation, § 49.126. If a deficiency in income tax is determined, then certain officials are authorized to send notice of such deficiency the taxpayer, 26 U.S.C.A. §§ 6212-6213. The notice of deficiency is sometimes referred to as a "ticket to the Tax Court."

Section 49.131, p. 242, of 9 Mertens, Law of Federal Income Taxation, states:

In Robinson v. Commissioner of Internal Revenue, 57 T.C. 735, the court at page 737 said:

See, also, Rogers v. Commissioner, 57 T.C. 711.

In United States v. Lehigh (W.D. Ark.1961) 201 F.Supp. 224, the court had before it for decision the identical questions sub judice. The court (Judge Henley) discussed all issues pertaining to the defense, and his conclusions were stated with remarkable clarity. At page 227 the court stated:

At page 228 the court stated:

At page 233 the court stated:

The case was appealed by the United States and dismissed on its own motion, 305 F.2d 377 (8 Cir. 1962).

In United States v. Ball, (4 Cir. 1964) 326 F.2d 898, the court beginning at page 900 said:

At page 902 the court said:

See, also, Brafman v. United States, (5 Cir. 1971) 384 F.2d 863.

The record is replete with inadmissible, irrelevant and totally unsupported conclusions of various employees of plaintiff in its effort to establish that IRS timely followed the statutory procedures and that it is entitled to summary judgment of liability against the defendant. The court is convinced from consideration of all the competent, relevant and admissible evidence and the applicable law heretofore set forth that the complaint should be dismissed.

As heretofore stated, the defendant timely filed the statutory joint income tax return for the CY 1961. He was at that time and had been for several months employed in the operation of a general insurance business and had many agents soliciting business and reporting the various policies as they were obtained by said employees. Soon after the return was filed the IRS began an investigation apparently for the purpose of reaching a compromise with defendant, but no agreement was reached. At that time he and his wife were living at 4900 Forest Ridge Lane, Columbia, S. C., as indicated on the return. In the month of October 1962 he and his wife separated and he left the home pending the determination of a divorce proceeding instituted by his wife. In the month of September 1964 a final decree of divorce was granted, and she was awarded the house mentioned at the above address. The record does not show the date he answered a call of the Government for service in the U. S. Army, but in 1965 he lived at Holden Beach, N. C. and was stationed at Fort Bragg from June 1965 to September 1965, when he was transferred to Fort Gordon and remained there until February 11, 1966. He was transferred to a training base for CIA at Washington, D. C. On May 8, 1966, he was assigned for service in Viet Nam and was stationed there on June 22, 1966, when the alleged notice of deficiency was mailed. While in Viet Nam he received two furloughs, one in October 1966 and again in March 1967. On July 25, 1967, he was evacuated medically to the United States and stayed at Holden Beach until November 1967. From November 1967 until March 1968 he lived in Washington, D. C., and worked for the CIA. He was assigned to Manila and Viet Nam on March 14, 1968, and did not return to the United States until November 15, 1969.

On November 9, 1965, in an effort to aid in the investigation of his business, he executed a power of attorney to E. L. McGowan, an attorney of Columbia, S. C., to represent him in respect to internal revenue matters. He gave his attorney all of his IRS records which were delivered by his attorney to the IRS and so far as the record shows were retained by the IRS.

He testified that at all times the officials of the IRS were advised of his address and the various changes. This was not denied by anyone.

The plaintiff now claims that it caused to be mailed a statutory notice of deficiency to E. L. McGowan, the attorney, on June 22, 1966, and that the 90-day period in which the defendant could have filed a petition with the Tax Court expired on September 20, 1966.

The only evidence submitted by plaintiff is evidenced by Exhibit 3 of plaintiff to the discovery deposition of defendant taken on October 11, 1974. Exhibit 3 is Post Office Department Form 3877-A, "Firm Mailing Book for Use in Acceptance of Insured, C. O. D. and Certified Mail," to which was attached the following:

No statement indicating by whom notice was sent or when sent and no notice of deficiency for 1961 was referred to in Exhibit 3. There was no evidence that any notice was included in the letter of June 22, 1966, to Mr. McGowan. It will be noted that the document above set forth refers to the calendar years 1959, 1960, 1961 and 1962. If an assessment was made and notice of deficiency prepared, copies would be available and could have been introduced into evidence.

Mr. McGowan did received the communication of June 22, 1966, and on December 29, 1966, wrote the Acting Chief of the Appellate Branch Office of the IRS, in which he stated:

An assessment is merely a bookkeeping account on the part of the Treasury. The tax liability for each taxpayer is recorded and becomes in effect the District Director's record of accounts payable. The assessment is made when the appropriate official in the Director's Office or Service Center signs a summary record sheet which contains the taxpayer's name, address, amount of tax, type of tax and taxable period. The date of assessment is very important because unless it falls within the assessment period, the assessment is void, and the 6-year period for collection of taxes begins. The defendant would not normally be aware of the date of the assessment until he receives a notice and demand. 26 U.S.C.A. § 6213 provides:

The attorney for the plaintiff frankly admitted at pre-trial conference that he nor plaintiff could find a copy of the notice required to be sent by the applicable statute.

No one testified of his own personal knowledge that a deficiency was found and declared; that an assessment was made; and that notice of such deficiency was sent to the defendant by certified or registered mail; but if it be assumed that a notice was properly mailed, the question remains whether such notice was sufficient to constitute a valid notice under the applicable statutes. That question could have been answered if a duly attested copy of the alleged deficiency, the assessment of the claimed deficiency, and notice of such deficiency had been introduced, but no such attested copies were introduced. The Certificate of Assessments and Payments is not sufficient. The document attached to Exhibit 3, heretofore set forth, purports to deal with the years 1959, 1960, 1961 and 1962. The only year involved was 1961.

This record deals with events that occurred not later than June 22, 1966. The suit was not filed until October 10, 1972, a delay of more than six years for recovery of the taxes for 1961. The answer was filed October 31, 1972. Nothing further was done until February 9, 1974, more than seven years and seven months later, when this court by correspondence and long distance urged the parties to prepare the case for trial or other disposition. The case then began to move and the last brief was submitted January 22, 1975.

Affidavits have been filed by the attorneys in support of the contentions of the parties but none of the affidavits are based on personal knowledge and do not set forth facts admissible in evidence or supplemental to answers to interrogatories as required by Rule 56(f), Fed.R.Civ.P. When the record is considered as a whole, the court is of the opinion that the plaintiff has exhausted all available sources of relevant and admissible facts in its effort to establish that a valid notice of a deficiency was sent to defendant and nothing can be established by further proceedings; and that the defendant has met his burden of proof on the essential point involved herein. The government has effectively deprived the defendant of his right to file a petition with the Tax Court for a redetermination of the deficiency, and the complaint should be dismissed.

Judgment in accordance with the above is being entered today.

SUPPLEMENTAL OPINION

On February 6, 1975, the plaintiff filed the motion, pursuant to Rules 52(b) and 59(a), Fed.R.Civ.P., to alter or amend the court's judgment entered January 28, 1975, and to either enter judgment for plaintiff or, in the alternative, to set aside the judgment and set the matter for trial for the reason that the court "viewed this matter as one having substantial factual issues and accordingly this matter should not be determined in a summary proceeding but only after all factual questions had been tried in a trial before the court." Plaintiff further alleges "that the court erred as a matter of law in holding that the defendant, Edward J. Ahrens, was entitled to judgment in his favor in this matter."

On February 24, 1975, the defendant filed his response to the motion in which he alleged that the judgment entered on January 28, 1975, was entered in accordance with the opinion of the court filed the same date, and that the court did not err as a matter of law in holding that defendant was entitled to a judgment dismissing the complaint of plaintiff.

In its motion plaintiff submitted a memorandum in support thereof and requested oral argument. The defendant supported his response by memorandum.1

In considering the issues now before the court, it is necessary to keep in mind dates of certain actions of the parties that occurred prior to the date of the judgment of January 28, 1975.

February 7, 1974, plaintiff filed its first motion for summary judgment.

February 19, 1974, defendant filed response to the first motion.

April 2, 1974, the motion was overruled and parties were ordered to proceed with their discovery procedures.

November 5, 1974, the court by order set the case for pretrial on November 20, 1974.

November 19, 1974, the day prior to the date fixed for pretrial, plaintiff filed its second motion for summary judgment and supporting brief.

December 5, 1974, the court granted defendant time to file response to the second motion and such motions as he deemed necessary.

On December 19, 1974, defendant filed his various motions referred to in the original opinion and supported them by brief.

On January 20, 1975, plaintiff served its brief in opposition to the motions and brief of defendant.

On February 6, 1975, plaintiff filed its brief in support of its present motion to alter or amend the judgment of January 28, 1975.

On February 24, 1975, defendant filed his brief in opposition to the motion of plaintiff to alter or amend the judgment.

It is difficult to conceive of a case where more confusion existed on the part of the IRS from the date defendant and his then wife filed their joint income tax return for the calendar year 1961 on March 20, 1962.

The plaintiff now contends on its brief of February 6, 1975:

(1) That the court in its original opinion recognized the existence of crucial factual issues and judgment should only be entered after trial on the merits.

(2) That the court found:

(3) That the court erred as a matter of law in granting judgment in favor of the defendant.

The plaintiff, in making its contentions, completely overlooks and disregards the applicable law and its absolute duty to substantiate its contentions by legal and admissible evidence. The Exhibit 3 referred to by plaintiff in the statement of its contentions is Post Office Department Form No. 3877-A, "Firm Mailing Book for Use in Acceptance of Insured, COD, and Certified Mail." The document is set forth in full in the opinion of January 28, 1975.

In August v. Commissioner, (1970) 54 T.C. 1535, the court beginning at page 1537 outlined the standard procedure that is followed in the mailing of statutory notices of deficiency, as follows:

The plaintiff contends that this so-called Exhibit 3 is positive proof that the notice of deficiency was in the envelope mailed to the attorney for the defendant on June 22, 1966, and relies most heavily on the case of Cataldo v. Commissioner, (1973) 60 T.C. 522. The case in nowise supports the contention. In Cataldo the Commissioner introduced the testimony of witnesses who handled the details of the transaction and who testified that they followed the standard procedure. The court held that the law requires the Commissioner "to establish his procedure for the mailing of such notices and to introduce evidence showing that such procedure was followed in the case before it." The court held the Commissioner had, by the testimony of the witnesses, met his burden of proof. Here the plaintiff did not call or produce a single witness that handled any of the transaction or completed or assisted in the various transactions.

An examination of Exhibit 3 of plaintiff, Post Office Department Form 3877-A, which was set forth in full in the original opinion, discloses that on June 22, 1966, one article, No. 601215, was mailed to Mr. Edward J. Ahrens and Lillian M. Ahrens, husband and wife, 4900 Forest Ridge Lane, Columbia, South Carolina 29206, and article No. 601216 was mailed to Mr. Edward J. Ahrens and Mrs. Lillian M. Ahrens, Husband and Wife, c/o Mr. E. L. McGowan, Attorney, 1500 Washington Street, Columbia, South Carolina 29201, for the years 1959, 1960, 1961 and 1962. The document further states the statutory notices of deficiency for the years indicated had been sent to the taxpayers by certified mail, but does not state when or by whom the notices of deficiency were prepared or signed or the provisions of such notices.

The envelope containing the document above referred to was in fact received by the addresssed, E. L. McGowan, and plaintiff, relying upon the deposition of E. L. McGowan, strenuously contends that the notice of deficiency was contained in the envelope. The deposition of Mr. McGowan taken on October 30, 1974, discloses that he was the attorney for defendant in the controversy with the plaintiff. The material portion of his testimony is set forth.2

The only thing definite that is established by the deposition of Mr. McGowan is that his employment as an attorney by the defendant was probably continuing, but he had no distinct recollection of what or when he did anything for defendant and seldom, if ever, communicated with him. On page 6 of the deposition he very glibly testified that:

Apparently the attorney for plaintiff was not satisfied with the testimony. On page 8 of the deposition he further asked the witness whether he recalled receiving a notice of deficiency sometime around late June or July concerning Edward Ahrens' tax liability for the year 1961, and he answered, "I don't recall it, but I'm sure I did."

He was also asked about a letter that he wrote Mr. McLean, Appellate Division, in which he referred to "your letter of the 22nd day of June, 1966." He said that the letter didn't refresh his memory, but obviously he wrote it because it was on his stationery and bore his signature. "This was three or four years after I represented—after I initially began representing Mr. Ahrens." He was asked to what letter he was referring to in his letter to McLean, and he answered:

Q. Is it possible your letter is referring to receipt by you of a notice of deficiency?

A. This is quite possible.

On January 3, 1967, William M. Foster, Chief, Appellate Branch Office, answered the letter of McGowan, above referred to, in which he stated:

Q. Do you recall if an assessment was made against Ed Ahrens for the tax year 1961?

A. Yes, sir, there was an assessment made.

Q. Do you recall when that assessment was made?

A. No, sir, but it would have been made, I would say, roughly in '63 or '64.

Q. Are you quite sure of that?

A. No, I'm not. * * *

The only thing that is definitely established by the testimony of McGowan and the so-called Exhibit 3 hereinbefore referred to is that someone mailed envopes containing certain documents, to which the Post Office or someone else assigned Nos. 601215 and 601216. In nowise does that exhibit or the testimony of McGowan or anyone else establish that a proper notice of deficiency was mailed to McGowan and anyone else, and it is sheer speculation for the plaintiff to contend that the notice was enclosed in the envelope.

The record does not show that the Clerk from the review section of the Audit Division checked the documents or letters taken to the Post Office for mailing. If he in fact delivered for mailing the letters of notice of a deficiency, it would be evidenced by Exhibit 3. No notice was listed in the exhibit and plaintiff did not call the Clerk as a witness. If a notice of delinquency was enclosed, it would have been listed on Exhibit 3. It would have been helpful if plaintiff had called the clerk to testify as to the contents of the envelopes.

In 9 Mertens, Law of Federal Income Taxation, § 49.116, page 222, it is stated:

The court recognizes that the applicable statute does not prescribe any particular form or content of a notice of deficiency, and therefore any form is sufficient if it serves to advise the taxpayer that there has been a deficiency determined or assessed and to advise him of the amount of the deficiency and the year with respect to which such deficiency has been determined or assessed, or at least to give the taxpayer enough information so as he is not deceived as to the taxable period. Generally speaking, according to § 49.132 of 9 Mertens, Law of Federal Taxation, it may be said that notice of deficiency contemplated by the Code is a formal communication to the taxpayer concerning the proposed deficiency in tax. It must be definite as to the year, the assessment and the amount of the tax and not deceive him as to the taxable period. Here the document enclosed showed the taxable period to be 1959, 1960, 1961, and 1962. The original complaint filed herein October 10, 1972, alleged the taxable year as 1967 but was later amended to show 1961.

The court has seen no case holding that a mere statement of income tax due has ever been considered to qualify as a statutory notice. Certainly the plaintiff is now and has been in a position whereby it could have supplied a duly authenticated copy of the notice or could have called the employees who handled the transaction and thus advise the court of exactly what had been done and by whom.

In IV Wigmore on Evidence, § 1281, p. 691, it is stated:

If a statutory notice was in fact prepared and mailed, the burden was upon plaintiff to establish that fact and the same is true of the alleged original assessment. The plaintiff admits that it has been unable to find the original notice, but those documents are official and key documents. Authenticated copies must be furnished, or at least the documents must be identified by the witnesses, and until such identification is made, the alleged documents are not admissible in evidence.

On July 12, 1974, the defendant filed a request for production of documents. On July 18, 1974, the plaintiff responded. Among other filings plaintiff filed the certificate of assessment, which shows that the first notice to defendant was sent October 28, 1966, and that a delinquent notice was mailed March 17, 1967, but at the same time plaintiff contends that the notice of deficiency was in the envelope that was mailed to Mr. McGowan and Mr. Ahrens on June 22, 1966, 8 months and 15 days prior to the date of the delinquent notice mentioned in the certificate of assessment.

At oral argument the plaintiff was represented by Hon. Francis P. Dicello, a learned and experienced attorney of the Tax Division of the Department of Justice. A transcript of the argument has been filed with the Clerk of the Court.

Mr. Dicello stated that when the defendant filed his response to the first motion for summary judgment, in which he pleaded the defense that the defendant had never received a statutory notice of deficiency, "the issue really began to boil down" to the validity of the defense urged by defendant. "This is a rather tough case—it does raise an important principle since the Government relies so strongly—and, so often, on the prima facie correctness of what the date of assessment has been and what the taxpayer has to do to rebut that assessment." He refers to the contention and cases cited in plaintiff's brief where it is stated:

In discussing said cases, he argued "that once the assessment is made, that certificate right here—is prima facie evidence which will sustain a judgment unless the taxpayer rebuts it sufficiently —the assumption of correctness. Here pretty much is our problem. Neither one of us has been able to turn up that notice of deficiency." * * * "I think I know exactly what happened. And, I throw this out—not for evidentiary purposes —because we searched everywhere, because if we do have a trial and the court should grant the motion—I just will not be able to produce that document. But, there was on the deficiency notice that we allegedly sent out—it did not cover one year—but, several years, '59, '60, '71 and '62." * * * "The deficiency notice as a matter of practice is attached to the last year—the actual return for the last year. After six years any return that doesn't show a liability for which there isn't a deficiency outstanding is destroyed." He further stated that since the only liability claimed was for the year 1961, "the Government destroyed the return—and, in so doing it's my guess—and, it's only a guess—that they destroyed the deficiency notice. I have no proof of that, but, my guess is that's what happened."

He then argues that Mr. McGowan, as the attorney for the defendant, received the deficiency notice, but admits that "we didn't get into the question of whether the facts jived with a later assessment notice that he may have gotten or anything else." He then refers to the certificate of assessment that was executed June 7, 1972, which states that the "First Notice" was dated "10-28-66" and "Delinquent Notice, Section 6213(C), Orig. # 446001760" was dated "3-17-67". The court cannot determine whether plaintiff relies upon the date of the delinquent notice of March 17, 1967, but nevertheless the plaintiff continues to contend that the notice of deficiency was in the envelopes that were allegedly mailed to Mr. McGowan and Mr. Ahrens on June 22, 1966, eight months and fifteen days prior to the alleged notice of March 17, 1967.

The confusion in the record is not cleared or explained by the oral argument, but is further confounded.

During the argument Mr. Dicello also offered in evidence Exhibits 1, 2 and 3, as a basis for a request subsequently made by him. Exhibit 1 is an alleged offer of compromise which bears the notation "Rec'd 1-19-70." Exhibit 2, is a notice of federal tax lien filed in the Office of the Clerk of the Court, Florence County Court House, on June 14, 1972. Exhibit 3, dated October 29, 1972, is not the same exhibit 3 to the deposition of defendant. It is simply a statement of the defendant in which he complains of certain actions that had been taken by plaintiff during its entire investigation. The defendant objected to the introduction of said documents, but the court permitted the exhibits to be filed to be given consideration by the court if determined to be material. The court does not believe that said exhibits are material or that they add anything to the solution of this case, and the objection is sustained.

The main contention argued by Mr. Dicello is that regardless of whether a proper statutorily required notice was mailed, "can it be inferred by implied facts? Then, we think we ought to have a trial to see what implied facts there are."

He further stated that if the court denied the motion to alter the judgment of January 28, 1975, it should grant a trial and then the plaintiff would, by cross examination of defendant at such trial, attempt to show, if possible, that no harm was done by the failure to issue proper notice of deficiency.

The deposition of defendant was taken October 11, 1974, and filed November 21, 1974, with its exhibits heretofore discussed. The deposition was not specifically referred to by the parties but was and is a part of the record.

The plaintiff is not entitled to a third attempt and to thus prolong further the final disposition of this case in a "vague hope that something may turn up at trial."

In E. P. Hinkel & Company, Inc., v. Manhattan Co., 506 F.2d 201, the court said at page 205:

In Jacobson v. Maryland Casualty Co., (8 Cir. 1964) 336 F.2d 72, the court at page 74 held:

See, also, Engl v. Aetna Life Ins. Co., (2 Cir. 1943) 139 F.2d 469.

In 6 Moore's Federal Practice, 2d Ed., beginning at § 56.15[3], and extending to § 57.17[1], the author completely summarizes the burden resting upon a movant for summary judgment. In the first paragraph of the summary the learned author states:

The court has thoroughly considered all the contentions of the plaintiff presented by its pleadings, the briefs and oral argument. In addition, the court has read and considered the authorities cited by plaintiff in support of its contentions and is convinced that the plaintiff has failed to establish by legal and admissible evidence that a proper and statutorily required notice of deficiency was mailed to the defendant or his attorney, and such failure on the part of plaintiff has prevented the defendant from proceeding in the Tax Court for a redetermination of the amount of taxes, if any, that are owed by defendant.

As stated in the original opinion, this case is hoary with age and the controversy should be settled. All parties have had a fair chance and equal opportunity to present their contentions and the court is today entering a judgment denying and overruling the motion filed February 6, 1975, to alter or amend the judgment of this court entered herein on January 28, 1975, and further confirming and approving said judgment.