Ballantine v. Commissioner, 70 T. C. 558 (1978)

The IRS’s failure to issue a second examination letter under section 7605(b) does not invalidate a notice of deficiency or shift the burden of proof if no second examination occurred.

Summary

In Ballantine v. Commissioner, the Tax Court ruled that the IRS’s failure to issue a second examination letter under section 7605(b) did not invalidate the notices of deficiency issued to the taxpayers. The court held that since no second examination took place, there was no violation of section 7605(b). The taxpayers argued that the IRS’s actions were arbitrary and excessive, but the court found that the IRS’s deficiency determinations were based on available information, and thus, the burden of proof remained with the taxpayers. This decision clarifies that the IRS’s noncompliance with section 7605(b) does not automatically void a notice of deficiency or shift the burden of proof in the absence of a second examination.

Facts

Robert A. Ballantine and Inez V. Ballantine, along with their related corporations, were audited by the IRS from August 8, 1975, to February 10, 1977. During the audit, the IRS requested the taxpayers to execute “Slush Fund Affidavits,” which they refused on Fifth Amendment grounds. Subsequently, the IRS sought further access to their books and records, but the taxpayers, advised by counsel, refused to allow further access without a second examination letter under section 7605(b). The IRS issued deficiency notices without further inspection, leading the taxpayers to challenge these notices on the grounds that the IRS violated section 7605(b) by not issuing a second examination letter.

Procedural History

The taxpayers filed a petition with the Tax Court challenging the IRS’s deficiency determinations. The IRS moved to strike paragraph 4(e) of the petition, which alleged a violation of section 7605(b), claiming it failed to state a claim upon which relief could be granted. The taxpayers cross-moved to dismiss the case or, alternatively, the IRS’s motion to strike, arguing that the IRS failed to timely move with respect to the petition. The Tax Court heard arguments on both motions and ultimately adopted the opinion of the Special Trial Judge.

Issue(s)

1. Whether the IRS’s failure to issue a second examination letter under section 7605(b) renders the notices of deficiency null and void?
2. Whether the IRS’s failure to issue a second examination letter shifts the burden of proof to the IRS by rendering the deficiency notices arbitrary and excessive?

Holding

1. No, because no second examination occurred, and thus, there was no violation of section 7605(b).
2. No, because the deficiency notices were based on available information and not deemed arbitrary and excessive solely due to the lack of a second examination letter.

Court’s Reasoning

The court applied section 7605(b), which limits the IRS to one inspection per taxable year unless the taxpayer requests otherwise or the IRS provides written notice of an additional inspection. The court reasoned that since no second examination took place, there was no violation of section 7605(b). The court cited United States Holding Co. v. Commissioner and Rose v. Commissioner, where similar facts led to the same conclusion. The court also distinguished Reineman v. United States, noting that it involved a second examination without notice, unlike the present case. The court emphasized that the taxpayers’ refusal to allow further inspection did not compel the IRS to issue a second examination letter, and the IRS’s decision to issue deficiency notices based on existing information did not render them arbitrary and excessive. The court also noted that the taxpayers’ claim regarding the second examination letter was intertwined with other allegations of arbitrary and excessive determinations, but striking paragraph 4(e) would not prejudice their case.

Practical Implications

This decision clarifies that the IRS’s noncompliance with section 7605(b) does not automatically invalidate a notice of deficiency or shift the burden of proof unless a second examination occurs without proper notification. Attorneys should advise clients that refusing further IRS access to records without a second examination letter does not provide a defense against a notice of deficiency. Practitioners should focus on proving that deficiency notices are arbitrary and excessive based on the information available to the IRS, rather than relying solely on procedural noncompliance. This ruling has been followed in subsequent cases, reinforcing the principle that the IRS’s procedural errors do not necessarily undermine its substantive determinations.