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IRS deficiency thrown out due to "gross ineptitude."

The Mathernes filed a joint 1982 federal tax return. The IRS mailed it back to them; no one knows why. The IRS had stamped the return "received March 1984." The IRS kept a copy of the first page only, which showed the filing status and the number of exemptions.

Mr. Matherne died in late 1984; later the IRS began an audit of the Mathernes' 1982 tax liability. It asked for a copy of the 1982 return, which now could not be found. In 1986, Matherne's attorney gave the IRS a "reconstructed" version of the 1982 return.

In late 1987 and early 1988, the IRS issued notices of transferee liability to Matherne's heirs. The notices were based on married-filing-separately rates and said Mr. Matherne had not filed a 1982 return. Penalties also were asserted. The heirs contested the deficiencies in Tax Court, arguing no proper "determination" was made, and therefore the deficiency was invalid. The Tax Court held in the IRS's favor.

To be valid, a deficiency notice must be preceded by a "determination" of a deficiency [IRC section 6212(a)]. A notice of transferee liability is governed by the same standards as a notice of deficiency [IRC section 6901(a)]. Case law says a determination means a "thoughtful and considered determination" that more tax is owed.

Result: For the Matherne's transferees. There was no valid determination of a deficiency; it is clear the IRS did not make a "thoughful and considered determination." With what the court termed "gross ineptitude," the IRS disregarded the fact a 1982 return had been filed, despite supporting evidence in its own files (the copy of the first page); it also disregarded information to which it had access. Thus, the statute of limitations on assessment of transferee liability [IRC section 6901(c)] having run, the opportunity to assert deficiencies against the transferees was apparently lost.
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Article Details
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Author:Wagenbrenner, Anne
Publication:Journal of Accountancy
Date:Jan 1, 1992
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