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1975-1976 Preview U.S. Sup. Ct. Cas. 1 (1975-1976)

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Oct. 1975 Term-No. 1                  I    u            -        LI..'   LbXu-  L.LJ UJuxb. u E.LDI                    October 9, 1975
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JAMES LAING v. UNITED STATES
(Docket No. 73-1808)
UNITED STATES v. ELIZABETH HALL
(Docket No. 74-75)
Federal income tax procedure--Necessity for
notice of deficiency in termination-of-taxable-
year cases.
On petition for Writs of Certiorari to the
U.S. Court of Appeals for the Second Circuit in
Laing and the U.S. Court of Appeals for the Sixth
Circuit in Hall. Decisions below: Laing--496 F.
2d 853 (1973); Hall--493 F. 2d 853. Argument
scheduled for week of October 13, 1975
Analysis prepared January 15, 1975, by
Professor David I. Kempler, Columbus School of
Law, Catholic University of America, Washington,
D.C. 20064; telephone (202) 635-5147
The Issue
Whether the Internal Revenue Service (IRS)
may terminate a taxpayer's taxable year and assess
the taxes due for the terminated period without
issuing a statutory notice of deficiency, thus
limiting the taxpayer's choice of forums in which
to litigate the case?
Background and Significance
With certain exceptions, the federal income
tax is imposed on income derived during a period
of 12 calendar months. However, section 6851 of
the Internal Revenue Code authorizes the IRS to
terminate a taxpayer's taxable year and demand
immediate payment of the tax determined to be due
for the terminated period in cases where there is
evidence that the taxpayer plans to evade payment
of anticipated taxes by going, or by placing pro-
perty, beyond the reach of the IRS before the end
of the taxable year. Recently, this termination
provision has occasioned considerable litigation
and publicity because of its increased use by the
IRS in its attempt to curtail narcotics traffic
and other criminal activity. Probably the most
notable instance of the exercise of the IRS's
section 6851 power involved the termination of
the taxable years of Clifford and Edith Irving,
perpetrators of the so-called Howard Hughes Hoax.
Both the District Court and the Court of Appeals
upheld the IRS's termination procedures in that
case., Irvin! v   ray, 344 F. Supp. 567 (S.D. MY.),
aff'd, 479 P. 2d20T2d Cir. 1973).

Section 6851 operates in the form of a demand
for tax, which is, at best, an estimated tax, since
the District Director acts quickly under emergency
conditions. The tax demanded is an interim, pro-
visional, or temporary determination made solely
for collection purposes. If the taxpayer refuses
to pay the tax, the IRS commences its collection
procedures and can levy on any property or rights
to property of the affected taxpayer under section
6331(a) of the Code after notice and demand, with-
out regard to the normal 10 day grace period.
The major issue leading to several court
battles has arisen because section 6851 does not
specifically require the IRS to send a notice of
deficiency to the taxpayer affected by the termina-
tion. This notice is a prerequisite to Tax Court
jurisdiction, the only Court that may review the
IRS's determination on the termination of a taxable
year before the taxpayer makes full payment of his
tax. Thus, the taxpayer's sole remedy remaining
is to file a full-period return, pay any additional
tax, and then institute a refund suit in either
the U.S. District Court or Court of Claims six
months after filing his full-period return.
The lack of necessity of sending a deficiency
notice in termination cases is in contrast to the
Service's power to make jeopardy assessments under
section 6861, a comparable collection device.
Under that section, the IRS must send the taxpayer
a notice of deficiency within 60 days after assess-
ment is made. That provision presupposes that a
return has been filed and that assessment or col-
lection of a deficiency already determined will be
jeopardized by delay. The termination provision
under section 6851 presupposes a more exigent
situation of jeopardy than the jeopardy assessment
provision under section 6861 covers, so that immedi-
ate collection after income is earned or comes to
light is required, rather than waiting for the
close of the taxable year and determination of a
statutory deficiency. Under section 6861, a tax-
payer can stay all collection proceedings pending
Tax Court review if he is able to post an adequate
bond. Under section 6851. a taxpayer can also file
a bond to stay collection, but, in both these cases,
if the taxpayer's resources have been seized by
the IRS, the taxpayer probably has no funds to
furnish an adequate bond.
The recent termination assessment cases in the
district courts have been actions seeking injunc-
tions to enjoin the collection of termination as-
sessments. At the outset, however, the taxpayers
Continued on page 2

Association of American Law Schools: President: CHARLES J. MEYERS, Stanford University 0 President-elect. FRANCIS A. ALLEN, University of Michigan 0l
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