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Clark v. Campbell

United States Court of Appeals, Fifth Circuit
501 F.2d 108 (1974)
ELI5:

Rule of Law:

An assessment made following a "quick termination" of a taxable year under Internal Revenue Code § 6851 constitutes a "deficiency." Therefore, the Internal Revenue Service (IRS) must issue a notice of deficiency to the taxpayer, which provides the right to seek pre-payment judicial review of the tax liability in the U.S. Tax Court.


Facts:

  • On June 11, 1969, the Bureau of Narcotics and Dangerous Drugs (BNDD) conducted a search of two buildings in Dallas, Texas, pursuant to a warrant.
  • During the search, the BNDD seized a substantial amount of property belonging to Elzie Clark.
  • By letter dated July 14, 1969, the Internal Revenue Service (IRS) notified Clark that his taxable period was being terminated immediately under § 6851(a) of the Internal Revenue Code.
  • The IRS notice declared that a tax of $104,697.20 for this shortened period had been assessed and was immediately due and payable.
  • The IRS then filed federal tax liens against Clark's real estate and served notices of levy on three Dallas banks and other entities holding Clark's property.
  • The IRS did not issue a formal notice of deficiency (a "90-day letter") to Clark, which is the document that grants a taxpayer access to the Tax Court.

Procedural Posture:

  • Elzie Clark and others sued Ellis Campbell, Jr., the District Director of the IRS, in the U.S. District Court for the Northern District of Texas (a federal trial court).
  • The plaintiffs sought to enjoin the IRS from levying on and seizing their property, arguing the IRS failed to issue a required notice of deficiency under § 6213(a).
  • The District Court found that a deficiency notice was required for a § 6851 termination assessment.
  • The District Court ordered that the IRS's assessment and levy would be enjoined unless the IRS issued a deficiency notice to Clark within 60 days.
  • The IRS, as the defendant-appellant, appealed the District Court's order to the U.S. Court of Appeals for the Fifth Circuit.

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Issue:

Does the IRS have to issue a formal notice of deficiency when it makes an assessment after a "quick termination" of a taxpayer's taxable year under Internal Revenue Code § 6851, thereby allowing the taxpayer to petition the Tax Court for a pre-payment redetermination of the tax liability?


Opinions:

Majority - John R. Brown

Yes, the IRS must issue a formal notice of deficiency. An assessment following a quick termination under § 6851 creates a 'deficiency' that triggers the taxpayer's right to pre-payment review in the Tax Court. The court reasoned that the tax amount assessed after a § 6851 termination fits the statutory and regulatory definition of a 'deficiency' under § 6211. The court further held that the assessment authority for a § 6851 termination must be derived from § 6861 (the jeopardy assessment provision), not the general assessment provision of § 6201. Since § 6851 and § 6861 are analogous jeopardy provisions with equally 'awesome' consequences for the taxpayer, they must be read together. Because § 6861(b) explicitly requires the IRS to mail a deficiency notice within 60 days of a jeopardy assessment, this procedural safeguard must also apply to § 6851 terminations to honor the clear congressional intent to provide taxpayers with a forum to litigate tax liability prior to payment. The alternative remedy of a post-payment refund suit is inadequate for a taxpayer whose assets have been seized.



Analysis:

This decision significantly curtailed the IRS's ability to use the § 6851 quick termination procedure as an end-run around the taxpayer-protective requirements of § 6861. By linking the assessment authority for § 6851 to § 6861, the court ensured that taxpayers facing either type of summary collection action would have the same procedural rights, most notably access to the Tax Court for pre-payment adjudication. This ruling reinforced the fundamental principle of pre-payment review in the American tax system and protected taxpayers from the potentially ruinous effect of having their assets seized without a prompt judicial forum to contest the underlying liability. The decision contributed to a circuit split on the issue, which was ultimately resolved by the Supreme Court in Laing v. United States, 423 U.S. 161 (1976), which affirmed this circuit's reasoning.

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