Unpublished Dispositionin Re Joyce B. Barry & Richard E. Hunt, Debtors,joyce B. Barry A/k/a Joyce Hunt (86-5666), Richard E. Hunt(86-5671) Plaintiffs-appellants, v. Internal Revenue Service, Defendant-appellee, 825 F.2d 410 (6th Cir. 1987)

Until they divorced in 1977, Richard Hunt and Joyce Barry filed joint federal income tax returns. When the Internal Revenue Service assessed additional taxes for the years 1972, 1974, 1975, and 1976, both filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. I.R.S. filed proofs of claim for unpaid income taxes, penalties and interest, the debtors objected, and the bankruptcy court proceeded to determine the debtors' tax liabilities for those years, pursuant to 11 U.S.C. § 505(a).

Richard Hunt first takes issue with the bankruptcy court's conclusion that the debtors could not deduct as 'bad debts,' during 1974 and 1975, interest payments he made on behalf of Hunt-Florida Enterprises, Inc., a corporation formed by the debtors to avoid Florida usury restrictions and for the purpose of developing and operating motels. The interest payments, $191,704.57 in 1974, and $65,238.90 in 1975, were made to Investment Realty Trust, which had loaned $1,300,000 to Hunt-Florida. Hunt paid the interest on the loan when Hunt-Florida failed to do so, since the debtors were guarantors of the loan.

The bankruptcy court pointed out that a guarantor cannot claim a deduction for a bad debt until the taxable year in which it can be demonstrated that there is no recourse against the principal obligor, and concluded that the debtors had failed to prove that the obligation of Hunt-Florida to repay Hunt was worthless in 1974 or 1975. The court noted that Hunt-Florida still owned properties used as collateral for the loan from Investment Realty Trust, and that the debtors had not established that the properties should not be considered in determining Hunt-Florida's ability to repay Hunt in 1974 or 1975.

On appeal, Hunt argues that the evidence indicated that Hunt-Florida was insolvent in 1975, or in 1976 at the latest, and, because it was then unable to pay back the money owed Hunt, the debt was worthless and the proper subject of a 'bad debt' deduction.

What was litigated in the bankruptcy court was the debtors' entitlement to deductions in 1974 and 1975, the years in which deductions were claimed. Entitlement to a deduction in 1976 was not litigated, and cannot be considered in the first instance upon appeal. In his brief, Hunt points to no evidence that would establish insolvency during 1974. To establish insolvency during 1975, he relies upon evidence of a mortgage modification agreement entered into by the debtors with Investment Realty Trust on September 30, 1975, under which the debtors became jointly obligated with Hunt-Florida on the loan; testimony indicating that the real estate market in Florida was depressed; and testimony that the value of property owned by Hunt-Florida had decreased. While this may have been evidence of Hunt-Florida's declining financial position during 1975, it was of not of so conclusive a nature as to compel a factual finding by the bankruptcy court that the obligation from Hunt-Florida to Hunt was worthless during 1975.

Accordingly, we are unable to say that the bankruptcy court's determination, that the debtors failed to establish that the debt was worthless during 1974 or 1975, was clearly erroneous.

By the same token, we are unable to find fault with the bankruptcy court's conclusion that the debtors failed to carry their burden of establishing their entitlement to an investment tax credit. See Welch v. Helvering, 290 U.S. 111 (1933).

Both debtors sought to avoid collection of the 1972 deficiency on the basis that they neither received notice of the claimed deficiency, nor waived such notice, as required by statute.

The Code does indeed require notice of a claimed deficiency as a condition precedent to collection, but it further provides that notice can be waived by the taxpayer.¹  I.R.S. concedes that no notice of deficiency was given the debtors as contemplated by the Code. However, both received a form entitled 'Income Tax Audit Changes,' which set out the claimed deficiencies for 1970, 1971, 1972, 1973, and, on February 17, 1975, both signed the form on a line provided below this statement:

Consent to Assessment and Collection--I do not wish to exercise my appeal rights with the Internal Revenue Service or to contest in the United States Tax Court the findings in this report; therefore, I give my consent to either (1) the immediate assessment and collection of the increase in tax shown on line 14, plus any interest due on this tax, and also any penalties shown on line 15 or (2) the decrease in tax shown on line 14, plus any interest and adjustment by any penalties shown on line 15. It is understood that this report is subject to acceptance by the District Director.

The form contained I.R.S. computations from its audit of returns for the four tax years, resulting in increases in tax (overpayments) for 1970 and 1971, an increase in tax (deficiency) of $152,434.12 for 1972, and no change in 1973.

A second Income Tax Audit Changes form was prepared by I.R.S. on March 31, 1975, which revised the calculations on the earlier form, resulting in an additional overpayment of approximately $2,700 in 1971, and lowering of the 1972 deficiency to $150,005.21. No change was shown on the computations for 1970 and 1973. Accordingly, the second form resulted in a lowering of the debtors' liability by approximately $5,100. Richard Hunt signed the waiver at the bottom of this form, but Joyce Barry did not.

Hunt argues that his second waiver was invalid, in view of instructions appearing on the form that ' [i]f a joint return was filed, both taxpayers must sign.' Those instructions do not implement any portion of the statutory notice and waiver requirements, and merely served to advise the debtors that both were required to sign if both sought to waive.

Barry contends that the first waiver was ineffective because the district court failed to accept it and, since she neither received a notice of deficiency based upon the revised income tax audit, nor signed the waiver, I.R.S. could not proceed against her to collect the deficiency. The second income tax audit report, which included the waiver signed by Hunt only, was accepted by the District Director.

Barry's reliance upon the opinion in Steiner v. Nelson, 259 F.2d 853 (7th Cir. 1958), is not well-placed since the waiver at issue in that case contained specific language that ' [t]his waiver . . . is subject to acceptance by the Commissioner . . . and if not accepted, it will be of no force or effect.' 259 F.2d at 856. By contrast, the form at issue here contains language making the 'report' of Income Tax Audit Changes subject to acceptance by the District Director. This language merely serves to advise a taxpayer that the figures arrived at by revenue agents are subject to subsequent review and revision.

We are left, then, with the statute's requirement that the waiver be 'filed with the Secretary.' 26 U.S.C. § 6213(d). Delivery of a waiver by a taxpayer to a revenue agent is sufficient to satisfy the filing requirement of the statute. Moore v. Cleveland Ry. Co., 108 F.2d 656, 661 (6th Cir. 1940).

The question remains, then, whether in view of her having not received a notice of deficiency embodying the revised lower deficiency, and not having waived notice, I.R.S. was permitted to proceed against Barry on the basis of her initial waiver. The statutory provision for a notice of deficiency is in the nature of a jurisdictional requirement, which must be satisfied before I.R.S. may proceed to collect a deficiency. Like any jurisdictional notice required to institute legal proceedings, the purpose of the notice is to advise the taxpayer of the government's claim, and that the government is proceeding against him on that claim; it affords the taxpayer the opportunity to contest. The Consent to Assessment and Collection on the Income Tax Audit Changes form, when signed, waives receipt of this notice. Barry signed the first form.

Once the threshold jurisdictional requirement has been satisfied, either by notice or waiver, I.R.S. is not required to give the same kind of formal notice each time it revises the amount of its claim--so long as the taxpayer receives actual notice of the revisions--any more than a plaintiff is required to reinstitute service of process when he files an amended complaint. This is especially the case where, as here, the revision is the product of an erroneous calculation which had twice included the same item in a cost basis figure and of the allowance of a credit to the taxpayer, with a net result of a lower amount being claimed against the taxpayer.

It should be emphasized that the Consent to Assessment and Collection form purports to do more than just waive notice; it also addresses waiving contest. This appeal concerns only that portion of the waiver which waived notice of the deficiency. Here, I.R.S. did not rely upon that part of the waiver in an effort to deny the debtors an opportunity to contest the amounts claimed. Although it could be argued that the first waiver was effective to preclude contest of the revised figure, since it was lower than the one covered by the first waiver, it does not follow that the earlier waiver could have been asserted to preclude contest of a higher revised claim.

The judgment of the district court is affirmed.