Scar v. Commissioner

Howard and Ethel Scar (plaintiffs) filed joint tax returns in 1977 and 1978. In both years, the Scars were involved in a tax shelter involving videotapes. For the 1977 tax year, the Internal Revenue Service (IRS) (defendant) determined a deficiency on the Scars’ taxes, finding that the videotape activity lacked an economic motive other than the avoidance of tax. For the 1978 tax year, the Scars again claimed deductions related to the videotape tax shelter. The IRS issued the Scars a notice of deficiency for the 1978 tax year. This time, however, the IRS’s notice contained several errors: (1) the notice associated the Scars with a mining-company tax shelter with which the Scars had no involvement, (2) the notice falsely claimed that the Scars’ tax return was not available, and (3) the notice calculated the amount of the deficiency based on figures that had no relation to the amounts the Scars had actually reported on their tax return. The 1978 notice did state the amount the IRS claimed as a deficiency and the year in which the deficiency applied and gave the Scars 90 days’ notice to challenge the notice in the United States Tax Court. The Scars petitioned the Tax Court for review. The IRS conceded that the initial notice’s contents were factually incorrect and attributed the errors to a transcription mishap by an IRS employee. The IRS maintained that a lower deficiency amount was still proper based on the Scars’ participation in the videotape tax shelter. The Scars filed multiple motions for summary judgment and a motion to dismiss for lack of jurisdiction. On all motions, the Scars’ primary contention was that the factual errors in the initial notice rendered it invalid so that the Tax Court did not have jurisdiction to assess any deficiency. A divided, fully empaneled Tax Court ruled that the initial notice was valid despite its errors and held the Scars liable for the recalculated deficiency. The Scars appealed.