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Raheja v. Commissioner of Internal Revenue

decided*fn*: January 11, 1984.


Cudahy, Coffey and Flaum, Circuit Judges.

Author: Cudahy

CUDAHY, Circuit Judge.

Petitioners-appellants appeal pro se from the decision of the Tax Court sustaining a deficiency determination. We affirm.


In 1980, the Internal Revenue Service issued a statutory notice of deficiency of $349.76 for petitioners' 1974 federal income tax return. This amount represented the net effect of adjustments for partnership distributable income and a partnership capital loss (Mrs. Raheja was a financial partner in a travel agency, Skylab Travel), and the disallowance of a portion of a home office deduction. Petitioners do not contest the correctness of these adjustments. They argue instead that the notice of deficiency should be declared null and void because petitioners were selected for audit in violation of their Fifth Amendment right of due process.

In the petition filed before the Tax Court, petitioners presented three arguments in support of their constitutional claim: their return was not selected for audit by either the Discriminant Function System (DIF)*fn1 or the Taxpayer Compliance Measurement Program (TCMP)*fn2 computer programs (petitioners' brief on appeal therefore identifies the audit as an illegal search in violation of the Fourth Amendment); petitioners were not notified in advance in writing that their return was selected for audit; and petitioners were subjected to "personal vendetta and discrimination" by the IRS. Only the first two issues were pursued before the Tax Court, and both were rejected by Judge Fay. On appeal, petitioners continue to argue that they had a right to be selected by computer for audit, and should have received advance notification of the audit. Much of petitioners' brief, however, is devoted to the argument that the audit was based on evidence illegally obtained through " outrageous and malicious conduct" by IRS personnel. The brief requests $500,000 punitive damages as well.

Aside from the home office deduction question, petitioners' problems with the IRS apparently arose because of their association with Skylab Travel. According to the Rahejas, the managing partner of Skylab converted partnership assets to personal use, and refused to provide the Rahejas with the partnership financial information necessary for completing their 1974 tax return. The Rahejas therefore requested an extension of time for filing the 1974 return (due April 15, 1975) until October 15, 1975; the earliest document in the record is an August 15, 1975 letter to the IRS expressing thanks for the extension. In this and several subsequent letters to the IRS, the Rahejas urged the IRS to investigate the managing partner of Skylab. The Rahejas assert that an audit of Skylab did eventually take place.

A May 1976 IRS "Referral Report to Audit" form states that the Rahejas had "been contacted several times with no success in securing returns" for 1974 and 1975.*fn3 This is the only indication in the record of acrimony between petitioners and the IRS.*fn4 The two returns were finally filed in August 1977 along with a letter describing continuing difficulties with Skylab, and promising an amended return when the partnership information became available. An amended return was filed in April of 1978, and included a tax payment reflecting the Skylab income. The audit initiated in 1976 apparently continued, and resulted in the notice of deficiency issued May 22, 1980. Although the notice refers to Skylab and home office information not reflected on the original return, it appears that the $349.76 deficiency assessed reflects only the home office deduction change, the tax attributable to Skylab having been paid in 1978.


As a general rule, the Tax Court will not look behind the notice of deficiency to examine the evidence used or the propriety of the Commissioner's motives or of his administrative policy or procedure in making his determinations. Proesel v. Commissioner, 73 T.C. 600, 605 (1979); Greenberg's Express v. Commissioner, 62 T.C. 324, 327 (1974); Suarez v. Commissioner, 58 T.C. 792, 813 (1972). The rationale for this rule is that the Tax Court proceeding is de novo. Greenberg's Express, 62 T.C. at 328.

An exception to the rule against "looking behind" the notice of deficiency is made when an infringement of the taxpayer's constitutional rights is alleged and the integrity of the judicial process is at stake. In cases of alleged Fourth Amendment violations, the Tax Court has carefully scrutinized the notice of deficiency and imposed sanctions to discourage reliance on evidence which is not merely inadmissible under the usual rules of evidence (the deficiency determination often rests upon hearsay or other inadmissible evidence), but is constitutionally inadmissible. Proesel at 605; Suarez at 813. Similarly, while the conscious exercise of some selectivity in criminal prosecution is not in and of itself a constitutional violation, see Oyler v. Boles, 368 U.S. 448, 456, 82 S. Ct. 501, 505, 7 L. Ed. 2d 446 (1962), it is possible that selectivity may rise to the level of an equal protection violation. Fundamental to an equal protection defense to prosecution is "proof that the decision to prosecute was based on impermissible considerations such as race, religion, or the desire to penalize the exercise of constitutional rights." United States v. Peskin, 527 F.2d 71, 86 (7th Cir.1975), cert. denied, 429 U.S. 818, 97 S. Ct. 63, 50 L. Ed. 2d 79 (1976). See also United States v. Falk, 479 F.2d 616 (7th Cir.1973) (en banc) (selective enforcement of draft card regulations designed to discourage Vietnam dissent).

Numerous taxpayers have raised Fourth Amendment or equal protection arguments in an attempt to quash notices of deficiency -- and have been notably unsuccessful. In Suarez, all the evidence on which the notice of deficiency was based was obtained in an illegal search of taxpayer's premises. As a remedy, the Tax Court merely removed the presumption of correctness attached to the notice of deficiency, and shifted the burden of producing and going forward (not the burden of proof) to the Commissioner who had to present independent untainted evidence to sustain the asserted deficiency. In Greenberg's Express (alleged selection for audit on the basis of taxpayers' ties to organized crime) and Foxman v. Renison, 625 F.2d 429 (2d Cir.), cert. denied, 449 U.S. 993, 101 S. Ct. 530, 66 L. Ed. 2d 290 (1980) (allegation of selection on the basis of the IRS agent's dislike of dentists who deal with Medicaid patients), even the minor burden-shifting remedy was denied. In no case was the notice of deficiency quashed.


In light of these standards, it is clear that petitioners have not established grounds for quashing the notice of deficiency. The gist of petitioners' computer selection argument is that computerized audit selection programs were devised to discourage an "unlimited, arbitrary and capricious" use of IRS power, and the IRS is therefore precluded from selecting returns for audit by any other means. Petitioners offer no support for this position. While the DIF makes it possible for the IRS to screen a large number of returns automatically, it in no way restricts the ability of the IRS to investigate a return for reasons other than statistical aberration. It is well-settled that the IRS "can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not." United States v. Powell, 379 U.S. 48, 57, 85 S. Ct. 248, 254, 13 L. Ed. 2d 112 (1964). In this case the Rahejas were selected for audit because of their own failure to file a return,*fn5 and because of their involvement with a partnership having difficulty with the IRS. It is not unusual for an IRS investigation of one individual or business to result in ...

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