The Internal Revenue Code and Internal Revenue Service authority have long mystified both tax professionals and the American people at large, but in the last year breakthroughs relating to application of Internal Revenue Code taxing authority and required administrative procedure have opened the door to favorable resolution of tax-related controversies. This memorandum treats core issues and authorities, with reasonably comprehensive treatment of requirements for assessments and notice and demand for payment subsequent to assessments. The point of demarcation for the memorandum is an administrative regulation that clearly frames core issues.

All regulations in this memorandum were downloaded from Lexis Publishing's on-line Code of Federal Regulations. Cites are current through the May 3, 2000 edition of the Federal Register. United States Code sections reproduced in this memorandum were downloaded from the Lexis Publishing Internet service since January 1, 2000.

The following regulation, which sets out essentials of tax administration, is 26 CFR § 601.103(a), the "Summary of general tax procedure, collection process." 

(a) Collection procedure. The Federal tax system is basically one of self-assessment. In general each taxpayer (or person required to collect and pay over the tax) is required to file a prescribed form of return which shows the facts upon which tax liability may be determined and assessed. Generally, the taxpayer must compute the tax due on the return and make payment thereof on or before the due date for filing the return. If the taxpayer fails to pay the tax when due, the district director of internal revenue, or the director of the regional service center after assessment issues a notice and demands payment within 10 days from the date of the notice. In the case of wage earners, annuitants, pensioners, and nonresident aliens, the income tax is collected in large part through withholding at the source. Another means of collecting the income tax is through payments of estimated tax which are required by law to be paid by certain individual and corporate taxpayers. Neither withholding nor payments of estimated tax relieves a taxpayer from the duty of filing a return otherwise required. Certain excise taxes are collected by the sale of internal revenue stamps.  [Underscore added]

The authority relative to Part 601, cited following § 601.103, is 5 U.S.C. §§ 301 & 552.

At the onset, publishing authority is important as 5 U.S.C. § 301 is applicable solely to government personnel, and § 552 relates to freedom of information as part of the Administrative Procedures Act. In other words, this particular regulation does not have general application; it is limited primarily to government personnel.

The regulation does not suppose to comply with the Federal Register Act mandate for publication (44 U.S.C. § 1505(a)) that would affect the American people at large. Where it issues under authority of 5 U.S.C. § 301, it may be enforced solely against government personnel identified as being subject to withholding at the source in Chapter 24 of the Internal Revenue Code (26 U.S.C. § 34301(c) & (d)):

(c) Employee.
 For purposes of this chapter, the term "employee" includes an officer, employee, or elected official of the United States, a State, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing. The term "employee" also includes an officer of a corporation.

(d) Employer.
 For purposes of this chapter, the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person…

§  301 Departmental regulations 

The head of an Executive department or military department may prescribe regulations for the government of his department, the conduct of its employees, the distribution and performance of its business, and the custody, use, and preservation of its records, papers, and property. This section does not authorize withholding information from the public or limiting the availability of records to the public.

(vi) Other operative sections. The rules provided in this section also apply in determining -- 
 (A) The amount of foreign source items of tax preference under section 58(g) determined for purposes of the minimum tax; 
 (B) The amount of foreign mineral income under section 901(e); 
 (C) [Reserved] 
 (D) The amount of foreign oil and gas extraction income and the amount of foreign oil related income under section 907; 
 (E) The tax base for citizens entitled to the benefits of section 931 and the section 936 tax credit of a domestic corporation which has an election in effect under section 936; 
 (F) The exclusion for income from Puerto Rico for residents of Puerto Rico under section 933; 
 (G) The limitation under section 934 on the maximum reduction in income tax liability incurred to the Virgin Islands; 
 (H) The income derived from Guam by an individual who is subject to section 935; 
 (I) The special deduction granted to China Trade Act corporations under section 941; 
 (J) The amount of certain U.S. source income excluded from the subpart F income of a controlled foreign corporation under section 952(b); 
 (K) The amount of income from the insurance of U.S. risks under section 953(b)(5); 
 (L) The international boycott factor and the specifically attributable taxes and income under section 999; and 
 (M) The taxable income attributable to the operation of an agreement vessel under section 607 of the Merchant Marine Act of 1936, as amended, and the Capital Construction Fund Regulations thereunder (26 CFR, part 3). See 26 CFR 3.2(b)(3).

Geographical definitions at 26 CFR § 31.3121(e)-1 demonstrate that social welfare taxes are applicable only in the District of Columbia and insular possessions of the United States where the government personnel tax in Chapter 24 applies to a specific activity, that being government employment. Congress' first effort to impose a social welfare tax was declared unconstitutional by the Supreme Court of the United States in 1935, so the geographical limitation imposed by definitions of "State", "United States" and "citizen" at 26 CFR § 31.3121(e)-1 are exclusive of States of the Union. The Supreme Court ruled that implementing a social welfare system is beyond constitutionally enumerated powers in Railroad Retirement Board v. Alton Railroad Company:

The catalogue of means and actions which might be imposed upon an employer in any business, tending to the satisfaction and comfort of his employees, seems endless. Provision for free medical attendance, nursing, clothing, food, housing, and education of children, and a hundred other matters might with equal propriety be proposed as tending to relieve the employee of mental strain and worry. Can it fairly be said that the power of Congress to regulate interstate commerce extends to the prescription of any or all of these things? It is not apparent that they are really and essentially related solely to the social welfare of the worker, and therefore remote from any regulation of commerce as such? We think the answer is plain. These matters obviously lie outside the orbit of congressional power. Railroad Retirement Board v. Alton Railroad Co., 295 U.S. 330, 55 S. Ct. 758 (1935)

In the event a government employer discovers that an employee should make larger contributions, it is up to the employer to work out a payment schedule. If the employee refuses to cooperate, process for litigation is prescribed at 5 U.S.C. § 5512 and notes following; consult procedural Code sections in general at 5 U.S.C. §§ 5512-5520a. The General Accounting Office, as general agent of the Treasury, must verify the liability then the Attorney General, in his capacity as Solicitor of the Treasury, must authorize or initiate litigation. The Internal Revenue Service plays no role in the matter. 

The only situation where the Internal Revenue Service might make an assessment and undertake collection of a delinquent tax is where the designated government withholding agent failed to comply with requirements for keeping books and records, filing returns, and making appropriate payments. This is basically what 26 CFR § 601.103 in general, and § 601.103(a) in particular addresses. Where the regulation issues under authority of 5 U.S.C. § 301 rather than the Federal Register Act, the authority cannot lawfully extend further.

Even in the confines of Chapter 24, however, IRS personnel, assuming IRS had lawful authority for tax administration in the several States, are required to comply with lawful requirements for assessment and 10-day notice and demand. The regulation clearly preserves lawful procedure with the statement, "If the taxpayer fails to pay the tax when due, the district director of internal revenue, or the director of the regional service center after assessment issues a notice and demands payment within 10 days from the date of the notice." 

The regulation that prescribes the method of assessment, with necessary elements specified, is 26 CFR § 301.6203-1: 

The district director and the director of the regional service center shall appoint one or more assessment officers. The district director shall also appoint assessment officers in a Service Center servicing his district. The assessment shall be made by an assessment officer signing the summary record of assessment. The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. The amount of the assessment shall, in the case of tax shown on a return by the taxpayer, be the amount so shown, and in all other cases the amount of the assessment shall be the amount shown on the supporting list or record. The date of the assessment is the date the summary record is signed by an assessment officer. If the taxpayer requests a copy of the record of assessment, he shall be furnished a copy of the pertinent parts of the assessment which set forth the name of the taxpayer, the date of assessment, the character of the liability assessed, the taxable period, if applicable, and the amounts assessed.

If a tax liability has not been paid prior to assessment, a district director or director of a regional service center must serve 10-day notice and demand for payment in compliance with 26 CFR § 6303-1:

(a) General rule. Where it is not otherwise provided by the Code, the district director or the director of the regional service center shall, after the making of an assessment of a tax pursuant to section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. Such notice shall be given as soon as possible and within 60 days. However, the failure to give notice within 60 days does not invalidate the notice. Such notice shall be left at the dwelling or usual place of business of such person, or shall be sent by mail to such person's last known address. 

 (b) Assessment prior to last date for payment. If any tax is assessed prior to the last date prescribed for payment of such tax, demand that such tax be paid will not be made before such last date, except where it is believed collection would be jeopardized by delay.

The assessment is a formal procedure that must comply with specifics of 26 CFR § 301.6203-1, per United States v. Miller 318 F.2d 637 (1963):

We think it clear that the term 'assessment' referred to in this section of the Internal Revenue Code of 1954 has  [*639]  a technical meaning spelled out in the Code and that meaning is binding on this court. n2

The district court properly considered the copy of the official Certificate of Assessments and Payments submitted by the Government in ruling on the motion for summary judgment.  28 U.S.C.  §  1733(b); and Rule 44(a), Fed.R.Civ.P.  That document shows that assessment entries were made on March 8, and April 13, 1956, in the manner prescribed by the statute and the applicable regulation…

We, nevertheless, conclude that the law applicable to ordinary bankruptcy is inapplicable to this Chapter XI proceeding.  The salutary purposes of Section 397 are two-fold.  It not only recognizes the need of taxing authorities for additional time to determine and assess taxes which may be asserted [**8]  late as a priority claim under Section 64 of the Act, but it also fixes a time limit qualification upon the type of claims which will be accorded such preferred treatment.  While the bankruptcy court may be required to reconsider its order of confirmation or to modify the plan of arrangement or dismiss the proceeding on account of the impact of such a late filed claim (see In re Gates, supra, 256 F. Supp. at page 4), it need do so only if the delayed claim is for a tax "found to be owing" within one year of the filing of the petition.  "Found to be owing," as used in this section, means "assessed." The Internal Revenue Code provides for a specific procedure for assessment (26 U.S.C. ß  6203). An assessment is an administrative determination of tax liability. Kurio v. United States, 281 F. Supp. 252 (S.D.Tex.1968); United States v. Miller, 318 F.2d 637 (7th Cir. 1963). And until the assessment has been made, the tax has not been found to be owing.

This requirement is construed as to not accommodate deviation, down to an including the requirement for the signature of a duly appointed assessment officer. The matter was addressed at length in Brafman v. United States 384 F.2d 863 (1967):

For a tax to be collected upon any deficiency, an assessment must be made against the taxpayer within three years after his return is filed.  Int. Rev. Code of 1939, §  874 (§  6501 of the 1954 Code).  The mailing of a ninety-day letter of deficiency or the filing of any court action will suspend the running of the statute of limitations, and the time will not begin to run again until sixty days from the entry of final judgment of that court or until ninety days following the mailing of the letter of deficiency if no proceedings are begun.  See Int. Rev. Code of 1954, §  6213.  In the case of a transferee, a separate section provides that the assessment must be filed [**6]  against the transferee within one year after the expiration of the period of limitation for assessment against the original transferor. Int. Rev. Code of 1939, §  900(b)(1) (§  6901(c)(1) of the 1954 Code) 

If the estate is not assessed within the statutory period there can be no transferee liability.  United States v. Updike, 1930, 281 U.S. 489, 50 S. Ct. 367, 74 L. Ed. 984. For the Government to collect any tax from the transferee, Mrs. Brafman, a valid assessment must have been made against the estate of the transferor, Abraham Lazarowitz, by September 28, 1957. 

There is no disagreement that if the assessment against the estate was made on July 23, 1956, as the Government argues and the documents apparently indicate, the assessment of the transferor was timely.  Mrs. Brafman contends, however, that no valid assessment was made on July 23, 1956, because the assessment certificate was not signed. 

Section 6203 of the Internal Revenue Code of 1954 specifies that an assessment n4 shall be made by recording the liability of the taxpayer in the office of the Secretary or his delegate in accordance with rules or regulations prescribed by the Secretary or his delegate. 

The District Director shall appoint one or more assessment officers, and the assessment shall be made by an assessment officer signing the summary record of assessment.  The summary record, through supporting records, shall provide identification of the taxpayer, the character of the liability assessed, the taxable period if applicable, and the amount of the assessment.  The amount of the assessment shall in the case of tax shown on a return by the taxpayer, be the amount so shown, and in all other cases the amount of the assessment shall be the amount shown on the supporting list or record.  The date of the assessment is the date the summary record is signed by an assessment officer.  * * * Treas. Reg. §  301.6203-1 (1955)(emphasis added.)

The assessment certificate involved in this case, a photostated copy of which is in the record, is not signed by an assessment officer or by any other official.  The certificate refers to July 23, 1956, but shows that it was "prepared" August 1, 1956.  Apparently this is the  [*866]  date on which the assessment was to be formally certified, as it appears twice in the certification portion of the form.  Since the certificate lacks the requisite signature, it cannot constitute a valid assessment. 

We are not moved by the Government's argument that the assessment was valid and effective on July 23rd because it is certified for authenticity under the seal of the United States Treasury.  There is no question as to the authenticity of the document or its admissibility into evidence. n5 But authenticity of the certificate cannot be equated with validity of the assessment on the alleged date: a seal establishes the former, a signature of the assessment officer -- as required by the Treasury Regulations -- establishes the latter.

We find section 301.6203-1 of the Treasury Regulations reasonably adapted to carry out the intent of Congress as reflected in §  6203 of the Code. n6 We therefore adhere to our pronouncement in United States v. Fisher, 5 Cir. 1965, 353 F.2d 396, 398-399, that: 

In the absence of any better test, we give effect to the generally recognized rule that Regulations issued by the Secretary of the Treasury, pursuant to statutory authority, and when necessary to make a statute effective, although not a statute, may have the force of law.  Fawcus Machine Co. v. United States, 282 U.S. 375, 51 S. Ct. 144, 75 L. Ed. 397; Commissioner of Internal Revenue v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S. Ct. 695, 92 L. Ed. 831.

The Treasury Regulations are binding on the Government as well as on the taxpayer: "Tax officials and taxpayers alike are under the law, not above it." Pacific National Bank of Seattle v. Commissioner, 9 Cir. 1937, 91 F.2d 103, 105. n7 Even the instructions on the reverse side of the assessment certificate, Form 23C, specify that the original form "is to be transmitted to the District Director for signature, after which it will be returned to the Accounting [**10]  Branch for permanent filing.  * * *"

Case after case has quoted Treasury Regulation §  301.6203-1 and cited it approvingly, and the treatises on taxation take its literal application for granted. n8 In United States v. Miller, 7 Cir. 1963, 318 F.2d 637, the administrator of an estate executed an estate tax Waiver of Restrictions on Assessment, which was accepted by the Commissioner on February 16, 1956.  The Commissioner made assessments by certificate on March 8 and April 13, 1956.  Suit for collection was not brought until March 2, 1962.  An intervenor argued on appeal that acceptance of the waiver amounted to assessment which commenced the running of the statute of limitations.  The Court rejected this [**11]  argument, saying that "assessment", as referred to in §  6502 of the Code, "has a technical meaning spelled out in the Code and that  [*867]  meaning is binding on this court." n9 The Court continued: 

The district court properly considered the copy of the official Certificate of Assessments and Payments submitted by the Government in ruling on the motion for summary judgment.  * * That document shows that assessment entries were made on March 8, and April 13, 1956, in the manner prescribed by the statute and the applicable regulation.  Since the present suit was filed by the Government on March 2, 1962, it was not barred by the applicable statute of limitations. 318 F.2d at 639, (emphasis added).

The taxpayer in Filippini v. United States, N.D. Cal. 1961, 200 F. Supp. 286, argued that the assessment was not effective until notice was sent to him, and notice was not sent until three days after the running of the statute of limitations.  The Court found that the assessment was "made and complete" when the procedure outlined in the Code and Regulations -- including the signing of the summary record by the assessment officer -- was followed.  In accord with Filippini and Miller are Graper v. United States, E.D. Wis. 1962, 206 F. Supp. 173; In re Milwaukee Crate & Lumber Co., E.D. Wis. 1961, 206 F. Supp. 115. See also Commissioner of Internal Revenue v. Welch, 5 Cir. 1965, 345 F.2d 939, 948 n. 33. 

When §  6203 of the Internal Revenue Code of 1954 was before Congress, the detailed discussions of the proposed section in both the House and Senate was substantially the same: 

This section is a substantial clarification of existing law.  It provides that the assessments shall be made by recording the liability of the taxpayer in accordance with rules or regulations of the Secretary.  This will permit recording of liability, and hence assessment, through machine operations [**13]  or through any other modern procedure.  The Secretary is directed to furnish to the taxpayer, upon request, a copy of the record of the assessment of that taxpayer's liability. n10

It appears to us that the requirement of the applicable Treasury Regulation -- that an assessment officer sign the assessment certificate -- is consistent with the literally mechanical procedures for recording of liability.  The recordation is to be accomplished through "machine operations", but the actual and final assessment step, that step which establishes a prima facie case of taxpayer liability, n11 can be taken only with the approval of a responsible officer of the Internal Revenue Service.  The Government may want to postpone assessment in certain cases because of the limitations on collection and lien perfection that begin to run at the time of assessment.  [**14]  This might be accomplished, after the computers have run their course, only by the assessment officer refusing to sign the already prepared certificate. n12 What is important in any case is that assessment is not automatic upon recordation; it requires the action of an assessment officer.  That action, as defined explicitly in the Treasury Regulations, is the signing of the certificate.

We recognize that in sustaining Mrs. Brafman's contention regarding lack of proper assessment within the limitations period we are disposing of this case on what could be termed a "technical defense".  As the district court said in  [*868]  United States v. Lehigh, W.D. Ark. 1961, 201 F. Supp. 224, 234, this [**15]  is both true and immaterial: 

Any procedural defense is in a sense "technical." The procedures set forth in the Internal Revenue Code were prescribed for the protection of both Government and taxpayer.  Neglect to comply with those procedures may entail consequences which the neglecting party must be prepared to face, whether such party be the taxpayer or the Government.

Certainly the courts have not hesitated to enforce strictly the Code requirement that a taxpayer's returns must be signed to be effective.  Thus, unsigned returns, even with remittances, have been viewed as nullities from the standpoint of imposition of penalties n13 and of commencement of the running of the statute of limitations. n14 It has availed the taxpayer little that his failure to sign was inadvertent. n15

This brings us to the merits of the case.  The court's opinion, which the Judge treated as his findings, found there had been no notice or demand respecting these taxes given to Coson, individually, prior to commencement of his action.  He also found: 'Between March and August of 1955, plaintiff invested $ 31,000 in a newly organized Las Vegas, Nevada, hotel and gambling establishment known as the 'Moulin Rouge,' and obtained a 1.70 per cent interest therein.  He reasonably and in good faith thought he was investing as a limited partner in a limited partnership.  The Moulin Rouge was note, however,  [**14]  a limited partnership.  Upon first ascertaining this, plaintiff promptly mailed notices of renunciation.' n10 (169 F.Supp. 672)

All of this is significant in view of the fact that on December 27, 1956, when this suit was started, no notice or demand concerning these taxes had been given to or served upon Coson.  This procedural prerequisite to the securing of a Government lien for such taxes is made plain by the statute.  See Detroit Bank v. United States, 317 U.S. 329, 335, 63 S.Ct. 297, 87 L.Ed. 304. §  6321 of Title 26 U.S.C. recites that the amount of taxes shall be a lien upon the property of a person liable to pay the tax who 'neglects or refuses to pay the same after demand.' n15 The procedure for making such demand is set forth in §  6303(a) of the same title as follows: 'Where it is not otherwise provided by this title, the Secretary or his delegate shall, as soon as practicable, and within 60 days, after [**23]  the making of an assessment of a tax pursuant to §  6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof. * * *'

Internal Revenue Service personnel are not competent witnesses when it comes to liabilities alleged or verified by third parties. Whoever is responsible for the master agency return and issuing the W-2 or some other report such as a Form 1099 payment record is the "competent witness" responsible for the evidence. Both the support documents and the assessment are available on request by the alleged "taxpayer".

Documentary or other material evidence in and of itself has no lawful effect. In order to put evidence in record, there must be a competent witness, or put another way, testimonial verification. Courts of law recognize three kinds of "testimonial witness" to convey or verify evidence for the record. The forms are (1) testimony by affidavit, (2) testimony by deposition, or (3) testimony under direct examination. (See Federal Rules of Evidence and rules applicable in each State of the Union.)

Whenever someone files a tax return, he is required to sign under penalties of perjury that facts set out on the return are accurate or true. The return is an affidavit, i.e., testimonial verification of facts entered on the return.

As this reasonably short memorandum demonstrates, the 26 CFR § 601.103(a) summary of collection procedure tacitly confirms three issues of law: (1) Whoever files a tax report or return is the competent witness as to facts reflected on the return, not IRS personnel; (2) district or region assessment officers must execute assessments prior to commencing collection process; and (3) the district director or the director of the regional service center must issue 10-day notice and demand for payment prior to undertaking any other administrative collection action.

Pat Patton's book makes a definitive statement where the assessment and 10-day notice and demand letter are concerned. Unless or until there is a procedurally proper assessment in place, there is no tax liability, and the necessary first step in collection process is the 10-day notice and demand letter. When and if either of these elements is missing, any collection initiative is under color of law and is illegal. (A link for ordering Patton's book is on the Research page of the Law Research & Registry web site at www.LawResearch-Registry.org)

IRS personnel may be competent witnesses so far as assessments and 10-day notice letters are concerned, but not competent where third-party reports and returns are concerned. They may verify legitimacy of liability where they have first-hand knowledge, which might be the case for a Bureau of Alcohol, Tobacco and Firearms inspector who gauged production at a still or verified an inventory, but if obligations attested by a third party are challenged, the person responsible for the report is the competent witness. An IRS agent might testify that, "Yes, Joe Public filed this return," but he would be incapable of verifying facts stated on the return unless he personally audited original information the return was based on.

In order for government personnel to be competent witnesses, the allegation of liability must at a minimum including recitation of taxing and liability statutes, with attending implementing regulations. This is particularly the case where a penalty is to be imposed, as recited in United States v. Menk 260 F.Supp. 784 (1966):

The defendant's contention that the information must allege that he was engaged in the "trade or business" of gambling for a profit is based on the use of those words in Title 26 U.S.C. §  4901. The defendant argues that this section, and not Section 4461, defines the offense charged.  In its pertinent parts, this section provides:

"(a) Condition precedent to carrying on certain business. - No person shall be engaged in or carry on any trade or business subject to the tax imposed by section *** 4461(a)(1) (coin-operated gaming devices) *** until he has paid [**8]  the special tax therefor."

 [*787]  It is immediately apparent that this section alone does not define the offense as the defendant contends.  But rather, all three of the sections referred to in the information - Sections 4461, 4901 and 7203 - must be considered together before a complete definition of the offense is found.  Section 4461 imposes a tax on persons engaging in a certain activity; Section 4901 provides that payment of the tax shall be a condition precedent to engaging in the activity subject to the tax; and Section 7203 makes it a misdemeanor to engage in the activity without having first paid the tax, and provides the penalty.  It is impossible to determine the meaning or intended effect of any one of these sections without reference to the others.