61 T.C. 693">*693 The Commissioner determined a deficiency in petitioner's 1968 income tax in the amount of $ 5,219. ¹ Four issues are presented for decision. These are (1) whether the Commissioner conducted an "unnecessary" examination or investigation in respect of petitioner's tax liability for 1968 contrary to the provisions of section 7605(b), I.R.C. 1954; (2) whether the Commissioner failed to comply with the Service's recognized procedure (set forth in Rev. Proc. 68-28, 1968-2 C.B. 912) in reopening a closed tax year of petitioner; (3) in the event either of the above questions is answered affirmatively, whether the Commissioner's procedural noncompliance deprived the resultant deficiency notice of any validity; and (4) if the deficiency notice is valid, whether the charitable foundation created and endowed by petitioner normally receives a substantial part of its support "from direct or indirect contributions from the general public" as provided in section 170(b)(1)(A)(vi) of the Code. In the event that respondent prevails on the first two issues, the third issue1974 U.S. Tax Ct. LEXIS 146">*150 becomes moot; alternatively, if the third issue is reached and decided in favor of petitioner, it will become unnecessary to consider the final issue.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with its accompanying exhibit, is incorporated herein by this reference.

61 T.C. 693">*694 Petitioner Robert F. Collins, a physician, resided in North Hollywood, Calif., at the time of filing his petition herein. He timely filed a Federal income tax return for the taxable year 1968 with the district director of internal revenue at Los Angeles, Calif.

On or about November 22, 1968, petitioner established the Collins Foundation (foundation), a California corporation, and contributed to it $ 1,000 cash and the building in which he conducted his medical practice. The building had a fair market value of $ 40,000, and it together with the $ 1,000 cash comprised the sole assets of the foundation. 1974 U.S. Tax Ct. LEXIS 146">*151 Subsequently, the foundation executed a lease of the entire building to petitioner for 1 year with five 1-year options to renew.

The foundation's initial board of trustees consisted of petitioner and his two sisters, both of whom were registered nurses holding college degrees. By limiting board membership to his immediate family, Dr. Collins hoped to retain personal control of the foundation's activities. The foundation had no office or telephone, nor did it employ any secretarial help. Instead it shared petitioner's personal office space, using that mailing address. Petitioner's wife handled what correspondence there was.

Petitioner's alleged purpose in creating the foundation was to promote and foster the study of human "traits" with respect to their causal relationship to human "attitudes." The Internal Revenue Service approved the foundation's tax-exempt status under section 501(c) (3). There were difficulties in resolving certain fundamental definitional problems as well as in developing basic projects, and the activities and research conducted by the foundation have been quite limited both in amount and scope. Dr. Robert Morman, a "research teacher" at City College of1974 U.S. Tax Ct. LEXIS 146">*152 Los Angeles, prepared a pamphlet under the aegis of the foundation in 1970 designed to identify "attitudes" on drivers' problems in order ultimately to develop a set of highway safety "predictors." Throughout the preparation of the pamphlet Morman was employed on a full-time basis by City College and he received no compensation from the foundation, although it did pay unspecified costs associated with the pamphlet. In 1972, Dr. Lawrence H. Brown, professor emeritus at Creighton University, initiated a study of "traits," pursuant to a research grant of an undisclosed amount from the foundation; a resulting pamphlet was produced in 1973. At some time in the first part of 1973, the foundation hired Dr. Brown to conduct "basic research" as a full-time employee. The record does not disclose whether the compensation received by him is consequential in amount. In the case of both foregoing pamphlets, the record is unclear both as to the number of copies produced and as to the manner of their dissemination, if they were in fact distributed at all.

61 T.C. 693">*695 At about the time of incorporating the foundation, petitioner had some conversations with a representative of one and perhaps several1974 U.S. Tax Ct. LEXIS 146">*153 pharmaceutical companies with respect to the possibility of obtaining financial support for the foundation's activities. Although he understood the responses to be generally favorable, they were entirely noncommittal, and the foundation in fact received no financial support outside of what petitioner himself had contributed.

The fair market value of all of petitioner's charitable contributions in 1968 equaled $ 41,856, which amount included his donations ($ 41,000) to the foundation. On his individual Federal income tax return for that year, petitioner claimed a charitable deduction in the amount of $ 30,194, and sought to deduct the unclaimed excess in his return for the following year. Section 170(b) of the Code, as it applied to 1968, generally permitted a deduction for charitable contributions in an amount up to 20 percent of a taxpayer's adjusted gross income. Irrespective of this limitation, contributions to certain defined charities qualified for an additional separately calculated deduction in an amount up to 10 percent of adjusted gross income, thus in effect resulting in a 30-percent aggregate limit. The amount claimed by petitioner for 1968 was predicated upon the 1974 U.S. Tax Ct. LEXIS 146">*154 foundation qualifying for the more favorable percentage limitation. Gifts to private foundations generally were restricted to the 20-percent limitation. Accordingly, if the foundation failed to qualify as an organization which received "a substantial part of its support * * * from the general public" (sec. 170(b)(1) (A)(vi)), then the deduction to which petitioner was entitled in 1968 would have been substantially less than that claimed by him.

Sometime shortly after September 19, 1969, petitioner received a written request from Internal Revenue Agent Albert Zelmon to make his books and records pertaining to his 1967 and 1968 income available in connection with an audit of his returns for those years. As a result of his investigation, Agent Zelmon determined deficiencies in both of those years arising from matters unrelated to the issues herein. Petitioner signed a consent to the adjustments dated November 23, 1970, and paid the amounts due.

On or about May 13, 1971, petitioner was advised by Internal Revenue Agent Norman Smoller that he was at that time commencing an audit of petitioner's 1969 tax return. On or about July 6 of that year, while Agent Smoller's audit was still 1974 U.S. Tax Ct. LEXIS 146">*155 in progress, another revenue agent, Terry Milne, commenced an audit of the foundation's tax return for the taxable year ending November 30, 1969. Milne communicated with the foundation's lawyer, Jack Bratter, who is also petitioner's lawyer, and asked to examine the foundation's records for the year 61 T.C. 693">*696 in question. Bratter provided the requested records at a meeting held on July 27, 1971. On the basis of his examination of the foundation's records, Milne concluded that the foundation was subject to unrelated business income taxation on account of the building which it had leased to petitioner, and he so advised Bratter on September 1, 1971. Milne's conclusion turned upon treating the 1-year lease and the five options to renew as the equivalent of a 6-year lease, thus satisfying the statutory requirement (sec. 514) that the lease in question extend for a period of more than 5 years. Bratter disagreed as to the legal effect of the lease, and there the matter stood for the time being.

Through his examination of the foundation's books and records, however, Milne learned that petitioner was the sole contributor to the foundation and on that basis concluded some time in November1974 U.S. Tax Ct. LEXIS 146">*156 1971, that, although its activities had remained within the scope of its tax-exempt status, the Collins Foundation was a private foundation. Aware that such a determination would render any carryover deduction of petitioner's 1968 contribution to 1969 ineligible (see sec. 170(b)(5) as it applied to 1968), Milne called Agent Smoller, who was still engaged in the audit of petitioner's 1969 return, to apprise him of his conclusion. Because petitioner had in fact claimed such a carryover deduction in 1969, Agent Smoller called Bratter in order to notify him that he proposed to disallow the carryover deduction on the strength of Agent Milne's determination of the foundation's private status. Bratter thereafter called Milne on or about December 1, 1971, in order to verify the information received from Smoller. At that time Milne confirmed the substance of his conversation with Smoller. Petitioner's personal audit for 1969 ultimately concluded with a partial agreement dated December 16, 1971, with respect to the disallowed carryover deduction and another item, while a third issue remained unresolved.

In early January of 1972, Milne once again called Bratter, suggesting that before he1974 U.S. Tax Ct. LEXIS 146">*157 wrote his report with respect to his audit of the foundation they meet in an effort to resolve the question of the foundation's unrelated business income. Bratter agreed, and on February 8, 1972, he, Milne, and Milne's group supervisor met. They were, nevertheless, unable to reach any agreement. As a collateral matter, however, they reviewed the possibility that, due to the existence of an encumbrance attached to the donated building, the amount of which was in excess of the basis of the building, there had been a slight gain which should have been reflected in petitioner's 1968 return. Either Milne or his supervisor, though, assured Bratter that, in view of the small 61 T.C. 693">*697 amount involved, they would not seek to reopen petitioner's 1968 return if that were the only adjustment needed.

Shortly thereafter and with the approval of his supervisor, Milne nonetheless requested and on February 16, 1972, obtained permission from the Assistant Regional Commissioner, Audit, to reopen petitioner's 1968 tax return. Milne's decision to reopen the return rested upon his earlier conclusion that the foundation was private, the germinal information for which he had drawn from the foundation's1974 U.S. Tax Ct. LEXIS 146">*158 records. When Milne learned that petitioner had claimed a carryover deduction in 1969 from the same gift, he was alerted to the likelihood that petitioner in 1968 had erroneously employed the higher percentage limitation associated with public foundations in calculating his permissible deduction for charitable contributions.

Milne therefore notified Bratter that he had reopened petitioner's 1968 return and, since the period of limitations within which a deficiency could be assessed against petitioner was about to expire, Milne requested the execution of an appropriate waiver of the statute of limitations. Bratter refused that request but did agree to allow Milne to examine a copy of petitioner's 1968 Federal income tax return which Bratter had, recognizing that the original of that return was obtainable by Milne from the IRS files and that thus making the copy available was merely for Milne's convenience. They met for this purpose on March 2, 1972, and Milne then verified that petitioner had calculated his 1968 charitable contribution deduction in accordance with the higher percentage limitation. Milne prepared a computation of the proposed adjustment at that time which he left1974 U.S. Tax Ct. LEXIS 146">*159 with Bratter. Bratter then asked Milne whether an agreement with respect to the foundation's unrelated business income might induce the Service to forego reopening petitioner's return; Milne responded that such an arrangement was not possible.

As a result of these events, the Commissioner issued a notice of deficiency on April 13, 1972, in which he determined that --

the deduction claimed for contributions in the amount of $ 31,852.00 ² is allowable to the extent of $ 20,621.00 for the taxable year 1968. You contributed property with a net fair market value of $ 40,000.00 to the Collins Foundation and claimed the maximum deduction allowable (30 percent of adjusted gross income). The Collins Foundation does not qualify for the 30 percent limitation as described in Section 170(b)(1)(A) of the Internal Revenue Code. Therefore, your contribution deduction is limited to 20 percent of adjusted gross income. * * *

1974 U.S. Tax Ct. LEXIS 146">*160 61 T.C. 693">*698 OPINION

The threshold issue presented concerns whether the Government complied with the procedural dictates of section 7605(b), which provides as follows:

SEC. 7605. TIME AND PLACE OF EXAMINATION.

(b) Restrictions on Examination of Taxpayer. -- No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

Petitioner argues that the reconsideration of his 1968 return by Revenue Agent Milne was "unnecessary" because the Commissioner had previously concluded an examination with respect to the same taxable year. On the materials before us we hold otherwise.

As a preliminary matter we note that in reexamining petitioner's 1968 tax return, Agent Milne did not conduct an unauthorized inspection of petitioner's books of account, nor does petitioner so allege. Cf. Geurkink v. United States, 354 F.2d 629, 631 (C.A. 7); Bouschor v. United States, 316 F.2d 451, 457-4581974 U.S. Tax Ct. LEXIS 146">*161 (C.A. 8); De Masters v. Arend, 313 F.2d 79, 85-86 (C.A. 9); Credit Bureau of Erie, Inc., 54 T.C. 726">54 T.C. 726, 54 T.C. 726">729; Millard H. Hall, 50 T.C. 186">50 T.C. 186, 50 T.C. 186">201-202, affirmed 406 F.2d 706 (C.A. 5). Neither does petitioner contend that his acquiescence in the Commissioner's first deficiency notice with respect to other items in 1968 qualifies as a "closing agreement" which might constitute a bar of itself to the present deficiency notice.³

There is no question that at some time after examining the1974 U.S. Tax Ct. LEXIS 146">*162 foundation's records Milne's interest in petitioner's 1968 tax return ripened into an investigation of petitioner's tax liability for that year, separate from the previous investigation conducted by Agent Zelmon. Compare United Statesv. Fordin (E.D.N.Y., 72-2 U.S.T.C. par. 9618 at 85,468), with United States v. Schwartz, 469 F.2d 977, 984 (C.A. 5). This much is not controverted. While this transformation probably occurred prior to the time Milne advised Agent Smoller in November of 1971 to disallow petitioner's carryover deduction in 1969, the precise moment is irrelevant for our purposes.

It is evident from the legislative history of section 7605(b) that Congress intended that provision to prevent the Internal Revenue 61 T.C. 693">*699 Service from undertaking repetitive investigations as a method of taxpayer harassment. There is no indication that it was enacted to restrict the scope of the Commissioner's legitimate power to protect the revenue. H. Rept. No. 350, 67th Cong., 1st Sess., p. 16 (1921); S. Rept. No. 275, 67th Cong., 1st Sess., p. 31; 61 Cong. Rec. 5202, 5855 (1921); H. Rept. No. 356, 69th Cong., 1st1974 U.S. Tax Ct. LEXIS 146">*163 Sess., p. 55 (1926); 67 Cong. Rec. 3855-3857 (1926). See United States v. Powell, 379 U.S. 48">379 U.S. 48, 379 U.S. 48">55 fn. 13. In light of this legislative history, an "investigation cannot be said to be 'unnecessary' if it may contribute to the accomplishment of any of the purposes for which the Commissioner is authorized by statute to make inquiry." De Masters v. Arend, 313 F.2d 79, 87 (C.A. 9). By analogy to other administrative agencies, the courts have concluded that the Internal Revenue Service may investigate merely on the suspicion that taxes are owed; stated otherwise, in the absence of a showing that the Commissioner acted arbitrarily or in excess of his statutory authority, an investigation is not unnecessary. United States v. Powell, 379 U.S. 48">379 U.S. at 57; De Masters v. Arend, supra at 89-90. Cf. Application of Magnus, 196 F. Supp. 127">196 F. Supp. 127, 196 F. Supp. 127">128-129 (S.D. N.Y.), affirmed 299 F.2d 335, 337 (C.A. 2), certiorari denied 370 U.S. 918">370 U.S. 918. In the present circumstances, Agent Milne's knowledge1974 U.S. Tax Ct. LEXIS 146">*164 both that petitioner had regarded the foundation as publicly supported in 1968 and that he had claimed a carryover deduction in 1969 in respect of his 1968 contribution to the foundation left little room to doubt that petitioner had claimed an excessive deduction in 1968. To attribute arbitrariness to an investigation arising from these facts is simply untenable.

Petitioner alleges that the investigation was nevertheless "unnecessary" because the Government initiated the investigation in an unlawful effort to procure his agreement to the proposed adjustment to the foundation's tax liability on account of the existence of unrelated business income. In support of his contention he refers us to the fact that it was at the instigation of Agent Milne that the parties met on February 8, 1972, to try to reach agreement on the foundation's tax liability. When petitioner declined to acquiesce, Milne proceeded directly to request permission to reopen petitioner's individual return for 1968.

To be sure, an investigation which is conducted in order to pressure the taxpayer with respect to a collateral issue may be an improper purpose sufficient to render such investigation "unnecessary" and1974 U.S. Tax Ct. LEXIS 146">*165 thus violative of section 7605(b). United States v. Powell, 379 U.S. 48">379 U.S. 48, 379 U.S. 48">58 (dictum). But we are unpersuaded that such a motive underlay Milne's actions. To the contrary, prior to obtaining permission to reopen the return, Milne avoided any suggestion of his intention in that regard even though he had been aware of the possible tax liability 61 T.C. 693">*700 for at least several months. Indeed, his request for the February 8, 1972, meeting indicates to us an unmistakable objective to bring to a final conclusion his and petitioner's respective positions with regard to the foundation before auditing petitioner's individual return precisely in order to avoid even the appearance of applying improper pressure. Our conclusion is buttressed by Milne's unequivocal refusal to accept the very arrangement which petitioner alleges he sought when subsequently offered by petitioner. Furthermore, the juxtaposition of the February 8, 1972, meeting and Milne's request to reopen the return does not bespeak governmental harassment but rather reflects the time pressure exerted by the statutory limitations period for petitioner's 1968 tax liability due to expire shortly1974 U.S. Tax Ct. LEXIS 146">*166 thereafter. In essence, petitioner's position is tantamount to challenging the Commissioner's authority to conduct simultaneous investigations of the several taxable capacities relating to a single individual. This we deem to be a wholly unwarranted extension of section 7605(b), and we accordingly refuse to adopt it. ⁴

1974 U.S. Tax Ct. LEXIS 146">*167 Irrespective of section 7605(b), petitioner further argues that the Commissioner erred in reopening the audit of petitioner's 1968 tax return after it had become a closed case within the meaning of Rev. Proc. 68-28, 1968-2 C.B. 912, 913, sec. 3.01(1). ⁵ Specifically, petitioner alleges that Agent Milne's decision to reopen the case did not conform to express conditions for such action detailed in Rev. Proc. 68-28. There it is provided, in relevant part:

Sec. 4. Policy.

.01 The Internal Revenue Service will not reopen any case closed after examination by a district office * * * to make an adjustment unfavorable to the taxpayer unless:

1. There is evidence of fraud, malfeasance, collusion, concealment or misrepresentation of a material fact; or

2. The prior closing involved a clearly defined substantial error based on an established Service position existing at the time of the previous examination; or

3. Other circumstances exist which indicate failure to reopen would be a serious administrative omission.