At about the time of incorporating the foundation, petitioner had some conversations with a representative of one and perhaps several 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 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 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

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 November 1971, that, although its activities had remained within the scope of its taxexempt 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 he 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

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's 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 left 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 $31,852.00TM 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.*

This figure differs from the $30,194 deduction claimed on petitioner's return. See p. 695 supra. However, by reason of certain uncontested adjustments resulting from Zelmon's audit, petitioner's adjusted gross income was increased, and the $31,852 figure above probably represents the application to the revised adjusted gross income of the claimed statutory percentage.

532-904-74- -45

OPINION

RAUM, Judge: 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, 457-458 (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, 729; Millard H. Hall, 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."

There is no question that at some time after examining the 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 States v. 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

SEC. 7121. CLOSING AGREEMENTS.

(b) FINALITY.-If such agreement is approved by the Secretary or his delegate * such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact

(1) the case shall not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States,

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., 1st Sess., p. 55 (1926); 67 Cong. Rec. 3855-3857 (1926). See United States v. Powell, 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. at 57; De Masters v. Arend, supra at 89-90. Cf. Application of Magnus, 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. In the present circumstances, Agent Milne's knowledge 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" and thus violative of section 7605 (b). United States v. Powell, 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