Luhring v. Glotzbach
| Decision Date | 28 May 1962 |
| Docket Number | No. 8528.,8528. |
| Parties | Henry G. LUHRING, Jr., and Alice Luhring; Lawrence R. Luhring and Reidun S. Luhring; and Henry G. Luhring and Dolly E. Luhring, Appellants, v. Clifford W. GLOTZBACH, District Director of Internal Revenue, Appellee. |
| Court | U.S. Court of Appeals — Fourth Circuit |
William C. Baskett, Norfolk, Va., (George H. Bowers, Jr., and Bowers & Baskett, Norfolk, Va., on brief), for appellants.
Giora Ben-Horin, Attorney, Department of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Meyer Rothwacks, Attorneys, Department of Justice.
Claude V. Spratley, Jr., U. S. Atty., and Roger T. Williams, Asst. U. S. Atty., on brief), for appellee.
Before SOPER, HAYNSWORTH and BOREMAN, Circuit Judges.
Separate suits were filed August 9, 1961 in the District Court against the District Director of Internal Revenue at Richmond, Virginia, by Henry G. Luhring, Jr., and wife, and by Lawrence R. Luhring and wife, and on August 10th by Henry G. Luhring, Sr. and wife, seeking to enjoin the collection of income taxes assessed against them in excess of the taxes reported by them on their several joint income tax returns for the taxable years 1957, 1958 and 1959. Temporary restraining orders were issued by the District Judge and subsequently the cases were heard on motions of the taxpayers for temporary injunctions, based on the allegations of the complaints, and on motions of the defendant to dismiss the complaints on the ground that they did not state a cause of action. The District Judge denied the motions for temporary injunction and granted the motions to dismiss. The taxpayers appealed from the adverse rulings and the cases were consolidated for the purposes of this appeal.
The gravamen of the complaints is that the deficiencies claimed for the taxable years were illegally assessed because the District Director, before sending deficiency notices to the taxpayers, failed to follow certain general procedural rules set forth in 26 C.F.R. — Internal Revenue Part 601 of Subchapter H, Internal Revenue Practice, prescribing the actions to be followed by agents of the Internal Revenue Service under the direction of the Commissioner of Internal Revenue, unless the procedure is interrupted by the imminent expiration of the statutory period for the assessment of the tax. The District Judge was of the opinion that the complaints did not disclose such special and extraordinary circumstances as to avoid the prohibition against suits to enjoin the assessment and collection of taxes contained in 26 U.S.C. § 7421. He also held that the failure of the agents to follow the usual procedures was fully justified by the imminent expiration of the statutory period for the year 1957; and he pointed out that the taxpayers could have had the benefit of the usual procedures if they had not refused the request of the examining agent for an extension of the statutory period. The facts set out in the complaints may be summarized as follows:
Henry G. Luhring, Sr., and his two sons, Henry G. Luhring, Jr., and Lawrence R. Luhring, are officers of the Luhring Motor Company, Inc., which is located in Norfolk, Virginia, where the taxpayers reside. Together with their wives, they filed timely joint federal income tax returns with the District Director at Richmond, Virginia, for the taxable years 1957, 1958 and 1959. C. H. McCoy, a Certified Public Accountant, prepared the tax returns of the Company and of Henry Luhring, Sr., for the years in question.
In March, 1960, Lawrence Luhring received a letter from the District Director requesting information with regard to the examination of his 1959 income tax return. On March 24, 1960, a conference was held at which he furnished the requested information and, thereafter, he received a further letter from the District Director, dated April 13, 1960, stating that the examination revealed no necessary change and that accordingly the return would be accepted as filed.
In October, 1960, Henry G. Luhring, Sr., received a letter from the District Director, dated the 20th of that month, requesting additional information concerning dependency exemptions claimed in his 1959 tax return. He referred the letter to C. H. McCoy, who asked that the case be transferred from Richmond to Norfolk.
On October 26, 1960, W. G. Grigg, an Internal Revenue agent under the supervision of the defendant, communicated with McCoy concerning examination of the income tax returns of the Luhring Motor Company for the years 1956 through 1959, and the returns of its officers, including the taxpayers, for the years 1957 through 1959. McCoy advised Grigg that he had prepared the returns of the senior Luhring but not those of the other taxpayers, that he did not represent the taxpayers, and that he had requested the transfer of the pending examination of the 1959 return of Henry, Sr., to Norfolk.
At a later meeting with McCoy on December 12, 1960, Agent Grigg gave McCoy a schedule of automobile operating expenses and rental values which he proposed to disallow as a corporate deduction and to include in the income of the taxpayers for the years 1957 through 1959. On February 20, 1961, Agent Grigg met with McCoy again and with Henry Luhring, Jr., at the Company and asked about dependency exemptions claimed by the senior Luhring on his 1959 return, and whether the taxpayers' wives owned any automobiles. Henry, Jr., told him that his mother had not driven in 20 years and that his wife did not own a car. Grigg did not then inquire about the returns of Henry, Jr.
On February 27, 1961, Grigg telephoned Henry, Jr., and Lawrence Luhring, and requested their consent to the execution of extensions of the period of limitations for assessment of the tax for the year 1957. They refused to grant the extensions, but offered their cooperation in the completion of the examination within the remaining month and a half of the statutory period. No request for extension was made of the senior Luhring.
Without further examination of the returns the taxpayers received statutory notices of deficiency dated March 22, 1961, demanding payment of additional taxes for each of the years 1957 through 1959.
Thereafter, Lawrence R. Luhring attempted to obtain an administrative hearing with the District Director, but the request was denied by letter dated March 27, 1961, explaining that jurisdiction rested with the Appellate Division in Richmond, to which the case had been transferred. That office, in turn, on March 30, advised him that the notice of deficiency had been sent after he had declined to extend the statutory period of limitations and that it was contrary to policy to consider such cases during the 90 day period in which a petition might be filed with the Tax Court.
In July of 1961 the taxpayers received, on Forms 17-A, notices and demands of payment of the additional taxes assessed plus interest, as follows:
1957 1958 1959
Henry G. Luhring
Jr. ...... $843.16 $907.64 $758.56
Lawrence R
Luhring .. 855.12 868.75 747.13
Henry G. Luhring
Sr. ...... 632.67 656.98 532.07
On August 9, 1961 they filed the present actions.
The taxpayers complain that the agents of the District Director ignored and violated the procedural rules set out in § 601.105 which were promulgated under the authority of 5 U.S.C.A. § 22. See 20 Federal Register 4621. Particularly, it is charged that the taxing authorities failed to comply with the provisions set forth in Subsection (b) (1), (3) and (4), and in Subsections (c) and (d) of § 601.105, as follows:
1. The agents did not examine, at the taxpayers' premises, the taxpayers' returns for the years 1957, 1958 and 1959, or their books and papers bearing on the matters required to be included in the returns, and did not afford the taxpayers an opportunity to agree with the findings of the examining agents.
2. The taxpayers were deprived of the right to an informal conference in the Auditing Department of the District Director, as provided by Subsection (c), which a taxpayer may have if he applies for it within 10 days after he is advised in writing that he may present his objections to the findings of the examining agent.
3. The taxpayer was deprived of the benefit of the provisions of Subsection (d) which directs the District Director to send to the taxpayer a 30-day letter setting out the agent's determination and advising the taxpayer of his right to file a written protest within 30 days and to have a hearing in the Appellate Division of the region.
The taxpayers contend that these procedural rules were promulgated under the authority of Section 7805(a) of the Internal Revenue Code of 1954 and the Administrative Procedure Act, 5 U.S.C. A. § 1011, and were published in the Federal Register in accordance with 5 U.S.C.A. § 1002(a) of the latter act. They contend in effect that the rules have the force and effect of law and are mandatory in their operation and unless they are observed no valid assessment and collection of taxes can be made.1
In our view the procedural rules do not have this weight; and compliance with them is not essential to the validity of a notice of deficiency. The Statement of Procedural Rules, part of which is pertinent here, was promulgated and published in the Federal Register of June 30, 1955, 20 F.R. 4621, now 26 C.F.R., part 600, et seq. It was signed only by the Commissioner, Internal Revenue, and purports to be issued under R.S. § 161; 5 U.S.C.A. § 22, which reads: "The head of each department is authorized to prescribe regulations, not inconsistent with law, for the government of his department, the conduct of its officers and clerks, the distribution and performance of its business, and the custody, use, and preservation of the records, papers, and property appertaining to it." This statute was originally passed in 1789 and codified in 1875 as ...
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