Free Enterprise Society member beats IRS!
By: Dave Wellington
On March 2, 2016 the Eighth Circuit Court of Appeals ruled in favor of Free Enterprise Society member Leroy Muncy. In Muncy v. Commissioner of Internal Revenue the appeals court slammed the Tax Court in a stunning decision on an issue that hadn’t seriously seen the light of day for years. The issue: who in the IRS actually has authority to issue a notice of tax deficiency? Despite both the statutes written by congress, and the regulations addressing this issue, the Tax Court had for years been saying any questions about such authority were ‘frivolous’. In fact, over the years it had even threatened to impose monetary sanctions against anyone who dared to raise the issue. But it has now been slapped by an appellate court for taking this position.
Like many cases, Free Enterprise Society member Leroy Muncy’s started with someone inside the IRS sending him a notice of deficiency (a pre-assessment notice required by law in most cases for making a claim of more tax due or 90 day letter). Once someone receives this type of notice, their options are either petition the Tax Court, or do nothing. (Some people have advocated sending these notices back with some sort of disclaimer/refusal; but this actually does nothing except provide proof of receipt of the notice; and something that is just later used against the person who returned the mail to show proof they received it).
Muncy decided to petition the Tax Court. One thing the Tax Court absolutely needs for jurisdiction in a deficiency case is a valid deficiency notice. One of the ideas going into the case was the (advanced) theory that the Tax Court would have to determine that it lacked jurisdiction because the deficiency notice was invalid. The reason the notice was invalid is because it had not been issued by someone with delegated authority to do so.
In his case, the deficiency notice had been issued by someone in the position of a ‘Territory Manager’. But no statute or regulation mentioned anything about any such position as having delegated authority to issue any deficiency notice. This issue was critical, because, again, if the notice was invalid, the Tax Court would lack jurisdiction, and the only thing it would have authority to do is say so, and dismiss the case for that reason. (But then, the IRS could also not proceed any further with any tax claim).
In its decision after trial, the court determined the issue to be ‘frivolous’, citing 5 prior case decisions which had supposedly addressed the issue. It determined the issue to be so ‘frivolous’ that it considered imposing a monetary sanction against Muncy for even making any argument about it. But, it ended up not imposing any sanction because the judge thought a ‘warning’ was first in order, and that ‘now that such a warning has been issued, it did not expect Muncy to make frivolous arguments or relitigate a settled issue’. A decision was entered determining Muncy owed most of the tax claims and penalties being asserted by the IRS. Muncy appealed.
In its decision, the appellate court noted the deficiency notice ‘was printed on letterhead from the Department of Treasury, Internal Revenue Service, and a was signed by Janet Miller, a ‘Technical Services Territory Manager’, who purported to issue the notice on behalf of the Commissioner of Internal Revenue’. In other words it looked official. The appeal court also noted Muncy’s argument in the Tax Court about the illegitimacy of the notice because no evidence of any delegated authority existed for a person in Miller’s position to issue any such notice. It noted the trial court’s refusal to address the issue, but instead only calling it ‘frivolous’.
In reversing and completely vacating the Tax Court’s decision, the appellate court did something basic. It simply read the applicable law (that had been pointed out in Muncy’s appeal briefs). It read the simple (and single) statute in the tax code that plainly discussed delegated authority. After doing this, it said "we conclude that the tax court erred in declining to address the legitimacy of the NOD [notice of deficiency]". It then vacated the Tax Court’s entire decision and remanded the case for it to determine the legitimacy of the NOD.
So after all the tax court judge’s huffing and puffing about the issue being ‘frivolous’, and even threatening sanctions against Muncy for having the gall to dare raise it, the appellate court not only agreed with Muncy, but vacated the tax court’s entire decision. How embarrassing is that for the tax court judge? It’s certainly one thing to disagree with someone’s argument and rule against them. But to get reversed after summarily dismissing an argument by calling it ‘frivolous’ has to be the ultimate smack-down.
After the case got back to the Tax Court judge, he took weeks before deciding to issue an order for further proceedings. But to actually do anything further, he first had to put his tail between his legs, and (at least implicitly) reverse or disregard his own prior rulings about the issue being ‘frivolous’.
In the end the judge decided to issue an order for further briefing. Both Muncy and the IRS attorney submitted briefs on the authority delegation for issuing deficiency notices. Muncy relied on statutes and regulations in his brief, which showed the title of the position Janet Miller claimed to hold (‘Technical Services Territory Manager’) was not listed as someone with authority to issue deficiency notices. He also cited many case decisions which said statutes and regulations are binding not just on the agency, but also the court.
In contrast, the government attorney relied on a portion of the secret, unpublished Internal Revenue Manual for her position. But she made no argument that any part of this secret manual had any legal weight whatsoever, much less enough to contradict the agency’s own published regulations.
After reviewing Muncy’s argument, the IRS attorney issued a written statement that she would not be submitting any response brief. Other than ‘throwing in the towel’, why would an attorney pass up an opportunity like this to respond to Muncy’s very strong arguments?
Although briefing was completed on this issue in August 2016, of February 2017 the judge has still issued no ruling ... on an issue that he himself had declared was so simple, it was ‘frivolous’. One would have to wonder, if the issue is so ‘frivolous’, why would it take this long to make a ruling??
Keep in mind that if the end-result of this is that Miller had no authority to issue the deficiency notice , the judge will have no choice but to totally dismiss the case for lack of jurisdiction due to an invalid deficiency notice. The result of this would be the IRS could not proceed to assess or collect whatever tax claims it was making. To get free copies of the court ruling email HERE. You’ll get a response within minutes with your download link. (email firstname.lastname@example.org if the link does not work)
If you believe you have been the victim of unauthorized notices of deficiency (virtually every notice issued since the early 2000’s fits this), and especially if you have had money or other property taken from you within the last 2 years due to a levy that was based on the claims in that deficiency notice, or you’d just like to get more information, call us today. Free Enterprise Society 209-966-7040. <end>