Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 74 C 1283 - Abraham L. Marovitz, Judge.
Before FAIRCHILD, Chief Judge, MARKEY, Judge,*fn** and GRANT, Senior District Judge.**fn**
GRANT, Senior District Judge. This is an appeal from an order of the district court permanently restraining the Internal Revenue Service from issuing any subpoenas or requesting any books or records of J. Richard Dema (the appellee herein), Sally A. Dema, his wife, or Tabcor, Inc., a subchapter S corporation of which appellee was president, for the years 1972 and prior thereto. The relevant facts of the case are as follows: The government filed a petition pursuant to §§ 7402(b) and 7604(a) of the Internal Revenue Code of 1954, seeking to enforce IRS summonses. The summonses, issued by Revenue Agent David J. Feddor, sought information for the purpose of ascertaining the correct tax liability of appellee and his wife for the years 1971 and 1972, and of Tabcor, Inc., for the years 1971, 1972, and 1973. Appellee refused to comply with the summonses and asked that they be quashed. After several hearings, the district court ordered appellee to produce certain corporate records, but quashed the summons for his personal records upon being advised by the government that such information was not required. The district court, on being advised that the corporate records had been produced as ordered, dismissed the action without prejudice. On the same day that the action was dismissed, however, a notice of deficiency with respect to appellee's 1971 income tax liability was mailed. Appellee thereupon filed a motion for an order from the court requiring Agent Feddor to show cause why he should not be held in contempt of court for violating the court's previous order quashing the summons on personal records, and for an order directing withdrawal of the notice of deficiency. The government responded, alleging that appellee was seeking injunctive relief which was proscribed by the provisions of the Internal Revenue Code. A hearing on the matter was held on 20 June 1975. After stating that the Service's action "borders on harassment," the district court entered an order permanently restraining the IRS from issuing any subpoenas or requesting any books or records of appellee, his wife, and Tabcor for the years 1972 and prior thereto. The court also suppressed any existing subpoenas or requests for those years. Thereupon, the action was dismissed with prejudice. This appeal followed.
Appellant's primary contention in this appeal is that § 7421(a) of the Internal Revenue Code of 1954 prohibits all suits seeking to restrain the assessment or collection of any tax. This prohibition, it is argued, reaches not only those actions which seek to restrain the assessment or collection acts themselves, but extends as well to all suits which seek to restrain any and all acts necessary or incident to the assessment or collection of taxes. Therefore, appellant maintains that the order of the district court, which precludes the IRS from carrying out investigations leading to the assessment and collection of taxes, contravenes the clear mandate of § 7421(a). In this regard, appellant claims that appellee presented no evidence, and thus did not establish the two conditions - (1) that there are no circumstances under which the government could ultimately prevail, and (2) that equity jurisdiction exists - which must be shown if the bar of § 7421(a) is to be avoided. Enochs v. Williams Packing Co., 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962). For these reasons, appellant urges this Court to remand this case to the district court with directions to dissolve the restraining order and dismiss the action.
In response, appellee argues that in an IRS enforcement proceeding where the trial court has determined that there has been harassment, § 7421(a) is not applicable to the entry of an order prohibiting the IRS from requesting records that it has already, in fact, seen. In this respect, appellee says that the court below acted well within its inherent equity powers in issuing the relief granted. Even if this Court should determine that § 7421(a) is found to be applicable to the case at bar, however, appellee asserts that he has met the requirements for injunctive relief by proving to the trial court's satisfaction that the government could not ultimately prevail and additionally that he would suffer irreparable harm unless he received equitable relief. Finally, appellee contends that the restraining order entered by the district court is specific in its terms, is fully supported by the evidence; and, therefore, the government's suggestion that the court's order of 20 June 1975 is invalid for lack of findings therein is without merit. In support of this contention, appellee submits that, because of the trial judge's extensive remarks which outlined his reasons for issuing the restraining order, there is no need for this Court to conjecture as to what were the reasons for the entry of the order. For the foregoing reasons, appellee requests that the lower court's order of 20 June 1975 be affirmed.
The sole issue presented in this appeal is whether the district court lacked the authority to render injunctive relief to appellee in view of the prohibition contained in § 7421(a) of the Internal Revenue Code of 1954. For the reasons which follow, we find that the district court was precluded from issuing the restraining order herein by § 7421. Accordingly, the order of the district court is reversed, and the cause is remanded with directions to dissolve the restraining order and dismiss the action.
Section 7421(a) of the Internal Revenue Code of 1954 states in clear and precise language that "... [No] suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person...." The policy or purpose behine this provision, of course, is "to [protect] the government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference...." Bob Jones University v. Simon, 416 U.S. 725, 736, 40 L. Ed. 2d 496, 94 S. Ct. 2038 (1974). It is also clear that this ban against judicial interference is applicable not only to the assessment or collection itself, but is equally applicable to activities which are intended to or may culminate in the assessment or collection of taxes. Koin v. Coyle, 402 F.2d 468 (7th Cir. 1968). The restraint placed on the courts in this regard, however, is not absolute. John M. Hirst & Co. v. Gentsch, 133 F.2d 247, 248 (6th Cir. 1943). Extraordinary or exceptional circumstances may exist, for example, which are of sufficient importance to warrant court interference. Singleton v. Mathis, 284 F.2d 616, 618 (8th Cir. 1960). Therefore, under certain circumstances, a taxpayer may maintain a suit to enjoin the collection of federal taxes. Martin v. Andrews, 238 F.2d 552, 554 (9th Cir. 1956). In order that such a suit may be maintained, though, the taxpayer has the burden of proving: (1) that the government could not ultimately prevail under any circumstances; and (2) that equity jurisdiction otherwise exists. Enochs, supra, 370 U.S. at 7; Pizzarello v. United States, 408 F.2d 579, 582 (2d Cir. 1969).
In the instant case, we are not convinced, based on a careful review of the record before us, that appellee sustained his burden of proving the exceptional circumstances necessary to justify the trial court's intervention into the assessment and collection process. First of all, the record is barren of any evidence which would support the conclusion that the government could not ultimately prevail in the assessment or collection of a deficiency in taxes for the years of 1972 and prior thereto. The fact of the matter is that appellant sought to inspect books and records for the sole purpose of ascertaining the correct tax liability for the years in question. The tax deficiency had already been determined; and this Court is of the opinion that it was improper for the court below to thwart the Service's attempt to obtain material pertinent to the assessment. We conclude, therefore, that the first requirement of Enochs, supra, has not been satisfied.
In this regard, the Court has noted with interest appellee's argument that there is a significant distinguishing feature between the instant case and those cited by appellant - that feature being the fact that the order appealed from herein resulted from the actions of the IRS itself and not from any suit brought by appellee to enjoin those actions. We fully appreciate appellee's contention in this respect. Nevertheless, under the circumstances of the present case, we decline to be persuaded thereby. Although we concede, as we must, that appellee did not initiate proceedings against appellant in an attempt to enjoin the assessment or collection of taxes, it must be admitted that for all practical purposes appellee sought the identical result when he filed his motion for an order directing withdrawal of the notice of deficiency. The net result of appellee's motion, and the obvious intent thereof, was to restrain the IRS from pursuing any activities relating to the assessment and collection of taxes. Accordingly, it could reasonably be argued that appellee herein instituted his own sub-action against appellant for injunctive relief, the potential result of which was in contravention of the spirit and purpose of § 7421(a). In such circumstances, as we have stated above, we hold that it was improper for the district court to intervene and restrain appellant from pursuing its assessment procedures.
Second, this Court is not impressed with appellee's argument that he would suffer irreparable harm if equitable relief were not granted. It is clear in this case, as it is in all cases where the IRS asserts a tax claim, that appellee was not without an adequate remedy at law. His remedies were three-fold. First, he could have paid the tax and then proceeded with a suit for refund. Enochs, supra, 370 U.S. at 7. Second, he could have elected to seek redetermination by the Tax Court. Bob Jones, supra, 416 U.S. at 746. Additionally, appellee could have chosen to refuse to comply with the request for inspection, which would have forced the IRS to seek a judicial determination in an enforcement proceeding. Dickerson v. Conrad, 274 F. Supp. 881 (D. Alaska 1967). We conclude, therefore, that the court below lacked the necessary equity jurisdiction to issue injunctive relief to appellee.
Finally, the Court feels constrained to address itself to the lower court's statement concerning its belief that the investigation of appellee "borders on harassment." We are aware of, and subscribe to, the proposition that the IRS should not be allowed to abuse its position of power to harass a taxpayer by means of repeated demands for inspection. The court below was convinced that this occurred in the present case, and we support the trial judge's desire to protect the appellee from such an abuse. However, we cannot conclude from the record that a conscious program of harassment was aimed at appellee. In any event, our review of the record on this subject does not allow us to conclude that any harassment of appellee - if, in fact, there was harassment - amounted to an exceptional or extraordinary circumstance sufficient to avoid the strictures of § 7421(a).
For the foregoing reasons, therefore, the 20 June 1975 order of the district court is REVERSED, and the cause is REMANDED with directions to dissolve the restraining order and dismiss the action.
MARKEY, Chief Judge, United States Court of Customs And Patent Appeals, dissenting.
With unmitigated deference, I am unable to agree that the District Court lacked jurisdiction to issue this restraining order, and I am convinced that the record amply supports a finding of taxpayer harassment in this case. I also feel that the case presents novel legal issues on the interaction of Sec. 7421(a) and Sec. 7605(b) of the Internal Revenue Code which have not been directly addressed by any federal appellate court. The effect of court-approved taxpayer harassment upon our "voluntary" tax system further impels these few remarks.
Some knowledge of the background of the case is necessary to fully appreciate the ...