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Educo Inc. v. Alexander

decided: July 15, 1977.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 75-C-3602 - Julius J. Hoffman, Judge.

Cummings, Circuit Judge, Pell, Circuit Judge, and Bauer, Circuit Judge.

Author: Cummings

CUMMINGS, Circuit Judge.

Plaintiff Educo, Inc., is a corporation which has engaged in the business of designing, implementing and administrating educational benefit plans for corporate employees for over a decade. On September 2, 1975, defendant Commissioner of Internal Revenue issued Technical Information Release (TIR) 1406, subsequently republished as Revenue Ruling 75-448 (1975-2 C.B. 55), which significantly changed the tax status of the transactions involved in educational benefit plans. As a result of the Ruling, clients and potential clients of Educo, Inc. cancelled or threatened to cancel existing and proposed Educo Plans.

On October 28, 1975, Educo filed its complaint under various sections of the United States Code, including 5 U.S.C. §§ 701-706, and asked, inter alia, that the Commissioner of Internal Revenue and co-defendant Secretary of the Treasury be enjoined from implementing TIR 1406. On May 21, 1976, the district court granted the Government's motion to dismiss the action on the ground that it lacked jurisdiction over the subject matter because of the provisions of the Anti-Injunction Act, 26 U.S.C. § 7421(a). It is from this dismissal order that Educo appeals.

The plans created by Educo (Educo Plans) are funded by corporate contributions to a trust fund administered by plaintiff. The funds are distributed to the participating corporation's key employees for educational expenses when an employee's eligible child enters college. No employee has an option to receive anything of value in lieu of his child's eligibility under a plan.

At an early stage of Educo's development, its accountants requested private letter rulings from the IRS to determine whether the employer's contributions to the trusts constituted ordinary and necessary business expenses and hence were deductible under Section 162 of the 1954 Internal Revenue Code, 26 U.S.C. § 162. Two of Educo's clients received such rulings in July 1968 and in August 1971 (Government's Br. App. B). In both cases, the plans qualified for deductions under Section 162, but current deductibility was not mentioned. On April 23, 1974, a Technical Advice Memorandum was issued by the Internal Revenue Service concerning the income tax consequences of a plan designed for another Educo client, Hamlin, Inc.*fn1 Once again the IRS opined that payments made to the trust were deductible as ordinary and necessary business expenses to the employer, but adding "in the year the payments are made to the trust". In this Memorandum, however, it was also noted that the plan was part of the pattern of employment at Hamlin, Inc. and that the payments made thereunder were compensation for services rendered. As a consequence of this Memorandum, the IRS assessed deficiencies against those employees of Hamlin who had received benefits under the plans. Three of these individuals unsuccessfully challenged the assessments in the United States Tax Court.*fn2

While the employees' cases were pending, the IRS issued TIR 1406, which announced the pending publication of Revenue Ruling 75-448. This Ruling described the terms of an Educo-type plan and indicated that such a plan constituted deferred compensation. In addition, it stated that amounts contributed by the employer would be deductible only in the taxable year in which an amount attributable to the contribution would be included in the gross income of those employees on whose behalf the contributions had been made, as provided in Section 404(a)(5) of the Internal Revenue Code.

Although private letter rulings cannot be relied on by other taxpayers, Weller v. Commissioner, 270 F.2d 294, 299 (3d Cir. 1959), cert. denied, 364 U.S. 908, 5 L. Ed. 2d 223, 81 S. Ct. 269, and Revenue Rulings do not have the force and effect of Treasury Regulations, Kaiser v. United States, 262 F.2d 367, 370 (7th Cir. 1958), aff'd, 363 U.S. 299, 4 L. Ed. 2d 1233, 80 S. Ct. 1204, plaintiff contends that its clients, and others, viewed Revenue Ruling 75-448 as having the force of law. Because Educo, Inc., a once thriving business, virtually disintegrated as a result of Revenue Ruling 75-448, it sought an order compelling the Government to withdraw or modify its Ruling pending the disposition of the aforementioned Tax Court cases. Its attempt failed because the district court dismissed the action for lack of subject matter jurisdiction on May 21, 1976, long before the Tax Court cases were decided.

The pertinent phrase of the Anti-Injunction Act (26 U.S.C. § 7421(a)) upon which the district court based its decision is quite clear: "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person * * *." Although a literal reading of the statute would require summary affirmance of the lower court's decision, plaintiff argues that the Anti-Injunction Act is not applicable to this case or, alternatively, if it is applicable that the exception to the Act created in Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125, has been satisfied.

Educo's first argument that the Anti-Injunction Act is not applicable is based on the theory that the relief it seeks is not "to enjoin the assessment or collection of any federal tax." Rather, Educo wants the Internal Revenue Service to withdraw or modify its Revenue Ruling and thus to assure Educo's clients of advance assurance of deductibility as they make payments to Educo. Plaintiff's purported goal is not to obstruct revenue collecting but instead to maintain Educo's financial viability.

This attempt on the part of Educo to define the relief it seeks in terms permitted by the Anti-Injunction Act ignores the ultimate deleterious effect such relief would have on the Government's taxing ability. If Educo were successful in obtaining an injunction, numerous taxpayers would benefit by receiving a reduction of their tax liability. Indeed, Educo would not be interested in obtaining injunctive relief if that relief did not effectively restrain the taxation of its clients under Revenue Ruling 75-448. While the end sought by this action is not directed expressly at assessments, the means to the end, i.e., the withdrawal of the Revenue Ruling, would have this result. Therefore, Educo's argument that this suit is not precluded by the Anti-Injunction Act must be rejected. Koin v. Coyle, 402 F.2d 468, 469 (7th Cir. 1968).

Educo suggests, however, that the plain meaning of Section 7421(a), which bars suits "by any person, whether or not such person is the person against whom such tax was assessed," was intended only to prohibit affected taxpayers from suing and not neutral third parties. This argument is contrary to the statutory language. In Alexander v. "Americans United" Inc., 416 U.S. 752, 760, 40 L. Ed. 2d 518, 94 S. Ct. 2053, the Supreme Court indicated that the Anti-Injunction Act is "triggered" when a suit to enjoin the assessment or collection of taxes is filed. The action itself, regardless of the plaintiff's status, touches off jurisdiction. Moreover, in Bob Jones University v. Simon, 416 U.S. 725, 731-732, 40 L. Ed. 2d 496, 94 S. Ct. 2038 n.6, the 1966 addition to the Act of the aforesaid phrase was interpreted as a reaffirmation of the literal meaning of Section 7421(a).

Educo is in substantially the same situation as were the plaintiffs in Bob Jones, "Americans United " and Cattle Feeders Tax Committee v. Shultz, 504 F.2d 462 (10th Cir. 1974), a recent decision virtually on all fours with this case.*fn3 In those cases, plaintiffs were third parties who alleged a serious injury because taxpayers were adversely affected by an IRS ruling. In each case, the Anti-Injunction statute was held applicable, regardless of the allegations of irreparable harm. Because there is no reason to distinguish this case from these earlier decisions, we hold that Educo is a "person" as defined in Section 7421(a) and that it governs this ...

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