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Wiemerslage v. United States

decided: January 20, 1988.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division, No. 85 C 6573 -- Nicholas J. Bua, Judge.

Wood, Jr. and Ripple, Circuit Judges, and Fairchild, Senior Circuit Judge.

Author: Ripple

RIPPLE, Circuit Judge.

This case presents the question of whether the antidisclosure section of the Internal Revenue Code (the Code), 26 U.S.C. § 6103, precludes the Internal Revenue Service (the IRS) from contracting out tax return processing functions. The appellants, residents of Illinois, request a declaratory judgment that the IRS illegally contracted out for processing certain estimated tax returns to a bank in Illinois. They also seek an injunction precluding any further farming out of their tax returns. Finally, the appellants seek monetary damages. In addressing the government's motion to dismiss the appellants' equitable claims, the district court, 633 F. Supp. 718, ruled that the Anti-Injunction Act of the Code, 26 U.S.C. § 7421(a), and the federal tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201(a), barred the injunctive and declaratory relief sought. The court later granted the government's motion for summary judgment on the damages claim by ruling on the merits of the case. Because the federal tax antidisclosure statute does not prevent the IRS from contracting out tax return processing functions, we affirm.



A. Facts

In 1985, the appellants were required to file quarterly estimated federal income tax payments. They were required to mail their estimated tax returns and tax payments to a post office box leased by the First National Bank of Chicago (the Bank). The tax return form, form 1040-ES, requested the following four items of information: the amount of the payment, and the name, address and taxpayer identification number of the filer. In addition, for a taxpayer filing on a fiscal year basis, the 1040-ES form requested the month and year of the end of the applicable fiscal year.

Under the terms of a contract between the Bank and the United States Department of the Treasury, the employees of the Bank would perform the following daily procedure: empty the post office lockbox; scan the 1040-ES forms by machine (or, if not machine readable, encode the data by hand); microfilm the checks; note discrepancies between the amounts shown on the 1040-ES forms and the amounts of the accompanying checks; deposit the checks in an authorized account; log the checks in blocks of 100; and ship the 1040-ES forms, envelopes, log and magnetic scanning tape to the IRS service center for posting and processing. This tax collection procedure differs from the procedure used in other states where taxpayers mail estimated taxes directly to an IRS service center. At these service centers, IRS employees directly process all of the returns and remittances. The IRS implemented this Illinois lockbox depository program in an attempt to reduce the "flow" time on checks, thereby gaining substantial interest revenues for the United States. Wiemerslage v. United States, 633 F. Supp. 718, mem. op. at 1, 3 (N.D. Ill. 1986).

B. Holding of the District Court

The district court, in a memorandum opinion dated May 1, 1986, held that injunctive relief was barred by the Anti-Injunction Act. In the district court's view, the prohibition of the Act "reaches not only those actions seeking to restrain the collection acts themselves, but also extends to all suits seeking to restrain any and all acts necessary or incident to the collection of taxes." Mem. op. at 3. Therefore, held the court, it did not have the authority to restrain the IRS from proceeding with its chosen method of tax collection, an experiment designed to expedite the collection of taxes and to increase government revenues. The court recognized that the judicial restraint mandated by the Anti-Injunction Act is not absolute and that there is an equitable exception in extraordinary circumstances that allows a court to issue an injunction. However, to invoke this exception, said the court, a plaintiff has the burden to show: 1) that the government ultimately could not prevail under any circumstances; and 2) that equity jurisdiction otherwise exists. Enochs v. Williams Packing Co., 370 U.S. 1, 7, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962). In applying the above standard to this case, the district court held that the appellants failed to sustain their burden of proof. In addition, the court found that the appellants suffered no irreparable harm because an adequate remedy existed at law; under section 6103 of the Code, the appellants can recover monetary damages if they prove that the IRS violated the statutory rules preventing disclosure of tax return information.

The district court then turned to the question of declaratory relief and held that, because the federal tax exception to the Declaratory Judgment Act is at least as broad as the collection of taxes provision of the Anti-Injunction Act, declaratory relief also was barred.

In a later judgment, dated August 15, 1986, the court granted the government's motion for summary judgment on all counts of the complaint, including those seeking damages.*fn1 In addressing the merits in an accompanying order, the district judge reviewed the language of section 6103(n)*fn2 of the Code and concluded that the disclosure of the appellants' tax return information to the Bank was not in violation of the Code. In addition, the court noted that section 6302(c)*fn3 of the Code permits the Secretary of the Treasury (the Secretary) to authorize banks to collect any tax promulgated under the internal ...

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