Laino v. United StatesLaino v. United States
80-2 USTC P 9724
Pasquale LAINO and Minerva Laino, Plaintiffs-Appellants,
v.
UNITED STATES of America, Jerome Kurtz, as he is the
Commissioner of the Internal Revenue Service, and George S.
Alberts, as he is the District Director of Internal Revenue,
Brooklyn District, Defendants-Appellees.
No. 85, Docket 80-6039.
United States Court of Appeals,
Second Circuit.
Argued Sept. 17, 1980.
Decided Oct. 6, 1980.
John A. Dudeck, Jr., Tax Div., Dept. of Justice, Washington, D.C. (Edward R. Korman, U.S. Atty., E. D. N. Y., New York City, M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews and Richard W. Perkins, Tax Div., Dept. of Justice, Washington, D.C., of counsel), for defendants-appellees.
Elliott H. Pollack, New York City (Law Offices of Michael B. Pollack, New York City), for plaintiffs-appellants.
Before FRIENDLY and MESKILL, Circuit Judges, and BONSAL, District Judge.*
FRIENDLY, Circuit Judge:
Pasquale and Minerva Laino, husband and wife, brought suit in the District Court for the Eastern District of New York, seeking to declare null and void an income tax assessment based on unreported income from gambling activities asserted against them by the Commissioner of Internal Revenue, and to enjoin the Commissioner from enforcing a lien to collect the tax.1 The district court dismissed the complaint for lack of subject matter jurisdiction and this appeal followed. We affirm.
Appellants' tax problems date back to 1973, when the New York City Police Department placed Pasquale Laino under surveillance on suspicion of bookmaking activities. According to the sworn affidavit of Patrolman Robert Patterson, on five days in April beginning on April 2, 1973, Laino was observed receiving slips of paper and money in bill form from a variety of persons at a social club in Brooklyn. In a typical transaction, a "runner" would enter the premises, hand an envelope or brown paper bag containing the policy slips and cash to Laino, who would then count the money, place the slips behind a counter and stash the bills in his pocket. Late in the afternoon Laino would put all the slips and bills in a large brown paper bag and give the bag to someone else, who would then leave the club and drive off. The affidavit also alleged that on one occasion the large brown paper bag containing the day's receipts was placed in the trunk of a Cadillac regularly used by Laino, and that on one afternoon late in April, the bag was taken directly to Laino's residence in Queens. Based on this affidavit, a search warrant issued and a raid of the Laino home took place on May 3, 1973. In the course of their search, the police seized 8 banker statements, 142 controller statements, 9 pay and collect slips, 4 controller ribbons, 181 weekly collectors' records, one adding machine, and $1,713 in currency.
Pasquale Laino was arrested and indicted on one count of promoting gambling in the second degree and one count of possession of gambling records in the second degree. Penal Law, McKinney's Consol. Laws of N.Y.Ann., §§ 225.05, 225.15. On January 7, 1974, Laino withdrew his pleas of not guilty and pled guilty to the second count of possession of gambling records. Upon the recommendation of the district attorney, the court accepted the plea. Prior to sentencing, counsel for Laino made the following statement, which we shall relate because of the importance attached to it by appellants:
He has not been previously convicted of any crime. His involvement I can say was a minor one. These were not his personal records. He was an employee of someone making a normal salary for just holding the records. He is not anything big in the hierachy. He is like a middle man. He is gainfully employed.
This colloquy continued as follows:
The Court: How old are your children?
The Defendant: The oldest one is eight, six, three and three months.
The Court: How old are you, sir?
The Defendant: Thirty-three years old.
The Court: Well, I don't think any useful purpose would be (served by) putting you on probation. If you have been fooling around with policy or gambling, this is the time to stop.
Laino received a fine of $1,000.
On July 20, 1977, the Internal Revenue Service (IRS) mailed a notice of deficiency to appellants, notifying them of unpaid taxes for 1973 in the amount of $57,677.87 plus interest and penalties. The amount of unreported taxable income was computed as follows: from 5 days of betting slips totalling $67,115.70 seized in the raid on Laino's house, an average per day of $13,423.14 was obtained. This daily average was multiplied by 29 days, yielding a figure for gross receipts equal to $389,271.06. Profits were estimated at thirty-five percent, resulting in unreported net taxable income of $136,244.87. The tax owing on the Laino's reported and unreported income was then calculated to be $57,677.87.
At no time did appellants take advantage of their right to file a petition with the Tax Court seeking redetermination of the deficiency, see 26 U.S.C. § 6213. Subsequently, in December, 1977, the IRS assessed the outstanding taxes, penalty and interest against them, and in March, 1978, filed notice of a tax lien in the office of the Register of Queens County, N.Y., where the Lainos' home is located. Another year passed, and in May, 1979, appellants brought this action in the district court seeking injunctive and declaratory relief. Their principal contention below, and again on appeal, was that Pasquale Laino had no proprietary interest in the bookmaking operation but served merely as a bookkeeper at a salary of $150 per week, and that the Commissioner had not presented any evidence of ownership. According to appellants, the Commissioner's assessment attributing the total profits of the scheme to Laino thus lacked any basis in fact. As noted above, the district court, for reasons which will appear more clearly below, dismissed for lack of subject matter jurisdiction.
Section 7421(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 7421(a), commonly known as the Anti-Injunction Act (the Act), provides with certain exceptions that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." The only statutory exception of which appellants might at one time have availed themselves is that set out in section 6213(a), 26 U.S.C. § 6213(a), which prohibits the Commissioner from assessing or collecting a tax prior to the mailing of a notice of deficiency, prior to the expiration of the ninety-day period following such a mailing in which a taxpayer may petition the Tax Court for a redetermination of the deficiency, or prior to the rendering of a final decision of the Tax Court if such a petition has been filed. In these circumstances, if the Commissioner makes an assessment or takes steps to collect a tax, section 6213(a) expressly allows injunctive relief. Appellants, however, have not questioned the validity or the receipt of the notice of deficiency sent to them, nor did they petition the Tax Court during the ninety-day period or at any time thereafter.
Recognizing the force of this statutory bar to the maintenance of their suit, appellants seek to bring their cause within the judicially created exception to the Anti-Injunction Act articulated in Enochs v. Williams Packing & Navigation Co.,
(T)he question of whether the Government has a chance of ultimately prevailing is to be determined on the basis of the information available to it at the time of suit. Only if it is then apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim, may the suit for an injunction be maintained. Otherwise, the District Court is without jurisdiction, and the complaint must be dismissed.
Id. Later decisions reaffirming this two-pronged test have noted the "almost literal effect" which Williams Packing gave to the Act, and characterized it as requiring that the Government's action be "plainly without a legal basis" or have "no chance of success on the merits." Bob Jones University v. Simon,
Appellants assert that the one legal remedy still open to them a refund suit which would require that they first pay in full the amount assessed against them by the Commissioner, see Flora v. United States,
The case law supports this position. In Commissioner of Internal Revenue v. Shapiro, supra, a jeopardy assessment case in which the taxpayer sought injunctive relief while his petition before the Tax Court was still pending, the Court observed that if "the absence of a remedy at law at this time is due to respondent's failure to pursue that remedy, then equity will not intervene and the complaint should be dismissed. The inadequacy of his legal remedy would then be due to his own choice not to pursue it."
Our conclusion that appellants' failure to petition the Tax Court pursuant to section 6213 is dispositive of this appeal gains reinforcement from an understanding of the legislative history of that provision, first enacted in 1924. The House Report explained:The Committee recommends the establishment of a Board of Tax Appeals (now the Tax Court) to which a taxpayer may appeal prior to the payment of an additional assessment of income, excess-profits, war-profits, or estate taxes. Although a taxpayer may, after payment of his tax, bring suit for the recovery thereof and thus secure a judicial determination on the questions involved, he cannot, in view of section 3224 of the Revised Statutes (the Anti-Injunction Act), which prohibits suits to enjoin the collection of taxes, secure such a determination prior to the payment of the tax. The right of appeal after payment of the tax is an incomplete remedy, and does little to remove the hardship occasioned by an incorrect assessment.
H.Rep.No. 179, 68th Cong., 1st Sess. 7 (1924), reprinted in Cum. Bull. 1939-1, Pt. 2, at 246-47. Four years later Congress modified the predecessor of section 6213, by inserting a narrow exception to the Anti-Injunction Act, described above, which countenanced injunctive relief to restrain the Commissioner from assessing or collecting a tax before the mailing of a notice of deficiency, before the expiration of the period for filing a Tax Court petition, or if a petition were filed, before the decision of the Tax Court became final. Revenue Act of 1928, 45 Stat. 791, 852. Thus it appears that the potential difficulty inherent in a refund suit, the very hardship of which appellants complain here, was an evil which Congress sought to overcome not by dissolving the bar of the Anti-Injunction Act altogether, but by providing for pre-payment review of the Commissioner's determination. The exception to the Act which accompanied this legislative solution was a limited one, designed solely to protect the taxpayer's right to seek Tax Court review before paying any assessment. It would be a patent violation of this legislative plan were we to encourage taxpayers to spurn redetermination by the Tax Court and to come instead into equity complaining of the hardship of a refund suit. See Flora v. United States, supra,
We hold alternatively that even if equity jurisdiction were established, the complaint would have to be dismissed because appellants have not shown that under no circumstances could the Government prevail on the merits. Appellants insist that Pasquale Laino was but a low-salaried scribe without any proprietary interest in the bookmaking operation. In support of this view, they rely chiefly on the "unchallenged" assertion by Laino's attorney immediately prior to sentencing that Laino was "an employee of someone making a normal salary for just holding the records," and not "anything big in the hierarchy."
The prosecutor's silence in the face of these self-serving statements cannot be said to establish their veracity. As noted above, Laino was indicted on two counts and originally pled not guilty to both. As a result of plea bargaining, the prosecutor apparently decided to drop the count of promoting gambling in return for a guilty plea to the second count of possession of gambling records. The gist of the offense charged in the dropped count was knowingly advancing or profiting from illegal gambling activity. When Laino's counsel made the statements in question, implying that Laino had not shared in the gambling profits, the prosecutor had just recommended to the court that the plea be accepted. Under these circumstances it was not to be expected that the prosecutor would accuse Laino of a role in the gambling ring more appropriately described in the count he had agreed to drop. In effect, appellant would have us treat Laino's guilty plea to the second count as establishing his innocence on the first count.
Apart from the dialogue at Laino's sentencing, appellants contend that the record is devoid of any evidence of a proprietary interest in the illegal operation on Laino's part. Again we disagree. Under New York's standards, Laino's indictment for knowingly advancing or profiting from unlawful gambling activity could not have issued unless the grand jury considered the evidence sufficient, if unexplained or uncontradicted, to justify a jury verdict of guilty beyond a reasonable doubt, People v. Potwora,
The cases relied on by appellants support only the proposition that when the Commissioner's assessment is lacking in any factual basis whatsoever, the Williams Packing requirement is satisfied. In Pizzarello v. United States,
The decision of the Fifth Circuit in Lucia v. United States, supra, likewise does not advance appellants' cause. In that case, although there was ample evidence of the taxpayer's involvement in wagering activities, the court of appeals reversed and remanded to the district court to determine whether the method of computation, which projected one day's receipts over four-and-a-half years, was arbitrary and capricious. Appellants have not drawn the Commissioner's computational method into controversy, and indeed they would have been hard pressed to find fault with the extrapolation of five days' betting slips over twenty-nine days, especially given the regularity of the operation observed by the police. See De Lorenzo v. United States,
Our decision that appellants have failed to show the impossibility of the Government's succeeding on the merits is fully in accord with the Anti-Injunction Act's purpose of permitting the United States "to assess and collect taxes alleged to be due without judicial intervention." Enochs v. Williams Packing & Navigation Co., supra,
The decision of the district court dismissing the complaint for lack of subject matter jurisdiction is hereby affirmed.8
Notes
United States District Judge for the Southern District of New York, sitting by designation
The assessment against Mrs. Laino was based solely on her having filed a joint return with her husband
Because we hold that appellants' suit is barred by the Anti-Injunction Act, we need not decide whether it is also precluded by the federal tax exception to the Declaratory Judgment Act, 28 U.S.C. § 2201. See Bob Jones University v. Simon, supra,
Our decision in Bauer v. Foley,
It is worth noting that although the Bauer court discussed the case in terms of the judicially created exception to the Anti-Injunction Act delineated in Enochs v. Williams Packing & Navigation Co., supra, this was unnecessary; if the joint notice of deficiency was defective, the plaintiff's request for injunctive relief could have been granted pursuant to the exception to the Anti-Injunction Act contained in 26 U.S.C. § 6213(a).
Our conclusion that appellants inexcusably bypassed an adequate legal remedy makes it unnecessary to determine whether in the circumstances of this case, a refund suit afforded them another adequate remedy at law
We note in passing that Commissioner of Internal Revenue v. Shapiro, supra, while reaffirming the holding of Williams Packing, intimated that the Commissioner might be obliged to disclose facts amounting to "probable cause" to support his determination,
The opinion in Pizzarello also took a skeptical view of the Commissioner's method of computation,
In their complaint, appellants initially attacked as erroneous the Commissioner's determination that Laino was involved in gambling activities for the twenty-nine-day period, but they did not pursue the point. The period between the first police surveillance of Laino's gambling activities on April 2, 1973, and the raid on the Laino house on May 3 encompassed thirty-two days
Appellants attempt to color their complaint as an action to quiet title under 28 U.S.C. § 2410(a). Because they clearly seek to attack the validity of the underlying assessment, our decision in Falik v. United States,