UNITED STATES and David J. Feddor, Revenue Agent, Internal Revenue Service, Petitioner-Appellant, v. J. Richard DEMA, Respondent-Appellee.
No. 75-1894
United States Court of Appeals, Seventh Circuit.
Decided Oct. 2, 1976.
544 F.2d 1373
Before FAIRCHILD, Chief Judge, MARKEY, Judge, and GRANT, Senior District Judge.
Argued April 21, 1976.
As additional authority for this conclusion we would look to Rule 23(c)(1) itself which provides:
As soon as practicable after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained. An order under this subdivision may be conditional, and may be altered or amended before the decision on the merits.
We believe that this means not only that the district court should determine the class action certification before hearing the merits of the suit as we held in Peritz v. Liberty Loan Corp., 523 F.2d 349 (7th Cir. 1975), but also that such a determination should be subject to an interlocutory appellate review so that the class action question is finally settled at this stage of the litigation.
The spirit as well as the purpose of the rule would be better served by such interlocutory review. That spirit and purpose should not be frustrated by an unarticulated and perhaps subconscious hope on the part of appellate judges that if review of important class action determinations are delayed until the merits of the suit have been decided, the question of such class determination may be mooted and difficult questions avoided. The rights involved in the certification of a class action are simply too important to be left to chance. These rights fall within the rationale of Cohen v. Beneficial Loan Corp., supra, as affirmed in Eisen IV:
This decision appears to fall in that small class which finally determine claims of right separable from, and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated. 337 U.S. at 546, 69 S.Ct. at 1225.
For the reasons stated above, we would proceed to a consideration of the plaintiff‘s claim that the district court erred in holding that a class action was not maintainable.6
Samuel K. Skinner, U. S. Atty., Chicago, Ill., Scott P. Crampton, Asst. Atty. Gen., Francis J. Gould, Atty., Tax Div., Dept. of Justice, Washington, D. C., for petitioner-appellant.
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
Appellant‘s primary contention in this appeal is that
In response, appellee argues that in an IRS enforcement proceeding where the trial court has determined that there has been harassment,
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
Section 7421(a) of the Internal Revenue Code of 1954 states in clear and precise language that “. . . [N]o 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 behind 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, 94 S.Ct. 2038, 2046, 40 L.Ed.2d 496 (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, 82 S.Ct. 1125; 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
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
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, 82 S.Ct. 1125. Second, he could have elected to seek redetermination by the Tax Court. Bob Jones, supra, 416 U.S. at 746, 94 S.Ct. 2038. 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
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
Background
Some knowledge of the background of the case is necessary to fully appreciate the District Court‘s action.
Tabcor, Inc. is a corporation which coordinates ticket marketing, sales, and distribution for children‘s shows produced by a companion corporation. The shows are sponsored by various charitable organizations or schools in the Chicago area such as the Knights of Columbus, Elks, Amvets, B‘nai B‘rith, etc. A sponsoring organization may hire Tabcor as middleman to coordinate sale of tickets to a particular show, or it may handle the details itself. In either case ticket brokers, delivery men and other personnel are used for actual sales of the tickets with Tabcor acting as a clearing house for those shows in which it is involved.
The tax dispute which led to the issuance of the summonses in this case centers around the employment status, for withholding purposes, of brokers and delivery men.
Tabcor had been the subject of an earlier Internal Revenue Service (IRS) investigation for certain quarters of the years 1970 and 1971 which resulted in adjustments of $4,843.27 being paid. After those payments the investigation was closed for the quarters in question, while two other quarters were referred by the revenue officer to the audit division.
An apparently unrelated examination was initiated in March, 1973, to investigate the employment status of certain persons paid by Tabcor in 1971 and in January, 1972. Agent Feddor examined the books and records of Tabcor on at least two occasions and, according to his own work records, spent 93 hours on the case. In October, 1973, the agent asked appellee Dema, president of Tabcor, to voluntarily extend the statute of limitations for the year 1970 which would otherwise run out on April 15, 1974. Dema objected to the extension and to a subsequent notice of reexamination received for three quarters of 1970 and two quarters of 1971, because he had already paid adjustments for three of those five quarters and the earlier investigation had been closed for those periods. In December, 1973, Dema received Statements of Tax Due for all four quarters of 1970 aggregating over $140,000. Tabcor‘s gross receipts for 1970 were less than $100,000. Agent Feddor admitted to the District Court at a hearing that he had precipitated these disproportionate assessments because the limitation period was running out for 1970 and that he could not get copies of Tabcor‘s 1970 return from the IRS regional headquarters in time to make a proper determination because of the slowness of the response of that IRS office. He therefore used the Tabcor 1971 return as a basis for predicting the 1970 tax and told Dema‘s attorney he would adjust the figures if IRS could see the Tabcor books and records for 1970 again. Agent Feddor also stated to the court that he knew this procedure was unethical but that he felt he had no alternative.
In February, 1974, the two summonses at issue were served, calling for production of various books and records of Tabcor for 1971, 1972 and 1973. Dema again objected, this time raising the provisions of
Dissenting Opinion
I
This proceeding was instituted under the provisions of
Restrictions on examination of taxpayer.—No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer‘s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary. (Emphasis supplied.)
The legislative history of this section which was first enacted as Sec. 1309 of the 1921 Revenue Act clearly shows that its purpose was to curb the investigative powers of low-echelon revenue agents from making unnecessary inspections after a thorough examination was supposed to have been completed. 61 Cong.Rec. 5855 (1921). The enforcement of
The extensive record in this case was developed in more than a year of judicial proceedings which saw the attorneys for the parties before a judge fifteen times. Six of these hearings are transcribed fully in the record. The District Court showed concern throughout the action with doing justice to all parties and as a result allowed Dema to conduct limited discovery of IRS documents and personnel in the development of evidence of harassment and lack of necessity for further inspections.1
The Supreme Court has set forth standards which the Commissioner must meet to obtain enforcement of his summons:
He must show that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner‘s possession, and that the administrative steps required by the Code have been followed—in particular, that the “Secretary or his delegate,” after investigation, has determined the further examination to be necessary and has notified the taxpayer in writing to that effect. This does not make meaningless the adversary hearing to which the taxpayer is entitled before enforcement is ordered. United States v. Powell, 379 U.S. 48, 57-58, 85 S.Ct. 248, 255, 13 L.Ed.2d 112 (1964). (Emphasis supplied and footnote omitted.)
In addition, the same opinion discussed the circumstances under which a court could inquire into the underlying reasons for the examination.
It is the court‘s process which is invoked to enforce the administrative summons and a court may not permit its process to be abused. Such an abuse would take place if the summons had been issued for an improper purpose, such as to harass
the taxpayer or to put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation. The burden of showing an abuse of the court‘s process is on the taxpayer, and it is not met by a mere showing, as was made in this case, that the statute of limitations for ordinary deficiencies has run or that the records in question have already been once examined. 379 U.S. at 58, 85 S.Ct. at 255. (Emphasis supplied.)
Under these guidelines, a District Court could deny enforcement of a summons if: (1) the commissioner failed to establish one of the necessary elements above, or (2) if the court determined that enforcement would otherwise be an abuse of its process.
Based on the documents produced by IRS, the deposition of Revenue Officer Dillon, and the testimony in court of Dema and Revenue Agent Feddor, the court concluded that additional inspections of Tabcor, Inc.‘s records for 1971, as sought in the IRS summonses, were unnecessary. That conclusion is supported by the evidence.
The court ordered Dema to produce records for 1972 and 1973, presumably because the evidence was insufficient to show previous inspections for those years. The court also attempted to keep further IRS intrusions to a minimum by obtaining an estimate from Agent Feddor of how long he needed access to the records to complete work on the case. Agent Feddor was allowed ten days by the court (twice Feddor‘s estimate) to inspect the records and return them to Dema. Representations of counsel for the government show acquiescence in the limitations. After the records had been produced and inspected in accordance with the court‘s terms, the action was dismissed without prejudice.
However, the IRS apparently was not satisfied with its examinations and, according to Dema, asked to inspect the Tabcor books further, and also to examine the personal records of Mr. and Mrs. Dema.2 Dema was also notified of a deficiency in his personal income tax for the year 1970 on the same day the enforcement proceeding was dismissed.3 Dema considered these actions to be inconsistent with the court‘s earlier “order” and subsequently moved for an order to show cause and for a contempt judgment against the several IRS employees involved. The government filed a motion to strike raising procedural grounds, and
Dema‘s allegations in his motion, regarding IRS’ repeated requests for more inspections of his records, were neither admitted nor denied by the government. The government simply argued that production of his records was not the only remedy available to Dema in seeking to have the deficiency notice removed.
At the hearing on the motion,4 when the government again argued that
II
Section 7421(a) of the Internal Revenue Code, the so-called “anti-injunction” act, prohibits a court from entertaining any suit for the purpose of restraining the assessment or collection of any tax. The government contends that this proscription also extends to suits which seek to restrain any and all acts necessary or incident to assessment or collection, i. e., the production of financial records.6
Recent decisions of this and other courts have broadly interpreted
In considering
§ 7421(a) , a two-step analysis is necessary: (1) When does the statute apply? (2) When it is applicable, under what circumstances is an exception permitted? 416 U.S. at 767, 94 S.Ct. at 2061.
The threshold question, obviously, is whether the present litigation is a “suit for the purpose of restraining” any tax.
Contrary to the government‘s contention and the majority‘s opinion, this is not “a suit for the purpose of restraining” collection of any tax. A summons enforcement proceeding is the proper forum for a taxpayer who believes himself to be the subject of “unnecessary inspections” to invoke the
The government‘s concern as to the possible effect of the injunction on discovery in subsequent litigation over the liabilities for years up to and including 1972 is unfounded. Any lawful discovery in a judicial proceeding would be under authority of a court, and would not violate a properly fashioned injunction.
III
A judicial finding of IRS harassment should preclude further conduct of any kind, including service of a new summons, which would place unnecessary burdens on the taxpayer. In the situation present in this case, a restraining order against IRS would seem wholly appropriate, even if res judicata would bar a subsequent IRS action on the same operative facts. The taxpayer, having once proved his case, should not be subjected to the further harassment of having to defend the same issues again.
I fully recognize that the Commissioner‘s burden to obtain enforcement of a summons is very slight and the taxpayer‘s burden in obtaining a denial of enforcement or injunctive relief is extremely heavy. Nevertheless, I believe judicial intervention is proper, nay compelled, when a taxpayer does meet that heavy burden. There would be no need for
Leaving a taxpayer to his remedies in the Tax Court or Court of Claims on a possibly unrelated tax dispute would offer little or no relief from proven IRS harassment or improper IRS purpose related to inspections of his records. Likewise, seeking a judicial determination in a new enforcement proceeding would be an inadequate remedy for harassment when “unnecessary” multiple inspections of records are the very basis of that harassment.7 Even if the taxpayer should prevail in a collateral tax claim, he could not be compensated for the intrusions resulting from “unnecessary” IRS inspections.
The irreparable injury done the taxpayer when harassed by his government is but a part of the injury done a society attempting to live free. Arbitrary, arrogant and capricious action by a government agent, engaged in a vendetta and unfettered by law, does injustice to us all, including especially the government itself. Such action cries out for the healing power of judicial intervention.
I conclude that equitable relief in the form of an injunction was fully appropriate in this case.
IV
The record contains adequate evidence upon which the court below found harassment on the part of IRS. Agent Feddor‘s unethical action in precipitating tax assessments for 1970 as well as the IRS’ apparent disregard of the court‘s clear instructions to limit the further unnecessary intrusion on Dema‘s business, would appear sufficient of themselves. The court may have logically questioned the propriety of the personal deficiency notice served the very day on which it first dismissed the action, in view of the earlier, admittedly unethical practices used by Agent Feddor to avoid the statute of limitations. Absent a clear delineation of the error requiring reversal in the majority opinion, and I find none, I cannot join my colleagues. Being convinced that no such error is shown by the record, I would affirm the order of the District Court in all respects.
UNITED STATES of America, Plaintiff-Appellee, v. Dawn EICHHORST et al., Defendants-Appellants.
No. 76-1513
United States Court of Appeals, Seventh Circuit.
Decided Nov. 12, 1976.
Argued Sept. 27, 1976.
Notes
I don‘t know anything about this man [Agent Feddor] but I have heard him testify and I have watched what the operation is. I think it has become a personal vendetta for anybody to make the kind of evaluation that he did out of the clear blue sky and put the burden on the taxpayer to come in and try to offset it; in my judgment it is harassment. (Bracketed matter and emphasis supplied.)