Cole v. Cardoza

• Decision Date: 27 April 1971
• Docket Number: No. 20660.,20660.
• Citation: 441 F.2d 1337
• Parties: Eugene COLE and Mary Cole, His Wife, Plaintiffs-Appellants, v. Thomas A. CARDOZA, District Director, United States, Internal Revenue Service, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

441 F.2d 1337 (1971)

Eugene COLE and Mary Cole, His Wife, Plaintiffs-Appellants, v. Thomas A. CARDOZA, District Director, United States, Internal Revenue Service, Defendant-Appellee.

No. 20660.

United States Court of Appeals, Sixth Circuit.

April 27, 1971.

George Stone, Detroit, Mich., for plaintiffs-appellants; Max E. Klayman, Detroit, Mich., on brief.

John P. Burke, Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellee; Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Joseph M. Howard, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief; Ralph B. Guy, Jr., U. S. Atty., J. Kenneth Lowrie, Asst. U. S. Atty., Detroit, Mich., of counsel.

Before PECK, McCREE and KENT, Circuit Judges.

JOHN W. PECK, Circuit Judge.

Appellants brought this suit requesting the District Court to declare that tax assessments totaling $14,744.58 are illegal and void, to enjoin the collection of the assessments and to order the refund of the amounts already collected. The District Director filed a motion to dismiss and the trial court dismissed the complaint for lack of jurisdiction based principally on the prohibition against such suits contained in 26 U.S.C. § 7421 (a) as construed by the Supreme Court in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1961).

The assessments were alleged to be for gambling activities of appellant Eugene Cole during the period from August 1, 1965 to November 20, 1965 and consisted of an excise tax of $14,693.08 on the amount wagered during the period and a special tax of $51.50 on the occupation of wagering pursuant to 26 U.S.C. §§ 4401 and 4411. Appellants contend that the assessments are illegal for a number of reasons. They argue that the assessments amount to unconstitutional bills of attainder and violate their Fifth Amendment privilege against self-incrimination; that "the assessments are arbitrary and capricious and not based upon records of any kind or upon reliable information;" that 26 U.S.C. § 6201 does not authorize assessments for wagering as claimed by the District Director; and that as a result of the foregoing illegalities an undue hardship has been imposed upon appellants, thus vesting the District Court with equitable jurisdiction and entitling them to the requested relief. Appellants also contend that the District Court erred in not declaring null and void a levy for the taxes which was filed by the Internal Revenue Service with the Register of Deeds of Oakland County, Michigan. They state that the levy constitutes a cloud on the title to their home, located at 25000 Skye Drive, Farmington, Michigan, in Oakland County, which they own by the entirety.

Prior to the recording of the assessments herein, appellant was indicted by a federal grand jury in May, 1966, for gambling activities covering the same period as that in the present suit, but the amount involved in the criminal prosecution was only $2,902.00. Subsequently, the indictment was dismissed, presumably because of the decisions of the United States Supreme Court in Marchetti v. United States, 390 U.S. 39, 88 S.Ct. 697, 19 L.Ed.2d 889 (1968) and Grosso v. United States, 390 U.S. 62, 88 S.Ct. 709, 19 L.Ed.2d 906 (1968) holding that a proper assertion of the constitutional privilege against self-incrimination precludes criminal punishment for violations of the wagering tax provisions.

Thereafter, in August, 1969, the District Director recorded the tax assessments, $2,086.19 of which was for interest. Having received no payments on the amounts due, he proceeded to levy upon certain monies owed to Mr. Cole, including paychecks due from his employer. In December, 1969, appellants' counsel met with representatives of the Internal Revenue Service and then filed claims for refund with the Service on the amounts levied. Appellants assert in their Bill of Complaint that despite assurances to the contrary, the Internal Revenue Service has continued to proceed or threatened to proceed in the future with enforcement of the assessments by further seizures of Mr. Cole's paychecks, or by other means available to them. Appellants further claim that unless the prayed for relief is granted, they "will be deprived of their means of livelihood for the reason that they do not have sufficient assets either to post a bond, to secure such assessments or to pay same and sue in court for the refund."

It was later disclosed during the District Court proceedings in April, 1970, that appellants had been notified that their claims for refund had been rejected by the District Director. Since a final administrative determination had at that time been made, appellants could have sued in the District Court under 26 U.S.C. § 7422 for a decision of their claims on the merits. They chose instead to perfect this appeal.

In turning to appellants' arguments, we disagree with their contention that imposition of the assessments herein constitutes a bill of attainder or that their Fifth Amendment privilege against self-incrimination is violated. In essence, they contend that they cannot defend against the assessments because in order to do so they are compelled to disclose incriminating information which may later be used in criminal prosecutions by both federal and state authorities. They assert that their only alternative is to pay the assessments without being afforded an opportunity to be heard.

To support their argument, appellants quoted extensively in their brief, the language of the Supreme Court in Marchetti,supra, pointing out the hazards of self-incrimination accompanying the requirements of the wagering tax system. Were we concerned in the present case with an appeal of a conviction in which the defendant properly invoked the privilege against self-incrimination to prevent prosecution for violation of the wagering tax statutes as in Marchetti, appellants' argument would be most convincing. However Marchetti and Grosso stated that the wagering tax provisions were not violative of the Fifth Amendment with regard to the endeavors of the Internal Revenue Service in enforcing the taxpayer's civil liability. The Supreme Court in Marchetti stated:

"We emphasize that we do not hold that these wagering tax provisions are as such constitutionally impermissible; we hold only that those who properly assert the constitutional privilege as to these provisions may not be criminally punished for failure to comply with their requirements." 390 U.S. at 61, 88 S.Ct. at 709.

In similar if not stronger language, the Grosso court said:

"Section 4411 provides that the occupational tax must be paid `by each person who is liable for tax under section 4401\' and by each person who receives wagers for one liable under § 4401. It might therefore be argued that since petitioner is entitled to claim the constitutional privilege in defense of a prosecution for willful failure to pay the excise tax, he is thereby freed from liability for the occupational tax. We cannot accept such an argument. We do not hold today either that the excise tax is as such constitutionally impermissible, or that a proper claim of privilege extinguishes liability for taxation; we hold only that such a claim of privilege precludes a criminal conviction premised on failure to pay the tax." 390 U.S. at 69-70, n. 7, 88 S.Ct. at 714.

It is, therefore, clear that the Supreme Court preserved the civil sanctions pertaining to the wagering statutes, while at the same time insuring that no criminal prosecution could be based upon unconstitutional disclosures. This conclusion is further strengthened by the Supreme Court's decision in United States v. United States Coin & Currency, 401 U.S. 715, 91 S.Ct. 1041, 28 L.Ed.2d 434 (1971), in which the Court declared that the Fifth Amendment privilege, where properly invoked, precludes the federal government from confiscating money used in violation of the wagering statutes. The Court reasoned that the forfeiture statutes under which the money was seized were "intended to impose a penalty only upon those who are significantly involved in a criminal enterprise." 401 U.S., at 721, 91 S.Ct., at 1045, supra. Having found that the forfeiture statutes were criminal in nature, the Court determined that the Fifth Amendment privilege applies. However, even though the Court was confined to consideration of an action by the federal government in the nature of a criminal proceeding, they were very careful to reaffirm their position in Marchetti and Grosso regarding the civil liability of taxpayers under the wagering statutes by stating that they "in no way doubted the Government's power to assess and collect taxes on unlawful gambling activities." 401 U.S., at 717, 91 S.Ct., at 1043, supra. Hence, the Court has established in unmistakable terms that the Government is free to collect taxes for gambling activities provided that no criminal punishment can result from such collection.

This court has previously considered the vitality of the wagering tax provisions following Marchetti and Grosso. United States v. Scott, 425 F.2d 817 (6th Cir. 1970), petition for cert. filed, 39 U.S.L.W. 3056 (No. 455); United States v. One 1965 Buick, 392 F.2d 672 (6th Cir. 1968) vacated and remanded sub nom. Dean v. United States, 402 U.S. —, 91 S.Ct. 1602, 29 L.Ed.2d 105. Notwithstanding the Supreme Court's vacation and remand of our decision in One 1965 Buick, the following language therein on denial of a petition for rehearing is particularly applicable to the position we take in the present case:

"In Grosso and Marchetti, the Supreme Court limited its holding to criminal cases. The Court approved its previous decisions in License Tax Cases, 72 U.S. 462 (5 Wall.), 18 L.Ed. 497 (1866), and United States v. Sullivan, 274 U.S. 259, 47 S.Ct. 607, 71 L. Ed. 1037 (1927), which upheld the power of Congress to tax unlawful activities. It is not for us to extend Grosso and Marchetti to civil cases and thereby exempt from

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