Patrick v. U.S.

• Decision Date: 24 October 1975
• Docket Number: Nos. 74-1780,74-1884 and 74-1912,s. 74-1780
• Citation: 524 F.2d 1109
• Parties: 75-2 USTC P 16,203 Leonard PATRICK, a Witness before the Special January 1974 Grand Jury, Petitioner-Appellant, v. UNITED STATES of America, Respondent-Appellee, Leonard PATRICK, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. Jeanne EPSTEIN and Joseph Epstein, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1109

524 F.2d 1109

75-2 USTC P 16,203

Leonard PATRICK, a Witness before the Special January 1974

Grand Jury, Petitioner-Appellant, v. UNITED STATES of America, Respondent-Appellee, Leonard PATRICK, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

Jeanne EPSTEIN and Joseph Epstein, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

Nos. 74-1780, 74-1884 and 74-1912.

United States Court of Appeals Seventh Circuit.

Argued April 4, 1975.

Decided Oct. 24, 1975.

Carl M. Walsh, Anna R. Lavin, Chicago, Ill., for petitioner-appellant.

Scott P. Crampton, Asst. Atty. Gen., Dennis M. Donohue, Atty., Tax Div., Dept. of Justice, Washington, D. C., Samuel K. Skinner, U. S. Atty., Chicago, Ill., for respondent-appellee.

Before McALLISTER, Senior Circuit Judge, ^* and SWYGERT and STEVENS, Circuit Judges.

STEVENS, Circuit Judge.

In testimony given before a Grand Jury pursuant to a grant of immunity, appellant Patrick described a gambling business in which he held a 50% interest in 1967, 1968 and 1969. Based on that testimony the government made jeopardy assessments against Patrick and the Estate of his deceased partner, Epstein, of $835,558, for unpaid gambling taxes plus interest. In separate proceedings, Patrick and Epstein's Executors sought to enjoin the assessment and collection of the taxes, and Patrick sought the suppression of his Grand Jury testimony. The principal question presented by these three appeals is whether the district court properly held that relief was foreclosed by the statutory bar to such an injunction notwithstanding the allegations of misuse of the Grand Jury.

Patrick testified before the Grand Jury on February 6 and February 27, 1974. Excerpts from his testimony were placed in the record as an exhibit supporting the government's motion to dismiss Patrick's complaint. His testimony was given during the course of an investigation of gambling activities on Chicago's North Side. In his first appearance on February 6 he described certain practices and participants in that activity, and expressly acknowledged that he was a 50% owner of a "Sports Office" operated by Epstein which accepted wagers on sporting events; he identified an item of "Miscellaneous" income of $38,000 on his 1969 Federal Income Tax return as his share of the net income from the Sports Office during that year. He also acknowledged having had an interest in the business since 1955 or 1957, but denied participation after 1969.

In Patrick's second appearance on February 27, the prosecutor asked him a series of questions which arguably were intended to establish the amount of his wagering tax liability for 1967, 1968 and 1969. He first had Patrick reconfirm his testimony about the miscellaneous item on his 1969 income tax return, and then established that comparable entries, each for $28,000, on his 1967 and 1968 returns also reflected his share of the net income from the Sports Office in those years. The prosecutor then asked Patrick what amount of gross wagers would be required to produce those net profits. Patrick was unable to make even a rough estimate of the percentage of the gross that was represented by the net income figures, explaining that the day-to-day operation of the business had been Epstein's responsibility. Had Patrick given informative answers to these questions he would have provided a basis for determining the amount of his wagering tax liability since that tax is computed as 10% of the gambler's gross wagers. Other questions germane to the gambling investigation were also asked of Patrick during his appearance on the 27th as well as on the 6th.

As a result of his investigation the prosecutor concluded that Patrick had never filed any wagering tax returns for the money he received from the Sports Office, that he was liable for such taxes, and that since gamblers deal only in cash and maintain no records or bank accounts, a jeopardy assessment against Patrick would be appropriate. ¹ Accordingly on April 9, 1974, without notice to Patrick, he obtained an order from the district court authorizing the release of excerpts of Patrick's Grand Jury testimony and furnished those excerpts to the Internal Revenue Service. ²

On April 18, 1974, the Acting District Director approved a jeopardy assessment against Patrick for wagering taxes in the amount of $835,558, including interest. ³ The assessment was based on an estimate of wagers accepted derived from Patrick's reported gambling income. This income, representing 50% of the Sports Office profits, was doubled to determine the total profit from the gambling business. This total profit was then divided by .03, the assumed rate of net profit on a gambling business, to determine the total amount of wagers accepted, which were subject to the 10% wagering tax. The 3% figure was obtained from an unofficial source a book entitled Scarne's Complete Guide to Gambling. The period covered by the assessment was January 1, 1967, through December 31, 1969, the period identified in the Grand Jury testimony. An assessment of $237 was made for the occupational tax, § 4411, for the same period. ⁴

On December 13, 1974, the Internal Revenue Service amended its assessment for wagering tax to $125,328, based on a change in the estimated rate of net profit on the wagers accepted from 3 to 15%.

Appeal No. 74-1884

On May 2, 1974, Patrick filed a complaint in district court "for the recovery of Internal Revenue taxes erroneously and illegally assessed and collected and to enjoin further actions by the Defendant, its officers, attorneys and employees from proceeding with collection under the purported authority of such assessments and to declare such assessments illegal and void, and the determination of jeopardy arbitrary and without basis in fact." The government filed a motion to dismiss supported by an affidavit and exhibits, including relevant excerpts from Patrick's Grand Jury testimony. On August 2, 1974, the district court dismissed the complaint on the ground the injunctive relief is barred by the Anti-Injunction Statute, 26 U.S.C. § 7421(a). Patrick has appealed from that order.

Appeal No. 74-1780

On September 9, 1974, Patrick filed a motion in district court praying that the transcripts of his testimony be suppressed and their use in any proceeding or by any agency of the United States be prohibited. This motion was denied on September 12, 1974, on the ground that the issues raised were premature and would more properly be raised during the course of the tax refund litigation. Patrick has taken a separate appeal from that order.

Appeal No. 74-1912

On May 15, 1974, the executors of Epstein's Estate filed a separate action seeking an injunction. Their attempt to avoid the bar of § 7421 rests on a different theory from Patrick's. They allege that the assessment against the estate is based entirely on Patrick's testimony about transactions between Patrick and Epstein before the latter's death, that Patrick is an "interested party" in this suit between the United States and the Estate, and that Patrick's testimony is therefore inadmissible under the Illinois Dead Man's Statute, Chap. 51, Paragraph 2, Ill.Rev.Stats. The district court dismissed Epstein's complaint on August 2, 1974, explaining that the dismissal was made for "substantially the same reason that plaintiffs' argument in Patrick was unavailing: the question of admissibility of evidence is not grounds for an exception to the anti-injunction provisions of 26 U.S.C. § 7421(a)". The Estate appeals from this dismissal.

I.

By statute enacted in 1867, and effective continuously ever since, Congress has directed that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." ⁵ In its recent opinion in Bob Jones University v. Simon, 416 U.S. 725, 736-745, 94 S.Ct. 2038, 2043, 40 L.Ed.2d 496, the Supreme Court reviewed the history of interpretation of the Anti-Injunction Statute and concluded that the stringent, almost literal, construction adopted in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292, is viable today. Specifically, the Court held that irreparable injury to the taxpayer is not a sufficient basis for avoiding the statutory bar; instead of focusing on the degree of harm to the taxpayer, any exception to the statute must rest on a complete absence of merit in the government's position. The proposed tax assessment must be "plainly without a legal basis"; the case must be one in which the government has "no chance of success on the merits. ⁶

The Court summarized and reaffirmed its unanimous holding in Williams packing:

Only upon proof of the presence of two factors could the literal terms of § 7421(a) be avoided: first, irreparable injury, the essential prerequisite for injunctive relief in any case; and second, certainty of success on the merits. (370 U.S.) at 6-7 (82 S.Ct. 1125 at 1128-1129). An injunction could issue only "if it is clear that under no circumstances could the Government ultimately prevail . . . ." Id., at 7 (82 S.Ct. 1125 at 1129). And this determination would be made on the basis of the information available to the Government at the time of the 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."

416 U.S. at 737, 94 S.Ct. at 2046. In Williams Packing the Court had added:

To require more than good faith on the part of the Government would unduly interfere with a collateral objective of the Act protection of the collector from litigation pending a suit for refund.

370 U.S. 1, 7, 82 S.Ct. 1125, 1129. Thus, the statute only becomes inapplicable when the government should have known, at the time it made the assessment, that it had no chance of prevailing on the merits.

The several contentions advanced by appella...