Rosenblum v. U.S.

• Citation: 549 F.2d 1140
• Decision Date: 02 February 1977
• Docket Number: No. 76-1241,76-1241
• Parties: 77-1 USTC P 9177 Stanley M. ROSENBLUM et al., Appellants, v. UNITED STATES of America, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

Page 1140

549 F.2d 1140

77-1 USTC P 9177

Stanley M. ROSENBLUM et al., Appellants, v. UNITED STATES of America, Appellee.

No. 76-1241.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 12, 1976.

Decided Feb. 2, 1977.

Merle L. Silverstein, Clayton, Mo., for appellants; Stanley M. Rosenblum, of Rosenblum, Goldenhersh, Silverstein & Zafft, Clayton, Mo., on brief.

Michael J. Roach, Atty., Tax Div., Dept. of Justice, Washington, D.C., for appellee; Scott P. Crampton, Gilbert E. Andrews and Carleton D. Powell, Attys., Washington, D.C., on brief.

Before VAN OOSTERHOUT, Senior Circuit Judge, HEANEY and HENLEY, Circuit Judges.

HENLEY, Circuit Judge.

This is an action brought in the United States District Court for the Eastern District of Missouri against the United States pursuant to 26 U.S.C. § 7426(a) by the members of the Clayton, Missouri law firm of Rosenblum, Goldenhersh, Silverstein & Zafft (hereinafter Rosenblum), and by Edward Yawitz and Florence Yawitz, his wife, and Clardel Drug Company, a corporation (hereinafter taxpayers). The purpose of the suit is to recover from the government approximately $42,000.00 that was paid to Rosenblum by taxpayers as an attorney's fee and to defray expenses in connection with Rosenblum's agreement to represent the taxpayers in litigation pending in the Tax Court of the United States; prior to the payment of the money to Rosenblum, the Commissioner of Internal Revenue had made a jeopardy assessment of income taxes against the taxpayers and had filed notices of tax liens; after the payment had been made, the Internal Revenue Service levied on all of the assets of the taxpayers and also levied upon the moneys paid to Rosenblum. A demand on the IRS for release of the money was refused, and this action was instituted. Subject matter jurisdiction is predicated upon 28 U.S.C. §§ 1346(a)(1) and 1346(e). ¹

The theory of the plaintiffs is that the "totality" of the seizure by the IRS, including the seizure of the money paid to Rosenblum, has deprived the taxpayers of their alleged constitutional right to be represented by competent tax counsel in the litigation that taxpayers have pending in the Tax Court, which litigation plaintiffs describe as being complicated and technical. ²

The suit was filed in August, 1975. The government filed a motion to dismiss the complaint and a later motion for summary judgment alleging that the district court lacked subject matter jurisdiction, and that the complaint failed to state a claim upon which relief could be granted.

On February 23, 1976 the district court ³ filed a memorandum opinion and entered a judgment dismissing the complaint without prejudice. The view of the district court was that Rosenblum had no protectable interest in the moneys that were seized, and that the constitutional claim of the taxpayers would have to be raised in the Tax Court and could not be adjudicated in the district court. Disagreeing with the district court in both respects, plaintiffs filed a timely notice of appeal.

The facts of the case are mostly undisputed.

Edward Yawitz and Florence Yawitz are husband and wife, and they reside in St. Louis County, Missouri. It is inferable that they are interested in and probably control the third taxpayer, Clardel Drug Company.

It seems clear that for a number of years prior to September, 1974 the taxpayers had been in controversy with the IRS with respect to their income tax liabilities, including civil fraud penalties and that they had cases pending in the Tax Court. Apparently, there were six of those cases, three instituted by the individual taxpayers and three instituted by the corporate taxpayer. Judging from Tax Court docket numbers appearing in the complaint, it may be inferred that the Tax Court proceedings were instituted in 1972, 1973 and 1974.

On September 9, 1974 Mr. Yawitz entered a plea of guilty in federal court to a charge of fraudulent evasion of federal income taxes due with respect to calendar year 1968. Immediately thereafter the Commissioner made jeopardy assessments against the taxpayers covering all asserted income tax liabilities on their part. Demand for payment was made on the taxpayers with which demand there was no compliance, and on September 16, 1974 the IRS filed notices of tax liens.

In the meantime, on September 11, 1974, taxpayers employed Rosenblum to represent them in the litigation pending in the Tax Court. The individual taxpayers agreed to pay Rosenblum a fee of $20,000.00 and to advance expenses of litigation amounting to $2486.05. The corporate taxpayer agreed to pay a fee of $19,625.00. Those sums were in fact paid over to Rosenblum not later than October 8, 1974, and were deposited in three separate special bank accounts in a Clayton, Missouri bank. When the payments were made, Rosenblum was on constructive notice of the government's tax liens, and it is quite possible that Rosenblum had actual knowledge that the liens had been perfected.

Between October 8 and November 8, 1974 Rosenblum notified the IRS that it had received the payments from the taxpayers.

On November 8, 1974 the IRS served a notice of levy on Rosenblum calling upon it to turn over to the IRS the moneys that it had received from the taxpayers. On November 13, 1974 Rosenblum complied with the demand and surrendered the money. On November 25, 1974 Rosenblum requested the IRS by letter to return the moneys to the law firm; that request was denied by letter on February 20, 1975. This action was commenced on August 18 of that year.

The complaint is in two counts. The first count sets out the claim of Rosenblum and of the individual taxpayers for a return of the $22,486.05 paid by those taxpayers to Rosenblum. The second count sets out the claim of Rosenblum and the corporate taxpayer for the return of the $19,625.00 paid to Rosenblum by that taxpayer. Aside from differences in parties and amounts, the two counts are essentially identical.

Count I of the complaint alleges ⁴ that the cases of the individual taxpayers in the Tax Court are complicated and are based on sophisticated theories of law and fact and that the individual taxpayers are required to refute allegations of fraud, to establish the status of Mrs. Yawitz as an "innocent spouse," and to sustain the burden of proof on the non-fraud issues in the cases which involve substantial amounts of money. ⁵ It is said that in order to properly present the cases the taxpayers require the assistance of competent, expert and experienced tax counsel who will be required to work on the cases for many hours, and that at the present time the IRS has requested pretrial and administrative conferences at which the taxpayers will require vigorous and skilled representation.

It is further alleged that the taxpayers will not be able to obtain competent counsel unless they are able to compensate such counsel; that the taxpayers believe that Rosenblum is competent to represent them properly and has requested it to do so; that Rosenblum is willing to represent the taxpayers "but is unwilling to do so without fair compensation."

And Paragraph 13 of Count I alleges:

(13) That unless the aforesaid sum of Twenty-Two Thousand Four Hundred Eighty-Six Dollars and Five Cents ($22,486.05) is released by the Internal Revenue Service, plaintiffs Yawitz will be unable to retain competent counsel, and to pay said necessary costs and expenses, and will suffer adversely therefrom, and will be deprived of their property without due process of law in contravention of the Fifth and Sixth Amendments to the Constitution of the United States. Plaintiffs Yawitz are denied due process when the defendant United States (respondent in said pending civil tax cases) is permitted to seize the very money which plaintiffs Yawitz used to secure counsel to defend their property interests. The defendant has heretofore levied and seized upon the money and property which plaintiffs Yawitz paid to retain said Rosenblum and for said necessary expenses to protect said property interests as aforesaid; the result of said levy and seizure is that plaintiffs Yawitz are totally and effectively denied the opportunity and right to be represented by competent and retained counsel and denied the opportunity for an adequate, full, adversary and fair hearing, all contrary to the aforesaid amendments to the Constitution of the United States.

The government does not deny the factual allegations that have been mentioned, and for present purposes we will accept them as true. The government, of course, does not admit the validity of the conclusions of law that are alleged in the two counts of the complaint. And we are not required to accept those conclusions. Specifically, the government does not admit, nor do we necessarily accept, the validity of plaintiffs' allegations that the seizure of the money was wrongful and that unless the money is returned to Rosenblum the taxpayers will be denied due process of law in connection with the proceedings in the Tax Court. ⁶

I

The question of whether the IRS may, agreeably with the due process clause, seize all of a taxpayer's money and property on the basis of a jeopardy assessment and thereby render the taxpayer financially unable to adjudicate his tax liability in the Tax Court or otherwise is a serious one. And it gave trouble to the Tax Court in Human Engineering Institute v. Commissioner of Internal Revenue, 61 T.C. 61, 64-68 (1973), the opinion in which case was referred to by the district court in this case. While the Tax Court raised the question and expressed concern about it, the court found it unnecessary to decide the question because the taxpayers had in fact been able to raise funds to finance their Tax Court litigation.

While the constitutional question just mentioned is serious, the precise question before us at the moment is whether the plaintiffs were entitled to litigate the constitutional issue in the district court within the framework...