Owensboro Ditcher & Grader Co. v. Lucas

• Decision Date: 30 April 1927
• Citation: 18 F.2d 798
• Parties: OWENSBORO DITCHER & GRADER CO. v. LUCAS, Collector of Internal Revenue.
• Court: U.S. District Court — Western District of Kentucky

18 F.2d 798 (1927)

OWENSBORO DITCHER & GRADER CO. v. LUCAS, Collector of Internal Revenue.

District Court, W. D. Kentucky.

April, 1927.

Sandidge & Sandidge, of Owensboro, Ky., for plaintiff.

Thos. J. Sparks, U. S. Dist. Atty., of Greenville, Ky., and A. W. Gregg, Gen. Counsel Bureau Internal Revenue, and I. R. Blaisdell, Sp. Atty. Internal Revenue, both of Washington, D. C., for defendant.

Elwood Hamilton, of Louisville, Ky., amicus curiæ.

DAWSON, District Judge.

This suit involves the constitutionality of section 280 of the Revenue Act of 1926 (44 Stat. 67), which, among other things, authorizes the Commissioner of Internal Revenue to assess and collect, in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax, "(1) the liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess profits, or war profits tax act," and also involves the right of a transferee of the property of a taxpayer to enjoin the collection by distraint of such assessed liability.

The bill, as amended, states that in the month of August, 1920, the plaintiff, Owensboro Ditcher & Grader Company, a Kentucky corporation, purchased from the Simplex Farm Ditcher Company, a Kentucky corporation, all the assets of the latter company, and gave in payment thereof $95,000 par value of the capital stock of the plaintiff company; that at the time and in the manner provided by law the Simplex Farm Ditcher Company made and filed with the collector of internal revenue for the district of Kentucky its return for income and profits taxes due the United States government for the calendar year 1919, under the acts of Congress then in force; that this return showed that the taxpayer had sustained a loss for that year, and that therefore no tax was due; that the Commissioner of Internal Revenue, in the month of July, 1923, and almost three years after all the assets of the taxpayer had been transferred to the plaintiff in this case, made a deficiency assessment of income and profits taxes for the year 1919 in the sum of $2,266.40 against the taxpayer, Simplex Farm Ditcher Company, and in regular course demanded payment thereof; that at the time and in the manner provided by law the Simplex Farm Ditcher Company made and filed with the then collector of internal revenue for the district of Kentucky its return, as required by the acts of Congress then in force, for income and profits taxes for the year 1920, this report likewise showing that the taxpayer had sustained a loss in the conduct of its business during the calendar year 1920, and that therefore no tax was due for that year; that in the month of May, 1925, almost five years after the sale of its assets, as heretofore stated, the Commissioner of Internal Revenue made a deficiency assessment against the Simplex Farm Ditcher Company in the sum of $15,034.46, on account of income and profits taxes for the year 1920, and that demand for the payment of this amount, together with $1,217.79 interest, was regularly made on the Simplex Farm Ditcher Company by the collector; that on the 2d day of August, 1926, the plaintiff was notified by the Commissioner of Internal Revenue that under authority of section 280 of the Revenue Act of 1926 he proposed to assess these taxes and interest thereon against plaintiff as the transferee of the property of the taxpayer, Simplex Farm Ditcher Company; that the plaintiff failed to avail itself of the privilege of a hearing before the Board of Tax Appeals, and that in due time these taxes and the interest thereon were assessed against the plaintiff as a liability on its part as the transferee of the property of the taxpayer, Simplex Farm Ditcher Company, and payment thereof was demanded; and that the defendant, as collector of internal revenue, is threatening to and will, unless enjoined and restrained, issue distraint warrants against plaintiff's property and sell same, in satisfaction of the amounts claimed to be due by this plaintiff.

The bill charges that section 280 of the Revenue Act of 1926, under which the Commissioner of Internal Revenue and the defendant acted and are acting, is violative of the Fifth Amendment to the Constitution of the United States, in that it deprives plaintiff of its property without due process of law, and of the Seventh Amendment to the Constitution of the United States, in that it deprives plaintiff of its right to a trial by jury, and of section 1 of article 3, in that it undertakes to vest judicial power in the Commissioner of Internal Revenue. As a basis of equitable jurisdiction, it is alleged that plaintiff has not sufficient money with which to pay these claims, and to borrow same would impair its credit; that the property which the defendant is threatening to sell is real estate, used and necessary for use in the plaintiff's business, and that the threatened acts of the defendant cast a cloud upon its title; that there is no demand in the city where its property is located for that character of property, and, if sold, it would be at a great sacrifice, and would cripple and injure plaintiff's business; that it has no adequate remedy at law, and that it will suffer irreparable injury unless the defendant is enjoined from levying upon and selling its property.

The defendant filed a motion to dismiss the bill upon several grounds, but the court is of opinion that only three questions are necessary to be considered: (1) The constitutionality of section 280 of the Revenue Act of 1926. (2) Is the court prohibited from granting an injunction by section 3224 of the Revised Statutes of the United States (Compiled Statutes, § 5947), which provides that no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court? (3) Has the plaintiff an adequate remedy at law?

That section 280 of the Revenue Act of 1926, if enforced, as the bill alleges is threatened to be done in this case, will result in denying to the plaintiff due process of law within the meaning of the Fifth Amendment to the Constitution of the United States, seems too obvious for extended discussion, and in reaching this conclusion I am not unmindful of the rule that taxes, as such, may be assessed against and collected from the taxpayer by an administrative body, without giving the taxpayer any right to resort to the courts prior to the payment of the tax.

The legislative department has the undoubted right to levy a tax, and commit to a nonjudicial body the duty of assessment and collection, and if, at any stage of the procedure, the taxpayer is given the right to be heard by the authority charged with the assessment and collection thereof, he has not been denied due process of law. The plaintiff's liability, however, if any, which the defendant, under section 280, is seeking to enforce, does not grow out of nor flow from any of the provisions of the Revenue Act of 1926, nor from any other statute of the United States. The Revenue Act of 1926 undertakes in no way to define the measure of the liability of the transferee of the property of a taxpayer for the tax primarily due by the taxpayer, or to lay down any rule by which it may be determined. No revenue statute, so far as the court is advised, has ever undertaken so to do. So far as the court is advised, the liability of one who has had transferred to him the assets of a taxpayer before the...