Transport Manufacturing & Equipment Co. of Del. v. Trainor

• Decision Date: 16 August 1967
• Docket Number: No. 18672.,18672.
• Citation: 382 F.2d 793
• Parties: TRANSPORT MANUFACTURING & EQUIPMENT COMPANY OF DELAWARE, a Delaware Corporation, Appellant, v. Edwin P. TRAINOR, District Director of Internal Revenue, Sheldon S. Cohen, Commissioner of Internal Revenue, and Henry H. Fowler, Secretary of the Treasury of the United States, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

382 F.2d 793 (1967)

TRANSPORT MANUFACTURING & EQUIPMENT COMPANY OF DELAWARE, a Delaware Corporation, Appellant, v. Edwin P. TRAINOR, District Director of Internal Revenue, Sheldon S. Cohen, Commissioner of Internal Revenue, and Henry H. Fowler, Secretary of the Treasury of the United States, Appellees.

No. 18672.

United States Court of Appeals Eighth Circuit.

August 16, 1967.

COPYRIGHT MATERIAL OMITTED

Guy A. Magruder, Jr., Kansas City, Mo., for appellant; Terrell, Van Osdol & Magruder, Kansas City, Mo., on the brief.

Anthony Zell Roisman, Attorney, Tax Division, Dept. of Justice, Washington, D. C., for appellees; Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and David O. Walter, Attorneys, Tax Div., Dept. of Justice, and Richard D. Fitz-Gibbon, Jr., U. S. Atty., and John A. Newton, Asst. U. S. Atty., St. Louis, Mo., on the brief.

Before MATTHES, MEHAFFY and LAY, Circuit Judges.

MATTHES, Circuit Judge.

Transport Manufacturing & Equipment Company of Delaware filed an action in the nature of mandamus against Edwin O. Bookwalter, Sheldon S. Cohen, and Henry H. Fowler, appellees, in regard to its income tax liability for the years 1949 through 1953, inclusive, and the jeopardy assessment made in connection with such liability.¹ Plaintiff sought to compel appellees to accept payment of its liability for income taxes, penalties and interest for the years in question, and upon receipt thereof to make a finding that no jeopardy existed in respect to the collection of the tax due, and thereupon to abate the jeopardy assessment.² Appellee, the District Director of Internal Revenue, moved to dismiss the action on the grounds that (1) the complaint failed to state a claim upon which relief can be granted, and (2) the court lacked jurisdiction over the subject matter. The district court ordered the action dismissed on ground (1) of the motion. Plaintiff (hereinafter appellant) appeals from that order.

Since appellant's cause of action was dismissed, we look to the complaint for the facts. The District Director, Edwin O. Bookwalter, had asserted against appellant, as transferee, income tax deficiencies, penalties and interest approximating $3,300,000.00 in respect of the tax liability of appellant's predecessor and transferor corporation for the years 1949 through 1953. In July, 1958 appellant petitioned the Tax Court for a redetermination of the deficiencies. On September 14, 1960 Bookwalter, under Section 273(a) of the Internal Revenue Code of 1939, made a jeopardy assessment against appellant and its transferor in the total amount of $3,301,998.11.³

The Tax Court on July 14, 1964 filed its opinion directing that decision be entered pursuant to Rule 50. 23 C.C.H. Tax Ct.Mem. 1113 (1964). On February 4, 1966 Bookwalter completed computation of appellant's liability for the years in question in accordance with the opinion of the Tax Court.

Pursuant to agreement with the Internal Revenue Service, appellant has made various payments on its tax liability. After receiving credit for these payments, appellant's liability as of March 1, 1966, for the years in question, was $150,136.41 in tax and $16,816.68 in penalties, or a total of $166,953.09.

On April 9, 1965 the District Director, in conformity with the Rule 50 computation, abated the jeopardy assessment to the extent of $1,108,327.28 in tax $350,753.33 in penalties, and $527,083.21 in interest. The remainder of the jeopardy assessment has not been abated.

Appellant has repeatedly offered to pay the tax and penalties for which it is liable, plus 6% interest thereon from the date the tax was due to the date of final payment. Appellant alleges that appellee owes it a duty to accept the tendered payment and upon receipt thereof to find that no jeopardy exists as to the collection of the amount due, and thereupon to abate the jeopardy assessment; appellee, however, has refused to accept such payment and to make any determination as regards the existence or nonexistence of jeopardy and the abatement of the jeopardy assessment.

The threshold question is whether the district court had jurisdiction of the matter at issue. If jurisdiction is lacking, the power of this Court is limited to correcting the error of the district court in entertaining jurisdiction. Vorachek v. United States, 337 F.2d 797, 798 (8th Cir. 1964); Rock Island Millwork Co. v. Hedges-Gough Lumber Co., 337 F.2d 24, 27 (8th Cir. 1964).

Resolution of this preliminary question depends upon the nature and purpose of appellant's action. Appellee submits that appellant is seeking to restrain the assessment and collection of a tax, and that the action is therefore barred by the provisions of Section 7421 of the Internal Revenue Code of 1954.⁴ In support of his claim of no jurisdiction appellee also asserts that this action is "tantamount to a suit for a declaration of rights as to the correctness of the assessment," and therefore falls within 28 U.S.C. § 2201.⁵ Thirdly, appellee proposes that this suit is also barred by Section 6404(b) of the Internal Revenue Code of 1954.⁶

Appellant takes issue with these jurisdictional arguments and contends that it is merely seeking the performance of appellee's duty to make a determination of whether or not, when appellant offers to pay the full amount of its liability, jeopardy exists as to the collection of that sum — "that by its nature this proceeding is a request for action in conformity with law, not restraint."

From our analysis of the complaint, in light of the briefs and the controlling law, we are convinced that there is more to this lawsuit than suggested by appellant.

One of the concomitants of a jeopardy assessment, and the bone of contention here, is the interest on the jeopardy assessment which is collected as part of the tax. Under Section 294 of the Internal Revenue Code of 1939 (applicable here), the deficiency in income taxes, plus penalties and interest thereon, bear interest on the whole from the date of the jeopardy assessment. In short, the interest is compounded, or the original interest itself bears interest from the date of the jeopardy assessment.⁷ Cf. Ginsburg v. United States, 278 F.2d 470, 472-473 (1st Cir. 1960), cert. denied, 364 U.S. 878, 81 S.Ct. 166, 5 L.Ed.2d 101 (1960); 9 Mertens, Federal Income Taxation, §§ 49.144-49.152.

In our case the "interest on interest" amounts to approximately $150,000. Although appellant premises its suit on its ability and willingness to pay the entire amount of income tax, penalties and interest due for the years 1949-1953, it has failed to tender the compounded interest due under the jeopardy assessment, and, as both parties recognize, that item would be eliminated from appellant's tax liability if the jeopardy assessment is abated. Such a result would follow under Section 273(k) of the 1939 Code which provides, in effect, that if the jeopardy assessment is abated, it shall be treated as never having been made.

Thus despite appellant's attempt to cloak its lawsuit as an action in the nature of mandamus to compel the District Director to revoke his finding of jeopardy and thereupon abate the jeopardy assessment, we are firmly of the opinion that its suit is tantamount to an action for an injunction to restrain the District Director from continuing in effect an assessment of taxes against it and from collecting a part of its tax liability, and therefore falls within the bar of Section 7421(b) of the Internal Revenue Code of 1954, which provides:

"(b) Liability of transferee or fiduciary. —

No suit shall be maintained in any court for the purpose of restraining the assessment or collection * * * of —

(1) the amount of the liability, at law or in equity, of a transferee of property of a taxpayer in respect of any internal revenue tax * * *."

The courts, moreover, have uniformly held that the proscription of Section 7421 applies to suits to restrain the collection of jeopardy assessments as well as to ordinary assessments. Licavoli v. Nixon, 312 F.2d 200 (6th Cir. 1963); Melvin Building Corporation v. Long, 262 F.2d 920 (7th Cir. 1958); Lloyd v. Patterson, 242 F.2d 742 (5th Cir. 1957); Homan Mfg. Co. v. Long, 242 F.2d 645 (7th Cir. 1957). See also Milliken v. Gill, 211 F.2d 869 (4th Cir. 1954), cert. denied, 348 U.S. 827, 75 S.Ct. 47, 99 L.Ed. 652 (1954), decided under 26 U.S.C. § 3653, the predecessor of Section 7421.⁸

The provisions of Section 7421(b) and its predecessors are not an absolute bar to the maintenance of a taxpayer's suit, and under "extraordinary and exceptional circumstances," an injunction may issue. Miller v. Standard Nut Margarine Co., 284 U.S. 498, 509-510, 52 S.Ct. 260, 76 L.Ed. 422 (1932); Hill v. Wallace, 259 U.S. 44, 62, 42 S.Ct. 453, 66 L.Ed. 822 (1922); Smith v. Flinn, 261 F.2d 781, 784-785 (8th Cir. 1958), modified on petition for rehearing, 264 F.2d 523 (8th Cir. 1959); Yoke v. Mazzello, 202 F.2d 508, 509-510 (4th Cir. 1953); Shelton v. Gill, 202 F.2d 503, 506 (4th Cir. 1953); Kaus v. Huston, 120 F.2d 183, 185 (8th Cir. 1941). Under the doctrine of Miller v. Standard Nut Margarine Co., supra, a taxpayer to avoid the bar of Section 7421(b) must show both the illegality of the tax as applied to him and the existence of "extraordinary or exceptional circumstances" which warrant equitable relief. Cf. Missouri Valley Intercollegiate Athletic Ass'n. v. Bookwalter, 276 F.2d 365, 366-367 (8th Cir. 1960); Homan Mfg. Co. v. Long, supra, 242 F.2d at 651-653.

Appellant does not challenge the legality of the original $3,300,000 jeopardy assessment nor does it contest the amount of its present tax liability⁹ (except the compounded interest). Neither does it argue that the jeopardy assessment, per se, will result in financial ruination. There is no contention that as a result of the jeopardy assessment appellant's property has been or will be seized and sold under distraint proceedings, as was true in Smith v. Flinn, supra. Indeed, as shown above, pursuant to an agreement...