Church of Scientology of Hawaii v. United States

• Citation: 485 F.2d 313
• Decision Date: 06 September 1973
• Docket Number: No. 71-2761.,71-2761.
• Parties: CHURCH OF SCIENTOLOGY OF HAWAII, Plaintiff-Appellee, v. The UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

485 F.2d 313 (1973)

CHURCH OF SCIENTOLOGY OF HAWAII, Plaintiff-Appellee, v. The UNITED STATES of America, Defendant-Appellant.

No. 71-2761.

United States Court of Appeals, Ninth Circuit.

September 6, 1973.

Meyer T. Rothwacks (argued), Scott P. Crampton, Asst. Atty. Gen., Fred B. Ugast, Acting Asst. Atty. Gen., Dept. of Justice, Washington, D.C., Robert K. Fukuda, U. S. Atty., Honolulu, Hawaii, Harold S. Larsen, Grant W. Wiprud, Donald H. Olson, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

Tobias C. Tolzmann (argued), Joe Thrasher, Honolulu, Hawaii, for plaintiff-appellee.

Before KOELSCH, WRIGHT and TRASK, Circuit Judges.

TRASK, Circuit Judge:

The district court denied the government's motion to dismiss in this tax refund case. Being of the opinion that the denial involved a controlling question of law and that an immediate appeal might materially advance the ultimate disposition of the case, the trial court so stated and we allowed the interlocutory appeal under 28 U.S.C. § 1292(b).¹

The Church of Scientology of Hawaii (Church) was granted a charter as a nonprofit religious corporation on December 8, 1964. It filed information income tax returns for the years 1965 and 1966 claiming exemption under section 501(c) (3) of the Internal Revenue Code as a church formed exclusively for religious and educational purposes, no part of the net earnings of which inured to the benefit of any private shareholder or individual. The Internal Revenue Service denied the claim of exemption and assessed tax deficiencies for the two years. The Church paid the deficiencies, filed claims for refunds which were disallowed and then filed suit for a refund of the sums paid. The issue in all of the proceedings was the claimed exempt status under section 501(c) (3). Following discovery proceedings and a motion for summary judgment filed by the Church, the government proposed a settlement whereby a refund would be made of the amount "plaintiff would have received (other than costs) had it prevailed in this litigation." The action would then be dismissed with prejudice. This offer was rejected but the Church suggested that an offer of judgment pursuant to Rule 68 Fed.R.Civ.P. would receive favorable consideration. No such offer was made but the government caused checks aggregating $806.08 to be tendered. The tender was not accepted and the motion to dismiss was filed asserting that the action had become moot and that a justiciable controversy no longer existed by virtue of the continuing tender. The motion to dismiss was denied and this interlocutory appeal allowed.

At the outset we recognize that there must be a viable justiciable controversy before the court in order for it to act, since the court does not render advisory opinions or decide abstract propositions. California v. San Pablo & Tulare R.R. Co., 149 U.S. 308, 314, 13 S.Ct. 876, 37 L.Ed. 747 (1893).² It is also entirely clear that jurisdiction to decide questions concerning federal taxes has been expressly withheld under the Declaratory Judgments Act, 28 U.S.C. § 2201. Apart from these settled rules there is left for consideration whether under the general rules of mootness there remains anything for the court to decide after an unconditional and continuing offer by the government to refund the amount the taxpayer has paid, plus interest. Appellee calls our attention to several matters about the offer that it urges as significant. (1) The offer does not include any costs in the action; (2) there is a dispute as to the computation of interest; (3) the offer states that "the terms of settlement should not be included in the stipulation" (emphasis in original); and (4) there remain a number of unresolved questions and continuing consequences whose determination will be foreclosed by a dismissal. All of these work together, it is argued, to preserve jurisdiction against an unaccepted tender of the refund.

Appellant relies heavily upon our decision in Mitchell v. Riddell, 402 F.2d 842 (9th Cir.1968), cert. denied, 394 U.S. 456, 89 S.Ct. 1223, 22 L.Ed.2d 415 (1969), as being dispositive of this case. In Mitchell the settlor of an inter vivos trust established exclusively for charitable purposes had attempted unsuccessfully to have the Internal Revenue Service (IRS) declare it a tax exempt organization. The service had declined to do so and persisted in its demand that the trust report its income as a taxable organization, although apparently no assessment had been made by IRS nor other legal action taken. In order to obtain a determination Mitchell, the settlor, filed a trust return, remitted the sum of ten dollars to IRS in behalf of the trust and "`included the statement that no tax was due, . . . and calling for a refund with reasons stated.'" 402 F.2d at 844. He thereupon filed suit in the district court to recover the ten dollars. In a second cause of action he asked that the trust operations be found to be tax exempt under the Code. The government later repaid the ten dollars to settlor and settlor accepted the money. The trial court dismissed and we affirmed. We held that the repayment mooted the first cause of action and the proscription in 28 U.S.C. § 2201 of the Declaratory Judgments Act stripped the court of jurisdiction to pass upon the second.

Some readily apparent distinctions make Mitchell v. Riddell, supra, a questionable precedent. The payment of the refund was not only tendered, but accepted. Again, the entire litigation was contrived by settlor. No assessment for unpaid federal income taxes against the trust or its alter ego had been made. Significantly, we said:

"Appellants are not without a remedy. The Congress has provided ample machinery for the settlement of income tax controversies. In the event a tax is assessed against the Foundation, judicial review of such assessment may be sought under the provisions of 26 U.S.C. § 7422 by paying the tax and seeking a refund in the district court, or by petitioning the Tax Court of the United States, prior to paying the tax, and in the event of an adverse decision by the Tax Court by petitioning this Court to review the decision of the Tax Court." 402 F.2d at 847.

Here there had been an assessment for claimed tax deficiencies, payment with claim for refund and detailed statement of reasons and after denial of claim, a suit to recover payments. This is the "ample machinery for the settlement of income tax controversies" to which we pointed in Mitchell, supra.

The government also cites four cases as authority for the proposition that in no other case has a taxpayer been able "to withstand a motion to dismiss following a tender of the amount in dispute." We consider them. In Drs. Hill & Thomas Co. v. United States, 392 F.2d 204 (6th Cir.1968), the taxpayer, a professional corporation, challenged a Treasury Regulation which would eliminate taxation of income to the corporation and cause it to flow through to the individuals on a partnership basis. The Commission tendered a refund of the entire amount in dispute and the case was dismissed, the court pointing out that the identical problem was being litigated in two other circuits where no mootness defense was available. The taxpayer was thus assured of a judicial determination. In Lamb v. Commissioner of Internal Revenue, 390 F.2d 157 (2nd Cir.1968), the taxpayer sought a determination of the deductibility of his law school expenses. During the pendency of the litigation a similar problem was ruled against the Commissioner, prompting him to tender the refund sought by this suit. The court dismissed the action as moot pointing out the foregoing and that further proceedings against the taxpayer for the next year were barred. Thus, there appears to have been a final determination. A. A. Allen Revivals, Inc. v. Campbell, 353 F.2d 89 (5th Cir. 1965), was a case where taxpayer sought exemption as a religious and educational organization. Its suit was to recover funds paid as Federal Insurance Contributions Act taxes. It tendered the money to the taxpayer but during the litigation the Tax Court held that the taxpayer was in fact organized and operated exclusively for charitable and educational purposes and no income taxes were due. IRS also ruled that the taxpayer was exempt from employment taxes. Thus, again there had been a judicial determination of status. Regina v. United States, 208 F.Supp. 137 (W.D. Pa.1962), involved an income tax based upon a valuation of corporate stock used in an exchange. A tender of the refund sought was made and the litigation held moot and dismissed. Although the merits were not judically determined it was a non-recurring transaction and tax with no indicated collateral involvements upon which other difficulties to the taxpayer could hinge.

In none of them, therefore, was there an even arguable reason to continue with litigation after the tender or payment was made. Thus we do not find any of the cases cited by the government as dispositive of the issues here. Looking first at the direct controversy between the parties, we note that there is nothing in the proposed refund payment to the taxpayer of sums involuntarily paid for 1965-1966 which would have assured it that the same demands would not be made for 1967 and 1968. Indeed, the contrary is strongly suggested.³ It has long been the rule that "mere voluntary cessation of allegedly illegal conduct does not moot a case." United States v. Concentrated Phosphate Export Ass'n, 393 U.S. 199, 203, 89 S.Ct. 361, 364, 21 L.Ed.2d 344 (1968). Prior to the Phosphate Export case, the Court had warned against the danger of dismissal for mootness when actions of governmental agencies are likely to be repeated, pointing out that broader considerations should not be defeated by short-term orders "capable of repetition, yet evading review. . . ." See also Moore v. Ogilvie, 394 U.S. 814, 816, 89 S.Ct. 1493, 23 L.Ed.2d 1 (1969); Southern Pacific Terminal Co. v. Interstate...