Cooper Agency v. McLeod, Civ. A. No. AC-1804.

• Decision Date: 28 October 1965
• Docket Number: Civ. A. No. AC-1804.
• Parties: COOPER AGENCY, Plaintiff, v. Harold M. McLEOD, District Director of Internal Revenue, Defendant.
• Court: U.S. District Court — District of South Carolina

247 F. Supp. 57

COOPER AGENCY, Plaintiff, v. Harold M. McLEOD, District Director of Internal Revenue, Defendant.

Civ. A. No. AC-1804.

United States District Court E. D. South Carolina. Columbia Division.

Heard October 4, 1965.

Decided October 28, 1965.

Charles F. Cooper, and John Gregg McMaster, of Tompkins, McMaster & Thomas, Columbia, S. C., for plaintiff.

Terrell L. Glenn, U. S. Atty., Charles S. Porter, Jr., Asst. U. S. Atty., Columbia, S. C., and Norman E. Bayles, Trial Atty., Dept. of Justice, Washington, D. C., for defendant.

HEMPHILL, Chief Judge.

Plaintiff commenced this action by filing its complaint, together with a motion for preliminary injunction, on September 27, 1965. Sought is an injunction against defendant, Harold M. McLeod, District Director of Internal Revenue, from taking any action to collect certain tax liabilities heretofore "illegally" assessed against the plaintiff, and from committing other "illegal acts and omissions" which would prevent the plaintiff from paying the amount plaintiff alleges was "legally" assessed against it, and thereafter suing for refund. Plaintiff's cause of action appears to be predicated on the theory that the defendant through his agents has "conceded" that plaintiff is liable by virtue of the assessments for, at most, only $198,000 — a relatively small percentage of the total amounts assessed against the plaintiff. By virtue of the alleged "concession", plaintiff's argument is that the notices of deficiency sent to the taxpayer with regard to the original assessments were invalid with respect to the amount of the assessments exceeding $198,000. Hence, the plaintiff reasons it comes within the statutory exception provided in Section 7421, Internal Revenue Code of 1954, which prohibits actions for injunctive relief with respect to the assessment or collection of any tax except where a statutory notice of deficiency has not been sent to the taxpayer as required by Sections 6212(a) and 6213(a), Internal Revenue Code of 1954. Plaintiff urges that the statutory notices of deficiency admittedly received were "illegal" in that the amounts reflected in the letter far exceeded the amount now "conceded" by the defendant to be owed by plaintiff. Therefore, plaintiff concludes, this action is not barred by Section 7421 by virtue of the exception contained therein.

Concerned that plaintiff should not have a day in Court only after its rights were "hollow", this Court granted an order to show cause directed to the defendant as to why a preliminary injunction should not be granted and set the matter down for immediate hearing.

Defendant prior to the hearing filed a Motion to Dismiss and Objection to Plaintiff's Motion for Preliminary Injunction urging:

(1) that this action is barred by the doctrine of res judicata;

(2) certain allegations in plaintiff's complaint regarding certain "concessions" related solely to negotiations seeking to arrive at a compromise and are, therefore, inadmissible;

(3) other enumerated grounds, all of which raise the question of the jurisdiction of this court to entertain this action and grant the equitable relief requested.

As part of defendant's motion, many of the pleadings and orders entered in the prior proceeding (Civil Action No. AC-1283) brought by the plaintiff against the defendant and the United States of America, were submitted as exhibits. These exhibits were offered by defendant in support of the defense of res judicata. In this action plaintiff seeks to enjoin collection of the same liabilities involved in the prior civil action.

Examination of these exhibits discloses that plaintiff heretofore on November 5, 1963 instituted an action against the District Director and the United States seeking to enjoin collection of the very same liabilities involved in this action, to quash the liens and levies arising out of the assessments, and to, thereafter, quiet title to plaintiff's property. The substance of plaintiff's amended and supplemental complaint in the prior action was the same as alleged here; the prior complaint differing only in that it alleged the defendant had conceded plaintiff was liable for only $463,000 of the assessed liabilities as opposed to the $198,000 now alleged. The prior amended complaint also alleged the statutory notices of deficiency (90 day letter) did not comply with Sections 6212 and 6213, Internal Revenue Code of 1954, in that the District Director had not made a valid determination that plaintiff was liable for the full amount of the assessed liabilities of $1,508,033.10, and, therefore, injunctive relief was not barred by Section 7421, Internal Revenue Code of 1954, by virtue of the exception contained therein. Chief Judge Martin in his comprehensive and able opinion (235 F.Supp. 276) considered the identical contentions now being advanced by plaintiff here but still found the Court lacked jurisdiction to entertain the action, and dismissed the suit with prejudice, 235 F.Supp. at p. 286. The Fourth Circuit Court of Appeals (per curiam) affirmed (348 F.2d 919).

At the hearing, plaintiff presented the testimony of Gene V. Pruet, Esquire, one of the attorneys who represented the plaintiff in the prior action. Pruet testified he was present at various conferences with representatives of the Internal Revenue Service, namely, a revenue agent and the Chief of the Audit Division, at which it was "conceded" the plaintiff was liable only in the amount of $198,000, rather than for the full amount of $1,508,033.10 assessed against the plaintiff. On cross-examination the Government brought out that the plaintiff, together with other related taxpayers, made an offer to the Department of Justice in connection with the prior suit to settle the liabilities of all of the related taxpayers, which offer was rejected by the Department. It was further established that the Department referred the taxpayers, including the plaintiff, back to the Internal Revenue Service for further settlement negotiations, if they desired to negotiate further. Affidavits of the District Director and the Government trial attorney, together with testimony elicited from plaintiff's counsel on cross-examination, establish clearly that the alconcessions were part of the "give and take" of settlement negotiations which took place at the request of the taxpayer (and other related taxpayers); and that a compromise of the liabilities was never consummated, although numerous conferences for that purpose were held. The affidavit of the District Director states that plaintiff as of September 29, 1965, owed $1,881,358.52, which amount included interest to that date on the prior assessments. The testimony of Pruet was offered subject to the objection of Government counsel on the ground that the testimony was inadmissable in this proceeding since it arose out of civil settlement negotiations. The Court reserved its ruling on this objection.

In summary, plaintiff alleges the Government has conceded through his agents that only $198,000 is owed out of the original assessed liabilities of $1,508,033.10; that by virtue of this the notices of deficiency were invalid to...