In re Steckler

• Decision Date: 01 July 1961
• Docket Number: No. IP 57-B-124.,IP 57-B-124.
• Parties: In the Matter of Don Bernard STECKLER. Don Bernard STECKLER v. UNITED STATES of America and District Director of Internal Revenue.
• Court: U.S. District Court — Southern District of Indiana

195 F. Supp. 879

In the Matter of Don Bernard STECKLER Don Bernard STECKLER v. UNITED STATES of America and District Director of Internal Revenue.

No. IP 57-B-124.

United States District Court S. D. Indiana, Indianapolis Division.

July 1, 1961.

Thomas H. Krise, of Knox, O'Hara & Krise, Indianapolis, Ind., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Richard M. Roberts and Edward A. Bogdan, Jr., Attys., Dept. of Justice, Washington, D. C., and Don A. Tabbert, U. S. Atty., and Philip R. Melangton, Jr., Asst. U. S. Atty., Indianapolis, Ind., the United States and District Director of Internal Revenue.

STECKLER, Chief Judge.

This matter is before the undersigned district judge for a review of an order of the referee in bankruptcy sustaining the motion of the defendants to dismiss a complaint for injunctive relief filed by the plaintiff, Don Bernard Steckler, the discharged bankrupt.

Plaintiff was adjudicated a bankrupt on August 23, 1957. On November 5, 1957, the District Director of Internal Revenue caused a proof of claim to be filed in the estate in the amount of $20,400.36 for excise taxes, penalties, and interest, of which $2,771.19 was for penalties. The referee allowed the claim for taxes and interest to the date of bankruptcy, August 20, 1957, but disallowed the claim as to all penalties and as to interest accruing subsequent to that date. On November 27, 1957, plaintiff was granted "a discharge in bankruptcy from all debts and claims which by the Act of Congress relating to Bankruptcy were made provable against his estate, except such debts as were by said Act excepted from the operation of a discharge in bankruptcy." On September 19, 1960, the defendant District Director of Internal Revenue, by letter to the plaintiff, stated that the disallowed penalties were legally due from plaintiff and subject to collection by the usual administrative procedure provided in the Internal Revenue Code. On October 20, 1960, plaintiff filed the present complaint seeking to enjoin the United States and the District Director from taking any steps to collect the $2,771.19 in penalties. Plaintiff complains of harassment, lack of funds, jeopardy of new business transactions and retention of employment, and states that the bankruptcy court has already determined that penalties are not taxes collectible out of the bankrupt's estate.

Defendants filed motions to dismiss the complaint for lack of jurisdiction over the subject matter, failure to state a claim, and that the relief sought is expressly prohibited by statute. The United States also alleged that it has not consented to be sued in a proceeding of this nature. On April 7, 1961, the referee sustained the motions to dismiss, finding that the bankruptcy court had jurisdiction of the parties and the subject matter, and concluding that the law was with the defendants and against the plaintiff. By note to counsel, the referee called attention to the case of Botta v. Scanlon, 2 Cir., 1961, 288 F.2d 504. Plaintiff has petitioned for review of the order of dismissal.

The defendants rely on 26 U.S.C. § 7421, which provides that except as provided in sections 6212(a) and (c), and 6213(a), which are not pertinent here, no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court. This section has been applied to penalties assessed in conjunction with taxes. Reams v. Vrooman-Fehn Printing Co., 6 Cir., 1944, 140 F.2d 237; Rosner v. McGinnes, D.C.E.D.Pa.1958, 167 F.Supp. 44.

The Supreme Court recognized an exception to the statute in Miller v. Standard Nut Margarine Co., 1932, 284 U.S. 498, 52 S.Ct. 260, 76 L.Ed. 422. The court held that "in cases where complainant shows that in addition to the illegality of an exaction in the guise of a tax there exist special and extraordinary circumstances sufficient to bring the case within some acknowledged head of equity jurisprudence, a suit may be maintained to enjoin the collector." 284 U.S. at page 509, 52 S.Ct. at page 263. The defendants contend that plaintiff has not sufficiently alleged either condition of the exception; that the assessment of the penalties was admittedly legal and penalties are not provable in bankruptcy and thus not subject to discharge; and that inability to pay is not an extraordinary circumstance to invoke equitable powers. The defendants also cite and rely on Section 57, sub. j of the Bankruptcy Act (11 U.S.C.A. § 93, sub. j), which provides:

"Debts owing to the United States or to any State or any subdivision thereof as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued on the amount of such loss according to law."

The defendants cite 1 Collier, Bankruptcy ¶ 17.13 (14th ed. 1956); 3 Collier, ¶ 63.12, and other authorities, for the proposition that penalties are not provable, and therefore not dischargeable in bankruptcy.

Plaintiff recognizes the Standard Nut Margarine case, supra, and contends that he comes within the holding of that case because the collection of the penalties is unlawful, because of being discharged in bankruptcy, and that he has alleged special and extraordinary circumstances.

Contrary to the defendant's argument, plaintiff argues that penalties are provable in bankruptcy and thus dischargeable, although they are not allowable, or allowable only to the extent provided in § 57, sub. j, i. e., for the actual pecuniary loss sustained by reason of the act, transaction or proceeding out of which the penalty or forfeiture arose. He relies on National Foundry Co. of New York v. Director of Internal Revenue, 2 Cir., 1956, 229 F.2d 149, and United States v. Mighell, 10 Cir., 1959, 273 F.2d 682. Clearly the former case is distinguishable on the facts. There the court was dealing with penalties and interest sought to be imposed after the filing of the petition for arrangement. The court stated that the question of the accruing of interest and tax penalties during bankruptcy had divided the courts, including different panels of its own court, until the case of City of New York v. Saper, 1949, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710, and other companion cases settled that such claims, whether federal or state, were not collectible in bankruptcy, including reorganization and arrangement proceedings. In the Mighell case, supra, the court held that income tax penalties are discharged to the extent that they are not satisfied out of a pre-bankruptcy lien.

Since the referee disposed of the matter on the pleadings, only questions of law are presented for review.

As stated before, the referee found that he had jurisdiction of the parties and the subject matter, and, although the defendants rely principally on other grounds in support of the referee's order, they still urge that the court is without jurisdiction of the parties and the subject matter. As respects the defendant, United States of America, it, of course, has sovereign immunity and may not be sued without its consent. Therefore, since this is not an action pursuant to a statute whereby the sovereign immunity has been waived and consent to be sued granted, the action as against the United States should have been dismissed on that ground alone. The United States has not pressed this point on review, however. On the other hand, defendants concede that a court of bankruptcy has the power and may issue an injunction against a particular collector where the tax is clearly illegal and some special and extraordinary circumstances are asserted. Local Loan Co. v. Hunt, 1934, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230.

The basic question then is whether the complaint states a claim upon which relief can be granted, and this depends upon whether plaintiff's allegations bring him within the exception to 26 U. S.C. § 7421, recognized in Miller v. Standard Nut Margarine Co., supra. See also Botta v. Scanlon, supra. To come within the reach of the Miller case, the allegations must be such that plaintiff could conceivably prove: one, that the penalties are illegal, that is, that they have been illegally assessed, and two, that special and extraordinary circumstances are present to invoke equity. Absence of either would defeat the right to injunctive relief. See Homan Mfg. Co. v. Long, 7 Cir., 1957, 242 F.2d 645; England v. White, D.C.E.D.Ill.1958, 169 F.Supp. 449. It is noted, however, that there now seems to be a relaxation on the part of some courts in the application of the narrow holding in this regard in the Miller case, e. g., the Botta and National Foundry cases, supra. Here, the plaintiff does not claim the initial assessment of the penalties was illegal, nor is there an issue as to the amount of the penalties— rather, only the attempt to collect the penalties is claimed to be illegal. In his brief in support of his complaint for injunctive relief, plaintiff states:

"The plaintiff is not contesting the amount involved or the facts of the original assessment, but has alleged that plaintiff was discharged from all debts and claims which by Act of Congress relating to Bankruptcy, were made provable against his estate, except such debts as were by said Act, excepted from the operation of a discharge in bankruptcy. It is plaintiff's contention that in such discharge the penalties involved herein were discharged, and, therefore, the defendants are trying to collect an illegal tax."

Stated in another way, plaintiff claims the penalties attempted to be collected are an illegal tax because they were provable in bankruptcy and disallowed by the referee, and therefore discharged, and cannot now be collected.

First, it is essential to keep in mind the purpose of § 57, sub. j. Collier states:

"The Act of 1938 left § 57j substantially unchanged. The purpose of the provision is

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