International Lotto Fund v. Virginia State Lottery Dept., s. 93-1324

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Citation20 F.3d 589
Docket NumberNos. 93-1324,93-1325,s. 93-1324
Parties-1627, 94-1 USTC P 50,151 The INTERNATIONAL LOTTO FUND, Plaintiff-Appellee, v. VIRGINIA STATE LOTTERY DEPARTMENT; Kenneth W. Thorson, Director, Defendants-Appellants, and United States of America, Defendant. The INTERNATIONAL LOTTO FUND, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant, and Virginia State Lottery Department; Kenneth W. Thorson, Director, Defendants.
Decision Date31 March 1994

ARGUED: Edward T. Perelmuter, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellant U.S.; Teresa Creef Manning, Asst. Atty. Gen., Office of the Atty. Gen., Richmond, VA, for appellants Virginia State Lottery and Thorson. John E. Holleran, Hunton & Williams, Richmond, VA, for appellee. ON BRIEF: Michael L. Paup, Acting Asst. Atty. Gen., Gary R. Allen, Bruce R. Ellisen, Kenneth E. Melson, U.S. Atty., Tax Div., U.S. Dept. of Justice, Washington, DC, for appellant U.S.; Stephen D. Rosenthal, Atty. Gen., R. Claire Guthrie, Chief Deputy Atty. Gen., Mary Yancey Spencer, Deputy Atty. Gen., Michael K. Jackson, Senior Asst. Atty. Gen., N. Pendleton Rogers, Senior Before WILKINSON, LUTTIG, and WILLIAMS, Circuit Judges.

Asst. Atty. Gen., Office of the Atty. Gen., Richmond, VA, for appellants Virginia State Lottery and Thorson. Patricia M. Schwarzschild, George C. Howell, III, Paul D. Anders, Hunton & Williams, Richmond, VA, for appellees.


WILKINSON, Circuit Judge:

The question in this case is whether the Anti-Injunction Act, 26 U.S.C. Sec. 7421(a), and the Tax Injunction Act, 28 U.S.C. Sec. 1341, bar the district court from enjoining the Virginia State Lottery Department's withholding of federal and state income taxes from a foreign enterprise's lottery winnings. We hold that the statutes do bar such injunctive relief. We therefore reverse the district court's grant of an injunction and remand the case to the district court with directions that it be dismissed.


The International Lotto Fund ("Fund"), an Australian trust managed by Lowe & Lippmann Nominees Pty. Ltd., engages in lotteries and other games of chance throughout the world. In February 1992, the Fund systematically purchased a large number of tickets in the Virginia State Lottery, resulting in its holding winning tickets worth nearly $28 million. Among the Fund's winning tickets was one for the lottery jackpot, totalling $27,036,142 and payable in annual installments over a twenty-year period. Lowe & Lippmann claimed the prizes on March 5, 1992. Five days later, the Virginia State Lottery Department ("Lottery") announced that it would validate the winning tickets and pay the Fund, but that it would withhold 30% of each payment for federal taxes pursuant to the Internal Revenue Service's recommendation. The Lottery also indicated that it would withhold 4% of each payment for Virginia state taxes.

On March 25, 1992, counsel for the Fund submitted a memorandum to the IRS arguing that the Fund's lottery winnings were not taxable in the United States and thus should not be subjected to withholding under I.R.C. Sec. 1441(a), the withholding provision applicable to nonresident aliens. The Fund claimed that its winnings were non-taxable by virtue of the United States-Australia Income Tax Treaty, 1 and filed a completed IRS Form 1001, dated March 24, 1992, with the Lottery Department. Treasury regulations provide that a foreign corporation may seek an exemption from United States income tax on the basis of a tax treaty by filing such a form with the withholding agent. See 26 C.F.R. Sec. 1.1441-6(c). The Fund also claimed that it was exempt from the withholding of state taxes from its lottery winnings.

On August 14, 1992, the director of the Lottery formally denied the Fund's request for an exemption from both federal and state withholding. The Fund responded by filing this action against the Lottery and its director, claiming that the Lottery had wrongly failed to honor its Form 1001 request and seeking both preliminary and permanent injunctive relief. The district court awarded the Fund a preliminary injunction, and subsequently a permanent injunction, requiring the Lottery to pay the full amount of the prizes without withholding any taxes, 800 F.Supp. 337. In granting the injunctions, the court found that such relief was not barred by either the Anti-Injunction Act, 26 U.S.C. Sec. 7421(a), or the Tax Injunction Act, 28 U.S.C. Sec. 1341. The Lottery, joined by the United States, appeals on the ground that those two acts denied the district court jurisdiction to issue injunctive relief. We address the withholding of federal and state income taxes in turn.


Section 7421(a) of the Internal Revenue Code, commonly referred to as the Anti-Injunction Act, states in pertinent part that

... no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.

26 U.S.C. Sec. 7421(a). As the Supreme Court has recognized, the statute's language "could scarcely be more explicit," and it reflects the Act's principal purpose of protecting "the Government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference...." Bob Jones Univ. v. Simon, 416 U.S. 725, 736, 94 S.Ct. 2038, 2046, 40 L.Ed.2d 496 (1974); see also Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7-8, 82 S.Ct. 1125, 1129, 8 L.Ed.2d 292 (1962). The Supreme Court has squarely held that the definition of "collection of tax" under Sec. 7421(a) includes withholding. See United States v. American Friends Serv. Comm., 419 U.S. 7, 10, 95 S.Ct. 13, 15, 42 L.Ed.2d 7 (1974) (per curiam). Accordingly, an "injunction against the collection of the tax by withholding enjoins the collection of the tax, and is therefore contrary to the express language of the Anti-Injunction Act." Id.

The Court's holding in American Friends Service leaves little question about the proper resolution of this case: the district court lacked jurisdiction to issue injunctive relief. No court is permitted to interfere with the federal government's ability to collect or assess taxes, yet that is just what the district court's injunction did here. Its order plainly directs the Virginia Lottery to pay the Fund "the full amount of each annual installment, when due, without federal and state income tax withholding throughout the life of this Order." This order is a perfect example of what the Anti-Injunction Act was passed to prevent.

Nonetheless, the Fund raises several objections to this straightforward application of the Anti-Injunction Act. First, the Fund asserts that it is entitled to a tax exemption under the United States-Australia Treaty, and that the bar of the Anti-Injunction Act yields a result inconsistent with the Treaty's terms. This assertion, however, overlooks the perfectly valid remedy available to the Fund, namely to pay the tax under protest and then seek a refund. The Supreme Court's reading of the Anti-Injunction Act makes it clear that challenges to the validity of a tax assessment can be determined in a refund proceeding, see American Friends Serv., 419 U.S. at 12, 95 S.Ct. at 16; Bob Jones Univ., 416 U.S. at 736-37, 94 S.Ct. at 2045-46; Williams Packing, 370 U.S. at 7-8, 82 S.Ct. at 1129, and it is in that context that the effect of the Treaty's terms can be determined.

Second, the Fund attempts to divert the court's attention from the central issue here--i.e., the award of an injunction in a case concerning tax assessment or collection--by characterizing its claim as one to compel a withholding agent to accept its Form 1001. The Fund asserts that the only issue here is the Lottery's failure to act properly as a withholding agent, and that Treasury Regulations require the Lottery to honor the Fund's Form 1001 request. The Fund concludes that this action does not challenge the validity of the withholding framework, and thus is not barred by the Anti-Injunction Act.

We disagree. Regardless of how the claim is labelled, the effect of an injunction here is to interfere with the assessment or collection of a tax. The Fund is not free "to define the relief it seeks in terms permitted by the Anti-Injunction Act" while "ignor[ing] the ultimate deleterious effect such relief would have on the Government's taxing ability." Educo, Inc. v. Alexander, 557 F.2d 617, 620 (7th Cir.1977); see also Yamaha Motor Corp., U.S.A. v. United States, 779 F.Supp. 610, 613 (D.D.C.1991) (holding that plaintiff's construction of claims did not block application of Anti-Injunction Act when plaintiff's claims "manifest[ed] a purpose of restraining the IRS in its plan to assess and collect taxes"). It is quite clear that an injunction against the withholding of taxes disrupts the government's "taxing ability," even when the plaintiff claims that the injunction merely forces the withholding agent to carry out its "ministerial" duties. See Lynch v. Polaroid Corp., 80-1 U.S.T.C. (CCH) p 9191 (D.Mass.) (applying Anti Injunction Act to bar plaintiff's action to "force acceptance of his signed W-4 form"), aff'd, 627 F.2d 1088 (1st Cir.1980). Indeed, even if a Treasury Regulation did require the Lottery to accept the Fund's request for an exemption, such a regulation could not confer jurisdiction upon the district court to consider its violation when a statute explicitly proscribes the exercise of jurisdiction over suits seeking to restrain the assessment or collection of taxes. 2

Finally, the Fund claims that the Anti-Injunction Act applies only to actions initiated after the IRS has assessed the taxpayer's liability, and thus that challenges to withholding under 26 U.S.C. Sec. 1441(a) are not barred. The Fund argues that an employer's withholding of taxes under I.R.C. Sec. 3402, for example, is...

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