Jones v. Fox

• Decision Date: 27 June 1958
• Docket Number: Civ. No. 8926.
• Citation: 162 F. Supp. 449
• Parties: Nathan JONES, t/a Jones' Tavern, Plaintiff, v. C. I. FOX, District Director of Internal Revenue, Defendant and United States of America, Intervenor.
• Court: U.S. District Court — District of Maryland

162 F. Supp. 449

Nathan JONES, t/a Jones' Tavern, Plaintiff, v. C. I. FOX, District Director of Internal Revenue, Defendant and United States of America, Intervenor.

Civ. No. 8926.

United States District Court D. Maryland.

July 11, 1957.

Supplemental Opinion May 26, 1958.

Addendum June 27, 1958.

COPYRIGHT MATERIAL OMITTED

Bartholomew B. Coyne, Washington, D. C., for plaintiff. Leon H. A. Pierson, U. S. Atty., Wm. J. Evans, Asst. U. S. Atty., Baltimore, Md., Charles K. Rice, Asst. Atty. Gen., James P. Garland and William F. Kolbe, Attys., Dept. of Justice, Washington, D. C., for defendants.

R. DORSEY WATKINS, District Judge.

This is an action to recover fifty dollars paid by the plaintiff under protest in partial satisfaction of a cabaret excise tax assessment levied by the defendant in the amount of One Thousand, Five Hundred Fifty-eight Dollars and Ten Cents ($1,558.10) for the fourth quarter of 1954.¹ The answer of the defendant District Director, which challenged the jurisdiction of this court, was coupled with a counterclaim for the unpaid balance of the assessment plus interest. Plaintiff responded to the counterclaim by denying the legality of the assessment, and in the alternative claimed as a set-off and credit. Two Thousand, Nine Hundred Eighteen Dollars and Ninety-seven cents ($2,918.97), a reduction in personal income tax allegedly due because of the plaintiff's failure to deduct the cabaret tax from the gross income of his business in computing his income tax for the period April 1, 1952 through March 31, 1955. The United States then moved to intervene and the defendant district director's counterclaim was amended so as to permit its being treated as the complaint in intervention² of the United States.

The first question presented is one of jurisdiction, the defendant and the intervenor contending that the court lacks jurisdiction of a suit for refund of taxes when only a part of the tax assessed has been paid.

The relevant statutory provisions, found in Title 28 U.S.C. § 1340, and Title 26 U.S.C. § 7422(a), 1954 I.R.C., are as follows:

"§ 1340. Internal revenue; customs duties

"The district courts shall have original jurisdiction of any civil action arising under any Act of Congress providing for internal revenue, or revenue from imports or tonnage except matters within the jurisdiction of the Customs Court."

"§ 7422. Civil actions for refund

"(a) No suit prior to filing claim for refund.—No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary or his delegate, according to the provisions of law in that regard, and the regulations of the Secretary or his delegate established in pursuance thereof."

The defendant and intervenor freely admit that the meaning of the word "tax" as used in Section 7422(a) is ambiguous enough to be open to construction by the court in determining whether or not a taxpayer may litigate his assessed liability after a partial payment; and urge that the legislative history of (1) the creation of the Board of Tax Appeals;³ of (2) the exempting of federal tax controversies from the Declaratory Judgments Act, 28 U.S.C. §§ 2201, 2202;⁴ and of (3) the prohibition of suits to enjoin the collection of federal taxes⁵ together with certain pronouncements⁶ of the Supreme Court regarding the rights of taxpayers to judicial determination of their tax liabilities as well as the Supreme Court's definition of the word "tax" in Snyder v. Marks, 1883, 109 U.S. 189, 192, 3 S.Ct. 157, 27 L.Ed. 901, all indicate a basic doctrine that one must pay first in full and litigate later.

This is not a novel argument but is rather one which has been considered by a number of district and appellate courts. Apparently only four decisions in any way support the position of the defendant and the intervenor (Suhr v. United States, 3 Cir., 1927, 18 F.2d 81, 83; Bushmiaer v. United States, D.C.W.D. Ark.1955, 131 F.Supp. 589, 595; Flora v. United States, D.C.D.Wyo.1956, 142 F. Supp. 602, 604, affirmed on appeal as to lack of jurisdiction, 10 Cir., 1957, 246 F.2d 929). The statement in the Suhr case is dictum and is in direct conflict with a later direct holding of the same Circuit (Sirian Lamp Co. v. Manning, 3 Cir., 1941, 123 F.2d 776, 779, 138 A.L.R. 1423). On appeal the Bushmiaer case was reversed (Bushmiaer v. United States, 8 Cir., 1956, 230 F.2d 146). In Flora v. United States, supra, the district court relying on the Suhr case and without reference to Sirian Lamp Co. v. Manning, supra, and thus considering the Third Circuit committed to the rule that full payment of a tax assessment is a prerequisite to a court suit for a refund, nevertheless was sufficiently doubtful as to its conclusion that it lacked jurisdiction, that it proceeded to pass on the merits of the case. In addition to the Third and Eighth Circuits, the Second Circuit has held that jurisdiction exists where only a part of the tax assessed has been paid (Coates v. United States, 2 Cir., 1940, 111 F.2d 609, 610; see also Hanchett v. Shaughnessy, D.C.N.D.N.Y. 1954, 126 F.Supp. 769, 771). The cases cited thoroughly and ably discuss the arguments for and against the contention of the defendant and the intervenor. The legislative history and the pronouncements of the Supreme Court relative to the rights of taxpayers to judicial determination of their tax liabilities, relied on by the defendant and intervenor, have been carefully considered in these cases. The decided weight of authority, and this court feels the most persuasive interpretation of Section 7422(a), is to the effect that jurisdiction exists. The reasoning and analysis of the courts so holding need not be repeated here but several additional comments might well be made.

The only Supreme Court decision cited by the defendant and intervenor not referred to in the opinions mentioned above is Snyder v. Marks, supra, which defined the word "tax" as used in Section 3224 of the Revised Statutes, now Section 7421(a) of the Internal Revenue Code of 1954, prohibiting suits restraining the assessment or collection of tax, by reference to the enactment then containing provisions substantially similar to the provisions of Section 7422(a) of the Internal Revenue Code of 1954. The definition given is "that which is in a condition to be collected as a tax, and is claimed by the proper public officers to be a tax, although on the other side it is alleged to have been erroneously or illegally assessed." (109 U.S. at page 192, 3 S.Ct. at page 159). From this it is argued that "tax" means the amount assessed, and a suit for the recovery of tax must be a suit to recover the amount assessed, thereby necessitating full payment of the tax. In Snyder v. Marks, supra, the Supreme Court had before it a case in which the appellant was seeking to restrain the collection of an assessed tax. It was urged that the word "tax" as used in the prohibition against injunctions meant only a legal tax, and, therefore, an illegal tax did not fall within the inhibition of the statute. Tax was defined as quoted above to meet and reject the contention of the appellant. The definition is neither helpful nor relevant to the issue herein involved. The court had previously said in 109 U.S. at page 192, 3 S.Ct. at page 159, "The first part of section 19 related to a suit to recover back money paid for a `tax alleged to have been erroneously or illegally assessed or collected,' * * *." This language clearly indicates that a suit for a refund is not a suit to recover a tax or, as defined by the defendant and intervenor, the amount assessed, but is a suit to recover money paid, a distinction made by the Eighth Circuit in Bushmiaer v. United States, supra, 230 F.2d at page 149, in connection with the claim for refund. "The claim for refund, however, is not for a refund of the tax as assessed but only for a refund of the tax as paid." Snyder v. Marks, supra, rather than supporting the position of the defendant and intervenor, weakens it.

It should be noted that the cabaret tax is an excise tax. The Tax Court has not been granted jurisdiction over excise taxes.⁷ The fact that, if this court does not have jurisdiction, the plaintiff is denied a judicial determination of his liability for the tax prior to payment in full of the amount assessed, a determination to which those challenging asserted deficiencies in income, estate, or gifts taxes are expressly entitled through recourse to the Tax Court, is, of course, not determinative of the legal soundness of his position but it does render inapposite the reasoning of cases denying jurisdiction in part because "Congress, by the enactment of the statute creating the Board of Tax Appeals, provided the remedy whereby the taxpayer could have the assessment reviewed and redetermined prior to the payment. * * *" and the taxpayer "deliberately failed and refused to test the validity of the deficiency assessment * * *," Bushmiaer v. United States, supra, D.C.W.D. Ark., 131 F.Supp. at page 594. Even if the decision of the Tenth Circuit is correct with respect to suits to recover income taxes, it is inapplicable here. It was based almost entirely in reliance on the legislative history of the creation of the Board of Tax Appeals and on cases evidencing the fact that since "the establishment of the tax court the distinctive purpose of its creation has been judicially recognized and its intended powers guarded", which factors caused the court to conclude that jurisdiction in the district court would serve "only to conveniently defeat the established purpose and function of the tax court." Flora v. United States, 10 Cir., 246 F.2d 929, 931. On the other...