Kemlon Products and Development Co. v. U.S.
| Decision Date | 12 March 1981 |
| Docket Number | No. 79-1452,79-1452 |
| Citation | 638 F.2d 1315 |
| Parties | 81-1 USTC P 9267 KEMLON PRODUCTS AND DEVELOPMENT COMPANY et al., Plaintiffs-Appellees, v. UNITED STATES of America et al., Defendants-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
J. A. Canales, U. S. Atty., Houston, Tex., Michael J. Kearns, Trial Atty., M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Section, Robert A. Bernstein, Philip I. Brennan, Tax Division, U. S. Dept. of Justice, Washington, D. C., for defendants-appellants.
Sponsel & Urquhart, Edward D. Urquhart, Houston, Tex., for plaintiffs-appellees.
Appeal from the United States District Court for Southern District of Texas.
Before HILL, RUBIN and ANDERSON, Circuit Judges.
The appellants, the United States, the Internal Revenue Service, and several officers of the Service, appeal an order permanently enjoining them from disclosing return information of appellee, Kemlon Products and Development Company ("Kemlon"), to any of Kemlon's business customers. Appellants maintain that the injunction falls within the scope of the Internal Revenue Code's Anti-Injunction Act, 26 U.S.C.A. § 7421(a) (West Supp.1980), 1 and that none of the judicially created exceptions to this Act applies. Since we find inadequate proof of irreparable harm and sufficient facts to show the government has a chance to prevail on its right to disclose such information, we agree with appellants that the case fits within none of the exceptions to the Anti-Injunction Act. We reverse the district court's decision.
The facts as pleaded and developed through affidavits disclose the following story.
Kemlon and Keystone Engineering Company ("Keystone") are engaged in the research, development, manufacturing, and sale of certain patented products for use in the oil and gas industry. Kemlon and Keystone are related by common ownership and the stock of these corporations is held by Sandiford Ring, Russell K. Ring, William S. Ring, and John H. Ring. 2 All of the foregoing were plaintiffs below, and are appellees here.
In December, 1976, the Internal Revenue Service initiated an audit of Kemlon's and Keystone's tax returns for the fiscal year ending September 30, 1975, and of the individuals' tax returns for the calendar year ending December 31, 1975. In the course of examining Kemlon's tax returns, the Service questioned the accuracy of the valuation of certain patents held by Kemlon. 3 In particular, the Service questioned whether a portion of the value which Kemlon assigned to the patents should have been allocated to assets other than the patents, such as goodwill. It was also concerned about the useful life of the patents. The Service was concerned that Kemlon had valued the patents too highly and had thereby obtained a larger depreciation deduction than was properly allowable. It is undisputed that during the audit, Kemlon has provided the Service with all the information it has requested concerning the patents and the patented product.
Despite Kemlon's cooperation, Engineering Agent Gary D. Brown, who was the Service's agent in charge of valuing the patents, determined that it would be necessary to contact customers of Kemlon. When counsel for Kemlon was informed by Agent Brown that he intended to contact Kemlon's customers and elicit information concerning the product, their use of the product and their dealings with Kemlon, Kemlon's counsel objected on grounds that any such contact would disrupt the confidential business relationship between Kemlon and its customers and would constitute unauthorized disclosure of tax return information in violation of 26 U.S.C.A. § 6103(k)(6) (West Supp.1980). 4 Kemlon's counsel offered to secure information from third parties or, alternatively, to arrange a meeting with customers if Agent Brown would furnish in advance the questions to be asked. Agent Brown declined to accept the suggestions of Kemlon's attorney.
After further consultation by Agent Brown with other officials in the Service, it was determined that the valuation of Kemlon's patents required that Agent Brown contact Kemlon's major customer. The Acting District Disclosure Officer notified Agent Brown that such a contact would not violate § 6103. Agent Brown thereafter contacted Kemlon and offered it the opportunity to arrange a meeting with its major customer and to be present at the meeting. Agent Brown continued to refuse to provide Kelmon with a list of questions to be asked or to have Kemlon act as intermediary.
Kemlon and the other appellees at this time filed the instant suit, seeking to enjoin Agent Brown and the Service from disclosing directly or indirectly Kemlon's return information to Kemlon's customers. 5 Kemlon claimed that such an injunction did not come within the scope of the Anti-Injunction Act and that disclosure of the return information would violate (i) § 6103(k)(6) of the Internal Revenue Code, (ii) the Privacy Act of 1974, 5 U.S.C.A. § 552a(b) (West 1977), and (iii) Kemlon's constitutional right to privacy. Kemlon alleged that the Service intended to contact its largest customer concerning the patents in question. In its pleading that such a contact would cause substantial and irreparable harm for which no adequate remedy existed at law, Kemlon alleged that its industry was highly competitive and that its largest customers are interested in doing business with technological and research-oriented companies which are considered financially stable. Kemlon alleged that disclosure of return information would result in a loss of business reputation and the opportunity for Kemlon to work on new and other patentable products.
In support of its allegation of irreparable harm, Kemlon submitted the affidavit of John H. Ring repeating the allegations of the complaint and containing an additional assertion that irreparable harm would result because Kemlon's customers are interested only in research companies stable in the areas of acquiring raw materials for inventory, the manufacturing process, the quality control process, and the distribution process. Ring's affidavit elaborated no further as to how irreparable harm would be suffered.
The Service submitted a motion to dismiss Kemlon's suit on grounds that it was barred by the Anti-Injunction Act. Attached to this motion was an affidavit by Agent Brown describing in very general terms the questions he wished to ask of Kemlon's customer. 6 Agent Brown also gave reasons as to why the Service was opposed to giving the specific questions first to Kemlon. 7 After a hearing on this motion on March 20, 1978, the district court entered an order dated May 22, 1978, in which it rejected Kemlon's claim that the disclosure was barred by the Privacy Act of 1974 and the United States Constitution. The district court further held that the requested injunction was within scope of the Anti-Injunction Act, but was concerned that the judicial exception to this Act established by Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962), was applicable. The district court noted that Kemlon had made a "substantial claim of irreparable injury" and had been unable to address adequately whether the Service would prevail on the § 6103(k) (6) claim because of the Service's refusal to disclose the specific questions it wished to ask Kemlon's customer. Rather than rule at that time on the motion to dismiss, the court on the basis of Commissioner of Internal Revenue v. Shapiro, 424 U.S. 614, 96 S.Ct. 1062, 47 L.Ed.2d 278 (1976), ordered the Service to submit to Kemlon questions to be asked of its customer in order that Kemlon could have an opportunity under Enochs to prove that it would prevail on its § 6103 claim.
The Service thereupon filed a motion requesting the district court to reconsider its May 22 order. The Service maintained that Shapiro was not applicable because Kemlon had not pleaded or proved facts establishing it would suffer irreparable harm through the contact with its customer. The Service argued in the alternative that if the district court believed Shapiro was applicable, Agent Brown's affidavit describing generally the questions to be asked provided sufficient information to show that the Enochs exception did not apply. In the event the district court should refuse to grant the motion to reconsider its May 22 order, the Service requested that the May 22 order be certified for appeal under 28 U.S.C.A. § 1292(b), or, alternatively, that the district court issue an injunction on the basis of the record as it then stood.
On September 8, 1978, a hearing was held with respect to the May 22 order. No new arguments were brought forth at that time although the Service submitted to the district court, sealed for in camera inspection, the specific questions it proposed to ask Kemlon's customer. On December 28, 1978, the district court entered final judgment denying the Service's motion to reconsider its May 22 order and issuing an injunction barring the Service from disclosing return information to Kemlon's business customers. The Service timely appealed this order. 8
On March 27, 1979, the district court entered Findings of Fact and Conclusions of Law. The district court found that the Service offered no evidence to controvert Kemlon's claims of irreparable injury for which there was no adequate remedy at law. Accordingly, the court found such irreparable injury to obtain. The district court further found that the Service refused to provide Kemlon with the specific questions to be asked of its customer, and that the appropriate sanction under Shapiro for such refusal was the issuance of the injunction. 9
Kemlon asserts without reference to authority that this suit to prevent alleged unnecessary disclosure of return information in violation of § 6103(k) (6) is not within the scope of the Anti-Injunction Act. The...
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