LOC Industries, Inc. v. United States

• Decision Date: 25 June 1976
• Docket Number: No. 76-33-NA-CV.,76-33-NA-CV.
• Parties: L. O. C. INDUSTRIES, INC. v. UNITED STATES of America.
• Court: U.S. District Court — Middle District of Tennessee

423 F. Supp. 265

L. O. C. INDUSTRIES, INC. v. UNITED STATES of America.

No. 76-33-NA-CV.

United States District Court, M. D. Tennessee, Nashville Division.

June 25, 1976.

Joel H. Dark, Dark & Bateman, Nashville, Tenn., Richard D. Hall, Jr., Wolfe, Coggin, Hoyle & Workman, Greensboro, N. C., Ocie F. Murray, Jr., Nance, Collier, Singleton, Kirkman & Herndon, Fayetteville, N. C., for plaintiff.

Charles H. Anderson, U. S. Atty., and Charles Fels, Asst. U. S. Atty., Nashville, Tenn., S. Martin Teel, Jr., Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendant.

MEMORANDUM

FRANK GRAY, Jr., Chief Judge.

This action was brought by L.O.C. Industries, Inc. (hereinafter referred to as L.O. C.), for a preliminary and permanent injunction to restrain the United States from conducting a second examination of L.O.C.'s books and records, and to require the United States to return monies seized by levy on L.O.C.'s bank account, pursuant to a jeopardy termination of L.O.C.'s tax year. On February 4, 1976, a hearing was held in this court on L.O.C's motion for a temporary restraining order to preclude the Government from proceeding with its second examination.¹ After the court refused to grant the motion for lack of a sufficient showing of irreparable harm, L.O.C. dropped its request for injunctive relief with respect to the second examination.² The only remaining question in the case is whether an injunction should be issued requiring the Government to return the $146,000 it seized from L.O.C's bank account.

A hearing on the case was scheduled for February 20, 1976. At that time, counsel for both parties informed the court that a stipulation had been agreed upon which would eliminate the necessity for an evidentiary hearing, and which would allow the court to decide the case on the merits, based on the stipulation and briefs of the parties. Counsel further informed the court that several amendments had been added to the stipulation, and these were read into the record at the hearing.

The original stipulation and the amendments thereto, which are set out in full in the court's order of February 24, 1976,³ recite in detail the events surrounding the jeopardy termination of L.O.C's tax year. On December 18, 1975, the F.B.I. searched L.O.C.'s premises and seized all its books and records. The Acting District Director of the Internal Revenue Service (I.R.S.), Nashville, Tennessee, learned of the search on the same afternoon. Thereafter, on December 19, 1975, several events followed, beginning with an I.R.S. Field Audit Group Manager's recommendation that L.O.C.'s tax year be terminated, which recommendation was approved by the Acting District Director at 6:00 a. m. At 6:18 a. m., a Notice of Termination of Taxable Period was mailed to L.O.C. by certified mail. This letter was not received by L.O.C. until after 9:30 a. m. At 7:12 a. m., a tax of $247,083 was assessed against L.O.C. At 8:05 a. m., a form 3552, Prompt Assessment Billing Assembly,⁴ was delivered to L.O.C.'s principal place of business, which form was not received by any officer or employee of the corporation until sometime after 8:30 a. m.⁵ At 8:18 a. m., a notice of levy was served on the main office of First American National Bank. This notice was followed by a second notice of levy at 8:30 a. m. on the Harding Road Branch of the First American National Bank. On January 6, 1976, First American paid approximately $146,000 to the I.R.S., pursuant to the notices of levy served on December 19, 1975. On February 12, 1976, a notice of tax deficiency was served on L.O.C. by the I.R.S.

The Government filed a motion to dismiss the action on February 24, 1976, claiming that the court lacked jurisdiction and citing four grounds in support thereof: (1) that the action is barred by the doctrine of sovereign immunity; (2) that it is in effect an action for refund under 26 U.S.C. §§ 7422(a) and 6532(a), which is not allowable because a claim for refund has not been filed which has been denied or not acted upon within six months; (3) that a refund claim is further barred because the plaintiff has failed to pay the full amount of the deficiency; and (4) that the Anti-Injunction Act in 26 U.S.C. § 7421(a) bars the plaintiff's claim for injunctive relief.⁶

In examining first the sovereign immunity argument, the court recognizes the traditional immunity against suit which attaches to the United States as sovereign. Along with this doctrine, however, goes the United States' capacity to consent to a lawsuit, United States v. Sherwood, 312 U.S. 584, 61 S.Ct. 767, 85 L.Ed. 1058 (1941), and Congress may provide such consent by statute, United States v. Shaw, 309 U.S. 495, 60 S.Ct. 659, 84 L.Ed. 888 (1940). The Government, in setting forth its grounds for dismissal, has recognized at least two statutes which provide the necessary consent in tax cases. A method is provided in 26 U.S.C. § 7422(a) by which a taxpayer can sue the Government for a refund, and the Anti-Injunction Act, 26 U.S.C. § 7421(a), recognizes, within the statute itself, exceptions where injunctions can be obtained, 26 U.S.C. §§ 6212(a), (c), 6213(a), 7426(a), (b)(1). In addition, the Supreme Court has said in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962), that the purpose of the Anti-Injunction statute, 26 U.S.C. § 7421(a), is not applicable if certain extraordinary circumstances⁷ are shown by the taxpayer, and an injunction may issue. Thus, whether sovereign immunity bars this action is the ultimate question, and may only be answered after the Government's remaining grounds are considered.

The second and third grounds, asserted by the Government in its motion to dismiss, address the same statutory scheme permitting suit against the Government for refund of a tax, 26 U.S.C. §§ 7422(a), 6532(a)(1),⁸ so the court will consider them together. In essence, the Government contends that the plaintiff's request for an injunction, requiring the Government to return monies seized by levy, is in actuality a suit "for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected," 26 U.S.C. § 7422(a). Therefore, the jurisdictional prerequisites for suit under § 7422(a) must be met, two of which are applicable to this action: (1) prior to initiating suit for a refund, the taxpayer must file a claim for a refund or credit, which claim must have been denied by the Secretary or not acted upon for six months, 26 U.S.C. § 7422(a), 6532(a)(1); and (2) prior to initiating suit the taxpayer must have paid the tax deficiency in full. Flora v. United States, 357 U.S. 63, 78 S.Ct. 1079, 2 L.Ed.2d 1165 (1958), rehearing granted 360 U.S. 922, 79 S.Ct. 1430, 3 L.Ed.2d 1538 (1959), affirmed on rehearing, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). Since L.O.C. makes no allegation that these prerequisites have been met, nor is there any reference to them in the stipulation, the court finds that this action is not sanctioned by that section.

The Government's contentions that this suit is actually a suit for a refund under § 7422(a) and that the action is thus barred because the jurisdictional prerequisites for an action under that statute have not been met, necessarily call for a conclusion that § 7422(a) is the only method by which the I.R.S. can be forced to return monies previously collected. This conclusion may be supported by the statute itself which says in part: "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 ...."⁹ However, the Government fails to cite any authority for reading the statute in this manner. Moreover, to say that a suit for an injunction in this case is barred because the action is in actuality a suit for a refund under § 7422(a) is to ignore completely the Supreme Court's recent decision in Laing v. United States, 423 U.S. 161, 96 S.Ct. 473, 46 L.Ed.2d 416 (1976). That case¹⁰ involved the seizure by the I.R.S. of over $300,000 from an automobile in which Laing and two companions were riding when they were stopped by customs officials. The amount seized was applied to deficiencies assessed against each of the individuals pursuant to a jeopardy termination of their tax year. Mr. Laing filed an action against the United States, ". . . seeking an injunction against the continued possession by the Internal Revenue Service . . . of money allegedly belonging to him . . .." Laing v. United States, 364 F.Supp. 469 (D.Vermont 1973). Although this action was dismissed by the district court on grounds not related to the discussion at this point, it was subsequently allowed by the Supreme Court. In that opinion the Court noted the following: "Petitioner Laing also has filed suit for refund in the United States District Court for the District of Vermont. Trial is being delayed, pursuant to stipulation of the parties, pending our decision in the present case." 423 U.S. at 166, 96 S.Ct. at 477, 46 L.Ed.2d at 426 n. 6. Clearly, the Supreme Court has not read § 7422(a) as the only method by which a taxpayer, such as L.O.C., can sue for a return of seized funds. Another permissible method, assuming the prerequisites for an injunction against the United States are met, is an action for an "injunction against the continued possession of the monies seized." Laing v. United States, 364 F.Supp. 469 (D.Vermont 1973). See also: Bailey v. Kelley, 372 F.Supp. 449 (N.D.Ohio 1974).

If L.O.C.'s complaint is construed as was the complaint in Laing, supra, the action is one for an injunction, and the Government's fourth ground must be examined. The Government contends that the action is barred by the Anti-Injunction Act, 26 U.S.C. § 7421(a)¹¹ because the exceptions recited therein are not applicable here, and further, because the requirements for Enochs v. Williams Packing & Navigation Co., supra,¹² are not present...