National Taxpayers Union, Inc. v. US

• Court: U.S. District Court — District of Columbia
• Writing for the Court: LAMBERTH
• Citation: National Taxpayers Union, Inc. v. US, 862 F. Supp. 531 (D. D.C. 1994)
• Decision Date: 31 August 1994
• Docket Number: Civ. A. No. 93-1796(RCL).
• Parties: NATIONAL TAXPAYERS UNION, INC., Plaintiff, v. UNITED STATES of America, Defendant.

862 F. Supp. 531

NATIONAL TAXPAYERS UNION, INC., Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 93-1796(RCL).

United States District Court, District of Columbia.

August 31, 1994.

David M. Katinsky, Donald J. Gavin, Tax Div., U.S. Dept. of Justice, Washington, DC, for defendant.

Charles F. Rule, Jackson R. Sharman, III, Allan B. Moore, Covington & Burling, Mark R. Levin, Jerald L. Hill, Mark J. Bredemeier, Richard P. Hutchison, Landmark Legal Foundation, Washington, DC, for plaintiff.

MEMORANDUM OPINION

LAMBERTH, District Judge.

This case comes before this court on defendant's motion to dismiss and on plaintiff's motion for summary judgment. In a separate order that shall issue this date, this court shall grant defendant's motion to dismiss for lack of jurisdiction and shall deny plaintiff's summary judgment motion as moot, for the reasons stated below.

I. FACTS

This case challenges the constitutionality of a provision of the recently enacted tax reform law, the Omnibus Budget Reconciliation Act of 1993 ("Act"). The provision at issue is Section 13208 of Title XIII of that Act ("Section 13208"), which retroactively increased the tax rate on certain estates and lifetime gifts.¹

Section 13208, which was signed into law on August 10, 1993, eradicated a short-lived lower gift and estate tax rate. About seven months before, on January 1, 1993, the top tax rate on the largest estates and gifts had dropped to 50 percent from 53 to 55 percent, the rates at which such estates and gifts had been taxed since 1984.² Section 13208 restored the old, pre-January 1993 rates. Under Section 13208, the tax rate for estates and lifetime gifts valued between $2.5 million and $3.0 million rose from 50 percent to 53 percent, and the tax rate for estates and lifetime gifts valued over $3.0 million rose from 50 percent to 55 percent.

Significantly for this lawsuit, Congress made the gift and estate tax increase retroactive to capture revenue from January 1, 1993. Section 13208(c) applies the restored higher tax rates to the estates of decedents who died, and to lifetime gifts that were made, between January 1, 1993 and August 10, 1993.

The National Taxpayers Union, Inc., ("NTU") brought this action to challenge the constitutionality of this retroactive tax increase on gifts and estates. NTU is a nonprofit corporation whose "fundamental purpose ... is to educate taxpayers, legislators, and the general public in a non-partisan fashion on the control of government spending and taxes and to promote sound, lawful, and fair revenue practices by the United States government." (Pl.'s Complaint at ¶ 5.) NTU has members who pay estate and gift taxes, who are executors of estates, and who are the heirs of estates and the donees of gifts. (Pl.'s Complaint at ¶ 5.)

NTU seeks injunctive and declaratory relief. The organization seeks a permanent injunction against the collection or enforcement of Section 13208, and a declaration that Section 13208 violates three constitutional provisions: Article I, the Due Process Clause of the Fifth Amendment, and the Taking Clause of the Fifth Amendment. The court does not reach the merits of plaintiff's case because the court lacks jurisdiction to decide the merits.

II. ANALYSIS

As stated above, plaintiff seeks a permanent injunction barring defendant from applying or enforcing Section 13208 and a declaration that Section 13208 violates three constitutional provisions. Because the Anti-Injunction Act, 26 U.S.C. § 7421(a) ("AIA"),³ deprive's this court of jurisdiction to do the former, and because the Declaratory Judgment Act, 28 U.S.C. § 2201(a) ("DJA"),⁴ deprives this court of jurisdiction to do the latter, plaintiff's case must be dismissed.⁵

The AIA bars any court from enjoining the collection or enforcement of any federal tax. The AIA itself carves out a few statutory exceptions to its anti-injunction bar, but plaintiff does not contend that any of those exceptions apply here. Instead, NTU argues that its case falls into one of the two judicially created exceptions to the AIA. The Supreme Court has held that the AIA does not apply where a plaintiff has no recourse to any alternative legal remedies (see South Carolina v. Regan, 465 U.S. 367, 104 S.Ct. 1107, 79 L.Ed.2d 372 (1984)), nor where the alternative legal remedies that do exist are inadequate and the government cannot possibly win on the merits (see Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962)). In this case, neither of these exceptions are applicable, because at least some of NTU's members have adequate legal remedies of their own.

A. South Carolina

Plaintiff argues first that its case falls into the South Carolina exception to the AIA bar. In South Carolina, the Supreme Court held that the AIA does not bar injunctive actions brought by aggrieved parties who lack recourse to any alternative remedy.⁶ The plaintiff in that case, South Carolina, sought an injunction to protect its bondholders from the enforcement of a federal tax that it argued was unconstitutional. The Court found that South Carolina would suffer indirectly as the tax hit its bondholders — either it would have to alter the form of its bonds or absorb at least some of the cost of the tax.⁷ Yet because the federal tax did not impose any direct tax liability on South Carolina,⁸ South Carolina could not take advantage of any statutory procedure to dispute the tax.⁹ Friendly bondholders might use those statutory procedures to raise the constitutional challenges that South Carolina wished to make, but the Court ruled that it would not require South Carolina to depend on a third party to raise its claims for it.¹⁰ Seeing no alternative action open to South Carolina to contest the tax's constitutionality, the Supreme Court held that the AIA did not bar South Carolina's injunctive suit.

NTU claims that, like South Carolina, it suffers the tax indirectly and that this suit for injunctive relief is its sole remedy. NTU claims that Section 13208 hurts it indirectly, either by its secondary effects,¹¹ or (as in South Carolina) by its shifting of some of the true cost of the tax to NTU.¹² Yet because NTU — an organization of taxpayers but not a taxpayer itself¹³ — will incur no tax liability, it cannot employ any of the ordinary alternative procedures to contest the tax. Like South Carolina, NTU could rely on a friendly constituent taxpayer to raise the organization's claims in a post-enforcement suit, but NTU cannot compel any such help. Fears of compromised privacy, undue financial disclosure, and government retaliation may deter "some if not all" NTU members from shouldering NTU's suit this way,¹⁴ just as the IRS's practice of routinely auditing the returns of taxpayers who litigate refund claims may have deterred South Carolina's bondholders from raising the state's claims in refund actions.¹⁵

Although in all these particulars NTU resembles South Carolina in its successful effort to jump the AIA bar, the South Carolina court took care to distinguish suits like NTU's from suits by states. The Court anticipated that taxpayer groups would craft complaints that mirrored South Carolina's, claiming that a challenged tax harms not just member taxpayers, but that it harms, indirectly, the group. The Court understood that permitting such suits to go forward would let taxpayers too easily evade the AIA by forming tax-litigating organizations.¹⁶ To thwart such suits, the Court stated in a footnote that the AIA would indeed bar injunctive suits of organizations whose constituents were taxpayers with alternative remedies of their own.¹⁷

NTU's suit is an example of the sort of taxpayer group suit the South Carolina court anticipated and wished to leave barred by the AIA. Many of NTU's members may bring their own individual actions against Section 13208, either by resisting a proposed deficiency assessment in the Tax Court,¹⁸ or by paying the full amount of the deficiency assessment and seeking a refund in U.S. District Court or U.S. Court of Federal Claims.¹⁹ The Supreme Court has cautioned that where "taxpayers have alternative remedies, it would elevate form over substance to treat such organizations of taxpayers as if they did not possess alternative remedies."²⁰

NTU counters that because not all of its members possess such alternative remedies, its action should be allowed. NTU concedes that some of its members may challenge the tax themselves:²¹ its donor members who are aggrieved by the tax may bring post-enforcement actions challenging Section 13208, and its executor members may bring post-enforcement actions on behalf of their estates challenging the tax. However, some of its members lack such alternative remedies. Its legatees, for example, cannot bring post-enforcement suits of their own. The legatees may be "aggrieved parties" because the funds they inherit are reduced by the amount of the Section 13208 tax, but since they have not paid the tax themselves, they cannot bring any post-enforcement action.²²

In Foodservice and Lodging Institute, Inc. v. Regan, 809 F.2d 842 (D.C.Cir.1987), however, this Circuit held that if even one member of a collective plaintiff has an "alternative remedy," the AIA bars the collective plaintiff's injunctive suit. The Foodservice court held that the South Carolina exception to the AIA did not apply to a claim of a trade association suing on behalf of its taxpaying employer members, because at least one of the trade association's aggrieved members could have brought suit individually on the trade association's claims.²³ In Foodservice, the government asserted (and the district court did not question) that with respect to some claims, "one" of the collective plaintiff's members could refuse to file a reporting item that the Internal Revenue Code required, pay the statutory penalty for its failure to file the reporting, file a claim for a refund and bring a refund suit.²⁴...