Peach Bowl, Inc. v. Shultz

• Decision Date: 28 September 1973
• Docket Number: Civ. A. No. 17854.
• Citation: 370 F. Supp. 685
• Parties: PEACH BOWL, INC., a Georgia corporation v. George P. SHULTZ, Secretary of the Treasury of the United States of America, et al.
• Court: U.S. District Court — Northern District of Georgia

370 F. Supp. 685

PEACH BOWL, INC., a Georgia corporation v. George P. SHULTZ, Secretary of the Treasury of the United States of America, et al.

Civ. A. No. 17854.

United States District Court, N. D. Georgia, Atlanta Division.

September 28, 1973.

John V. Skinner, Jr. and Paul J. Wagner, Jr., Skinner, Wilson, Beals & Strickland, Atlanta, Ga., for plaintiff.

William D. Mallard, Jr., Asst. U. S. Atty., Atlanta, Ga., S. Martin Teel, Jr., Trial Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendants.

ORDER

RICHARD C. FREEMAN, District Judge.

This is an action for declaratory and injunctive relief brought by plaintiff, a Georgia corporation, against various government officials, namely, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Chief of the Exempt Organization Branch of the Internal Revenue Service, and the District Director of Internal Revenue. Plaintiff is currently classified as an exempt organization within the meaning of 26 U. S.C. § 501(c)(4), but seeks in this action a declaratory judgment that it is a tax exempt organization within the meaning of 26 U.S.C. § 501(c)(3)¹, and an injunction enjoining the defendants, their successors and employees, from refusing to classify the plaintiff as such. Exhaustion of administrative remedies is alleged. Jurisdiction is grounded in 28 U.S.C. § 1340 and in Section 10 of the Administrative Procedure Act, 5 U. S.C. §§ 701-706.

Presently before the court is defendants' motion to dismiss. In their motion to dismiss, defendants assert that this court is without authority to grant the relief requested, that the plaintiff has an adequate remedy at law, and that the action is actually a suit against the United States, which has not consented to be sued.

Plaintiff alleges that it is a non-profit corporation formed for the principal purpose of generating funds for the Georgia Lion's Lighthouse Foundation, Inc., (hereinafter the "Foundation"), which aids in the prevention of blindness and the preservation of sight, conducts research into the causes of eye-deficiency and failure, and generally helps the blind. Plaintiff further alleges that its affairs are administered by a Board of Directors appointed by the Executive Committee of the Foundation and whose officers serve without compensation. Plaintiff further alleges that its Executive Director, Mr. George Crumbly, is President of George Crumbly Promotions, Inc., which promotes the corporation's only activity, an annual post-season football game sanctioned by the National Collegiate Athletics Association (NCAA) and known as "The Peach Bowl". It is alleged that after promotional, administrative, clerical and supply expenses are paid, the remaining funds generated are accumulated for distribution to the Foundation.

Plaintiff's purpose in seeking a change from § 501(c)(4) to § 501(c)(3) status is that contributors to organizations exempt under § 501(c)(3) may deduct contributions from their income tax, pursuant to 26 U.S.C. § 170(c)(2), whereas contributors to organizations exempt under § 501(c)(4) may not. Plaintiff contends that denial of exemption status under § 501(c)(3), and its corresponding denial of tax deductions for contributions made to the plaintiff, threaten the plaintiff's very existence.

In support of their contention that this court is not authorized to grant the relief requested by plaintiff, defendants rely upon 26 U.S.C. § 7421(a), which provides 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. (Emphasis added).

Despite the sweeping prohibitory language of this section, the U. S. Supreme Court has carved an exception from the anti-injunction provision in those cases (1) where the taxpayer would suffer irreparable injury and is without legal remedy, and (2) where it is clear that under no circumstances could the government ultimately prevail. Enochs v. Williams Packing Co., 370 U.S. 1, 7, 82 S.Ct. 1125, 1129, 8 L.Ed.2d 292 (1962). Thus the major question in this action is whether it is a suit "for the purpose of restraining the assessment or collection of any tax." If it is such a suit, then the court must determine whether both conditions of the test in Enochs v. Williams Packing Co., supra, are satisfied. If the test is not met, then the action must be dismissed for lack of subject matter jurisdiction.

Defendants argue strenuously that this action is a suit to restrain the assessment or collection of taxes. They contend that in addition to allowing contributors to deduct their contributions, an organization exempt under § 501(c)(3) is also exempt from federal social security (26 U.S.C. §§ 3101(a) and 3121(b)(8)(B)) and unemployment (26 U.S.C. §§ 3301 and 3306(c)(8) ) taxes. A § 501(c)(4) organization, however, is not exempt from such taxes. Therefore, according to defendants, the declaratory and injunctive relief sought (1) would necessarily bar the assessment against (and collection from) the plaintiff of social security and unemployment taxes and (2) would necessarily bar the assessment against (and collection from) plaintiff's contributors of deficiencies in income taxes resulting from disallowed deductions of contributions to the plaintiff.

Although § 7421(a) does not require that the person who maintains the suit be the taxpayer, and does not specify the type of tax, plaintiff argues in response that the tax whose assessment and collection is sought to be restrained must be an income tax levied upon the plaintiff. It is clear that the present action would not restrain the collection or assessment of such tax against the plaintiff, because its status as a § 501(c)(4) organization exempts it from income tax liability. If plaintiff were not already a § 501(c)(4) organization, then the assessment and collection of its income tax would be restrained by this lawsuit.

The questions raised by the present action have been recently considered by the Fifth, Fourth, and District of Columbia Circuits. In "Americans United" Inc. v. Walters, 155 U.S.App.D.C. 284, 477 F.2d 1169 (1973), the District of Columbia Circuit held that § 7421(a) did not bar a constitutional challenge (based on First and Fifth Amendment grounds to the Internal Revenue Service's revocation of the plaintiff's status as a § 501(c)(3) organization. As in the present case, the plaintiff's status as a § 501(c)(4) organization was not affected by the revocation. As a basis for its decision, the court reasoned that the restraint upon assessment and collection was at best collateral, in that the suit's main purpose was not to remove the burden of taxation from contributors but rather to avoid the disposition of contributed funds away from the corporation. 477 F.2d 1180.

However, in Bob Jones University v. Connally, 472 F.2d 903 (4th Cir. 1973), reh. den., 476 F.2d 259 (1973), the Fourth Circuit held that a suit by the plaintiff to restrain the Internal Revenue Service from terminating its status as a § 501(c)(3) organization was barred by § 7421(a). In denying the plaintiff University's petition for a rehearing, the court squared its result with "Americans United" Inc. v. Walters, supra, by noting that the University, unlike "Americans United", had not been classified as an exempt organization under § 501(c)(4). If the University's § 501(c)(3) status were revoked, it would be forced to pay income tax. Therefore, an injunction restraining the Internal Revenue Service from terminating the University's status as a § 501(c)(3) organization would restrain the assessment and collection of the University's income tax.

In Crenshaw County Private School Foundation v. Connally, 474 F.2d 1185 (5th Cir. 1973), reh. den., 475 F.2d 1404 (1973), the Fifth Circuit was presented with a factual situation similar to that faced by the Fourth Circuit in Bob Jones University v. Connally, supra, in that the plaintiff-appellant was not classified as a § 501(c)(4) organization. Instead, revocation of the plaintiff's status as a § 501(c)(3) organization had been threatened by the Internal Revenue Service. The court held that § 7421(a) barred an action for injunctive relief because Internal Revenue Service administrative proceedings that would have terminated the plaintiff's tax exempt status

are directly involved with the assessment and collection of taxes from appellant and those making contributions to it. If tax-exemption and deductibility-assurance rulings are withdrawn, appellant will be liable for taxes on any net income realized by it and contributors to it will not be permitted to deduct from their gross income the amount of their contributions. Either event will result in an increase in taxes. (Emphasis added) 474 F.2d 1188.

In so holding, the court in Crenshaw relied upon the Fourth Circuit's decision in Bob Jones University and declined to follow the District of Columbia Circuit's decision in "Americans United" Inc. One week after the Crenshaw decision was rendered, however, the Fourth Circuit harmonized its decision in Bob Jones University with "Americans United" Inc., as discussed above, by impliedly agreeing that assessment and collection of taxes upon contributors to would-be § 501(c)(3) organizations was not sufficient to raise the bar of § 7421(a).

Despite this change of events, this court is of the opinion that the Fifth Circuit in Crenshaw clearly felt that the tax effect upon contributors of a change in an organization's tax-exempt status is by itself sufficient for the purposes of § 7421(a). In addition, the absence of any substantial constitutional claim in this case, unlike Crenshaw, Bob Jones University, and "Americans United" Inc., supra, makes it clear that this suit is designed to directly restrain the assessment and collection of contributors' income taxes, rather than to vindicate any constitutionally secured...