Rambo v. United States

• Citation: 492 F.2d 1060
• Decision Date: 12 February 1974
• Docket Number: No. 73-1131,73-1413.,73-1131
• Parties: Charles R. RAMBO, Plaintiff-Appellee, v. UNITED STATES of America and District Director of Internal Revenue for the District of Kentucky, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

492 F.2d 1060 (1974)

Charles R. RAMBO, Plaintiff-Appellee, v. UNITED STATES of America and District Director of Internal Revenue for the District of Kentucky, Defendants-Appellants.

Nos. 73-1131, 73-1413.

United States Court of Appeals, Sixth Circuit.

Argued October 17, 1973.

Decided February 12, 1974.

Richard Farber, Tax Div., Dept. of Justice, for defendants-appellants; Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief; George J. Long, U. S. Atty., of counsel.

David W. Gray, Louisville, Ky., for plaintiff-appellee; Michael J. Clare, Louisville, Ky., on brief.

Before CELEBREZZE and MILLER, Circuit Judges, and O'SULLIVAN, Senior Circuit Judge.

WILLIAM E. MILLER, Circuit Judge.

These consolidated appeals raise important and difficult questions concerning the statutory authority of the Internal Revenue Service to collect "jeopardy assessments" and the procedural safeguards available to the taxpayer.

Charles Rambo, the taxpayer-appellee, was arrested on April 6, 1972, for reckless driving. A search of his car and person revealed a supply of drugs and $2,200 in cash. The arrest resulted in the revocation of the appellee's probation arising from previous charges, for which he is currently serving a sentence in the Jefferson County Jail. However, he was not prosecuted on any charge relating to the arrest of April 6.

On April 24, 1972, the District Director of Internal Revenue for the District of Kentucky wrote appellee, advising him that pursuant to Section 6851 of the Internal Revenue Code, his taxable period beginning January 1, 1972 was terminated as of April 24, 1972. An income tax of $28,446.88 was said to be immediately due and payable. The next day, on April 25, 1972, an assessment for income taxes in the above amount was made, and a notice of a federal tax lien was filed with the Jefferson County Court in Louisville. Simultaneously, notices of levy were served on appellee and his bank. Three automobiles were taken from the taxpayer while the bank turned over to the I.R.S. appellee's account, amounting to $12,661.25. Public sale of the automobiles was scheduled for September 14, 1972.

On August 14, 1972, Rambo filed in the United States District Court a complaint seeking both a preliminary and permanent injunction prohibiting the sale of his cars and requiring that the seized property be returned to him. The court enjoined the public sale, and an interlocutory appeal was taken to this Court. Before the appeal could be heard, the district court entered summary judgment for appellee — thereby ordering the government to return all property and to refrain from further attempts to collect the tax assessed for the terminated period. Furthermore, the court ordered the I.R.S. to release all encumbrances from the taxpayer's property. However, during the pendency of this appeal that order was stayed, except that one automobile was released for the use of Rambo's wife.

Because the issues in this case involve the interpretation and inter-relationship of a substantial number of sections of the Internal Revenue Code, we reproduce the principal ones in the appendix to this opinion rather than in footnotes.

The I.R.S. decided that Rambo's tax was "in jeopardy" within the ambit of Sec. 6851. This section authorizes the Secretary to terminate the taxable period of a taxpayer and to demand payment of the tax due for such terminated period upon finding that the taxpayer designs to do "any other act tending to prejudice or to render wholly or partly ineffectual" collection of the tax for the current year. Acting pursuant to Sec. 6851, the Service terminated Rambo's taxable year; determined a tax for the year to date and proceeded to assess the tax. The Service concedes that Sec. 6851 does not contain any independent authority for making an assessment;¹ instead, as authority for making the assessment it relies on the general provisions of Sec. 6201. That section generally authorizes the I.R.S. to make assessments of taxes but it makes no reference to a "deficiency notice." Once an assessment is made under that section, the I.R.S. could use its extensive statutory power to levy on the taxpayer's property and hold a public sale to satisfy the amount of the tax. See Sec. 6331 et seq. The taxpayer normally would have no recourse to the courts to halt these proceedings because of the provision in the code which generally prohibits suits that seek to restrain the assessment or collection of any tax. Sec. 7421(a).²

The taxpayer's only remedy would be to pay the tax; file a return at the end of the taxable year; then bring an action for a refund. See Secs. 6511, 6532 and 7422.

In the present case the district court rejected the position of the I.R.S. that the assessment was made under Sec. 6201 primarily because it found that the statutory authority for assessing a tax, which has been determined under Sec. 6851, is conferred by Sec. 6861, not Sec. 6201. Section 6861, which appears in the code under the heading, "Jeopardy Assessment," provides that once the I. R.S. determines that the collection of a "deficiency" may be jeopardized by delay, it can immediately assess the deficiency and demand payment thereof. In so doing, it must give a deficiency notice to the taxpayer within 60 days after the assessment.³ This is in contrast to the general "deficiency notice" provision of Sec. 6212 which authorizes the secretary upon determination of a deficiency to send notice to the taxpayer of such deficiency without specifying the time within which the notice must be given. If the Service fails to issue a deficiency notice under Sec. 6861 after declaring a deficiency, within 60 days of the assessment, the taxpayer may seek an injunction against the collection of the tax and invalidation of any prior levy. Schreck v. United States, 301 F.Supp. 1265 (D. Md.1969); Lisner v. McCanless, 356 F. Supp. 398 (D.Ariz.1973). Cf. United States v. Ball, 326 F.2d 898, 902, 903 (4th Cir. 1964). That is exactly what happened in this case. Since the Internal Revenue Service did not send Rambo a deficiency notice, and since the district court held that authority for assessment was derived from Sec. 6861, the court enjoined collection of the tax and ordered his property returned.

The issuance of a deficiency notice is of substantial importance to the taxpayer. The receipt of the notice is a jurisdictional prerequisite to litigation in the Tax Court, 26 U.S.C. Sec. 6213(a); Mason v. Commissioner of Internal Revenue, 210 F.2d 388 (5th Cir. 1954), to contest the validity of the tax before it is paid. Otherwise, he must pay the full tax and then bring suit in a federal district court for refund. Flora v. United States, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960) decision on rehearing of 357 U.S. 63, 78 S.Ct. 1079, 2 L.Ed.2d 1165 (1958). Also, while awaiting the decision of the Tax Court, the jeopardy taxpayer may stall collection proceedings if he is able to post an adequate bond, Sec. 6863(a). If he cannot, the seized property cannot be sold absent certain limited exigent circumstances. Sec. 6863(b) (3) (A). The I.R.S. may abate the jeopardy assessment if it finds that jeopardy does not exist. Sec. 6861(g). Although the I.R.S. still has extensive power under the jeopardy assessment provisions of Sec. 6861, such as the power to make an assessment and to seize but not to sell property, the limited procedural safeguards to the taxpayer under that section are of unquestionable value to him.

The government argues that the crucial flaw in the opinion of the district court is that Sec. 6861 is only for the jeopardy assessment of a deficiency as defined in Sec. 6211. That section reads in pertinent part:

§ 6211. Definition of a deficiency. (a) In general.

For purposes of this title in the case of income, estate gift, and excise taxes, imposed by subtitles A and B, and chapter 42, the term "deficiency" means the amount by which the tax imposed by subtitle A or B or chapter 42 exceeds the excess of —

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over —

(2) the amount of rebates, as defined in subsection (b) (2), made.

Therefore, the Service concludes that a deficiency can only exist after a taxpayer files a return showing a lesser amount of tax than is due or until the time for filing a return is past, and the taxpayer has not complied. On the other hand, Sec. 6851 says nothing about a deficiency, but merely that a taxable year may be terminated early whenever collection of the tax would be prejudiced or rendered ineffectual. By definition, the government argues, termination under Sec. 6851 cannot result in a deficiency because the taxable year is not at an end, and a return has not been filed. Instead of a deficiency, a Sec. 6851 termination results in a "provisional statement of the amount which must be presently paid as a protection against the impossibility of collection." Ludwig Littauer & Co. v. Commissioner, 37 B.T. A. 840, 842 (1938).

Support of the position of the Internal Revenue Service comes also from a decision of the Tax Court and two recent Circuit Court decisions. In Puritan Church — Church of America v. Commissioner, 10 TCM 485 (1951), aff'd per curiam on other grounds, 93 U.S.App.D.C. 129, 209 F.2d 306 (1953), cert. denied 347 U.S. 975, 74 S.Ct. 787, 98 L.Ed. 1115 (1953), the Tax Court implied that no deficiency notice was required when a tax year was terminated under the predecessor of Sec. 6851. Interestingly, the court seemed to believe that the assessment authority came from Sec. 6851 itself — a position which the I.R.S. now concedes is incorrect. Similarly, in Williams on v. United States, 31 A.F.T.R.2d 800 (7th Cir. 1973)...