Schildcrout v. McKeever

• Decision Date: 22 August 1978
• Docket Number: Nos. 76-2625,76-2794,s. 76-2625
• Citation: 580 F.2d 994
• Parties: 78-2 USTC P 16,299 Harry SCHILDCROUT, Petitioner-Appellee, v. Robert M. McKEEVER, District Director, Internal Revenue Service, Respondent-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 994

580 F.2d 994

78-2 USTC P 16,299

Harry SCHILDCROUT, Petitioner-Appellee, v. Robert M. McKEEVER, District Director, Internal Revenue

Service, Respondent-Appellant.

Nos. 76-2625, 76-2794.

United States Court of Appeals, Ninth Circuit.

Aug. 22, 1978.

Richard Farber, Atty. (argued), Dept. of Justice, Washington, D. C., for respondent-appellant.

Stephen E. Silver (argued) of Burch, Cracchiolo, Levie, Guyer & Weyl, Phoenix, Ariz., for petitioner-appellee.

Appeal from the United States District Court for the District of Arizona.

Before CHAMBERS, GOODWIN and KENNEDY, Circuit Judges.

KENNEDY, Circuit Judge:

The taxpayer, Harry Schildcrout, commenced this action in United States district court to enjoin the Internal Revenue Service from imposing a jeopardy assessment and from implementing the procedures necessary to enforce collection. The injunctive relief requested by the taxpayer was granted in part and denied in part by the district court.

The Internal Revenue Service imposed a jeopardy assessment against Schildcrout on March 31, 1973 under Internal Revenue Code section 6862. ¹ The IRS alleged nonpayment of the excise tax on wagering imposed by I.R.C. § 4401 ² and made a jeopardy assessment against Schildcrout for some $97,500, plus interest. The Government alleged that excise taxes were owed for wagering during a thirteen-month period from March 1, 1972 to March 31, 1973. The Government had direct evidence of the volume of wagering activity for only ten days of this period, March 9, 1973 to March 18, 1973. The jeopardy assessment for the thirteen-month interval was based on the Government's conclusion that gambling activities were carried on during the entire thirteen months and on an estimation of the volume of wagering activity during those thirteen months. The Government made its estimate by extrapolating from the amount of wagering during the ten-day period. Schildcrout contends that the assessment for the thirteen months is utterly without factual support, and that any assessment for wagering during the ten-day period or any extrapolation therefrom is impermissible because both are based on information that was disclosed in violation of federal laws regulating wiretapping. Schildcrout also contends that he will suffer irreparable injury as a result of the assessment.

The Government has argued, both here and in the district court, that the taxpayer's suit for injunctive relief is barred by the Anti-Injunction Act of the Internal Revenue Code, I.R.C. § 7421(a). ³ The principal issue in the case is whether the Government is correct in that assertion or whether Schildcrout's case comes within a judicially defined, and narrow, exception to the statutory proscription of injunctions against the collection of taxes. We conclude that the exceptional circumstances which permit a court to enjoin the assessment or collection of a tax are not present in this case.

Even before the Supreme Court's decision in Commissioner v. Shapiro, 424 U.S. 614, 96 S.Ct. 1062, 47 L.Ed.2d 278 (1976), the Court had established that the Anti-Injunction Act does not bar relief for taxpayers in a class of exceptional cases. Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962); Miller v. Standard Nut Margarine Co., 284 U.S. 498, 52 S.Ct. 260, 76 L.Ed. 422 (1932). The Nut Margarine case, as explained in Williams Packing, held that a district court has jurisdiction to enjoin the collection of a tax if the taxpayer satisfies the traditional requisites for equitable relief and in addition shows that "under no circumstances could the Government ultimately prevail" in the collection of the tax. Enochs v. Williams Packing & Navigation Co., 370 U.S. at 7, 82 S.Ct. at 1129.

In Shapiro the Supreme Court reaffirmed the doctrine of Nut Margarine and Williams Packing and addressed the question of what showing the Government is required to make when a taxpayer claims that his case falls within the exceptional class which justifies equitable relief. The Supreme Court declined to discuss the question in terms of burden of proof, but it would appear that the burden of showing that the assessment is baseless remains on the taxpayer. 424 U.S. at 627-29, 96 S.Ct. 1062; James v. United States, 542 F.2d 16, 17 (6th Cir. 1976), Cert. denied, 429 U.S. 1093, 97 S.Ct. 1107, 51 L.Ed.2d 540 (1977); Shannon v. United States, 521 F.2d 56, 61 (9th Cir. 1975), Cert. denied, 424 U.S. 965, 96 S.Ct. 1458, 47 L.Ed.2d 731 (1976); Westgate-California Corp. v. United States, 496 F.2d 839, 843 (9th Cir. 1974). See Flores v. United States, 551 F.2d 1169, 1174 (9th Cir. 1977). The Court did make it clear, however, that while the Government is not required to litigate its entire case, it is required to disclose the factual basis for the jeopardy assessment. Commissioner v. Shapiro, 424 U.S. at 628 & n.10, 633, 96 S.Ct. 1062. We further understand Shapiro to require that the Government reveal facts sufficient to indicate that it at least has probable cause for making the assessment. The Court stated:

The Government may defeat a claim by the taxpayer that its assessment has no basis in fact and therefore render applicable the Anti-Injunction Act without resort to oral testimony and cross-examination. Affidavits are sufficient so long as they disclose basic facts from which it appears that the Government may prevail. The Constitution does not invariably require more, Gerstein v. Pugh, 420 U.S. 103, (95 S.Ct. 854, 43 L.Ed.2d 54) (1975); Mathews v. Eldridge, 424 U.S. 319, (96 S.Ct. 893, 47 L.Ed.2d 18) (1976), and we would not hold that it does where collection of the revenues is involved.

Finally, it seems apparent that if the facts do not even disclose "probable cause," North Georgia Finishing, Inc. v. Di-Chem, Inc., 419 U.S. 601, 607, (95 S.Ct. 719, 42 L.Ed.2d 751) (1975); Gerstein v. Pugh, supra, to support the assessment, the Government would certainly be unable to prevail at trial. Thus the Williams Packing standard is consistent with the applicable constitutional standard.

Id. at 633, 96 S.Ct. at 1073.

Applying these principles to the instant case, Schildcrout's contention that the Government could not prevail under any circumstances must be examined as to three different time intervals to which the assessment applied, namely, a ten-day period during which there was a wiretap providing direct evidence of gambling activity (March 9, 1973 to March 18, 1973); a period of over twelve months preceding the ten-day interval (March 1, 1972 to March 8, 1973); and the brief period after the wiretap surveillance ended (March 19, 1973 to March 31, 1973).

We consider first the ten-day interval during which there was wiretap surveillance. At the hearing on this matter Schildcrout admitted that he accepted wagers during this time and the Government disclosed by affidavit that the information obtained by the wiretap revealed that over the ten-day period $27,225 was wagered on sporting events other than horse racing and $1,150 was wagered on horse racing. The district court refused to enjoin the assessment of $2,500 for unpaid wagering tax for these ten days, and we agree with its resolution of that issue.

Schildcrout has consistently maintained that any evidence obtained by wiretap is inadmissible under those sections of the Omnibus Crime Control and Safe Streets Act of 1968, as amended, pertaining to wiretap surveillance. 18 U.S.C. §§ 2510 Et seq. Without this evidence, he argues, the Government cannot ultimately prevail. The wiretap surveillance was conducted by the Police Department of the City of Phoenix. Schildcrout argues not that the wiretap itself was improper but that disclosure of its contents to IRS special agents is prohibited and that the proper remedy for the unauthorized disclosure is exclusion from evidence. He makes this contention both in this suit for injunctive relief and in a motion to suppress in a pending tax refund suit. The Government contends that an IRS special agent is an "investigative or law enforcement officer" as defined by 18 U.S.C. § 2510(7) ⁴ to whom the disclosure of information obtained by an authorized wiretap is permitted by 18 U.S.C. § 2517(1). ⁵ See Fleming v. United States, 547 F.2d 872, 875 n. 4 (5th Cir. 1977), Cert. denied, 434 U.S. 831, 98 S.Ct. 113, 54 L.Ed. 90 (1978); United States v. Iannelli, 477 F.2d 999, 1001 (3rd Cir. 1973), Aff'd on other grounds, 420 U.S. 770, 95 S.Ct. 1284, 43 L.Ed.2d 616 (1975). The Government further argues that even assuming that special agents are not entitled to receive wiretap information, suppression under 18 U.S.C. § 2515 ⁶ pertains only to unauthorized interception of wire communications, not to the unauthorized disclosure of legitimate interceptions. See Fleming v. United States, 547 F.2d at 874; United States v. Iannelli, 477 F.2d at 1001. See also United States v. Janis, 428 U.S. 433, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976).

Taxpayer injunction suits may not be used as a collateral mechanism for resolving issues of law or facts which may be disputed in good faith. Enochs v. Williams Packing & Navigation Co., 370 U.S. at 7-8, 82 S.Ct. 1125. To avoid the bar of section 7421(a) a taxpayer must show that "under the most liberal view of the law and the facts, the United States cannot establish its claim . . .." Id. at 7, 82 S.Ct. at 1129. In this case the Government has substantial, non-frivolous legal arguments to justify the introduction of the wiretap evidence. The Government's contentions, as well as other possible avenues for the introduction of the evidence, see 18 U.S.C. § 2517(3) & (5); ⁷ Fleming v. United States, 547 F.2d at 875, "are sufficiently debatable to foreclose any notion that 'under no circumstances could the Government ultimately prevail . . .,' " Bob Jones University v. Simon, 416 U.S. 725, 749, 94 S.Ct. 2038, 2052, 40 L.Ed.2d 496 (1974), Quoting Enochs v. Williams Packing & Navigation Co., 370 U.S. at 7, 82 S.Ct. 1125. Accord, ...