Stone v. United States, 74 Civ. 3643.

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Citation405 F. Supp. 642
Docket NumberNo. 74 Civ. 3643.,74 Civ. 3643.
PartiesAndrew L. STONE and M. Jeanne Stone, Plaintiffs, v. UNITED STATES of America and District Director of Internal Revenue, Manhattan District, Defendants.
Decision Date02 December 1975

COPYRIGHT MATERIAL OMITTED

Wagman, Cannon & Musoff, P.C., New York City, for plaintiffs; Wallace Musoff, New York City, of counsel.

Paul J. Curran, U. S. Atty., S.D.N.Y., New York City, for defendants; William G. Ballaine, Asst. U. S. Atty., of counsel.

OPINION

EDWARD WEINFELD, District Judge.

Plaintiffs, Andrew L. Stone and M. Jeanne Stone, husband and wife, commenced this action against the United States of America and the District Director of Internal Revenue for a judgment (1) enjoining the defendants from enforcing, by lien, levy or otherwise, a jeopardy assessment made against plaintiffs for income deficiencies, interest and penalties totalling $7,108,861.73 for the taxable years 1963 through 1967; (2) directing specific enforcement of an escrow agreement dated July 24, 1970, by causing the release to plaintiff Andrew L. Stone of income from escrow assets which has not been paid to Stone by reason of defendants' enforcement of the jeopardy assessment; and (3) awarding damages in the sum of $10,000 in favor of plaintiff Andrew L. Stone for breach of the escrow agreement.

The matter is now before the court on defendants' motion to dismiss the complaint pursuant to Rules 12(b) (2) and (b) (6) of the Federal Rules of Civil Procedure for lack of subject matter jurisdiction and for failure to state a claim on which relief can be granted.

In 1968 Andrew L. Stone, who was the principal stockholder and chief executive officer of a corporation engaged in the production of rocket launchers pursuant to contracts with the Department of the Navy, was indicted in the United States District Court for the District of Columbia. The thirty-count indictment charged him, the corporation, Francis N. Rosenbaum (its special counsel and a director) and others with conspiracy and substantive crimes to defraud the government through the presentation of false and fictitious invoices and statements and the receipt of kickbacks. Stone pleaded guilty to the conspiracy count and seven substantive counts. Rosenbaum also pleaded guilty to the conspiracy charge, as well as other counts.

In 1969 plaintiff Stone was again indicted with others in the United States District Court for the Eastern District of Missouri and charged with violations of and conspiracy to violate the Munitions Control Act by exporting arms, ammunition and implements of war without government approval and by the use of false statements. He was convicted upon his plea of guilty to the crime of conspiracy.

In 1969 the government commenced two separate civil actions, one in the Eastern District of Missouri and the other in the District of Columbia, against Stone and the corporations of which he was the principal shareholder, based in large measure upon the fraudulent and criminal acts committed by Stone and his co-conspirators. The complaints generally alleged various claims under the False Claims Act1 and the Anti-Kickback Act2 for breach of warranty, recoupment of public funds paid by mistake and declaration of a constructive trust. Damages were sought in the sum of over $6,000,000 and double that amount for violation of the False Claims Act.

Thereafter, in an effort to assure that sufficient assets of Stone would be available to satisfy any judgment which the government might recover upon its civil claims and to avoid attachment by it against his property and assets, Stone and the government entered into an escrow agreement. Under its terms, pending the disposition of the civil suits, Stone deposited $2,500,000 par value short term securities and the shares of a wholly owned corporation in escrow with the Trustee named in the agreement. The securities constituted some but not all of his assets. The agreement provided that any dividend or interest received by the Trustee upon the securities was to be credited to Stone's account with the Trustee. It is this provision which plaintiffs seek to have specifically enforced, among other relief.

In addition to the two government civil actions, four separate civil actions by individual plaintiffs were commenced in United States district courts against Stone and others associated with him, alleging securities law violations based generally upon the fraudulent conduct which was the subject of the criminal charges. Those six actions were transferred to the District of Columbia for coordinated or consolidated pretrial proceedings pursuant to 28 U.S.C., section 1407.3 In addition to the transferred actions. other civil suits against Stone were commenced in various state courts.

It is against this background that on February 7, 1972 the Internal Revenue Service made the jeopardy assessment against Stone and his wife for income tax deficiencies for the tax years 1963 through 1967. Notice with a schedule detailing the computation of the deficiencies and additions for fraud4 was duly sent to plaintiffs within sixty days of the making of such assessment.5 In July 1972 each filed a petition in the United States Tax Court seeking a redetermination of the deficiencies and additions assessed.6 Plaintiff M. Jeanne Stone in that proceeding contends she is an "innocent spouse" and as such is not liable for any alleged deficiency.7

In August 1974, during the pendency of the Tax Court proceeding, which is at issue and undetermined, plaintiffs commenced this action. In their amended complaint they allege five separate claims for relief: (1) that the United States breached the escrow agreement by filing the jeopardy assessment against the plaintiffs, thereby causing the escrow agent to withhold from Andrew Stone the income derived from escrow assets;8 (2) that the jeopardy assessment was made arbitrarily, in bad faith, and in violation of the Internal Revenue Service's own guidelines in order to bring pressure against Andrew L. Stone, then incarcerated upon the criminal charges, to settle the civil actions brought by the government, rather than to safeguard any revenue that might be due and owing to the government; (3) that the jeopardy assessment was arbitrary and capricious and made in violation of plaintiffs' right against unreasonable seizures under the Fourth Amendment and of their due process rights under the Fifth Amendment; (4) that the computations underlying the assessment were made arbitrarily and in violation of the due process clause of the Fifth Amendment; and (5) that plaintiff M. Jeanne Stone is an innocent spouse who is entitled to be relieved of the tax deficiency assessment. Plaintiffs allege jurisdiction under 28 U.S.C., sections 1331, 1340 and 1346(a)(2).

The essence of plaintiffs' various claims, however phrased, is that the jeopardy assessment was imposed arbitrarily and capriciously and not to collect taxes that were due. The government, in support of its motion to dismiss, contends that this court is without jurisdiction since 26 U.S.C., section 7421(a), insofar as pertinent, provides:

". . . 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."

The essential purpose of this anti-injunction provision is to enable the government to assess and collect taxes allegedly due as expeditiously as possible without judicial intervention. Those challenging a deficiency assessment may litigate its legality either by petition to the Tax Court9 (which, as noted, plaintiffs here have submitted) or, upon payment of the tax and denial of a refund, by a refund action in the federal district court,10 or by asserting a claim in the Court of Claims.11

Despite the absolute jurisdictional bar of section 7421(a), the Supreme Court, in Enochs v. Williams Packing & Navigation Company,12 held that a suit for injunctive relief against tax assessment or collection may be maintained where, on the basis of information available to the government at the time of the suit and under the most liberal view of the law and the facts, (1) "it is clear that under no circumstances could the Government ultimately prevail" and (2) "equity jurisdiction otherwise exists" because of irreparable injury and lack of an adequate remedy at law.13 Unless both conditions are met, the court is without jurisdiction and a suit for preventive injunctive relief must be dismissed.

The Supreme Court, in a series of recent cases,14 reiterated the stringent force of the anti-injunction standards of Williams Packing, which it described as "the capstone to judicial construction of the Act,"15 by refusing to engraft further exceptions based upon claims of alleged irreparable injury pending resort to alternative remedies and alleged denial of due process by reason thereof — in sum, the court interpreted Williams Packing to warrant injunctive relief only upon a showing "that the Service's action is plainly without a legal basis," and that it has "no chance of success on the merits."16 Thus, plaintiffs have a heavy burden to sustain their claim for judicial intervention with respect to the challenged jeopardy assessment.

To establish that they come within the rigid exceptions of Williams Packing, the plaintiffs in substance contend that the jeopardy assessment was made arbitrarily and capriciously by the Internal Revenue Service for punitive purposes and in the guise of a tax which it knew was not due; that the same items of income attributed to plaintiff Andrew L. Stone were attributed to his co-conspirator Francis M. Rosenbaum; that the purpose of the jeopardy assessment was not to collect or preserve the revenue, but to pressure plaintiffs into settling the civil actions, in violation of the escrow agreement; and that the assessment was imposed to satisfy the press,...

To continue reading

Request your trial
10 cases
  • Schaffer v. C.I.R.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • December 16, 1985
    ...679 F.2d 896 (9th Cir.1982), or attributed in full to each of the participants, e.g., Gerardo v. C.I.R., supra; Stone v. United States, 405 F.Supp. 642 (S.D.N.Y.1975), aff'd mem., 538 F.2d 314 (2d Cir.), cert. denied, 429 U.S. 921, 97 S.Ct. 317, 50 L.Ed.2d 288 (1976). In the latter event, t......
  • Satullo v. Wilkins
    • United States
    • United States State Supreme Court of Ohio
    • November 29, 2006
    ...law support such a finding. See Gerardo v. Commr. of Internal Revenue (C.A.3, 1977), 552 F.2d 549, 555, quoting Stone v. United States (S.D.N.Y.1975), 405 F.Supp. 642, 649 (the Internal Revenue Service is permitted "`to assess deficiencies against more than one person for the same tax {¶ 41......
  • Doggett v. Comm'r of Internal Revenue
    • United States
    • United States Tax Court
    • April 15, 1976
    ...affd. on this issue 383 F.2d 883 (8th Cir. 1967); Nat Harrison Associates, Inc., 42 T.C. 601, 617 (1964); Stone v. United States, 405 F.Supp. 642, 649 n. 26 (S.D. N.Y. 1975); cf. Goldstein v. United States, 227 F.2d 1 (8th Cir. 1955). The facts of this case differ from those cases in only o......
  • Gerardo v. C.I.R.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • March 18, 1977
    ...against more than one person for the same tax liability if there is an accepted legal basis for each assertion." Stone v. United States, 405 F.Supp. 642, 649 (S.D.N.Y.1975), aff'd, 538 F.2d 314 (2d Cir. 1976); accord, Wiles v. Commissioner of Internal Revenue, 499 F.2d 255, 259 (10th Cir.),......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT