The Kay Co. LLC v. U.S.A
| Decision Date | 03 March 2011 |
| Docket Number | CIVIL ACTION NO. 2:10-cv-00410 |
| Parties | THE KAY COMPANY, LLC, et al., Plaintiffs, v. UNITED STATES OF AMERICA, Defendant. |
| Court | U.S. District Court — Southern District of West Virginia |
Before the Court is Plaintiffs' Amended Motion for Temporary Restraining Order and for Injunctive and Declaratory Relief [Docket 13]. For the reasons set forth below, this motion is GRANTED.
This action arises out of an allegedly illegal tax assessment by the Internal Revenue Service ("IRS") against Plaintiffs. Plaintiffs include the Kay Company, LLC ("the LLC") and members of the LLC. The members of the LLC, along with others, were shareholders of The Kay Company, a separate corporate entity. According to Plaintiffs, in October 2000, The Kay Company transferred the ownership interests of some of its assets, coal properties, to the LLC. Subsequently, shareholders of The Kay Company redeemed a portion of their stock in return for ownership interests in the LLC. This was a way for The Kay Company to transfer interest in the coal properties. After this transaction, The Kay Company still had some assets, marketable securities, managed separately from the LLC, and did not own any part of the LLC. Then, on October 26, 2000, a third party, the First Union National Bank, bought the remaining stock of The Kay Company as trustee of CMD Statutory Trust ("the Trust"). The new owners of The Kay Company changed the name to CMD Company ("CMD"). CMD then sold the remaining marketable securities to the Trust. This sale resulted in the tax liability that the IRS is now seeking to obtain from the LLC, which is the subject of this action. Plaintiffs maintain that they are not responsible for the tax liability at issue. The Government insists that the shareholders of The Kay Company engaged in an abusive tax shelter and avoided corporate tax liabilities when they participated in the transactions described above.
On March 12, 2001, CMD filed the tax return applicable to the time period where the alleged liability arose. Plaintiffs argue that the Government had three years from this date to make an assessment against CMD. A notice of deficiency was not sent to CMD until March 5, 2007; the assessment against CMD was made on August 3, 2007. The Government insists that the applicable statute of limitations period was six years, the statute was tolled for a period of time, and that it acted within the proper time frame.
Plaintiffs allege that in June 2008, the IRS "issued Notices of Proposed Assessment to the Members of the [LLC], seeking to assess liability against them... under a 'transferee liability theory, ' [and] effectively [seeking] to extend the long-expired statute of limitations." (Docket 12 ¶ 15.) Plaintiffs originally disputed that the IRS could establish transferee liability; however, the individual Plaintiffs entered into closing agreements with the IRS to resolve their individual tax liability for approximately $2 million. Plaintiffs aver that the closing agreements settled any tax liability regarding a prior distribution of assets. (Docket 12 at 6.) The Government argues that theclosing agreements did not eliminate the remaining tax liability for which it now seeks to attach liability to the LLC itself.
In March 2010, the IRS served several notices of levy to certain companies associated with Plaintiffs "as successor corporation/alter ego/nominee of The Kay Company of: CMD Company, formerly known as The Kay Company." (Id. at 6-7.) Also in March 2010, the IRS filed a notice of federal tax lien upon the assets of the LLC. (Id. at 7-8.) On March 29, 2010, Plaintiffs filed their complaint, which was later amended on April 9, 2010.
Count One of Plaintiffs' amended complaint alleges that the IRS illegally issued the notices of levy and the notice of lien against them because the applicable statutes of limitations have expired. Plaintiffs request a temporary restraining order to quash the notices and for the court to hold a hearing to consider the issuance of a preliminary injunction. Count Two asks for the same relief as Count One, but alleges that the relief should be granted because: 1) Plaintiffs are not responsible for the liability as a successor, alter ego, or nominee; 2) Plaintiffs no longer are liable due to the closing agreements; and 3) the IRS is estopped from asserting this liability because of misrepresentations made by the IRS to Plaintiffs. Count Three seeks an injunction declaring that Plaintiffs are not liable for the relevant tax liability and precluding the IRS from further attempts to levy upon Plaintiffs' assets for the relevant tax liability. Count Four asserts that the actions of the IRS have resulted in an unlawful taking of Plaintiffs' property. Count Five requests an order from the Court quieting the title of Plaintiffs' property and preventing the IRS from placing additional liens upon Plaintiffs' property regarding the relevant tax liability.
In addition to Plaintiffs' amended complaint, Plaintiffs also filed an Amended Motion for Temporary Restraining Order and for Injunctive and Declaratory Relief [Docket 13]. The motionasks the Court to grant a temporary restraining order and injunction against the IRS to prohibit the IRS from levying upon the assets of Plaintiffs. Defendant filed a Brief in Opposition to Plaintiff's Amended Motion for a Temporary Restraining Order. (Docket 18.) On April 22, 2010, the Court held a preliminary injunction hearing. Defendant filed a Supplemental Brief in Opposition to Plaintiffs' Amended Motion for a Preliminary Injunction, (Docket 32), to which Plaintiffs responded in their Supplemental Brief in Support of Amended Motion for Injunctive and Declaratory Relief and in Rebuttal of Defendant's Supplemental Brief, (Docket 35).
Plaintiffs assert that jurisdiction is proper pursuant to 26 U.S.C. § 7426 and 28 U.S.C. §§ 1331, 2410, and 1346(a)(1). 28 U.S.C. § 1331 gives original jurisdiction to district courts for civil matters relating to a federal question. District courts also have original jurisdiction over "[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected." 28 U.S.C. § 1346(a)(1). 28 U.S.C. § 2410 states: "the United States may be named as a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter... to quiet title to... real or personal property on which the United States has or claims a mortgage or lien."
The Government argues that the Court lacks subject matter jurisdiction under 26 U.S.C. § 7421, the Anti-Injunction Act. The Anti-Injunction Act withdraws all courts' jurisdiction over suits filed "for the purpose of restraining the assessment or collection of any tax." 26 U.S.C. § 7421. The two primary objectives of the Anti-Injunction Act are "[1] to allow the federal government to assess and collect allegedly due taxes without judicial interference and [2] to compel taxpayers to raisetheir objections to collected taxes in suits for refunds." In re Leckie Smokeless Coal Co., 99 F.3d 573, 584 (4th Cir. 1996); accord South Carolina v. Regan, 465 U.S. 367, 376 (1984); Bob Jones Univ. v. Simon, 416 U.S. 725, 736 (1974).
Plaintiffs reply that "statutory and judicial exceptions to the Anti-Injunction Act apply in this case." (Docket 35 at 19.) Listed in the Anti-Injunction Act are several exceptions to its application. One such exception provides that district courts have jurisdiction to grant injunctions in respect to collection of taxes where the action is brought by a person other than the taxpayer who claims that the property was wrongfully levied. 26 U.S.C. § 7426.1 With regard to this case, a levy is wrongful if "[1] the levy is upon property in which the taxpayer had no interest at the time the lien arose or thereafter, or... [2] the levy or sale pursuant to levy will or does effectively destroy or otherwise irreparably injure such person's interest in the property which is senior to the Federal tax lien." 26 C.F.R. § 301.7426-1(b); accord Bregman, Berbert & Schwartz, L.L.C. v. United States, 145 F.3d 664, 668 (4th Cir. 1998) (citing Sessler v. United States, 7 F.3d 1449, 1451 (9th Cir. 1993)). Defendant argues that Plaintiffs do not meet the § 7426 exception because "there is no threat of irreparable harm." (Docket 18 at 18.) Plaintiffs counter that there is the threat of irreparable injury because Plaintiffs will have to fight the IRS in a refund suit.
"Under ordinary circumstances, the availability of a refund suit does negate any claim of irreparable injury." Estate of Michael v. M.J. Lullo, 173 F.3d 503, 511 (4th Cir. 1999) (citing Alexander v. "Americans United" Inc., 416 U.S. 752, 762 (1974); Bob Jones, 416 U.S. at 746; Int'l Lotto Fund v. Va. State Lottery Dep't, 20 F.3d at 591 (4th Cir. 1994)). In Lullo, the actions of the IRS were "transparently baseless" because the IRS pursued the matter after the statute of limitations had expired. 173 F.3d at 511. Under such circumstances, a refund suit is an "inadequate remedy." Id. Plaintiffs believe their situation is similar to the one in Lullo because the equities lie in their favor and a refund suit would be pointless. (Docket 35 at 19.)
The Supreme Court has also recognized an judicial exception to the Anti-Injunction Act. "Only upon proof of the presence of two factors could the literal terms of § 7421(a) be avoided: first, irreparable injury, the essential prerequisite for injunctive relief in any case; and second, certainty of success on the merits." Bob Jones, 416 U.S. at 737 (citing Enochs v. Williams Packing & Nav. Co., 370 U.S. 1 (1962)). In analyzing the second factor, courts must determine whether "under the most liberal view of the law and the facts, the United States cannot establish its claim." Judicial Watch...
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