UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
decided: November 27, 1973.
DONALD SHERMAN, MARCIA SHERMAN, ROLAND SHERMAN, A MINOR CHILD BY HIS PARENT DONALD SHERMAN, DEBRA SHERMAN, A MINOR CHILD BY HER PARENT, DONALD SHERMAN, APPELLANTS
ROLAND H. NASH, DISTRICT DIRECTOR OF INTERNAL REVENUE
Van Dusen, Gibbons and Hunter, Circuit Judges. Van Dusen, Circuit Judge, (dissenting).
Opinion OF THE COURT
HUNTER, Circuit Judge:
Appellants, Donald and Marcia Sherman, sought in the district court injunctive relief from a jeopardy assessment imposed upon them by the District Director of Internal Revenue ("District Director").*fn1 The district court held that it was without jurisdiction to review the decision of the District Director. This appeal followed pursuant to the jurisdiction granted this court by 28 U.S.C. § 1291. We reverse.
On April 7, 1971, there was delivered to the Shermans' New Jersey residence a demand for payment of taxes and notification that the Internal Revenue Service ("IRS") had seized their home and cars and had levied upon their bank accounts. This apparently was the first notification sent to the Shermans informing them that the IRS considered the tax liability reported on their tax return for the years 1965 to 1969 to be incorrectly computed.
On April 30, 1971, the Shermans filed a claim for abatement of the jeopardy assessment, pursuant to 26 U.S.C. § 6861(g).*fn2 Subsequently, the IRS on June 4, 1971 sent a deficiency letter as required by 26 U.S.C. § 6861(b)*fn3 and on August 12, 1971 forwarded new notices and demands for payment. The asserted deficiencies in these subsequent notices were of different amounts and were considerably less than the amount originally demanded.*fn4
After receipt of these notices, the Shermans petitioned the United States Tax Court for a redetermination of their tax liability. This action is presently pending before that court. Not having received a reply to their claim for abatement, the Shermans on October 8, 1971 brought suit in the district court seeking a review of the District Director's action. The Shermans' complaint alleged, inter alia, that the assessment was impairing Mr. Sherman's personal credit, resulting in great harm to his business ventures which were largely dependent on his credit; that this further impaired his ability to meet personal debts and provide for his family; and that the assessment was arbitrary and unreasonable, lacking any justification and imposed solely to harass and coerce plaintiffs for improper purposes. In support of this latter allegation, the Shermans argue on this appeal that the IRS was assisting the Justice Department in an attempt to force Mr. Sherman to appear before a grand jury investigating various criminal activities in Hudson County, New Jersey.*fn5
Initially, we emphasize that the only question before us is whether and to what extent a district court has jurisdiction to review a decision of the District Director imposing a jeopardy assessment. We are therefore concerned solely with interpreting those statutes which grant or limit the jurisdiction of the district court over the issues raised by the Shermans.
For many years under 26 U.S.C. § 7421 and its predecessors, Congress has withheld from courts jurisdiction to enjoin the "assessment or collection" of "any tax."*fn6 This restraint against injunctions has given rise to what has been commonly referred to as the "pay and sue" doctrine, the essence of which is that before a taxpayer may resort to the courts for a review of a tax assessment, he must first pay the assessment. After much criticism of this doctrine, Congress recognized the harshness and inadequacy of granting judicial review only through a suit for refund,*fn7 and, in 26 U.S.C. § 6213 and its predecessors,*fn8 provided a broad exception to section 7421 by giving the taxpayer the right of judicial review before any assessment and collection of a deficiency "in respect of any tax imposed by subtitle A or B or Chapter 42" may be "made, begun or prosecuted."*fn9 In the present case, the taxes allegedly owed by the Shermans were imposed under subtitle A (income taxes) of the Internal Revenue Code of 1954, and the Shermans have sought in the Tax Court a redetermination of their tax liability. Thus, pending a Tax Court decision which has become final, section 6213 clearly grants the district court jurisdiction to enjoin the assessments and levies imposed by the District Director on the Shermans and their property, unless such assessment was imposed in accordance with the authority granted in the jeopardy assessment provisions of section 6861.*fn10 Section 6861 by contrast reflects the Congressional recognition that in the limited circumstances where the collection of revenue seems to be in jeopardy, any hardship resulting from levying on a taxpayer's assets prior to judicial review is outweighed by the Government's need to protect revenue which would otherwise be lost.
Our decision today in no way deviates from this Congressional policy, for we fully concur with those courts which have concluded that Congress withheld jurisdiction from the district courts to review the sufficiency of the facts relied upon by the IRS to support a belief that jeopardy exists. E.g., Transport Manufacturing & Equipment Co. v. Trainor, 382 F.2d 793 (8th Cir. 1967); United States v. Bonaguro, 294 F. Supp. 750, 753 (E.D. N.Y. 1968). This does not mean, however, that Congress intended that by merely following the formal procedures of section 6861, the IRS should have thereby complete license to act arbitrarily and in bad faith and for other than the purpose of preserving revenue. See Iannelli v. Commissioner of Internal Revenue, 487 F.2d 317 (3d Cir. 1973); Bonaguro, supra.
When the IRS has acted ostensibly under section 6861, but in fact has used the jeopardy assessment as a device to harass a taxpayer or as a leverage to exert pressure on a taxpayer for nontax purposes, it has exceeded its statutory authority. Section 7421 does not shield such unauthorized acts from judicial review; since they are not authorized by section 6861, they are prohibited by the general provisions of section 6213 and are subject to the injunction authorized therein. For these reasons we conclude that the allegations in the Shermans' complaint to the effect that the only reason the IRS imposed the jeopardy assessment was to harass and coerce the plaintiffs for improer purposes are sufficient to give the district court jurisdiction under 26 U.S.C. § 6213.
In remanding to the district court, we note briefly that a jeopardy assessment, imposed in good faith, may have a myriad of incidental effects on a taxpayer, some of which may beneficially inure to other departments of government. So long as the IRS, however, acts from a good faith concern that its revenue interest is in jeopardy, its actions are shielded from injunctions by section 7421.*fn11
Finally, since an action of this nature seeks equitable relief, the district court should consider possible equitable defenses, such as laches, and should insure that the taxpayers seek promptly and without delay final judicial determination of their tax liability.
The order of the district court shall be vacated and the cause remanded for further proceedings not inconsistent with this opinion.
VAN DUSEN, Circuit Judge, dissenting:
Since the majority opinion seems to me inconsistent with this court's recent decision in Iannelli v. Long, 487 F.2d 317 (3d Cir. 1973), as well as with the great majority of federal cases*fn1 considering 26 U.S.C. § 6861(a)*fn2 and 26 U.S.C. § 7421,*fn3 I respectfully dissent. In Iannelli, Judge Hastie recognized a narrow exception to the prohibition of suits restraining the assessment or collection of taxes in 26 U.S.C. § 7421, using this language:
". . . if a levy on property is in formal guise an effort to collect taxes but in fact is only a device for harassing and punishing a wrongdoer without honest anticipation that the levy may yield money owed for taxes, it is arguable that a suit to restrain the tax collector's enterprise is not in reality a suit to restrain the collection of taxes. . . .
"Though one of the government's objectives in this undertaking to seize all of the taxpayers' discoverable property may have been to put economic pressure upon persons believed to be engaged in large scale criminal activities, the jeopardy assessment and consequent levies also appear to have been bona fide and potentially productive attempts to collect revenue. And bona fide efforts to collect taxes through lawful procedure are the very undertakings that Congress has protected through the enactment of section 7421(a) against frustration or delay by litigation."
The majority relies on the conclusory allegations in paragraph 19 of the complaint*fn4 that the jeopardy assessment "is illegal, arbitrary and unreasonable" and that "the only reason" for such assessment "has been an attempt to harass and coerce the plaintiffs for improper purposes." Contrary to these general allegations, the record contains the memorandum of an interview by Richard T. Phillips with the husband taxpayer on March 30 and 31, 1971, in Nassau, Bahamas, quoted in note 5 of the majority opinion, in which such taxpayer conceded that "he was aware of the income tax investigation being conducted and thought he could be financially ruined by the results of this investigation." Further, he stated that "he was contemplating moving himself and his family to the Republic of Ghana, Africa, where, he stated, he would be safe from any further proceeding."
On such a record, the income tax authorities were, at the least, entitled to issue the prompt jeopardy assessment of early April 1971. The good faith of the authorities is indicated by the decrease of the amount of the assessment several times since early April 1971. The failure of the authorities to withdraw the jeopardy assessment because the husband taxpayer returned to this country in mid-April 1971 and filed in November 1971 an affidavit saying he "stood ready to pay any deficiency properly determined to be due from me" (16a) but that his tax returns were correct as filed, does not justify the issuance of an order vacating the jeopardy assessment, which is what appellants seek. This is particularly true where the district court made a finding that "I don't think there is any irreparable injury here" (20a).
I would affirm the district court order of April 18, 1972, dismissing the action insofar as it was brought by the husband and wife plaintiffs.