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TAX ANALYSTS & ADVOCATES v. SHULTZ

June 7, 1974

Tax Analysts and Advocates, et al., Plaintiffs,
v.
George P. Shultz, et al., Defendants


Green, District Judge.


The opinion of the court was delivered by: GREEN

GREEN, District Judge.

 This case is presently before the Court on cross-motions for summary judgment and defendants' renewed motion to dismiss.

 The facts of the case are briefly as follows:

 On June 21, 1972, the Internal Revenue Service issued Rev. Rul. 72-355, 1972-2 Cum. Bull. 532 *fn1" in response to inquiries on gift tax treatment of contributions to political campaigns. In essence, the ruling stated that gifts of up to $3,000 to multiple finance committees organized to receive contributions for the campaign of the same political candidate are to be treated as gifts to the committees and not to the candidate. These gifts thus qualify for the $3,000 exclusion under the gift tax provision of the Internal Revenue Code (§ 2503(b)) *fn2" , if, inter alia, at least one-third of the officers of each committee are different. *fn3"

 As a result of this Revenue Ruling, millions of dollars were contributed to the campaigns of the 1972 presidential candidates in $3,000 increments to a multitude of finance committees who simply funnelled the money to the central finance committees. *fn4" Individual donors who contributed hundreds of thousands of dollars thereby escaped the gift tax which would have been imposed were the contributions made directly to the central campaign committees.

 The plaintiffs filed this action for declaratory and injunctive relief attacking Rev. Rul. 72-355 as an illegal act of the IRS. Plaintiffs rely primarily on the case of Helvering v. Hutchings, 312 U.S. 393, 85 L. Ed. 909, 61 S. Ct. 653 (1941) as the proper interpretation of the application of the gift tax.

 The defendants filed a motion to dismiss on June 22, 1973, which this Court denied by a written order without an opinion on September 17, 1973. Defendants have renewed that motion along with their motion for summary judgment. In light of two recent Supreme Court cases, infra,5 the Court feels that a detailed opinion on this issue is necessary.

 The defendants make the following arguments as grounds for their motion to dismiss: (1) § 7421(a) of the Internal Revenue Code *fn6" bars suits to restrain or enjoin the collection of taxes, (2) the Declaratory Judgment Act, 28 U.S.C. § 2201, *fn7" prohibits declaratory judgments in tax matters, (3) there has been no waiver of sovereign immunity, and (4) the plaintiffs lack standing.

 I.

 Defendants first argue that since § 7421(a) bars any suit to restrain the assessment or collection of taxes even if the plaintiff is not the "person against whom the tax was assessed", no court is authorized to give any relief to these plaintiffs.

 In Enochs v. Williams Packing and Navigation Co., Inc., 370 U.S. 1, 7, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962), *fn8" Chief Justice Warren stated that:

 
The manifest purpose of § 7421(a) is to permit the United States to assess and collect taxes alleged to be due without judicial intervention, and to require that the legal right to the disputed sums be determined in a suit for refund. In this manner the United States is assured of prompt collection of its lawful revenue.

 The language of the statute and its interpretation by the Supreme Court clearly indicates that this provision precludes suits to restrain the assessment or collection of taxes. It has no application to the instant situation in which plaintiffs seek not to restrain the Commissioner from collecting taxes, but rather to require him to collect additional taxes according to the mandates of the law. A refund suit or an action in the Tax Court is clearly inapplicable. No taxpayer is seeking any refund in this case; rather, plaintiffs allege, a tax which is due was not collected.

 The Court reads § 7421(a) as an effort to prevent the hindrance of the collection of taxes in dispute in matters which can be resolved in refund suits. Since plaintiffs are not seeking to restrain the collection of taxes, and since they cannot obtain relief through a refund suit, § 7421(a) does not bar the injunctive relief they seek.

 Two recent decisions by the Supreme Court, Americans United, supra, and Bob Jones University, supra, have shed further light on the scope of § 7421(a) and the exception to the Declaratory Judgment Act. Because of their potentially dispositive force, both cases require a complete analysis.

 The Supreme Court's decision in Americans United contains a full discussion of the factual background of the case, but the following synopsis is sufficient for our purposes. "Americans United" (AU) is a nonprofit, educational corporation organized under the laws of the District of Columbia, whose purpose is to defend religious liberty in the United States by fostering the constitutional principle of separation of Church and State. In 1950, the IRS granted it tax-exempt status under what is now § 501(c) (3) of the Internal Revenue Code. Thereafter, contributions to "Americans United" were treated as charitable deductions.

 The IRS revoked this status on April 25, 1969 . . .

 
when the Service issued a ruling letter revoking the 1950 ruling on the ground that respondent had violated §§ 501(c) (3) and 170(c) (2) (D) by devoting a substantial part of its activities to attempts to influence legislation. Shortly thereafter, the Service issued another ruling letter exempting respondent from income taxation as a "social welfare" organization under Code § 501(c) (4), 26 U.S.C. § 501(c) (4). The effect of this change in status was to render respondent liable for unemployment (FUTA) taxes under Code § 3301, 26 U.S.C. § 3301, and to destroy its eligibility for tax-deductible contributions under § 170. *fn9"

 Because of the substantial drop in contributions which followed, AU brought an action in this District Court seeking declaratory and injunctive relief alleging an erroneous and unconstitutional withdrawal of its tax-exempt status.

 The Supreme Court held that the Anti-Injunction Act is applicable because it was AU's intent in initiating this lawsuit to restrain the collection of taxes assessed against its contributors and to restrain the collection of its own FUTA taxes. The Court disagreed with the Court of Appeals' conclusion that the restraint of tax collection was "at best a collateral effect." *fn10"

 In Bob Jones University, supra, the Court came to the same conclusion -- petitioner's objective was to restrain the collection of taxes it owed. The Court noted that, "petitioner's complaint and supporting documents filed in the District Court belie any notion that this is not a suit to enjoin the assessment or collection of federal taxes from petitioner." *fn11"

 This Court is of the opinion that the decision in AU dictates a dismissal of this action as to plaintiffs NCEC and Levy but is distinguishable as to plaintiff Tax Analysts and Advocates.

 Plaintiff National Committee for an Effective Congress (NCEC) is an unincorporated committee organized in 1948 in New York City for the stated purpose of influencing the election of candidates on a non-partisan basis to the United States Senate and House of Representatives. NCEC's principal activity is to receive political contributions which it, in turn, distributes to a limited number of Congressional campaigns which it deems worthy of support. In 1972, NCEC contributed to approximately 90 such campaigns.

 Under Rev. Rul. 72-355, NCEC is treated for purposes of the $3,000 gift tax exclusion as a "person". Therefore, a donor of over $3,000 to NCEC in a taxable year will be subject to federal gift tax even though no candidate received as much as $3,000 as a result of his contribution. As a result, Rev. Rul. 72-355 has severely discouraged, and continues to discourage, contributions to NCEC in excess of $3,000, even where no single campaign derives more than $3,000 from such individual contributions. NCEC contends that since its tax treatment differs from that accorded to the campaign committees of the major political parties, contributors and potential contributors have been discouraged from supporting NCEC.

 In also representing its member-contributors (represented by plaintiff Levy), NCEC seeks to avoid the assessment and collection of a gift tax on contributions over $3,000. These are the same arguments advanced in Americans United. The Court concluded that a case so premised was proscribed by § 7421(a) because it seeks to restrain the enforcement or collection of federal taxes. This Court agrees and accordingly dismisses NCEC and Levy as party plaintiffs.

 Plaintiff Tax Analysts and Advocates (TAA) is a non-profit corporation organized under the laws of the District of Columbia in 1970 for the purpose of promoting tax reform through education of the press regarding Federal tax matters and by conducting a public interest legal practice concerning tax matters. Its members are persons who have contributed at least $15 annually ($5 in the case of students) to assist TAA and thereby promote tax reform and support its operation as a public interest tax law firm.

 The Court concludes that Americans United and Bob Jones University are factually distinguishable from Tax Analysts and Advocates and its named individual members as the plaintiffs. Tax Analysts and its members do not seek to restrain the enforcement of any tax whatsoever. Tax Analysts seeks to force the IRS to collect a tax which is due, but which has been allegedly avoided by an illegal Revenue Ruling. Americans United and Bob Jones U. held that whenever a plaintiff's own taxes will in any way be restrained either from assessment or collection, the action is barred. *fn12" This is so even though the tax effect appears only to be a collateral aspect of the action. Thus, if the IRS action under attack results in the elimination of a tax, an action to force the collection of that tax is clearly outside the scope of both the language and intent of § 7421(a).

 II.

 Defendants next argue that the exception to the Declaratory Judgment Act, 28 U.S.C. § 2201, bars the granting of declaratory relief.

 The rationale for the exclusionary clause is co-extensive with § 7421(a). *fn13" It prevents by declaratory relief what is similarly precluded by injunctive relief -- interference with the collection and assessment of taxes which are litigable by a refund suit or an action in the Tax Court.

 In McGlotten v. Connally, *fn14" the plaintiff sued both as a black American and as a taxpayer to enjoin Treasury Department officials from granting tax benefits to fraternal organizations and social groups which exclude nonwhites from membership. The government argued that the suit was barred by § 7421(a) and the exception to the ...


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