The opinion of the court was delivered by: BRYANT
This case is before the Court on plaintiff's Motion For Preliminary Injunction and defendants' Motion To Dismiss. In this action plaintiff seeks to have the Court enjoin the January 1, 1976 implementation of Treasury Regulations § 1.1232-1(c)(3) and § 1.1232-3A(f)(1), while the government asks that the action be dismissed for an asserted lack of proper subject matter jurisdiction, pursuant to F.R.C.P. 12(b)(1) and the Anti-Injunction Act, 26 U.S.C. § 7421(a). This memorandum constitutes the findings of fact and conclusions of law in support of Court's order of December 24, 1975 denying plaintiff's motion and granting defendants' motion to dismiss.
Plaintiff, a subsidiary of financial conglomerate Investors Diversified Services, is an investment corporation called, under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., a face amount certificate company (Pl. mem., p. 2). Under a typical face-amount certificate (hereinafter "certificate"), the certificate holder makes installment payments over a period of time (usually 15 years or 22 years) and upon maturity of the certificate is entitled to receive an amount equal to the face-amount of the certificate. The payout is usually in lump sum form, but some certificates may apparently be converted to payout as an annuity. A certificate may be surrendered before maturity for cash in an amount determined by reference to the table of cash surrender values shown on the certificate. For installment certificates (93.6% of the total maturity value of all certificates outstanding, see Complaint, para. 8), the stated cash surrender value does not equal or exceed the cumulative installment payments made by the holder until eight years have elapsed. Thereafter, the stated cash surrender value exceeds the amount paid in and increases until maturity when it equals the face amount of the certificate. The regulations in question would, pursuant to 26 U.S.C. § 1232(a)(3), § 1232(a)(3) of the Internal Revenue Code of 1954, force certificate holders to report as income each year a ratable portion of the amount to be received as interest under the certificate at payout, i.e. the original issue discount. Plaintiff claims this requirement would make the certificates unmarketable, causing it irreparable injury.
As plaintiff concedes, the Anti-Injunction Act does apply to this case, and the holdings in Enochs v. Williams Packing & Navigation Company, 370 U.S. 1, 8 L. Ed. 2d 292, 82 S. Ct. 1125 (1962), Bob Jones University v. Simon, 416 U.S. 725, 40 L. Ed. 2d 496, 94 S. Ct. 2038 (1974), and Alexander v. "Americans United," Inc., 416 U.S. 752, 40 L. Ed. 2d 518, 94 S. Ct. 2053 (1974) are controlling here. Those cases, interpreting the Act, hold in substance that for a court to enjoin "the assessment or collection of any tax", as here, the plaintiff must show that there is equitable jurisdiction (irreparable injury, inadequate remedy at law) and must also show that under no circumstances could the government ultimately prevail, even under the most liberal view of the law and the facts.
The plaintiff's allegations, which were not seriously addressed by the government, appear to represent irreparable injury: the destruction of its business and the loss of its highly trained and experienced sales force (which also markets other securities for IDS, the parent company). Since the tax is not to be imposed on plaintiff, but rather upon certificate holders, plaintiff appears to have no adequate remedy at law: it cannot contest the validity of the regulations through taxpayer litigation after assessment or collection of the tax, see Bob Jones, supra, 416 U.S. at p. 746 and at p. 747, n. 21.
Like the plaintiffs in Cattle Feeders Tax Committee v. Shultz, 504 F.2d 462 (10th Cir., 1974), however, plaintiff here has not carried the burden of showing that under no circumstances can the government ultimately prevail in this action. Unlike the situation in Cattle Feeders, whether the government could prevail here is a purely legal question, involving only statutory construction of certain sections of the Code. In order to prevail, therefore, plaintiff must show that the government does not have a solid, substantial legal basis for enacting the disputed regulations. This the plaintiff has not done.
Plaintiff argues that prior to the enactment of Internal Revenue Code § 1232(a)(3) in the Tax Reform Act of 1969, P.L. 91-172, December 30, 1969, Title IV, § 413(a), (b), 83 Stat. 609, 611, the taxability of face-amount certificates was governed by § 72, although at oral argument of this matter counsel conceded that for certain purposes § 1232 would be applicable instead. Under § 72(a), plaintiff contends, a certificate may not be taxed until maturity or earlier surrender. The 1969 Act, according to plaintiff, did not alter that situation.
§ 1232(d) Cross Reference. --
For special treatment of face-amount certificates on retirement, see section 72.
§ 72(l) Face-Amount Certificates. -- For purposes of this section, the term "endowment contract" includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., Sec. 80a-2), issued after December 31, 1954.
Regulation § 1.1232-1 Bonds and other evidences of indebtedness; ...