assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws. . . ." However, before a taxpayer can sue the Government under § 1346 he must first comply with several procedural prerequisites.
I.R.C. § 7422(a) provides that "No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary or his delegate." The record before the Court does not indicate that the plaintiff has filed an administrative claim for refund (Form #843). The taxpayer has the burden of proving that the refund claim has been timely filed. United States v. Rochelle, 363 F.2d 225 (5 Cir. 1966); 10 Mertens, Federal Income Taxation, § 58A.06 (1964 ed.). The fact that the plaintiff in this suit has filed a claim for a refund and redetermination of the deficiency assessment with the Tax Court, under I.R.C. § 6213, does not satisfy the requirement of I.R.C. § 7422(a) of filing an administrative refund claim prior to a judicial suit for the return of money seized by levy. Mulcahy v. United States, 388 F.2d 300 (5 Cir. 1968).
Another prerequisite of § 1346 is that full payment of an income tax assessment is a jurisdictional condition precedent to maintenance of most refund suits in the District Courts. Flora v. United States, 362 U.S. 145, 80 S. Ct. 630, 4 L. Ed. 2d 623 (1959). The record before the Court does not indicate that full payment has been made by the plaintiff.
The defendant argues that since no claim for refund has been filed, and since the consent of the United States to be sued for a refund of taxes is conditioned upon strict compliance with the provisions of I.R.C. § 7422(a), this Court has no jurisdiction to hear this suit.
Plaintiff answers this jurisdictional objection by contending that his action is not a tax refund suit brought under § 1346(a) and § 7422(a). Instead his suit is brought under 28 U.S.C.A. § 2410(a) to have a Government tax lien declared invalid. Under § 2410(a) the United States may be named a party in any civil action or suit in any District Court "to quiet title to or to foreclose a mortgage or other lien upon . . . real or personal property on which the United States has or claims a mortgage or other lien." The Court notes that § 2410 is part of the Judicial Code and not part of the I.R.C., and that the statute does not deal exclusively with tax liens, but with any and all liens in favor of the United States. Nevertheless, the Court feels that § 2410 provides a sufficient jurisdictional base to prevent a summary dismissal of plaintiff's action.
In an ordinary refund suit plaintiff's failure to exhaust his administrative remedies would probably prevent judicial review. Yet the Court feels that such a failure is not fatal to bringing a suit under § 2410 to challenge the validity of a jeopardy assessment lien and levy procedure.
The proper interpretation of § 2410 in relation to the sovereign immunity doctrine has been the subject of lively judicial debate. Quinn v. Hook, supra; Falik v. United States, 343 F.2d 38 (2 Cir. 1965); Broadwell v. United States, supra; Cooper Agency, Inc. v. McLeod, 235 F. Supp. 276 (E.D.S.C.1964) aff'd. 348 F.2d 919 (4 Cir. 1965); Remis v. United States, 172 F. Supp. 732 (D.Mass. 1959), aff'd., 273 F.2d 293 (1 Cir. 1960). The Third Circuit, in conformity with the weight of authority on the issue, adheres to the view that the Government waives its sovereign immunity under § 2410 in those suits which seek to determine the relative position of a Government lien on property as against other lienors, and those suits which question the validity of a lien in reference to compliance or noncompliance with statutory and constitutional requirements of due process. Quinn v. Hook, supra. In cases where a tax lien is involved, sovereign immunity is waived and subject matter jurisdiction conferred on the Court, provided that the plaintiff refrains from collaterally attacking the merits of the Government's tax assessment itself. Quinn v. Hook, supra ; Falik v. United States, supra.
Since the plaintiff in this action questions only the legality of the procedure used to enforce a jeopardy assessment, and not the validity of the jeopardy assessment itself, the suit falls within the proper jurisdictional scope of § 2410.
The Government next raises the objection that regardless of § 2410 the Court still lacks subject matter jurisdiction in light of certain historic statutory prohibitions against injunctions and declaratory relief in federal tax matters. 28 U.S.C.A. § 2201, I.R.C. § 7421.
The Declaratory Judgment Act, § 2201, prohibits declaratory relief "with respect to Federal taxes." The statute exemplifies the Congressional policy of guaranteeing the timely collection of the national revenues, free from undue litigation outside of the Tax Court. S.Rep.No.1240, 74th Cong., 1st Sess., p. 11 (1935). However, the plaintiff in this action is not seeking a premature judicial declaration concerning the merits of his federal tax assessment for 1969 and whether he does or does not owe the Government unpaid taxes. Plaintiff merely seeks a determination by this Court of the legality of the tax lien and levy independent from the merits of the deficiency assessment. The prohibition regarding Federal taxes within the Declaratory Judgment Act cannot be used to shield the IRS from judicial review of alleged constitutional violations resulting from the enforcement of IRS tax collection procedures.
I.R.C. § 7421 states that "Except as provided in sections 6212(a) and (c), 6213(a), and 7426(a) and (b) (1), no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court. . . ." This provision does not prohibit any and all suits to restrain the assessment or collection of a tax. In Miller v. Standard Nut Margarine Co., 284 U.S. 498, 52 S. Ct. 260, 76 L. Ed. 422 (1932), the Supreme Court held that such a suit may be maintained if the complainant shows the existence of special and extraordinary circumstances sufficient to bring the case within some acknowledged head of equity. Later, in Enochs v. Williams Packing and Navigation Co., 370 U.S. 1, 82 S. Ct. 1125, 8 L. Ed. 2d 292 (1962), the Court stated that the complainant must also demonstrate that under the most liberal view of the law and facts the United States cannot establish its tax claim.
Plaintiff's money has already been assessed and collected prior to this suit. Consequently, he seeks to show that the money was unlawfully obtained by the IRS. An examination on the merits is therefore needed for the Court to determine whether under the law and particular facts of the case the Government unlawfully obtained possession of the money in question. This Court has the power to order the return of any unlawfully held property under Rule 41(e), F.R. Crim. P., and under general principles of equity.
The courts have held that revenue collection proceedings are not immune from judicial interference under I.R.C. § 7421(a), if these proceedings are exercised in excess of the statutory authority granted to the IRS and in violation of constitutional rights. United States v. Bonaguro, 294 F. Supp. 750 (E.D.N.Y.1968), aff'd, 428 F.2d 204 (2d Cir. N.Y. 1970), cert. denied, 400 U.S. 829, 91 S. Ct. 57, 27 L. Ed. 2d 59 (1970). Transport Mfg. and Equipment Co. of Delaware v. Trainor, 382 F.2d 793 (8 Cir. 1967).
The Court feels that adequate subject matter jurisdiction exists in this action for a review of the substantive issues presented.
In the prior criminal action before this Court involving the plaintiff, United States v. Yannicelli, supra, a motion to suppress evidence was granted under Rule 41(e), F.R. Crim. P. The Rule states that illegally seized property shall be restored "unless otherwise subject to lawful detention." Upon being informed that the IRS had in the interim placed a tax lien and levy upon plaintiff's money, while in the hands of the U.S. Marshal, the Court did not order its return. At that time the Court did not make a determination that the tax lien was enforceable, noting only that the Government asserted a purported tax lien which appeared valid on its face and which prima facie impaired plaintiff's immediate possessory rights to the money.
The civil action now before the Court squarely raises the issue of the enforceability of the tax lien and levy. The plaintiff argues that before a tax lien can validly attach the Government must adhere to the provisions of I.R.C. § 6321, requiring that a taxpayer first neglect or refuse to pay the tax deficiency after demand. The levy papers served on the U.S. Marshal holding the seized money contained a standard form reference: "You are further notified that demand has been made for the amount set forth herein upon the taxpayer who has neglected or refused to pay, and that such amount is still due, owing, and unpaid from this taxpayer." Yet plaintiff states that no such demand to pay was ever made, and consequently no refusal to pay was ever given prior to the lien and levy. The Government does not refute this statement. Plaintiff argues that the Government's failure in this regard constitutes a statutory violation amounting to a denial of due process of law, and thereby invalidates the tax lien and levy.
Under I.R.C. § 6212, if an IRS official determines that there is a deficiency in respect of any tax the official is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail. I.R.C. § 3670 then provides that "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount, (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."
Under ordinary circumstances timely demand is necessary to create a valid tax lien, and the demand must be more than a mere formal reference in the notice of tax lien and levy. Ruth v. Winifred, 150 F. Supp. 630 (D.C.Mass. 1957).
I.R.C. § 6331 details the usual tax lien and levy procedure: "If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary or his delegate to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax." Yet the language of § 6331 contains a crucial distinction to the effect that if a finding is made "that the collection of such tax is in jeopardy, notice and demand for immediate payment of such tax may be made . . . and, upon failure or refusal to pay such tax, collection thereof by levy shall be lawful without regard to the 10-day period. . . ."
The determination that a tax is "in jeopardy" falls under the provisions of I.R.C. §§ 6851 and 6861. Under § 6861(a) "If the Secretary or his delegate believes that the assessment or collection of a deficiency . . . will be jeopardized by delay, he shall, notwithstanding the provisions of section 6213(a), immediately assess such deficiency . . . and notice and demand shall be made by the Secretary or his delegate for the payment thereof." This provision concerning notice and demand is further qualified by § 6861(b) which provides that "If the jeopardy assessment is made before any notice in respect of the tax to which the jeopardy assessment relates has been mailed under section 6212(a), then the Secretary or his delegate shall mail a notice under such subsection within 60 days after the making of the assessment."
Given the relevant statutory framework, and the particular facts of this case, the Court feels that the IRS acted within its statutory limitations concerning the tax lien and levy upon plaintiff's money. On July 6, 1971 the IRS made a jeopardy determination concerning plaintiff's 1969 income tax deficiency, and then levied upon his money while it was in the custody of the U.S. Marshal. The IRS subsequently sent the plaintiff a deficiency notice dated August 18, 1971-well within the 60 day period required by I.R.C. § 6861(b). Treasury Reg. § 301.6861-1(d).
The Courts have consistently held that no notice is necessary before levy for the purpose of enforcing a jeopardy assessment of income taxes. United States v. Ball, 326 F.2d 898 (4 Cir. 1964); Cooper Agency v. McLeod, supra ; Publishers New Press, Inc. v. Moysey, 141 F. Supp. 340 (S.D.N.Y.1956). In Phillips v. Commissioner of Internal Revenue, 283 U.S. 589, 51 S. Ct. 608, 75 L. Ed. 1289 (1931), the Supreme Court stated that summary administrative proceedings of assessment and levy without notice and hearing do not violate the due process clause of the Constitution so long as an adequate opportunity exists for the taxpayer to administratively and judicially contest the assessment and collection proceedings.
Since the plaintiff is being given the opportunity to contest the tax assessment in the Tax Court, and to contest the tax collection procedures in this Court, his Fifth Amendment right to due process of law has not been violated.
Plaintiff's chief contention in this action is that the jeopardy assessment lien and levy must be suppressed on the grounds that the United States Government cannot legally succeed in any tax collection action or "forfeiture" in which the forfeited money has been illegally seized. In support of this position he cites Silverthorne Lumber Co. v. United States, 251 U.S. 385, 40 S. Ct. 182, 64 L. Ed. 319 (1920) and later cases, indicating that since the Government is prohibited from using illegally seized property as evidence in prosecuting criminal proceedings, the Government cannot use it to punish in quasi-criminal forfeiture proceedings.
I.R.C. § 7302 deals with forfeitures, but the Court does not believe that forfeiture principles have any relevance at all to deciding this action.
Although the Court does agree that in many instances illegal seizures cannot be used as the basis of valid forfeitures under I.R.C. § 7302, a jeopardy assessment proceeding is quite distinct from a forfeiture proceeding. In the case before the Court, the IRS did not rely upon its forfeiture powers under I.R.C. § 7302 et seq. in gaining possession of the plaintiff's money; rather the IRS relied upon the jeopardy assessment provisions of I.R.C. § 6861 et seq.
By phrasing his argument in "forfeiture" terms the plaintiff needlessly confuses the major substantive issue presented for the Court's consideration. This issue is whether or not the initial illegal seizure of plaintiff's money by U.S. Marshals so "tainted" the subsequent IRS jeopardy assessment lien and levy on the same money, that the tax collection procedure itself violated plaintiff's Fourth Amendment rights.
In light of the Fourth Amendment's prohibition against unreasonable searches and seizures the courts have developed certain exclusionary rules of evidence. The exclusionary rules direct that evidence illegally seized is inadmissible in both criminal and quasi-criminal proceedings, and that any collateral evidence discovered as a direct or indirect result of the illegally seized evidence is also inadmissible. One 1958 Plymouth Sedan v. Commonwealth of Pennsylvania, 380 U.S. 693, 85 S. Ct. 1246, 14 L. Ed. 2d 170 (1965); Mapp v. Ohio, 367 U.S. 643, 81 S. Ct. 1684, 6 L. Ed. 2d 1081 (1961); Weeks v. United States, 232 U.S. 383, 34 S. Ct. 341, 58 L. Ed. 652 (1914). Yet the Supreme Court has never held that the exclusionary rules totally insulate illegally seized property from any and all types of lawful Government claims. Field v. United States, 263 F.2d 758 (5 Cir. 1959), cert. denied, 360 U.S. 918, 79 S. Ct. 1436, 3 L. Ed. 2d 1534 (1959). For instance, in some instances the Government is allowed and required by statute to condemn, forfeit or destroy certain contraband and deleterious property in its possession regardless of the manner in which it was seized. United States v. Jeffers, 342 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 59 (1951); Trupiano v. United States, 334 U.S. 699, 68 S. Ct. 1229, 92 L. Ed. 1663 (1948).
The critical issue now before the Court is whether the IRS may lawfully collect unpaid taxes by placing a lien and levy upon illegally seized property retained in Government custody.
In Welsh v. United States, 95 U.S. App. D.C. 93, 220 F.2d 200, 202 (1955), the Court of Appeals for the District of Columbia faced the question of whether the accused in a criminal case was entitled to the return of money illegally seized from him by the police of the District of Columbia, after the United States claimed that the money was subject to a lien for taxes. The Court concluded that the plain meaning of the relevant statutory provisions allows liens to attach to money belonging to a taxpayer in whatever hands it might be, and that property in the possession of the police is not excepted from such a tax lien:
. . . But here the money has been declared illegally seized and has been suppressed as evidence. To subject it to a tax lien does not result in using the money as evidence in any proceeding, criminal or civil. The money is being held as security for an asserted tax debt -- not arising out of the illegal seizure or, so far as appears, out of information gained from the seized money -- pending determination of the debt and lien in an appropriate proceeding.
The Court in Welsh further noted that it saw no Fourth Amendment violation if the return of the appellant's money was delayed or prevented entirely by the recognition of a statutorily valid and Congressionally recognized tax lien.
Field v. United States, supra, once again raised the question of whether money seized in violation of the requirements of the Fourth Amendment during the enforcement of criminal laws remains insulated from statutory proceedings for the assessment and collection of Federal taxes. Concurring with the opinion in Welsh, the Fifth Circuit made the following comment:
The citizen owes his tax to the sovereign. The citizen's property may be seized by levy to satisfy that tax. As long as it is his property, unencumbered by a lien having tax priority, the levy follows the property into the hands of whomsoever it might fall. Property stolen from the taxpayer would be liable to levy in the thief's hands. Here, had the cash been surrendered to Field pursuant to the initial suppression order the moment it was put back into Field's hand it would have been subject to immediate levy. Id., 263 F.2d at 763.
In Simpson v. Thomas, 271 F.2d 450, 452 (4 Cir. 1959), the plaintiffs' argued that money taken from them incident to a lawful arrest, and held by the U.S. Marshal for safekeeping, could not be subjected to a federal tax lien and was immune from levy by the United States while in the hands of the Marshal. The Fourth Circuit rejected this contention, stating that I.R.C. § 6321 provides no specific tax lien exemption of the property of a federal prisoner held for him by a U.S. Marshal or by others:
When a tax lien attaches to property, the United States becomes in a sense a co-owner with the taxpayer of the property to the extent of the lien. The taxpayer then ceases to have an unconditional right to obtain or retain possession of the property. The substantive rights of the United States and of the taxpayer are in no sense dependent upon the nature of the immediate custody of the property or the identity of the custodian. If it appeared that money in the possession of a marshal had been stolen, no good reason appears why the law should require its return to the thief upon his discharge from custody. Nor do we see any reason why the United States Marshal may not recognize the United States as the owner of an interest in property in his custody.