Unpublished Disposition, 884 F.2d 1395 (9th Cir. 1987)

MEMORANDUM^* 

Ernest and Delphine Lampert ("Lamperts" or "taxpayers") appeal summary judgment for the government. They brought this suit for declaratory and injunctive relief, claiming that Internal Revenue Code section 6703, which allows judicial consideration of tax or penalty assessments only when the taxpayer has paid 15% of the total assessed penalty (in this case, over $4,000,000 for the promotion of abusive tax shelters), offends due process by effectively preventing a pre-deprivation hearing. We reverse without considering the constitutional aspect of this claim because it is clear that the penalty assessment was improperly calculated and therefore void.

BACKGROUND AND PROCEEDINGS BELOW

To combat a "growing phenomenon" involving the marketing of abusive tax shelters, Congress authorized the government to institute suits to enjoin promoters of such shelters, and further permitted the imposition of penalties on any person who promotes abusive tax shelters. See Tax Equity and Fiscal Responsibility Act of 1982, Secs. 320-322, Pub. L. No. 97-248, 96 Stat. 324, 611-13; S.Rep. No. 494, Vol. 1, 97th Cong., 2d Sess. 266, reprinted in 1982 U.S.Code Cong. & Admin.News 781, 1014. These provisions were incorporated into the Internal Revenue Code, 26 U.S.C., at sections 6700 and 6703.

Section 6700(a) imposes a penalty "equal to the greater of $1,000 or 20 percent of the gross income derived or to be derived" by persons engaged in the promotion of abusive tax shelters. The burden of proof with respect to liability for penalties under that section is on the government. See 26 U.S.C. § 6703(a). Typically a taxpayer challenges the imposition of a tax by either filing a timely petition with the Tax Court or by paying the assessment and seeking a refund in a district court. Id. Secs. 6212-13. This procedure, however, is foreclosed for those taxpayers who are assessed a penalty under section 6700. See id. Sec. 6703(b).

Taxpayers who are assessed a penalty for promoting an abusive tax shelter have two choices. They may, within thirty days of the penalty notice, pay "an amount which is not less than 15 percent of the amount of such penalty" and file a claim for the refund of that amount in district court. Id. Sec. 6703(c) (1). No levy or proceeding in court for the collection of the remainder of the penalty may be made until the final resolution of the refund proceeding for the fifteen percent. Id. If taxpayers decline this option, they may only seek a refund after paying the entire amount of the penalty. Id. Sec. 6703(c) (2). Taxpayers here challenge the procedural requirements of section 6703.

During 1982 through 1984, the Lamperts, through their wholly owned and controlled corporation, United Energy Corporation ("UEC"), engaged in sales of tax shelters that purportedly involved renewable energy equipment and technology. The Internal Revenue Service ("Service") initiated an investigation of taxpayers and UEC in the beginning of 1984. On June 3, 1985, the government filed suit against taxpayers, UEC, and others seeking to enjoin them from promoting abusive tax shelters, in accordance with section 7408. See United States v. United Energy Corp., No. C-85-3655 RFP (N.D. Cal. Feb. 25, 1987), appeal docketed No. 87-1999 (9th Cir. May 6, 1987). This suit will be referred to as the injunction suit. On September 11, 1985, the taxpayers were assessed $4,443,000 in total penalties for promoting abusive tax shelters in violation of Code section 6700. These assessments were calculated by multiplying a single $1000 penalty by the 4443 abusive tax shelters marketed by UEC. At the same time, the Service placed tax liens against the Lamperts' property. The Lamperts claim that these liens prevented their paying any portion of the assessed penalties.

The taxpayers filed this suit on September 30, 1985, seeking declaratory relief that the procedural requirements of that section 6703 were unconstitutional as applied to them and that the assessments were void. They also sought injunctive relief to prevent the government from collecting the penalties and later moved for summary judgment. The government filed a cross-motion for summary judgment seeking dismissal for lack of jurisdiction on the ground that the Anti-Injunction Act and the Declaratory Judgment Act barred the relief sought by the taxpayers. The district court denied both motions on July 1, 1986. The court then stayed this action pending resolution of the injunction suit.

On February 25, 1987 a permanent injunction was entered against the taxpayers in the injunction suit. The district court found that the taxpayers had furnished extensive false and fraudulent statements in connection with the promotion of abusive tax shelters, and were therefore properly subject to penalties under section 6700. The government then renewed its motion for summary judgment in this case. On June 1, 1987, the court granted the government's motion, finding that it had no jurisdiction under the Anti-Injunction Act, 26 U.S.C. § 7421(a), and dismissed the action. The taxpayers timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1291 (1982).

STANDARD OF REVIEW

A district court's grant of summary judgment is reviewed de novo. The general standard an appellate court applies in reviewing the grant of such a motion is the same as that employed initially by the district court under Fed. R. Civ. P. 56(c). Allen v. A.H. Robins Co., 752 F.2d 1365, 1368 (9th Cir. 1985). The district court's factual findings on the jurisdictional issue must be accepted unless they are clearly erroneous. Bruce v. United States, 759 F.2d 755, 758 (9th Cir. 1985). The district court's legal judgment on this matter is, of course, reviewed de novo. Id.

DISCUSSION

The Anti-Injunction Act provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." 26 U.S.C. § 7421(a) (1987). None of the statutory exceptions to this rule apply in this case. The Anti-Injunction Act recognizes "the Government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference." Bob Jones University v. Simon, 416 U.S. 725, 736 (1974). The Anti-Injunction Act applies to the penalties imposed under section 6700. See 26 U.S.C. § 6671(a). In this case the taxpayers attempted to enjoin the assessment and collection of these penalties. Therefore, the relief sought falls squarely within the prohibition of the Anti-Injunction Act.

The Supreme Court, in Enochs v. Williams Packing & Navigation Co., 370 U.S. 1, 7 (1962), announced a judicial exception to the Anti-Injunction Act: where "it is clear that under no circumstances could the government ultimately prevail [on the merits] ... the attempted collection may be enjoined if equity jurisdiction otherwise exists." Equity jurisdiction exists where irreparable injury will occur absent the granting of equitable relief because no adequate remedy exists at law. Id. at 6-7. Thus, in order to fall within this exception the Lamperts must demonstrate (1) that the government cannot prevail on the merits, and (2) that equitable relief is necessary to prevent irreparable harm.

In United States v. United Energy Corp., No. C-85-3655 RFP (N.D.Calif. Feb. 25, 1987), the Lamperts litigated the abusive nature of their tax shelters, and lost on the issue of liability before the district court. They are not entitled to again litigate their liability for section 6700 penalties. The Lamperts, however, claim that although they may be liable for a penalty under section 6700, they can prevail by demonstrating that the calculation of the penalty was unlawful.

The Commissioner calculated the total penalty by multiplying a single $1000 penalty by the 4443 abusive tax shelters marketed by UEC. The taxpayers argue that this calculation violated section 6700, which provides for a "penalty equal to the greater of $1000 or 20 percent of the gross income derived or to be derived by such person from such activity." 26 U.S.C. § 6700(a). The Service defined the term "such activity" to mean each "sale," and concluded that each of the 4443 abusive tax shelters was a separate sale.

Under our recent decision in Bond v. United States, 872 F.2d 898 (9th Cir. 1989), this was erroneous. In Bond we held that the penalties calculated under section 6700 are to be calculated based on the gross income derived from the abusive tax shelter, and that the $1000 figure comes into play only when the percentage would yield a fine of less than $1000. Id. at 901. We are bound by Bond and therefore conclude that "under no circumstances could the Government ultimately prevail" on the merits. See Williams Packing, 370 U.S. at 7.

Moving to the second step of Williams Packing, we must determine whether equity jurisdiction "otherwise exists" over this matter because irreparable injury will occur absent the granting of equitable relief.

We think it does. The Lamperts have been wrongfully assessed a penalty based on the alleged number of sales of abusive tax shelters rather than on the income they derived. Equity requires us to remand this to the district court with instructions to remand the matter back to the Tax Service for reconsideration of teh penalty assessment.

Because we find that the Williams Packing exception to the Anti-Injunction Act is appropriate in this situation, and that the penalty assessment is clearly erroneous under Bond, we need not consider the appellant's other claims or reach the constitutional issue.

REVERSED AND REMANDED.