Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-01026/USCOURTS-azd-2_08-cv-01026-0/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:7422 IRS: Refund Excise Tax

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IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Raymond T. Nakano, 

Plaintiff, 

vs.

United States of America, 

Defendant. 

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No. cv-08-1026-PHX-ROS

ORDER

Before the Court are Plaintiff Raymond T. Nakano’s Motion to Enjoin Proceedings

(Doc. 20) and Defendant United States’ Motion to Stay (Doc. 17). For the reasons stated

herein, Plaintiff’s Motion will be granted and Defendant’s Motion will be denied.

BACKGROUND

Plaintiff Nakano was the Chief Financial Officer of a now-dissolved Nevada

corporation, National Airlines, Inc. At issue is the company’s unpaid excise taxes for the tax

periods ending September 30, 2000, September 30, 2001, and December 31, 2001. Under

26 U.S.C. § 6672, persons who are responsible for collecting, accounting for, and turning

over to the United States taxes collected for transportation by a corporation who willfully fail

to do so may be held personally liable. Often more than one is held liable for such a penalty.

Such was the case here; both Plaintiff and National Airline’s former Chief Executive Offer

Michael Conway were assessed over $8 million. 

Case 2:08-cv-01026-ROS Document 23 Filed 07/21/09 Page 1 of 7
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Both Plaintiff and Conway paid a nominal amount of the assessed penalty – $38.91

and $ 41.24, respectively – and filed suit for refund of those taxes. Plaintiff filed suit in this

Court; Conway, in the Eastern District of Texas. Neither person is subject to personal

jurisdiction in the other’s court. 

Meanwhile, Defendant instituted a collection suit against both Plaintiff and Conway

in the District of Nevada. Defendant moved to stay this action; Plaintiff moved to enjoin

Defendant’s prosecution of the Nevada action. The Eastern District of Texas has already

refused to stay its proceedings and enjoined Defendant’s prosecution of Conway in Nevada.

ANALYSIS

A. Proceeding Relating To

The Secretary of the Treasury may not begin any proceeding for collection of any

unpaid tax during the pendency of a proceeding bought by the taxpayer in question “for

recovery of any portion of such divisible tax which was paid by such person.” 26 U.S.C. §

6331(i)(1)-(4). By its plain terms, this statute applies to the instant case, where Plaintiff has

allegedly paid $38.91. However, the United States argues that this case falls under a

statutory exception for “(i) any counterclaim in a proceeding under [paragraph 6331(i)(1)],

or (ii) any proceeding relating to such a paragraph.” 26 U.S.C. § 6331(i)(4)(A). Because the

Nevada proceeding is “related” to the tax refund proceeding, Defendant argues, it therefore

cannot be enjoined.

Defendant seeks to define the word “relating to” as having a “connection, relation, or

reference” with. Webster’s II New Riverside University Dictionary 992 (The Riverside

Publishing Company 1984). This is a commonsense definition, and the Nevada proceeding,

which deals with the same subject matter, is clearly “related” under such a definition.

Defendant’s commonsense definition is severely lacking, however, in what it would exclude.

It is hard to imagine a collection proceeding that does not have a connection, relation, or

reference to a refund proceeding for that same text. Were Defendant’s position the correct

one, the exception would completely swallow the rule. 

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Such an interpretation is inconsistent with basic principles of statutory construction.

While often the words of a statute “are sufficient in and of themselves to determine the

purpose of the legislation,” when they lead to “to absurd or futile results,” courts must look[]

beyond the words to the purpose of the act.” United States v. Am. Trucking Ass’ns, 310 U.S.

534, 543 (1940). “[E]ven when the plain meaning [of the statute] did not produce absurd

results but merely an unreasonable one plainly at variance with the policy of the legislation

as a whole this Court has followed that purpose, rather than use literal words.” Id. at 544.

Defendant’s proposed definition is simply absurd. 

Given this, the Court must look to the purpose of the statute. The congressional

history supports a finding that Congress intended the statute to prohibit Defendant’s

collection action. The Senate Committee Report on the law notes that prior to its enactment

“the IRS [was] permitted to assess and collect tax liabilities during the pendency of a refund

suit relating to such tax liabilities.” S. Rep. No. 105-174 (1998). The Senate Finance

Committee thus sought the rule change because it “believe[d] that taxpayers who are

litigating a refund action over divisible taxes should be protected from collection of the full

assessed amount, before the court considering the refund suit may ultimately determine that

the taxpayer is not liable.” Id. Defendant’s cited legislative history similarly makes rather

the opposite of the point it intends. For instance, the Finance Committee noted that the new

“provision will not affect the IRS’s ability to collect other assessments that are not the

subject of the refund suit, to offset refunds, to counterclaim in a refund suit or related

proceeding, or to file a notice of Federal tax lien.” Id. (emphasis added). While this is not

an exhaustive list of related proceedings, none are at all similar to the collection proceeding

that Defendant attempts to bring here. The legislative history does clearly leave the United

States the power to bring a counterclaim against the taxpayer in the refund suit, an action that

is available to the government in this case.

Existing case law suggests a similar conclusion. The Federal Court of Claims

interpreted the provision in question as meaning that “while facing a refund suit . . . , the

government will no longer be able to file a collection action against the refund claimant in

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 This also negates any benefits of judicial economy that might accrue from staying

this case and allowing the Nevada proceedings to go forward.

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another court. The government [will] either have to file a counterclaim here, or wait until

this proceeding ends before filing elsewhere.” Rineer v. United States, 79 Fed. Cl. 765, 769

(2007). A Kentucky District Court found that “an exception that would allow the

Government to bring a collection action against the plaintiffs in a properly filed tax refund

suit for the same unpaid taxes at issue in the refund suit . . . would in effect render section

6331(i)(4) a nullity” and “be inconsistent with Congress’s intent and contrary to the

principle’s [sic] of statutory interpretation.” Swinford v. United States, No. CV-05-234,

2007 U.S. Dist. Lexis 9707 at *12 (W.D. Ky. Jun. 20, 2008). Finally, the Texas District

Court that is hearing Conway’s refund action adopted the Magistrate Judge’s Report and

Recommendation conclusion that the Government’s refund action is prohibited and enjoined

proceedings in the District Court of Nevada against Conway. Conway v. United States, No.

CV-08-201, 2009 U.S. Dist. Lexis 47478 (E.D. Tex. 2009).1

 

This Court concurs. Defendant’s action in Nevada is barred by statute.

B. Anti-Injunction Act

Defendant argues that the Nevada proceeding falls within the ambit of the AntiInjunction Act, which 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 is assessed.” 26 U.S.C. § 7421(a). That statute

is prefaced with “[e]xcept as provided in sections . . .,” which is followed by a long list of

statutory provisions including the above-discussed § 6331(i). Similarly, § 6331(i)(4) reads:

Notwithstanding section 7421(a), a levy or collection proceeding prohibited

by this subsection may be enjoined (during the period such prohibition is in

force) by the court in which the proceeding under paragraph (1) is brought.

Defendants argue that because the Nevada action is a “proceeding related to” this proceeding

it does not fall under the exception to the anti-injunction act. Because this Court rejects

Defendant’s interpretation of the “proceeding related to” language, it also rejects its

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application of the anti-injunction act. It is also worth noting that a number of courts have

found that district courts have the authority to enjoin collection proceedings in circumstances

similar to these. See, e.g., Enax v. United States, 243 Fed. Appx. 449, 451 (11th Cir. 2007)

(finding that § 6331(i)(4)(B) “grants a district court overseeing a taxpayer’s claim for

recovery of a portion of taxes already paid the authority to enjoin a collection proceeding on

the unpaid portion of those taxes until the taxpayer’s recovery suit is resolved.”); Conway,

2009 U.S. Dist. Lexis 47478.

C. Irreparable Harm

Defendant argues that this Court cannot grant an injunction barring a showing of both

“irreparable injury” and “inadequacy of legal remedies.” Weinberger v. Romero-Barcelo,

456 U.S. 305, 311-12 (1982). It is, as far as this Court can establish, an unsettled question

of law whether the “irreparable injury” requirement applies even when a statute specifically

authorizes a court to enjoin a particular proceeding and does not specify such a requirement.

For instance, the Supreme Court has held that general equitable requirements hold in the

patent context at least in part because “the Patent Act expressly provides that injunctions

‘may’ issue ‘in accordance with the principles of equity.’” eBay Inc. v. Merc Exchange,

L.L.C., 54 U.S. 388, 392 (2006). Section 6331(i)(4)(B) does not have such a requirement

and could be read as granting the court blanket authority. Conversely, Defendant’s is correct

in noting that § 6331(i)(4)(B) is permissive rather than mandatory, which may imply that a

District Court must police its traditional equity jurisdiction prior to granting an injunction.

However, it is not necessary to settle this question. Plaintiff has demonstrated that the

equitable criteria are met. First, denying the requested relief would force Plaintiff to litigate

two suits on the same issue at one time if he is to proceed with his own properly filed suit.

It would also force Plaintiff to take the very risk contemplated by the Senate Finance

Committee when enacting § 6331 – namely, that he may be forced to pay the full assessed

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 Defendant might point out that such a problem would not occur if this Court stayed

its suit as Defendant requests. However, as discussed, infra, no legal authority exists for

such a stay given that this suit is the only proper one under federal law. 

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amount before this Court determines that he is not liable.2

 Nor could any remedy at law

adequately mitigate this risk. 

D. Section 6672 Suits

Finally, Defendant argues that suits to reduce § 6672 penalty assessments to judgment,

like the Nevada suit, are not primarily vehicles for collection. Section 6672, or the trust fund

recovery penalty, authorizes personal liability to the United States against persons who are

responsible for collecting, accounting for, and turning over to the United States taxes

collected for transportation by a corporation and who willfully fail to do so. Defendant

argues that “[s]uits to reduce Section 6672 penalty assessments to judgment, like the Nevada

suit here, generally are not primarily vehicles for collection.” It adds 

[i]t may well be that, in some circumstances, suits to reduce assessments to

judgment may be used as collection devices – such as when liability has

already been determined in the Tax Court and the suit serves solely to obtain

a judgment that will secure the Government’s ability to collect . . . . But a suit

to reduce an assessment to judgment is also the only mechanism by which the

Government can bring an action to resolve liability of individuals as

responsible persons under IRC Section 6672.

Be that as it may, this suit appears to be exactly the source in which “suits to reduce

assessments to judgment may be used as collection devices.” The I.R.S. has already assessed

penalties against Plaintiff for tax periods ending September 30, 2000, September 30, 2001,

and December 31, 2001. It is these taxes that are, by Defendant’s own description of the

proceedings, “subject of the collection suit” filed in Nevada. And the Court notes that

nowhere in Defendant’s several pages of discussion of this issue, does Defendant argue that

it is not attempting to collect a tax in this instance. It seems quite possible that a district

courts may not always have cause (or even legal ability) to enjoin a Section 6672 suit

because of a pre-existing refund suit. That does not, however, mean that this Court cannot

enjoin this suit. Nor is Defendant’s argument that “although producing a certificate of

assessment establishes the Government’s prima facie case, the person against whom the

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assessment was made then can establish that he or she is not liable for the assessment by

proving that one or both elements of liability . . . is not present” persuasive. The point is not

that a collection suit must necessarily succeed regardless of actual liability; it is that a

taxpayer who brings a properly filed refund suit is entitled not to have another court

contemporaneously adjudicate his liability. 

Finally, it is worth noting that several other courts that have reached the same

conclusion as this Court with regards to § 6331 were doing so in the context of § 6672 suits.

See Rineer, 79 Fed. Cl. at 765 (Plaintiff filed suit “seeking the refund of money she paid to

partially satisfy a trust fund recovery penalty imposed under 26 U.S.C. § 6672.”); Swinford

2007 U.S. Dist. Lexis 9707 (the Government assessed “$ 60,150.99 in responsible party

penalties against the Plaintiffs pursuant to 26 U.S.C. § 6672.”); Conway, 2009 U.S. Dist.

Lexis 47478 (facts as here).

Accordingly, Plaintiff has demonstrated his entitlement to the requested relief. 

IT IS ORDERED Plaintiff’s Motion to Enjoin Proceedings (Doc.20) is GRANTED.

FURTHER ORDERED Defendant’s Motion to Stay (Doc. 17) is DENIED.

DATED this 21st day of July, 2009.

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