Opinion ID: 308764
Heading Depth: 1
Heading Rank: 2

Heading: The Assessment

Text: 25 On Lucia's allegations that the Government's assessment is arbitrary, capricious, and without factual foundation, we remand the case to the District Court for a trial on the merits. 26 Following Pizzarello v. United States, 408 F.2d 579 (2d Cir. 1969), this Court holds that a taxpayer under a jeopardy assessment is entitled to an injunction against collection of the tax if the Internal Revenue Service's assessment is entirely excessive, arbitrary, capricious, and without factual foundation, and equity jurisdiction otherwise exists. We hold that such a set of facts would bring the taxpayer within the narrow bounds of the exception to the anti-injunction statute 33 designed by the United States Supreme Court in Standard Nut Margarine Co. and Enochs. 27 Inasmuch as Standard Nut Margarine Co. granted injunctive relief and Enochs denied it, the two cases together delineate the requirements for equity jurisdiction in tax cases. 28 An injunction barring tax assessment and collection was permitted in Standard Nut Margarine Co., despite the Commissioner's argument that such relief was prohibited by the anti-injunction statute, on the finding that the excise tax there was assessed against a product that was not taxable at all under the governing Oleomargarine Tax Act. 34 The Government had assessed the tax, in disregard of prior contrary determinations by three federal courts and the Commissioner of Internal Revenue, under circumstances that would have both destroyed the taxpayer's business and caused it financial ruin. 29 In Enochs, the Court held that an injunction was barred by the statute, even though the District Court which enjoined the collection of social security and unemployment taxes had found that the taxes were not, in fact, payable and that collection would destroy the taxpayer's business. 35 The validity of the tax turned on the employer-employee relationship between the owners of shrimp boats and their fishermen crews. A review of the record revealed that the Government's claim, that the fishermen were the corporation's employees under the statutory definition, had some foundation, even though the District Court had found otherwise. From this, the Court reasoned that, because the taxpayer could not clearly show that under no circumstances could the government ultimately prevail, injunctive relief was improper. 30 The Court in Enochs specifically held that the mere showing that the tax is not due and that the legal remedy is inadequate is not sufficient to trigger the Standard Nut Margarine Co. exception. Speaking for the Court, Chief Justice Warren explained the manifest purpose of the anti-injunction statute: 31 [T]o 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. . . . 32 To require more than good faith on the part of the Government would unduly interfere with a collateral objective of the Act-protection of the collector from litigation pending a suit for refund. 36 33 The Standard Nut Margarine Co. principle was confirmed, nonetheless, by the Enochs Court: 34 [If] it is clear that under no circumstances could the Government ultimately prevail, the central purpose of the Act is inapplicable and, under the Nut Margarine case, the attempted collection may be enjoined if equity jurisdiction otherwise exists. In such a situation the exaction is merely in 'the guise of a tax.' 37 35 The initial test for application of this standard was then articulated as 36 [W]hether the Government has a chance of ultimately prevailing . . . [as] determined on the basis of the information available to it at the time of suit. Only if it is then apparent that, under the most liberal view of the law and the facts, the United States cannot establish its claim, may the suit for an injunction be maintained. Otherwise, the District Court is without jurisdiction, and the complaint must be dismissed. 38 37 In Pizzarello, the Second Circuit, upon determining that the tax assessment in question was excessive and was based on entirely inadequate information, relied on Enochs in reversing the denial of an injunction. Pizzarello was a wagering tax case that involved a projection of wagering, computed from a small amount of known wagers, much like the case at bar. The tax liability for gross wagers for five years was computed by applying the amount of average wagers accepted for a three-day period to the total number of days of operation. The Court found no proof in the record . . . that Pizzarello operated as a gambler for five years or that, even if he did so operate, his three-day average . . . represented his average daily business for the other 1,575 days. 39 The Second Circuit said that [n]o court could properly make such inferences without some foundation of fact. 40 38 The tax assessment against Lucia was based on a Revenue Agent's calculation of gross wagers accepted by or on behalf of Lucia during the period March 1, 1959, to November 21, 1963. Available to the Agent was the bounty of a raid on Lucia's alleged gambling establishment and a seizure of one day's betting slips purportedly accepted during the 1962 football season. This evidence, by the Agent's calculation, indicated a total of $28,780 in bets accepted for that day. Upon the premises that wagers in the Houston area were accepted on six days per week and that the total suggested by the seized bet slips constituted a representative day, the Agent determined that gross wagers in the amount of $2,244,840 were accepted during the 13-week football season. Using this figure to represent 40% of the gross wagers during the entire year, the Agent projected annual gross wagers of $5,612,100. Eliminating one day per week, the Agent calculated that bets were accepted on 313 days annually and divided that number into the projected annual gross wagers, thereby computing the daily amount of gross wagers to be $17,930. From this figure and from his estimate of the number of days each month that wagers would be accepted, the Agent computed gross wagers on a monthly basis. 39 It is this method of computation which Lucia alleges to be arbitrary, capricious, and without factual foundation. He stands ready, his brief indicates, to demonstrate on remand the impropriety of the projection procedure employed by the Government in its assessment. 40 The panel of this Court which first heard this case found two decisions of this Circuit controlling on the point. Mersel v. United States, 420 F.2d 517 (5th Cir. 1969), and Pinder v. United States, 330 F.2d 119 (5th Cir. 1964). 41 Subjected to careful analysis, Mersel and Pinder do not conflict with either Pizzarello or our decision in the case at bar. Mersel was a refund case in which the Government employed a similar projection procedure to estimate the amount of wagering tax owed. But the method of computation was not challenged by the taxpayers. Their proof was confined to an attempt to show that they had not engaged in wagering. 41 This Court held that the District Court's finding, that taxpayers were engaged in the business of accepting wagers, was not clearly erroneous. Pinder was also a refund suit in which we held that the taxpayer had failed to meet his burden of proving that the tax liability, based on a projected assessment, was improper. 42 Thus, both cases turned on the taxpayer's failure to carry his burden of proof. In this suit for injunctive relief, the taxpayer, Lucia, will have to prove his case upon remand, and the extent of our holding goes no further than to give him that opportunity. 43 42 We do not regard this decision as conflicting with the line of cases holding that injunctive relief will be denied if it appears that the Government can make at least some recovery of the tax assessed. 44 More fundamental considerations concern us here than a mere quarrel over the amount of the tax: Was the taxpayer accepting wagers during the entire period covered by the assessment? Are the Government's figures based on realistic projections or were they merely derived, Mandrakelike, from a filament of evidence and subjected to a sleight-of-hand computation? Does the 40% factor used in the computation have any factual basis, or is it merely the product of an agent's conjecture? Can the base day properly be assumed to be an average day for that week, much less for several years? Only after exploring all relevant considerations on remand will the District Court be able to determine whether the computative basis is so insufficient as to make the assessment an exaction in the guise of a tax rather than a legitimate tax on wagers.