Government Response

Sunday, 24 October 2010 19:09 - Last Updated Wednesday, 17 November 2010 15:19

IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA Z STREET, INC., Plaintiff, No. 2:10-cv-04307-CMR v. DOUGLAS H. SHULMAN, IN HIS OFFICIAL CAPACITY AS COMMISSIONER OF INTERNAL REVENUE, Defendant. MEMORANDUM IN SUPPORT OF UNITED STATES MOTION TO DISMISS Z Street contends that the Internal Revenue Service violated its First Amendment rights by singling out its application for heightened scrutiny and possible denial based upon the fact that its viewpoints are contrary to those of the Obama administration. While the United States denies these allegations, even if they were true, Z Streets complaint must still be dismissed for each of the following reasons: 1) Z Street has failed to identify a waiver of sovereign immunity; 2) equitable relief is inappropriate because Z Street has an adequate remedy at law; and 3) the Anti-Injunction Act and the Declaratory Judgment Act bar this Court from granting the declaratory and injunctive relief Z Street seeks. I. The Complaint Should Be Dismissed Because the United States Has Not Waived Its Sovereign Immunity. In a suit against the United States, a plaintiff must demonstrate that Congress has explicitly waived its immunity from suit. See, e.g., Block v. North Dakota, 461 U.S. 273 Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 1 of 11 -2(1983) (The basic rule of federal sovereign immunity is that the United States cannot be sued at all without the consent of Congress.); United States v. Dalm, 494 U.S. 596, 608 (1990); Lehman v. Nakshian, 453 U.S. 156, 160 (1981); United States v. Sherwood, 312 U.S. 584, 586-587 (1941). When an officer or employee of the United States is named as a defendant in an action for acts done in his or her official capacity, the suit is in actuality one against the United States and is subject to the doctrine of sovereign immunity. Malone v. Bowdoin, 369 U.S. 643, 648 (1962); Larson v. Domestic & Foreign Commerce Corp., 337 U.S. 682, 688 (1949).

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Government Response

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Any waiver of sovereign immunity is not to be implied, but must be unequivocally expressed by federal statute. United States v. Testan, 424 U.S. 392, 399 (1976). A waiver of sovereign immunity must be strictly construed in favor of the sovereign, and any suit may be maintained only if brought in strict compliance with the terms of the statute waiving immunity. Soriano v. U.S., 352 U.S. 270, 276 (1957); Orff v. United States, 125 S. Ct. 2606, 2610 (2005). A plaintiff suing the United States bears the burden of establishing an applicable waiver of sovereign immunity. Lewis v. Hunt, 492 F.3d 565, 570 (7th Cir. 2007); Holloman v. Watt, 708 F.2d 1399, 1401 (9th Cir. 1983). If Congress has not waived the United States sovereign immunity for the suit, the court lacks subject matter jurisdiction and dismissal is required. United States v. Nordic Vill., Inc., 503 U.S. 30, 33-34 (1992). In the present case, plaintiff has not identified any statute that waives the United States immunity from suit, and its complaint must therefore be dismissed. The plaintiff Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 2 of 11 -3rests jurisdiction on two statutes: 28 U.S.C. 1331 (federal question) and 28 U.S.C. 2201 (the Declaratory Judgment Act). Neither statute, however, waives sovereign immunity. See, e.g., Lonsdale v. U.S., 919 F.2d 1440, 1443 -1444 (10th Cir. 1990)(Section 1331 is not a waiver of sovereign immunity); Coggeshall Development Corp. v. Diamond, 884 F.2d 1, 4 (1st Cir.1989)(same); B.K. Instrument, Inc. v. U.S., 715 F.2d 713, 724 (2nd Cir. 1983)(same); Hart v. U.S., 1997 WL 732466, 1 (E.D. Pa. 1997)(same); Progressive Consumers Fed. Credit Union v. U.S., 79 F.3d 1228, 1230 (1st Cir.1996)(the Declaratory Judgment Act is not a waiver of sovereign immunity); Stout v. U.S., 229 F.2d 918 (2nd Cir. 1956)(same); Anderson v. U.S., 229 F.2d 675, 677 (5th Cir. 1956)(same); Balistrieri v. U.S., 303 F.2d 617, 619 (7th Cir. 1962)(same); Freistak v. Egger, 551 F.Supp. 238, 244-45 (M.D. Penn. 1982)(same); Robishaw Engineering Inc. v. U.S., 891 F.Supp. 1134, 1142 (E.D. Va. 1995)(same). Admittedly, the United States has waived its immunity for a suit involving the determination of whether an organization is tax-exempt under 26 U.S.C. 501(c)(3). See 26 U.S.C. 7428(a)(1)(A). Such a suit, however, must be brought in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia. 26 U.S.C. 7428(a). It cannot be maintained in this Court. See id. Moreover, before bringing suit, a petitioner must exhaust its administrative remedies. See 26 U.S.C. 7428(b). A petitioner is deemed to have exhausted its administrative remedies if it has taken, in a timely manner, all reasonable steps to secure [a tax-exempt] determination[,] and has waited 270 days from the time it Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 3 of 11 1 The United States recognizes that plaintiff is seeking a declaration that the Service violated its First Amendment right and that plaintiff does not appear to be seeking a declaration under Section 7428 that it is a tax-exempt organization. (See

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Government Response

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generally Compl.) Regardless of the relief requested, however, plaintiff must identify a clear, specific waiver of sovereign immunity. E.g., Hunt, 492 F.3d at 570. Section 7428 provides a limited waiver of immunity, but plaintiffs complaint falls outside of that waiver for the reasons discussed above. -4submitted a substantially completed application. See id. & 26 C.F.R. 601.201(n)(7). See also Christian Stewardship Assistance, Inc. v. Commr of Internal Revenue, 70 T.C. 1037, 1045 (T.C. 1978)(The 270-day period provided for in [7428(b)(2)] is a minimum period to enable respondent to consider determination requests without judicial interference.) As plaintiff did not submit its application until December 29, 2009, (Compl. 4,) the 270-day period would not expire until September 25, 2010, a month after plaintiff filed this suit. Because plaintiffs have filed suit in the wrong court and have not waited the prescribed 270 days, they cannot rely on Section 7428 as a waiver of sovereign immunity.1 Accordingly, Congress has not waived sovereign immunity, and the complaint should be dismissed for lack of subject matter jurisdiction. II. Plaintiffs Request for Injunctive Relief Must Be Dismissed Because Plaintiff Has An Adequate Remedy at Law. Granting injunctive relief is an extraordinary exercise of a courts equitable powers. See, e.g., Weinberger v. Romero-Barcelo, 456 U.S. 305 (1982); Frank's GMC Truck Center, Inc. v. General Motors Corp., 847 F.2d 100, 102 (3d Cir.1988)(Injunctive relief is an extraordinary remedy, which should be granted only in limited Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 4 of 11 2 See, e.g., 26 U.S.C. 6212 & 6213 (review of deficiency notices by the Tax Court); 6226 & 6247 (judicial review of partnership determinations); 6234 (judicial review of oversheltered returns); 7422 (suit for refund); 7426 (suit for wrongful levy); 7428 (declaratory judgment with respect to tax exempt organizations); 7429 (judicial review of jeopardy levy and assessments); 7431 (suit for unauthorized disclosure or inspection); 7433 (suit for wrongful collection activity). 3 See IRS Data Book at www.irs.gov/taxstats/article/0,,id=171961,00.html -5circumstances.). To qualify for such extraordinary relief, [a] party seeking an injunction from a federal court must invariably show that it does not have an adequate remedy at law. Northern California Power Agency v. Grace Geothermal Corp., 469 U.S. 1306 (1984). See also Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-07 (U.S. 1959)(The basis of injunctive relief in the federal courts has always been irreparable harm and inadequacy of legal remedies.); Wright & Miller, Federal Practice and Procedure 2942 (2010)([T]he main prerequisite to obtaining injunctive relief is a finding that plaintiff is being threatened by some injury for which he has no adequate legal remedy.) In this case, plaintiff has one or more adequate remedies at law. Thus,

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Government Response

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the Court should dismiss its claim for injunctive relief for failure to state a claim upon which relief can be granted. See Fed. R. Civ P. 12(b)(6). Congress has established a comprehensive system whereby aggrieved taxpayers can seek judicial review of a vast array of Internal Revenue Service actions and determinations.2 Given that more than 200,000,000 tax returns are filed each year,3 Congress, the Internal Revenue Service, and the courts have a compelling interest in ensuring that taxpayers follow the statutory system when seeking judicial review. Z Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 5 of 11 -6street has at least four avenues within this statutory system to seek redress apart from an injunction. First, plaintiff can file suit under 26 U.S.C. 7428 and have the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia make a determination as to whether it qualifies for tax exempt status without regard to the application of any special policy Z Street currently complains of. See 26 U.S.C. 7248; Centre for Intnl Understanding, v. Commr of Internal Revenue, 84 T.C. 279, 283 (Section 7428 is intended to facilitate relatively prompt judicial review of [whether an organization is exempt.])(citation ommitted). Second, if a notice of deficiency is issued against Z Street, it can challenge the Services determination that it does not qualify as an exempt organization in the Tax Court before paying the deficiency. See 26 U.S.C. 6212 & 13; Bob Jones University, 416 U.S. 725, 730 (1974). Third, if any tax is assessed, Z Street can pay the assessed tax and sue for a refund in district court or the court of federal claims, again arguing that it should be a tax exempt organization. See 26 U.S.C. 7422; Bob Jones, 416 U.S. at 730. Fourth, if Z Street is determined to be a taxable entity, a Z Street donor can make a donation, claim a deduction, and sue for a refund when the deduction is disallowed. See id. Given these statutory remedies, plaintiffs request for an injunction must be denied. Cf. Northern California Power Agency, 469 U.S. at 1306 (1984)(A party seeking an injunction from a federal court must invariably show that it does not have an adequate remedy at law.). Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 6 of 11 -7III. The Anti-Injunction Act and the Declaratory Judgment Act Bar the Requested Relief. A. The Anti-Injunction Act prohibits the injunctive relief plaintiff seeks. 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 . . . 26 U.S.C. 7421(a)(emphasis added). The principal purpose of the Act is to protect the Government's need to assess and collect taxes as expeditiously as possible with a minimum of preenforcement interference, and to require that the legal right to the

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Government Response

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disputed sums be determined in a suit for refund. Bob Jones University v. Simon, 416 U.S. 725, 736 (1974)(internal quotations omitted). A collateral objective of the Act is to protect the Internal Revenue Service from litigation pending a suit for refund. Id. at 737. The absolute language of the Anti-Injunction Act could scarcely be more explicit, and is strictly enforced. Bob Jones, 416 U.S. 725. To effectuate the purpose of the Anti-Injuction Act, courts have interpreted it broadly applying it not only to the assessment and collection of taxes, but to activities which are intended to or may culminate in the assessment or collection of taxes as well. Linn v. Chivatero, 714 F.2d 1278, 1282 (5th Cir. 1983)(citing cases). See also Alexander v. Americans United, Inc., 416 U.S. 752 (1974); Weinger v. Internal Revenue Service, 986 F.2d 12, 13 (2nd. Cir. 1993). Bell v. Rossotti, 227 F.Supp.2d 315, 318 (M.D. Penn. 2002)(Information gathering that may lead to the assessment or collection of taxes falls within this tax anti-injunction provision.). Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 7 of 11 -8Plaintiffs complaint falls within the strictures of the Anti-Injunction Act. Plaintiff seeks to enjoin the Internal Revenue Service from applying the so called Israel Special Policy to its application for tax-exempt status and to adjudicate its application without regard to whether Z Streets policies are inconsistent with the policy positions taken by the Obama administration. (Compl. Prayer for Relief A & B.) Moreover, Z Street seeks complete, public disclosure regarding the origin, development, approval, substance and application of the Special Policy. (Id. C.) The relief plaintiff seeks is precisely the type of preenforcement interference that the Anti-Injunction Act prohibits. Bob Jones, 416 U.S. at 736. First, the injunctive relief sought requires the Court to interject itself into the Services process by which it determines whether Z Street is a tax exempt organization. Cf. Christian Stewardship, 70 T.C. at 1045 (The 270-day period provided for in [7428(b)(2)] is a minimum period to enable respondent to consider determination requests without judicial interference.) Second, an injunction by the Court will delay and could frustrate the eventual assessment of tax against Z Street if the Service concludes that it is not a tax-exempt organization. Third, this suit runs counter to the collateral objective of the Actpreventing the Internal Revenue Service from the costs and delays of litigation pending a refund claim. Bob Jones, 416 U.S. at 737. In sum, the Anti-Injunction Act precludes judicial review of the Services actions in this case until 1) after the Service has made its determination, or 2) a complaint is filed under 26 U.S.C. 7428. This is true even though Z Street contends that the Services Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 8 of 11 4 Many cases have held that the Anti-Injunction Act and the Declaratory Judgment Act are coterminous. E.g., Natl Taxpayers Union, Inc. v. U.S., 68 F.3d 1428, 1435 (D.C. Cir. 1995). But See Cohen v. U.S., 578 F.3d 1, 18 (D.C. Cir. 2009)(Kavanaugh, dissenting)(By their terms, of course, the statutes are not

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Government Response

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coterminous: 2201(a) bars declaratory relief with respect to Federal taxes, and the Anti-Injunction Act precludes injunctive relief restraining the assessment or collection of any tax.), Rehearing en banc Cohen v. U.S., 599 F.3d 652 (D.C. Cir. 2010). -9actions are illegal or unconstitutional. See Yamaha Motor Corp., U.S.A. v. U.S., 779 F.Supp. 610, 613 (D.D.C. 1991)(The Anti-Injunction and Declaratory Judgment Acts protect the overall pre-enforcement assessment and collection process . . . even where the legality of the agency's action is in question.)(emphasis added)(citing cases); Vidra v. Egger, 575 F.Supp. 1305, 1037 (E.D. Pa. 1982)(The presence of constitutional issues is immaterial.). Accordingly, plaintiffs complaint for injunctive relief should be dismissed. B. The Declaratory Judgment Act prohibits the relief plaintiff seeks. The Declaratory Judgment Act provides that [i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration . . . 28 U.S.C. 2201. (emphasis added). The federal tax exception to the Declaratory Judgment Act is at least as broad as the Anti-Injunction Act. Bob Jones, 416 U.S. at 732; McCabe v. Alexander, 526 F.2d 963, 965 (5th Cir. 1976).4 Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 9 of 11 -10The purpose of the tax exception to the Declaratory Judgment Act, like the Anti-Injunction Act, is to prevent the disruption which would occur to the federal revenue gathering processes if these processes were subject to judicial interference prior to the actual determination, assessment and collection of tax liabilities. Dietrich v. Alexander, 427 F.Supp. 135, 137-38 (E.D. Penn. 1977). The legislative history to the Act indicates that it was intended to free [tax] determinations from judicial interference apart from the statutory review system. S.Rep.No.1240, 74th Cong., 1st Sess. 11 (1939-1 Cum.Bull. (Part 2) 651, 657). Thus, the Act protects the overall pre-enforcement assessment and collection process even the early strategic and investigative stages and even where the legality of the agency's action is in question. Yamaha Motor Corp., 779 F.Supp. at 613 (D.D.C. 1991)(emphasis added)(citing cases). The presence of constitutional issues is immaterial to the Declaratory Judgment Acts federal tax exception. Vidra, 575 F.Supp. at 1307 (E.D. Pa. 1982)(citing Commissioner v. Americans United, Inc., 416 U.S. 752 (1974)). Z Streets request for declaratory relief, namely a declaration that the so called Israel Special Policy violates the First Amendment of the Constitution, thus runs afoul of the Declaratory Judgment Act. Whatever process the Service uses in determining an

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Government Response

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organizations tax exempt status is to remain free from judicial interference apart from the statutory review system. S.Rep.No.1240, 74th Cong., 1st Sess. 11 (1939-1 Cum.Bull. (Part 2) 651, 657). See also Dietrich, 427 F.Supp. at 137-38 (E.D. Penn. 1977). Even if the Service had violated Z Streets First Amendment rights and may inappropriately deny Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 10 of 11 -11tax-exempt status to Z Street, there is a statutory scheme set up to adjudicate those alleged violations. The Declaratory Judgment Act, however, like the Anti-Injunction Act, requires that aggrieved litigants follow that scheme before the Courts can make a declaratory judgment or issue an injunction. See Church of World Peace v. I.R.S., 715 F.2d 492 (10th Cir. 1983)(Action for declaratory judgment prohibited because church had adequate remedy at law if the IRS tried to enforce its summons.) Because Z Street has not followed that scheme (e.g., filed suit under 26 U.S.C. 7428,) its complaint must be dismissed. CONCLUSION For the foregoing reasons, the Court should dismiss plaintiffs complaint. Date: November 1, 2010.

JOHN A. DiCICCO Acting Assistant Attorney General ZANE D. MEMEGER United States Attorney /s/ Duston K. Barton DUSTON K. BARTON Trial Attorney, Tax Division U.S. Department of Justice Post Office Box 227 Washington, DC 20044 Telephone: (202) 514-9961 Email: Duston.Barton@usdoj.gov Case 2:10-cv-04307-CMR Document 4-1 Filed 11/01/10 Page 11 of 11

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