Petition — Shannon v. United States

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Supreme Court of the United States

UCTOBER T

CAROL SMITH SHANNON.

Petitioner

Vv.

UNITED STATES OF AMERICA

Respondent

William P. Shannahan

1205 Prospect St.. Suite 325

La Jolla, California 92037

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INDEX

Opinions below

Jurisdiction . i

Question presented .

Statutes involved .

Statement of the case .

Reasons for granting the writ

1. The decision below conflicts with the decisions of

other courts of appeal as to whether the statutory

application of Section 7421(b) necessitates and

allows for a threshold examination of the question

of transferee status.

11. The decision below conflicts with the decision of

other courts of appeal as to the factual evidence

necessary to obtain a hearing on the question of

“certainty’’ under the Anti-Injunction Act.

111. Granting certiorari presents the Court with a first

impression opportunity to definitely construe the

new statutory language of Section 7426.

Conclusion .

Appendix

* «*

Cc.

TABLE OF AUTHORITIES

CASES

Alexander v. American United, Inc. 416 U.S. 752 .

Bauer v. Foley 404 F.2d 1215 (2nd Cir., 1969) .

Bob Jones University v. Simon 416 U.S. 725 .

Botta v. Scanlon 299 F.2d 504 (3rd Cir., 1961) .

Cole v. Cardoza 441 F.2d 1337 (6th Cir., 1971) .

Enochs v. Williams Packing Co. 370 U.S. 1.

Holland v. Nix 214 F.2d 317 (5th Cir., 1954) .

James v. United States 510 F.2d 860 (6th Cir., 1975) .

(per curiam) .

Jenkins v. McKeithen 395 U.S. 411

Lucia v. United States 474 F.2d 565 (5 Cir., 1973)

(en banc) .

Pizzarelio v. United States 408 F.2d 579 (2nd Cir., 1969)

cert. denied 396 U.S. 986

Shapiro v. Secretary of State 499 F.2d 527 (District of

Columbia Cir., 1974) cert. granted

420 U.S. 923

Shelton v. Gill 202 F.2d 503 (4th Cir., 1953) .

Sherman v. Nash 488 F.2d 1081 (3rd Cir., 1973)

STATUTES

26 U.S.C. 7421

26 U.S.C. 7426

28 U.S.C. 1346(e)

2,3,4,5

2,3,4,6,9,10

2,3

Ju the

Supreme Court of the Gnited States

OCTOBER TERM, 1975

CAROL SMITH SHANNON,

Petitioner,

UNITED STATES OF AMERICA,

Respondent.

Petition for a Writ of Certioran

Tv the United States Court of Appeals

For the Ninth Circuit

The Petitioner, Carol Smith Shannon, respectfully prays

that a writ of certiorari issue to review the judgement and

opinion of the United States Court of Appeals of the Ninth

Circuit entered in these proceedings on July 29, 1975, and

the Order Denying Petition for Rehearing and Suggestion for

Rehearing En Banc rendered on September 15, 1975.

OPINIONS BELOW

The opinion of the United States Court of Appeals, Ninth

Circuit and its denial of rehearing are as yet unreported and

appears at Appendix A and B infra pp._ 7 and

The opinion of the United States District Court of the

Southern District of California approving the Petitioner's

application for injunctive relief is as yet unreported and

appears at Appendix C infra pF

JURISDICTION

The judgment of the United States Court of Appeals of the

Ninth Circuit was entered on July 29, 1975. A timely Petition

for Rehearing and Suggestion For Rehearing En Banc was

denied Petitioner on September 15, 1975.

This petition for certiorari is filed less than 90 days from

the date of the denial of rehearing. The jurisdiction of this

Court is invoked under 28 U.S. C. 1254 (I).

QUESTION PRESENTED

The Petitioner filed an action to enjoin the collection of a

jeopardy assessment against Petitioner as transferee.

The questions presented are:

1. Whether the Anti-Injunction Act (Section 7421 of the

Internal Revenue Code of 1954) prevents the threshold

determination of the status of an alleged transferee.

2. Whether allegations denying transferee status and

arbitrary action require a hearing to determine the certainty

of success before the bar of the Anzi-Injunction Act is applicable.

3. Whether an alleged transferee may invoke the jurisdiction

of Section 7426 of the Internal Revenue Code of 1954 to

contest status of alleged transferee.

STATUTES INVOLVED

The pertinent provisions of Section 7421 and 7426 of the

Internal Revere Code of 1954 (26, United States Code) and

Section 1346(; (28, United States Code) are set forth in

Appendix D, pages & infra.

STATEMENT OF THE CASE

On August 1, 1973 a jeopardy assessment was made against

taxpayer, C. Arnholt Smith in the amount of $22,833,933.02.

On October 3, 1973 a notice of levy was served upon Petitioner

as an alleged nominee, agent or transferee of Mr. Smith. The

notice of levy attached specifically to the alleged interest of

Mr. Smith in property held by Petitioner in the amount of

$478,366.35.

About October 19, 1973, a jeopardy transferee assessment

was made in the amount of $2,645,329.35. A notice of levy

was served and a lien filed against Petitioner’s property in the

County Recorder's office of San Diego County, State of Calif-

ornia. The original assessment of $2,643,329.36 was subse-.

quently reduced by the Respondent without explanation to

$630,635.90 and on December 11, 1973 a statutory notice of

deficiency as transferce in the amount of $630,635.90 was

issued to Petitioner.

This case originated when Petitioner sought an injunction

against enforcement of the levy and other relief by virtue of

the jurisdiction authorized under 28 U.S.C. 1346(e) and 26

U.S.C. 7426, and that the action was arbitrary and capricious.

The United States then moved for dismissal.

The district court granted the motion for a preliminary

injunction and denied the government’s motion to dismiss

upon the conclusion that it had jurisdiction to hear this

matter under Section 7426 and no further evidence was

required at that point.

The court's opinion did not address itself specifically to

the question of the application of the application of Section

7421 nor the effect of Enochs v. Williams Packing Co. 370

U.S. 1, other than to state as a conclusion that Section 7421

does not prohibit this action. However, at oral argument when

the government was arguing under the Enochs decision as to

the jurisdiction that all of the allegations in the complaint as

to “transferee status’ and “ownership of assests’’ were con-

clusions, the court indicated that the allegations in the com-

plaint were “ultimate facts’ and if true the Petitioner could

prevail. In addition, the court concluded that the claim of

ownership of property was sufficient grounds to state a claim

for relief.

The Court of Appeals for the Ninth Circuit reversed and

remanded the case with instructions to dismiss for lack of

either Section 7426 jurisdiction or inherent equitable juris-

diction on the rational that Section 7426 does not allow

“alleged transferees’’ to question their liability or the tax

assessment, that Section 7421 does not statutorily allow for

a threshold examination of the question of ‘‘transferee

status’, and that the Enochs exception to Section 7421

requires the Petitioner to show a complete lack of merit in the

government's case regardless of arbitrary conduct by the

government.

The Petition For Rehearing and Suggestion For Rehearing

and Suggestion For Rehearing En Banc requested that the

matter be remanded to the district court for additional

evidence on the question of certainty of success and the

arbitrary action of the government. Said petition was denied

on September 15, 1975. (Appendix B, p..2 7, infra).

REASONS FOR GRANTING THE WRIT

The granting of certiorari in this case would give the Court

a further factual basis beyond the one presented by the pre-

sently pending Shapiro v. Secretary of State 499 F. 2d 527

(D.C. Cir., 1974) certiorari granted 420 U.S. 923 (No. 74-744,

this term) in which to examine the significant and recurring

problems concerning efforts to invoke federal jurisdiction

despite the bar of the Anti-injunction Act.

The Ninth Circuit opinion below reflects important

statutory and policy considerations growing out of a bona

fide effort to invoke jurisdiction.

The question of federal jurisdiction in this area is one of

common if not increasing occurrence, and both the litigants

and the courts urgently need the assistance of this Court in

understanding the policies and the language of Section 7421

and 7426 of the Internal Revenue Code of 1954.

1. THE DECISION BELOW CONFLICTS WITH THE

DECISIONS OF OTHER COURTS OF APPEAL AS TO

WHETHER THE STATUTORY APPLICATION OF

SECTION 7421 (b) NECESSITATES AND ALLOWS FOR

A THRESHOLD EXAMINATION OF THE QUESTION OF

TRANSFEREE STATUS.

The Ninth Circuit in its opinion below did not construe

Section 7421 to allow the district court jurisdiction to review

the transferee status of one making sufficient allegations.

denying it. (Appendix A, p. 42. infra).

In so holding the Ninth Circuit decision conflicts squarely

with the decisions adopted by the Second Circuit in Botta v.

Scanion, 288 F.2d 504 (2nd Cir., 1961), the Fifth Circuit in

Holland v. Nix 214 F.2d 317 (5th Cir., 1954), and the Fourth

Circuit in Shelton v. Gill 202 F.2d 503 (4th Cir., 1953).

In Botta, supra, the determination of that court to inquire

into the status of an assessed individual is clearly and suc-

cinctly set forth in the language of the decision at page 508:

However, a reasonable construction of the taxing

status does not include vesting any tax official with

absolute power of assessment against individuals not

specifically in the statutes as persons liable for tax

without an opportuinity for judicial review of the

status before the appellation of ‘‘taxpayer”’ is

bestowed upon them and their property is seized

and sold. (Emphasis added).

In Holland v. Nix, supra, the court of appeals concluded

the plaintiff was entitled to injunctive relief even though an

assessment was directly made against him as a transferee of a

transferee since the facts as pleaded (and admitted by virtue

of defendant's motion to dismiss), revealed that the plantiff

was not a transferee.

That the issue presented by the conflict is of importance is

shown by the large number of circuits ruling on it. Further-

more, Justice Blackman in his dissenting opinion in Alexander

v. American United, Inc. 416 U.S. 752, 767 discussed this

problem indicating that he felt that:

“In considering Sec. 7421 (a) a two-step analysis is

necessary: (1) Where does the statute apply? (2)

Where is it applicable under what circumstances is

there anil exception permitted? ... “

The effect of foreclosing jurisdiction to one denying alleged

transferee status is to allow the government the right to trans-

form a third party (who has jurisdiction to bring an action

under Section 7426) into a transferee by mere assessment,

and in doing give the government an arbitrary right to

revoke the party’s right to bring or continue in an action.

This conflict and its importance justify the granting of

certiorari to review the judgement below.

li. THE DECISION BELOW CONFLICTS WITH THE

DECISIONS OF OTHER COURTS OF APPEAL AS TO THE

FACTUAL EVIDENCE NECESSARY TO OBTAIN A HEAR-

ING ON THE QUESTION OF “CERTAINTY” UNDER THE

ANTI-INJUNCTION ACT.

The correctness of the decision below is open to serious

question. The records show quite plainly and the district

court found that the Petitioner clearly alleged that she

was the true owner of the property and not a transferee.

The refusal of the court below to respect the allegations

as true or to allow for the taking of further evidence cannot

be justified. In Jenkins v. McKeithen 395 U.S. 411, at 421,

this Court indicated that “’[F] or the purpose of a motion to

dismiss the material allegations of the complaint are taken as

true.”

The court below did not follow this Court’s directive in

Enochs, supra, that... ‘the question of whether the govern-

ment has a chance of ultimately prevailing is to be determined

on the basis of the information available to it at the time of

suit.” 370 U.S. 1,7.

Petitioner's allegations (taken as true for purposes of this

suit) satisfy the Enochs prerequisites.

In reliance upon what it incorrectly conceived to be the

principal established by the Court in Enochs, supra, and

Bob Jones University v. Simon 416 U.S. 725, the Ninth Circuit

held that the district court improperly granted an injunction

and remanded the case for dismissal even though the district

court's findings of facts concluded that the Petitioner claimed

ownership of the assets and claimed no liability as a transferee.

The Ninth Circuit felt that the record which was limited at “he

time of suit to the complaint and three affidavits did not meet

the prerequisite ‘‘that the government had no chance of

success’, the court citing the Sixth Circuit case of Cole v.

Cardoza 441 F.2d 1337 (6th Cir., 1971) for support on

this point. Similarily, in James v. United States 510 F.2d

860 (6th Cir., 1975) (per curiam) the Sixth Circuit rejected

what it considered to be strictly conclusionary allegations in

the complaint, and denied a taxpayer injunctive relief.

In so holding the Sixth and Ninth Circuits have adopted

requirements for remand or dismissal that conflict with the

requirements adopted by the Second Circuit in Pizzarello v.

U. S. 408 F.2d 579 (2nd Cir., 1969), cert. denied 396 U.S.

986, and Bauer v Foley 404 F.2d 1215 (2nd Cir., 1968),

the Third Circuit in Sherman v. Nash 488 F.2d 1081 (3rd

Cir., 1973), the Fifth Circuit in Lucia v. U.S. 474 F.2d 565

(Sth Cir., 1973) (en banc), and the Circuit Court of Appeal of

the District of Columbia in Shapiro, supra.

This confiict in the holdings of the circuits is best

illustrated by an examination of the issues involved. In

Bauer, supra, Shapiro, supra, Sherman, supra, and Lucia,

supra, the respective courts of appeals each remanded their

cases back to the district courts with instructions to take

evidence so that a fuller record is available for a proper

determination as to whether or not a government assessment

was arbitrary and excessive. |!n Pizzarello, supra, where the

Internal Revenue Service had made a five-year projection of

gambling income from a two-month study of the taxpayer's

activities the court of appeal dismissed the government's case

outright, finding its action clearly arbitrary.

In both Pizzarello, supra, and Lucia, supra, it was conceded

that the taxpayer had been engaged in gambling; the respective

courts of appeals involved still allowed jurisdiction to the tax-

payer despite the fact that the only issue at question was the

arbitrariness of the projection of gambling revenues made by

the government. Similarily, the Court of Appeals for District

of Columbia allowed jurisdiction to the taxpayer in Shapiro,

supra, a case involving a more complicated Cispute as to

whether the taxpayer had in fact been engaged in the business

of dealing in narcotics and further, what his income would

have been from that business. Further, the court indicated

that the Anti-Injunction Act would not be violated by

requiring evidence of the Government where the taxpayer

denies such allegations.

in Bauer, supra, where the issue involved an allegation of

forgery and coersion, the court remanded the case for trial

concluding that an allegation of forgery was enough to

throw into question the certainty of success of the Government.

In Sherman, supra, the Third Circuit affirmed the granting

of an injunction and remanded the case to allow the district

court to consider whether the assessments were intended to

coerce the taxpayer for improper reasons unrelated to the

collection of tax.

Contrastingly, in the case below where the Petitioner

clearly alleged a set of facts under which the Internal Revenue

Service could not prevail, the court of appeals did not allow

the Petitioner jurisdiction and refused to remand the case back

to the district court.to take further evidence to substantiate

the Petitioner's claim.

The facts in the case below (Appendix C, infra) shows an

orginial levy was made on the Petitioner on October 3, 1973

in the amount of $478,366.35. About October 19, 1973 the

jeopardy assessment and levy against the Petitioner suddenly

jumped to $2,645,329.35. Finally on November 12, 1973,

the Commissioner reduced the assessment to $630,635.90.

At the time of filing the suit until the present time, no

explanation has been given as to why in the short period of

six weeks a claim can go from under $500,000 to more than

$2,600,000 and back again to a little over $600,000. This

maneuvering certainly brings into focus under the Enochs

test the good faith of the government which the court of

appeals in Shapiro, supra, indicated must be substantiated

by facts other than the mere conclusive assertions by the

United States.

The court below failed to rule affirmatively on the

Petitioner's argument that this unexplained arbitrary conduct

by the Commissioner supported another basis for a factual

review of the Commissioner's actions, an improper conclusion

in light of the opinions of the Second, Third, Fifth and

Distric »f Columbia Circuits.

The failure of the lower court to accept the allegations of

the complaint and conflicting court of appeal opinions

justifies the granting of certiorari.

lll. GRANTING CERTIORARI PRESENTS THE

COURT WITH A FIRST IMPRESSION OPPORTUNITY TO

DEFINITELY CONSTRUE THE NEW STATUTORY

LANGUAGE OF SECTION 7426.

The court below held that Section 7426 denies jurisdiction

to an alleged transferee due tc the literal language of the

section. é

It is submitted that the decision of the lower court

assumes a premise that is in fact the crucial issue of this

case, namely whether the Petitioner is a transferee

Had the Petitioner filed suit after the initial levy on

October 3, 1973 but before the jeopardy assessment on

October 19, 1973, jurisdiction clearly would have existed

under Section 7426 which issue is referred to by the lower

court (Appendix A fn. 7 p./€ infra) but not decided.

Assuming this, must it follow that the Respondent could

remove the jurisdictional grant of Section 7426 by unilaterally

making a transferee assessment and moving for dismissal of

the action. This clearly would not fulfill the intent of

Congress and the remedial purpose of Section 7426.

The remedial purpose of Section 7426 was to protect

third parties whose property is threatened with seizure for

the liability of another and attempts to codify decisional law

including Botta v. Scanion, supra, Holland v. Nix, supra, and

Shelton v. Gill, supra.

It is submitted that a person such as the Petitioner is

within the group entitled to the protection of the courts

under Section 7426 which protection should be safeguarded

against the unilateral action of the Respondent of stealing

that protection by the mere allegation of transferee status.

The conflict here is not one of judicial opinions between

circuit courts but the conflict between the rights of private

parties to their property and the unabridged unilateral inter-

ference of these rights by a governmental agency.

Given this conflict, and considering the importance of

the Anti-Injunction Act in the administration of the tax

system, the assistance of this Court is needed in understanding

the policies and language of Section 7426, so as to provide

for the proper functioning of the tax system balancing both

the needs of the government for revenue and the rights of

parties other than those primarily liable. A Supreme Court

decision in this case will resolve questions whose importance

extends far beyond the particular facts and parties here

involved. Among the unanswered questions posed by the

opinion below, are:

(1) Whether the language of Section 7426... “any

person (other than the person against whom is assessed the

tax out of which such levy arose)”. . . permits action by

persons denying their status of transferzes. It is submitted

that such action is permitted because no levy could be made

against the Petitioner without an underlying assessment against

the alleged transferor and it is the assessment of the transferor

only that cannot be litigated.

(2) Whether Section 7426(c) only forecloses the challenge

of the orimary tax assessment and not the secondary and

derivative ability of an alleged transferee. It is submitted

that the prohibition is only against the primary assessment.

The court below answered both of the above questions in

the negative. In light of the purpose behind the adoption

of Section 7426, this Court should take this opportunity to

correct the decision below.

CONCLUSION

For these reasons, a writ of certiorari should issue to review

the judgment and opinion of the United States Court of

Appeals, Ninth Circuit.

Date: October 13, 1975

Respectfully submitted,

WILLIAM P. SHANNAHAN

1205 Prospect St., Suite 525

La Jolla, California 92037

Counsel for Petitioher

APPENDIX A

United States Court of Appeals for Ninth Circuit

No. 74-1922 July 29, 1975

Carol Smith Shannon,

Plaintiff-Appelle

United States of America

Defendant-Appellant

Opinion and Judgement Order.

Before: TUTTLE*, HUFSTEDLER and WRIGHT,

Circuit Judges

WRIGHT, Circuit Judge:

The covernment appeals from two orders by which the

district court (1) denied the defendant's motion to dismiss for

lack of jurisdiction and (2) granted a preliminary injunction

against the Internal Revenue Service (!RS) enjoining the en-

forcement of a levy against Shannon’s assets. This court has

jurisdiction under 28 U.S.C. § 1292 (a) (1). '

FACTS

On August 1, 1973 a jeopardy assessment was made against

C. Arnholt Smith for over $22.8 million for unpaid 1969 in-

come taxes. On October 3 of that year a notice of levy was

served upon Carol Smith Shannon, appellee, as the alleged

nominee, agent, or transferee of Mr. Smith.

The notice of levy for approximately $23.3 million sought

to attach all of Smith’s interest in $478,366.35 allegedly

withdrawn by Shannon from an account in the United

California Bank about August 3, 1973.

About October 19, 1973, pursuant to 26 U.S.C. § §6861

(a) and 6901 (I.R.C. 1954), 2a jeopardy transferee assessment

was made against Shannon for over $2.6 million, a notice of

levy was served and a lien filed against Shannon's property in

the county recorder’s office. The amount of the transferee

assessment was later reduced to $630,635.90 and on Dec-

ember 11 a statutory notice of deficiency in the amount of

the transferee assessment was issued to Shannon.

She then sought an injunction against the enforcement of

the levy and other relief. The United States, appellant,

moved for dismissal. The district court denied the motion to

dismiss and granted the preliminary injunction pending a

determination of the action on its merits.

ISSUES

(1) Did the district court have jurisdiction under 28

U.S.C. § 1346 (e)?

(2) If not, did the district court have jurisdiction on

any other basis? We answer both questions in the negative.

—

*Senior Circuit Judge for the Fifth Circuit.

'It is also established that an appeal from an order

granting a preliminary inju ction supports a review of

an order denying a motion to dismiss, even though

standing alone the latter would not be appealable.”’

Genosick v. Richmond Unified Schoo! District, 479

F.2d 482, 483 (9th Cir. 1973); 9 Moore, Federal

Practice section 110.25 [1].

2 §6901 in pertinent part provides

“(a) The amounts of the following liabilities shall .. .

be assessed, paid, and collected in the same manner and

subject to the same provisions and limitations as in the

case of the taxes with respect to which the liabilities

were incurred:

(A) Transferees.—The liability, at law or in equity, of

DISCUSSION

The provisions of 26 U.S.C. § 7421 (I.R.C. 1954) provide

the backdrop against which both issues must be discussed. *

Section 7421 not only prohibits suits to restrain the assess-

ment or collection of a tax, but also prevents the district

court from granting such equitable relief. Enochs v.

Williams Packing Co., 370 U.S. 1, 5 (1962). Unless one

seeking to enjoin the IRS brings herself within a statutory

or judicially-created exception to § 7421, the district court

has no jurisdiction and the suit for injunction is barred.

370 U.S. at 7.

The district court based jurisdiction on 28 U.S.C. §1346

(e), the jurisdictional counterpart of U.S.C. § 7426 (I.R.C.

1954). Applicable provisions of § 7426 give a civil action

against the United States to third persons whose assets

have been wrongfully levied against by the IRS.*

a transferee of property—

(i) of a taxpayer in the case of a tax imposed by

subtitle A (relating to income taxes.)”’

3 Applicable portions of § 7421 provide:

(a) Tax.—Except as provided in section . . . 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 by any person, whether or not such person

is the person against whom such tax was assessed.

“(b) Liability of transferee .... —No suit shall be

maintained in any court for the purpose of restraining

the assessment or collection . . . of—

(1)the amount of the liability, at law or in equity, of

a transferee of property of a taxpayer in respect of any

internal revenue tax... .”

a The applicable portions of § 7426 provide

—- =

Shannon argues that despite being assessed as a transferee

she comes within the provisions of § 7426 and the district

court thus has jurisdiction under §1346(e). She reasons that:

the prohibition of §7421{b) (1) applies only to an actual

transferee; the |RS was wrong in assessing her as such and the

district court should therefore find that she is not a transferee;

and once found not to be a transferee the injunction should

be granted under § 7421 (a) with its § 7426 exception. °

The fatal flaw in this analysis is that it fails to take into

account the literal language of § 7426. Clearly, the section

was not intended for those assessed as transferees.

First, the § 7426 remedies are denied to ‘‘the person

against whom is assessed the tax out of which such levy

arose.’’© The undeniable fact is that the October 19 jeopardy

transferee assessment was made against Shannon herself.

That assessment is the one out of which the levy arose.

(a) Actions permitted.—

{1) Wrongful levy.— !f a levy has been made on

property ... any person (other than the person against

whom is assessed the tax out of which such levy arose)

who claims an interest in... such property and that

such property was wrongfully levied upon may bring a

civil action against the United States in a district court

of the United States.

“(b) Adjudication. — The district court shall have

jurisdiction to grant only such of the following forms of

relief as may be appropriate in the circumstances:

(1) Injunction. If a levy ... would irreparably injure

rights in property which the court determines to be

superior to rights of the United States in such property,

the court may grant an injunction to prohibit the

enforcement of such levy... .”

5 Since the district court did not find that Shannon was

not a transferee, there was no § 1346(e) jurisdiction

even under Shannon’s reasoning.

6 See note 4, supra.

Shannon argues that it is Smith, not she, contemplated

by § 7426 when it sneaks of ‘‘the person against whom is

assessed the tax....’° This may have been true at the time

of the first levy (October3).’ It certainly was not true of

the second (October 23), made after she was assessed in her

own right as a transferee. One who has been assessed as a

transferee cannot argue that the assessment was not made

against her.

Second, one who sues under § 7426 cannot challenge the

validity of the assessment. 26 U.S.C. §7426(c) (I.R.C.

1954).° Shannon sought to enjoin the levy as wrong fu!

under § 7426 because she was “‘not the transferee of C.

Arnholt Smith,’’i.e., she had been improperly assessed

as such. She was thus challenging the validity of the trans-

feree assessment which is foreclosed by § 7426(c).°

Finally, legislative history indicates that it was not the

intent of Congress to make § 7426 available to persons

7 We do not decide whether Shannon could have brought her

§ 7426 action at that time. Shannon argues that she

could have and, assuming that fact, argues that the IRS

should not be allowed to destroy the § 7426 remedies

by “utilizing the mechanical . . . provisions of §6901.”’

This ignores the fact the section was intended for the

relatively ‘‘remedyless” third person, not for transferees

who have the same remedies as taxpayers. See ote 9,

infra. 7

s § 7426:

“(c) Validity of the Assessment.— For purposes of an

adjudication under this section, the assessment of tax

upon which the... lien of the United States is based

shall be conclusively presumed to be valid.”’

9 Cf. Kirtley v. Bickerstaff, 488 F.2d 768,770 (10th Cir.

1973), cert. denied 419 U.S. 828 (1974); Enterprises

Unlimited v. Davis, 340 F.2d 472, 474 (9th Cir. 1965).

a as transferees. '°

ur decision does not leave Shannon without a remedy. On

the contrary, a transferee has availiable the same avenues as a

taxpayer who seeks judicial review to challenge the govern-

ment’s collection efforts against him. She may bring a refund

suit in district court or a petition to the Tax Court for a

redetermination of the deficiency. Philips v. Commissioner,

283 U.S. 589,597-598 (1931).

Having decided that § 7426 is not available to a transferee,

we conclude that the district court did not have jurisdiction

Although the parties assessed in these cases were

primarily liable (appellee here is only secondarily liable),

the common element is that they were in fact assessed

as individuals. Both cases held that once the assessment

is made, the individual assessed is barred from challenging

the validity of the assessment.

10 Section 7426 was added to the Internal Revenue Code of

1954 by the Federal Tax Lien Act of 1966, P.L. 89-719,

80 Stat. 1142, Sec. 110(a). Prior to that, the United

States could not be sued by third persons where its

collection activities interfered with third party property

rights. This included the situation where the government

wrongfully levied upon the property of a third person

in an attempt to collect from a taxpayer. H. Rep. No.

1884, 89th Cong., 2d Sess., p.27 (1966-2 Cum. Bull.

815, 834). As stated by the Committee Report, it was

for this reason, inter alia, that the bil! provided for

wrongful levy actions brought by nontaxpayers. H Rep.

No. 1884, supra, p. 28 (1966-2 Cum. Bull., supra, p.

834). Clearly the act was not meant to apply to suits by

those assessed as transferees. They already had two

avenues of judicial review at the time the Act was

passed. Phillips v. Commissioner, 283 U.S. 589, 597-

598 (1931).

We note that Section 110 (c) of Federal Tax Lien Act

of 1966, supra, amended § 7421(a) of the Internal

Revenue Code of 1954 by adding a proviso that the

§ 7421(a) prohibition on suits to restrain the assessment

or collection of any tax did not apply to actions under

§ 7426(a) and (b) (1). No similar amendment was made

to § 7421(b) prohibiting transferee injunction suits

(see note 2, supra), clear evidence that Congress did

not intend that § 7426(a) would be available to transferees.

That latter section was developed by Congress in

cooperation with the American Bar Association's Special

Committee on Federal Tax Liens. House Hearings before

the Committee of Ways and Means on Priority of

Federal Tax Liens and Levies, 89th Congress, 2d Sess.,

pp. 64-65. The Final Report of that Committee had a

provision (§ 7431) similar to § 7426(a). Hearings, supra, p. 159.

The Final Report (Hearings, supra, p. 192) said:

“*** (This provision was] intended to codify the

procedural rights of third parties whose property is

seized or threatened with seizure for the tax liabilities -

of another. It has no application to the rights of the

person against whom as assessment is made, whether

as taxpayer, transferee, or otherwise. Procedures

available to such persons are provided by existing

provisions of the Code.” (Emphasis added.)

We find nothing in the entire legislative history of § 7426

which would indicate that this concept of the statute was

ever rejected.

under §1346(e)."'

Since § 1346(e) did not confer jurisdiction on the district

court in the circumstances of this case, it did not have juris

diction to entertain this action unless the bar of §7421(b)

was inapplicable.'? However, that section is applicable un-

less the plaintiff establishes two factors: (1) certainty of

success on the merits and (2) irreparable injury. (Bob Jones

University v. Simon, 416 U.S. 725,737 (1974); see also

Enochs v. Williams Packing Co., 370 U.S. 1 (1962); Miller

v. Standard Nut Margarine, 284 U.S. 498 (1932); Westgate-

California Corp. v. United States, 496 F.2d 839, 842-43

(9th Cir. 1974).'* Shannon failed to’establish certainty of

success on the merits.

11 Jurisdiction was not alleged under 28 U.S.C. § 1340

(“actions arising under an Act of Congress providing for

the internal revenue”’).

12’ The courts, moreover, have uniformly held that the

proscription of Section 7421 applies to suits to restrain

the collection of jeopardy assessments as well as to

ordinary assessments.”

Transport Manufacturing & Equipment Co. of Del. v.

Trainor, 382 F.2d 793, 797 (8th Cir. 1967) and the

cases collected there.

'3 These cases dealt with § 7421(a) and its predecessor,

§ 3224 Rev. Stat. However, since the enactment of

§ 7421(b) ‘‘the courts have treated requests for in-

junctions in transferee cases in the same fashion as in

cases involving the original taxpayers, and subject to the

same exception regarding extraordinary cicumstances.

_.."" [Footnotes omitted.| 9 Mertens, Law of Federal

Income Taxation (1971 Revision) §49.210 (p. 394).

When the district court granted the preliminary injunction

the record was limited to the complaint and three unillumi-

nating affidavits. Shannon’s complaint made a number of

corclusory allegations (e.g., that “she is not the transferee of

[Smith] ’’ and that she is ‘the true owner of all assets levied

upon by Defendant’’) which were neither supported by any

factual allegation nor established by any factual allegation

nor established by any evidence.

This was insufficient to meet the stringent Miller-Enochs-

Bob Jones test. The burden of proof was on the plaintiff

(Westgate, supra, at 843) and was not met by mere bald

assertions. See, e.g., Cole v. Cardoza, 441 F.2d 1337, 1341-

- 1342 (6th Cir. 1971), Collins v Daty, 437 F.2d 736, 739 (7th

Cir. 1971), Williams v Wiseman, 333 F.2d 810, 811 (10th

Cir. 1964), and Cooper Agency, Inc. v. McLeod, 235 F.

Supp. 276, 284 (E.D.5.C. 1964, aff'd per curiam 348 F.2d

919 (4th Cir. 1965) (complaint alleged that plaintiffs were

not transferees because at no time were transfers made with-

out full, fair, and adequate consideration). Thus, the court

could not have inferred a complete lack of merit in the

government's case. '¢

Because Shannon did not establish certainty of success

on the merits, we need not inquire whether she established

irreparable injury.’ U.S. v. American Friends Service Com.,

419 U.S. 7, 10 (1974).

Shannon did not demonstrate that the district court had

jurisdiction and the motion to dismiss should have been

granted. The order granting the preliminary injunction is

reversed and the cause is remanded to the district court to

dismiss the complaint for want of jurisdiction.

'*The district court did not find that the government

could not ultimately prevail on the merits.

15 The district court found that Shannon would suffer

irreparable harm for which she had no adequate legal

remedy. This was based on her allegations that the

assessment and levy had the effect of freezing her assets

so that she could not meet current obligations and of

severely damaging her credit rating.

ee ee

APPENDIX B

United States Court of Appeals for Ninth Circuit

No. 74-1922 September 15, 1975

Caro! Smith Shannon,

Plaintiff-Appellee

Vv.

United States of America

Defendant-Appellant

Opinion: Denial of Rehearing and’Suggestion for Rehearing

En Banc

Before: TUTTLE, HUFSTEDLER and WRIGHT,

Circuit Judges.

The panel as constituted in the above case has voted to

deny the petition for rehearing. Judges Hufstedler and

Wright have voted to reject the suggestion for a rehearing

en banc.

The full court has been advised of the suggestion for an

en banc hearing, and no judge of the court has requested

a vote on the suggestion for rehearing en banc. Fed. R.

App. P. 35(b).

The petition for rehearing is denied and the suggestion

for a rehearing en banc is rejected.

APPENDIX C

United States District Court, Southern District of California

No. 73-526 February 13, 1974

Carol Smith Shannon,

Plaintiff,

Vv.

United States of America,

Defendant.

Opinion and Judgement

The above-entitled matter having come on regularly for

hearing on the motion of the plaintiff for a preliminary in-

junction pending hearing on the merits of plaintiff's complaint

and on the motion of defendant United States of America

to dismiss the complaint on the basis that:

a) The Court lacked jurisdiction over the subject matter;

b) The Court lacked jurisdiction over the defendant, and:

c) That the complaint failed to state a claim from which

reliei can be granted.

The same came on for hearing on the 15th day of January,

1974 before the Honorable Leland C. Nielsen, United States

District Judge presiding. The plaintiff, Carol Smith Shannon,

appearing by her attorneys William P. Shannahan and David

R. Thompson, and the defendant, United States of America,

appearing by its attorneys Stephen G. Fuerth, United States

Department of Justice, and Robert H. Filsinger, Assistant

United States Attorney; the matter having been argued orally

and upon written memoranada, the Court having considered

the complaint herein and the affidavits filed February 1,

1974 in support of the motion hereby makes the following

findings of fact and conclusions of law.

FINCINGS OF FACT

1. On August 3, 1973, the Department of the Treasury,

Internal Revenue Serivce, served a Notice of Levy for the

year of 1969 on the assets of C. Arnholt Smith in the amount

of Twenty-Two Million, Eight Hundred Thirty-Three Thousand,

Nine Hundred Thirty-Three Dollars and Two Cents ($22,833,

933.02) allegedly pursuant to the jeopardy assessment pro-

visions of Title 26, U.S.C. §6861. There is now pending

Civil No. 73-320-N, contesting the propriety of said levy.

2. On or about October 3, 1973 the Department of the

Treasury, Internal Revenue Service, served a notice of levy

upon the plaintiff as alleged nominee, agent or transferee of

C. Arnholt Smith in the amount of Twenty-Three Million,

Two Hundred Fifty-Six Thousand, Four Hundred Fourteen

Dollars and Seventy-Eight Cents ($23,256,414. 78) allegedly

attaching to the sum of Four Hundred Seventy-Eight Thousand,

Three Hundred Sixty-Six Dollars and Thirty-Five Cents

($478,366.35).

3. On October 17, 1973 a notice of levy was served on

plaintiff's attorney in the amount of Three Hundred Thousand

Dollars ($300,000.00) which sum was in his possession.

4. On October 23, 1973 the Department of the Treasury,

Internal Revenue Service, served a notice of levy upon the

assets of the plaintiff as transferee of C. Arnho!t Smith in the

amount of Two Million, Six Hundred Forty-Five Thousand,

Three Hundred Twenty-Nine Dollars and Thirty Five Cetns

($2,645,329.35) and filed a lien against plaintiff's property

on October 23, 1973 in the Office of the County Recorder,

County of San Diego, State of California.

5. On November 12, 1973 the Department of the Treasury,

Internal Revenue Service, reduced the assessment on the

plaintiff from the sum of Two Million, Six Hundred Forty-

Five Thousand, Three Hundred Twenty-Ni1e Dollars and

Thirty-Five Cents ($2,645,329.35), to Six Hundred Thirty

Thousand, Six Hundred Th'rty-Five Dollars and Ninety

Cents ($630,635.90).

6. On December 7, 1973 final demand was made upon

plaintiff's attorney pursuant to the levy served upon him on

October 17, 1973.

7. Qn December 11, 1973 a statutory notice of deficiency

with respect to the jeopardy assessment made on October 19,

1973 was issued to the plaintiff in the amount of Six Hundred

Thirty Thousand, Six Hundred Thirty-Five Dollars and

Ninety Cents ($630,635.90).

8. The plaintiff claims ownership to all of the assets

levied upon by the defendant and further claims that plain-

tiff is not liable for any of the tax liability of C. Arnholt

Smith.

9. Plaintiff has no plain, speedy and adequate remedy at

law. The enforcement of the levy against the assets of the

plaintiff prior to a proper hearing by this Court will affect

her property rights, which action will result in irreparable

injury to the plaintiff's rights and property in which she

claims to have a superior interest to that of the defendant.

10. The claim of the plaintiff that she is the owner of the

property levied on and that the levy by the defendant is

wrongful is sufficient grounds to state a claim upon which

relief can be granted.

11. The granting of a preliminary injunction is necessary

to preserve the status quo until the merits of the case can be

decided.

CONCLUSIONS OF LAW

1. This Court has jurisdiction over this action under 26

U.S.C. § 7426 and 28 U.S.C. § 1346(e).

2. 26 U.S.C. § 7421 does not prohibit this action:

3. 28 U.S.C. §2201 may not apply to this action in that

§ 2201 appears on its face to only apply to suits by the tax-

payer and not actions by third parties.

4. 28 U.S.C. §2410 wherein the United States may be

. named a party in an action to quie: title to real and personal

property is a waiver of sovereign immunity.

5. Plaintiff is entitled to a preliminary injunction restrain-

ing the defendant from enforcing any levy against the assets

of the plaintiff or attaching or otherwise seizing the assets of

the plaintiff until this action can be heard and determined on

its merits.

ORDER

In accordance with the foregoing findings of fact and con-

clusions of law, IT IS HEREBY ORDERED:

1. Defendant's motion to dismiss is hereby denied.

2. Plaintiff's motion for a preliminary injunction is here-

by granted.

3. 1T IS FURTHER ORDERED that defendant United

States of America and its agents and employees, attorneys and

all persons acting in concert or in participation with them be

and are hereby restrained from in any manner, either directly

or indirectly, enforcing any levy against the assets of the

plaintiff or attaching or otherwise seizing in any manner the

assets of the plaintiff pending the final hearing and the

termination of this action.

4. IT IS FURTHER ORDERED that all third parties

against whom notices of levy have been filed concerning the

assets of the plaintiff shall retain possession of said assets

pending further order of this Court.

5. 1T 1S FURTHER ORDERED that the sum of Three

Hundred Thousand Dollars ($300,000.00) held by plaintiff's

attorney may be invested by said attorney in a savings account

or acertificate of deposit in a bank or savings and loan

association, in governmental obligations or similar invest-

ments, and that the income from said investment shall be

paid in to the registry of this Court.

6. IT IS FURTHER ORDERED that an injunction bond

of the plaintiff in the amount of One Thousand Dollars

($1,000.00) be hereby approved.

Dated: February 13, 1974

LELAND C. NIELSEN,

United States District Judge

APPENDIX D

Statutes Involved

SEC. 7421. PROHIBITION OF SUITS TO RESTRAIN

ASSESSMENT OR COLLECTION.

(a) [as amended by Sec. 110(c), Federal Tax Lien Act of

1966, P.L. 89-719, 80 Stat. 1125]. Tax.--Except as pro-

vided in :sectiois 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 by

any person, whether or not such person is the person against

whom such tax was assessed.

(b) Liability of Transferee or Fiduciary. --No suit shall be

maintained in any court for the purpose of restraining the

assessment or collection (pursuant to the provisions of

chapter 71) of --

(1) the amount of the liability, at law or in equity, of

a transferee of property of a taxpayer in respect of any

internal revenue tax, or

(2) the amount of the liability of a fiduciary under

section 3467 of the Revised Statutes (31 U.S.C. 192)

in respect of any such tax.

SEC. 7426 [as added by Sec. 110(a), Federal Tax Lien Act

of 1966, supra]. CIVIL ACTIONS BY PERSONS

OTHER THAN TAXPAYERS.

(a) Actions Permitted.--

(1) Wrongful Levy.-- If a levy has been made on

property or property has been sold pursuant to a levy,.

any person (other than the person against whom is

assessed the tax out of which such levy arose) who

claims an interest in or lien on such property and that

such property was wrongfully levied upon may bring

a civil action against the United States in a district court

of the United States. Such action may be brought with-

out regard to whether such property has been surrendered

to or sold by the secretary or his delegate.

(2) Surplus Proceeds. -- |f property has been sold

pursuant to a levy, any person (other than the person

against whom is assessed the tax out of which such

levy arose) who claims an interest in or lien on such

property junior to that of the United States and to be

legally entitied to the surplus proceeds of such sale may

bring a civil action against the United States in a

district court of the United States.

(3) Substituted Sale Proceeds. -- |f property has been

sold pursuant to an agreement described in section 6325

(b) (3) (relating to substitution of proceeds of sale),

any person who claims to be 4egally entitled to all or

any part of the amount held as a fund pursuant to

such agreement may bring a civil action against the

United States in a district court gf the United States.

(b) Adjudication. -- The district court shall have

jurisdiction to grant only such of the following forms of

relief as may be appropriate in the circumstances:

(1) Injunction. -- If a levy or sale would irreparably

injure rights in property which the court determines to

be superior to rights of the United States in such pro-

perty, the court may grant an injunction to prohibit

the enforcement of such levy or to prohibit such sale.

(2) Recovery of Property. -- If the court determines

that such property has been wrongfully levied upon,

the court may --

(A) order the return of specific property if the

United States is in possession of such property;

(B) grant a judjyement for the amount of money

levied upon; or ;

the amount received by the United States from the

sale of such property.

For the purposes of subparagraph (C), if the property

was declared purchased by the United States at a sale

pursuant to section 6335(e) (relating to manner and

conditions of sale), the United States shal! be treated

as having received an amount equal to the minimum

price determined pursuant to such section or (if

larger) the amount received by the United States

from the resale of such property.

(3) Surplus Proceeds. -- If the court determines that

the interest or lien of any party to an action under this

section was transferred to the proceeds of a sale of

such property, the court may grant a judgement

in an amount equal to all or any part of the amount of

the surplus proceeds of such sale.

(4) Substituted Sale Proceeds. -- If the court deter-

mines that a party has an interest in or lien on the

amount held as a fund pursuant to an agreement described

in section 6325 (b) (3) (relating to substitution of pro-

ceeds of sale), the court may grant a judgment in an

amount equal to all or any part of the amount of such

fund.

cation under this section, the assessment of tax upon which

the interest or lien of the United States is based shall be

conclusively presumed to be valid.

(d) Limitation on Rights of Action. -- No action may be

maintained against any officer or employee of the United

States (or former officer or employee) or his personal

representative with respect to any acts for which an action

could be maintained under this section.

(e) Substitution of United States as Party. -- If an action,

which could be brought against the United States under this

section, is improperly brought against any officer or employee

of the United States (or former officer or employee) or his

personal representative, the court shall order, upon such terms

as are just, that the pleadings be amended to substitute the

United States as a party for such officer or employee as of

the time such action was commenced upon proper service of

process on the United States.

28U.S.C.:

§ 1346 United States as defendant.

(e) The district courts shall have original jurisdiction of

any Civil action against the United States provided in section

7426 of the Internal Revenue Code of 1954.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.