Seventh Circuit Rejects Strict Irreparable Injury Requirement for § 7402(a) Injunctive Relief for Government (4/25/24)

In United States v. Olson, ___ F.4th ___ (7th Cir. 4/11/24), CA7 here and GS here, the Court discussed the “irreparable injury” requirement for equitable injunctive relief for the Government under § 7402(a). The opinion is short and crisply states the analysis, so I will just copy and paste the core discussion:

          The United States filed this suit seeking both a money judgment and an injunction compelling the Olsons to deposit withholding taxes into a bank using an approved payroll service. See 26 U.S.C. §§6302, 6157; 26 C.F.R. §§31.6302-1, 31.6302(c)-3. The proposed injunction also would require the Olsons to pay their taxes ahead of private creditors, permit the IRS to inspect their books. and records, and notify the IRS if they start another business.

          The district court ordered the Olsons to pay more than $300,000. But the court denied the motion for an injunction, relying on language in United States v. Benson, 561 F.3d 718, 724 (7th Cir. 2009). See 2023 U.S. Dist. LEXIS 8472 (N.D. Ind. Jan. 17, 2023). The United States sought reconsideration, observing that this portion of Benson interpreted 26 U.S.C. §7408(b), which deals with tax shelters, while the request in this case rests on 26 U.S.C. §7402(a), which reads:

          The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of the United States in such courts or otherwise to enforce such laws.

          Under this statute an injunction may issue if “necessary or appropriate for the enforcement of the internal revenue laws.”

          The district court understood §7402(a) to call for consideration of the traditional factors, under which a plaintiff seeking a permanent injunction “must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). Cf. Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008) (similar factors for preliminary injunction). As the district judge saw matters, the United States has not established irreparable harm because it will not become insolvent if the Olsons do not pay their taxes. 2023 U.S. Dist. LEXIS 40549 *7 (N.D. Ind. Mar. 9, 2023). The court added that the United States does not face irreparable injury, because it can get future money judgments against the Olsons if they persist in not paying taxes.

          By the district court's lights, no court ever would order relief under §7402(a), because the national government's solvency does not depend on tax payments from any one person or business, even the largest. Yet judges should not interpret statutes in a way that makes them ineffectual. Nor should a court be sanguine that the IRS can collect from the Olsons just because it has a money judgment. They have not paid in the past and assert inability to pay in the future. The sort of relief the United States seeks in this case creates a mechanism for payment: the use of a payroll service that will turn over with-holding taxes (at least) whether or not the Olsons cooperate. Ability to audit the Olsons' books without the need for subpoena-enforcement proceedings also will assist in tax assessment and collection.

          Application of the traditional factors is straightforward. (1) The United States suffers irreparable harm in the sense that it is unlikely to collect future taxes unless some intermediary such as a payroll processor superintends how the business's income is distributed. (2) Money damages are inadequate because the Olsons assert both inability and unwillingness to pay. (3) The balance of hardships favors relief (the Olsons' belief that they are entitled to prefer other uses of money amounts to little more than disagreement with the tax laws). And (4) the public interest calls for ensuring that the Olsons have the same costs (taxes as well as wages) as their competitors. The district court's contrary decision on these factors is an abuse of discretion.

When Is A Tax Not a Tax? When the Supremes Says It Is Or Not! (8/2/12)

In National Federation of Independent Business v. Sebelius,  567 U.S. ___ (2012), here, the Supreme Court affirmed the individual mandate as a tax but held that it was not a tax for purposes of the Anti-Injunction Act ("AIA"), 26 USC 7421(a), here, which prohibits injunctions against a tax assessment or collection.  What's that all about?  I won't try to answer that question in detail, but I will introduce readers to the back ground of the AIA.

The statute is:

§ 7421 - PROHIBITION OF SUITS TO RESTRAIN ASSESSMENT OR COLLECTION
(a) Tax.   Except as provided in sections 6015 (e), 6212 (a) and (c), 6213 (a), 6225 (b), 6246 (b), 6330 (e)(1), 6331 (i), 6672 (c), 6694 (c), and 7426 (a) and (b)(1), 7429 (b), and 7436, 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.

In the text book I summarize the AIA as follows:

Injunctions or injunction substitutes (such as declaratory judgments) are not allowed in tax controversies.  § 7421(a) (Also called the Anti-Injunction Act).  The reasons are (1) there is a strong governmental imperative in avoiding interference with the revenue function and (2) there are adequate procedures otherwise provided in which taxpayers can contest tax liabilities without undue burden.

(I have just "lifted" the citation to Section 7421(a) the text from a footnote where it formerly appeared.)

You will note that there are certain statutory exceptions to the prohibition (see the opening "Except as" clause).  The exceptions do not swamp the rule but they are significant.  In the Tax Procedure course we cover some of these exceptions.  For example, the notice of deficiency giving the taxpayer pre-assessment access to the Tax Court for income and estate and gift tax is an exception (see the reference in Section 7421(a) to Sections 6212 and 6213); if the notice is not sent or not properly sent (e.g., to the taxpayer's last known address), the taxpayer may enjoin any IRS assessment and attempt to collect the tax.  (We will study also certain more efficient alternatives to remedying this particular problem, but the injunction suit is available.)  There are other statutory exceptions, but for present purposes just note that there is a general prohibition on injunction suits unless there is an exception.  There is also a judicially-created exception applicable only in rare cases of clear unconstitutionality, but again that should not detract from the general rule.  I discuss the AIA and the exceptions in the texts as follows:  (i) footnoted version, pp. 525 ff; (ii) nonfootnoted version, pp. 387 ff.  (I also mention in the footnotes the AIA in discussing the exceptions, such as the exception for failure to send a proper notice of deficiency.

Where applicable, the AIA means that a tax cannot be enjoined.  This will mean, generally, that the, for taxes other than those requiring a notice of deficiency, the taxpayer must first pay the tax and then litigate the taxpayer's liability for the tax.  As applicable to the individual mandate which does not require a notice of deficiency, that would mean that a taxpayer / citizen must first pay the tax which does not kick in until 2014 and then litigate liability.