Estate of Michael v. Lullo

Filed: April 15, 1999
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 98-1196
(CA-97-1577-A)
Estate of Mansy Y. Michael, etc.,
Plaintiff - Appellant,
versus
M. J. Lullo, etc.,
Defendant - Appellee.
O R D E R
The court amends its opinion filed April 2, 1999, as follows:
On page 20, first full paragraph, line 2 -- the cross-
reference is corrected to read "infra at 21-2 4."
On page 20, second full paragraph, line 1 -- the paragraph is
corrected to begin "For the remaining four paragraphs . . . ."
On page 21, first paragraph, line 1 -- the cross-reference is
corrected to read "at 15".
For the Court - By Direction
/s/ Patricia S. Connor
Clerk
PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
ESTATE OF MANSY Y. MICHAEL, by
David Michael, Executor,
Plaintiff-Appellant,
v. No. 98-1196
M. J. LULLO, District Director of
Internal Revenue Service,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-97-1577-A)
Argued: December 2, 1998
Decided: April 2, 1999
Before HAMILTON, LUTTIG, and KING, Circuit Judges.
_________________________________________________________________
Reversed and remanded by published opinion. Judge King wrote the
majority opinion, in which Judge Hamilton joined. Judge Luttig wrote
a dissenting opinion.
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COUNSEL
ARGUED: George Edward Cranwell, CRANWELL & O'CON-
NELL, Arlington, Virginia, for Appellant. Michelle Bachand
O'Connor, Tax Division, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee. ON BRIEF: Loretta C.
Argrett, Assistant Attorney General, Helen F. Fahey, United States
Attorney, Richard Farber, Edward T. Perelmuter, Tax Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellee.
_________________________________________________________________
OPINION
KING, Circuit Judge:
We are presented with the question of whether the district court
had jurisdiction to entertain a taxpayer's mandamus action against the
District Director of the Internal Revenue Service (IRS) and, if it did,
whether it should have granted the writ compelling the District Direc-
tor to allow a federal death tax credit that the IRS had previously
agreed was accurate and allowable. On the narrow facts before us in
this appeal, we conclude that the district court had jurisdiction and
that the writ should be granted. Accordingly, we reverse the district
court's dismissal for lack of jurisdiction, and remand for further pro-
ceedings.
I.
Mansy Y. Michael died on May 30, 1988, and his estate (the
Estate) filed a federal estate tax return on August 30, 1989, reporting
taxes in the amount of $175,487.1 The IRS audited the return and
assessed the estate an additional amount. The Estate originally
objected to the additional assessment, but after negotiating exten-
sively with the IRS, it consented to increase its estate taxes by
$85,775.99.
On July 31, 1992, the IRS sent the Estate an Estate Tax Closing
Letter (the Closing Letter) which confirmed, pursuant to the parties'
negotiations, that the total estate tax had been assessed at
$261,262.99. On its face, the letter purported not to be a "formal clos-
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1 Section 2001 of the Internal Revenue Code imposes an estate tax on
the transfer of the taxable estate of decedents who are citizens or resi-
dents of the United States.
2
ing agreement under section 7121 of the Internal Revenue Code," but
represented that the IRS would not "reopen this case, however, unless
Revenue Procedure 85-13, reproduced on the back of this letter,
applies."
A substantial portion of the Estate was located in the United King-
dom and was administered there. Following the receipt of the closing
letter, the Estate submitted to the IRS a timely"proof of credit" veri-
fying that the Estate had paid taxes in the United Kingdom in the
amount of $228,939.50 with respect to property situated there. The
IRS credited this amount as a foreign death tax credit against the
estate tax that had been assessed.2 The IRS then sent the Estate an
Estate Tax Computation Form indicating a balance due of $67,976.
The Estate paid the balance on September 17, 1993, thus fully satisfy-
ing the estate tax burden as negotiated by the parties and assessed by
the IRS.
On June 21, 1994--over nine months later--the IRS reopened the
case. The District Director's office sent a letter to the Estate notifying
it of a newly discovered error in the estate tax return. Namely, the IRS
claimed that it had miscalculated the amount of the gross estate by
simply failing to include the assets listed on Schedules B, D, and F
of the return. As the IRS asserted, "This error resulted in the estate's
not being assessed the tax on these assets in [the] first audit." As a
result, the IRS concluded that its initial assessment had been $139,134
too low.
The District Director was aware that it could not assess additional
_________________________________________________________________
2 Against the estate tax imposed by I.R.C. § 2001, the taxpayer has the
right to credit the amount of estate, inheritance, legacy, or succession
taxes that it pays to a foreign country with respect to property situated
in the foreign country and included in calculating the gross estate. I.R.C.
§ 2014(a). The credit is allowed if the taxpayer provides "proof of credit"
to the IRS to verify the amount of taxes paid to the foreign country, the
amount and date of each payment made, the description and value of the
property in respect of which such taxes are imposed, and any other infor-
mation necessary to verify and compute the credit. § 2014(d). If the
amount to be credited exceeds the amount of taxes remaining outstand-
ing, then the taxpayer may file for a refund of the excess. § 2014(e).
3
taxes against the estate because, as he acknowledged and explained
in his June 21, 1994 letter, "the normal statute of limitations has
expired." The District Director then took the extraordinary action that
spawned this lawsuit, which the IRS now explains in its brief with
surprising candor:
The IRS . . . could not assess this additional amount
against the taxpayer because the statute of limitations for
assessing additional estate tax already had expired. Instead,
the IRS reduced the amount of the claimed foreign death tax
credit by the amount of the additional tax it determined to
be due. The reduction of the claimed foreign death tax credit
caused taxpayer to have an unpaid balance in its assessed
tax liability.
The Estate responded with an administrative appeal, asking the
District Director to reinstate the full amount initially allowed as a for-
eign death tax credit. When the administrative appeal was denied, the
Estate filed this mandamus action in the district court, again seeking
to compel the District Director to acknowledge the full amount of the
foreign death tax credit. The IRS moved to dismiss, arguing that the
district court was deprived of jurisdiction by the Anti-Injunction Act,
I.R.C. § 7421, and that the Estate's mandamus petition should be
denied on the merits. The district court granted the IRS's motion,
finding that the plaintiff was not entitled to mandamus relief.3
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3 While the district court appears to have decided the Estate's manda-
mus claim on the merits, it nevertheless dismissed the claim for lack of
jurisdiction, citing the Mandamus and Venue Act, 28 U.S.C. § 1361.
This decision could be read as suggesting that a district court's rejection
of a mandamus claim on its merits necessarily negates that court's juris-
diction over the claim. See Vishnevsky v. United States, 581 F.2d 1249,
1253 n.4 (7th Cir. 1978) ("[T]he existence of § 1361 jurisdiction is
unavoidably bound up with the merits."). But we have held that a plain-
tiff in a mandamus action need not "prove the merits of his case in order
to establish jurisdiction. If the complaint states nonfrivolous allegations
of the existence of the essential elements supporting a mandamus action,
jurisdiction is established and a trial court must determine a remedy vel
non on the merits." First Fed. Sav. & Loan Ass'n v. Baker, 860 F.2d 135,
138 (4th Cir. 1988).
4
II.
Initially, we must determine whether the district court properly dis-
missed this action for lack of jurisdiction. We review that decision de
novo. Flood v. New Hanover County, 125 F.3d 249, 251 (4th Cir.
1997).
A.
Two competing statutes mark the jurisdictional boundary at issue
here. The positive grant of jurisdiction is found in the Mandamus and
Venue Act (the Mandamus Act): "The district court shall have origi-
nal jurisdiction of any action in the nature of mandamus to compel an
officer or employee of the United States or any agency thereof to per-
form a duty owed to the plaintiff." 28 U.S.C.§ 1361. Though the
Mandamus Act grants district courts jurisdiction over any suit seeking
mandamus, it does not override the Anti-Injunction Act, I.R.C.
§ 7421. The Anti-Injunction Act withdraws all courts' jurisdiction
over suits filed "for the purposes of restraining the assessment or col-
lection of any tax."
To prevail, therefore, the Estate must show either that its claim
does not implicate the Anti-Injunction Act or that it fits within the
narrow exception to that act. For purposes of this opinion, and
although we harbor serious doubts on this point, we will nevertheless
assume that the Estate's mandamus action--which seeks to require
the IRS to allow the full amount of its foreign death tax credit--
would have the effect of "restraining the assessment or collection" of
its taxes.
B.
Thus the district court lacked jurisdiction unless this action fits
within the narrow but well-established exception to the Anti-
Injunction Act. Because we hold that this case does come within the
exception, the Anti-Injunction Act did not destroy the jurisdiction
conferred on the district court by the Mandamus Act.
As explained above, the plain text of the Anti-Injunction Act
5
deprives all courts of jurisdiction over any suit "for the purpose of
restraining the assessment or collection of any tax." I.R.C. § 7421(a).
But the Supreme Court has recognized an exception to this otherwise
absolute language: "Only upon proof of the presence of two factors
could the literal terms of § 7421(a) be avoided: first, irreparable
injury, the essential prerequisite for injunctive relief in any case; and
second, certainty of success on the merits." Bob Jones Univ. v. Simon,
416 U.S. 725, 737 (1974) (citing Enochs v. Williams Packing &
Navig. Co., 370 U.S. 1, 6-7 (1962)).4 The Estate's action is precisely
the rare type of suit for which this exception was crafted.
1.
In analyzing the "certainty of success" factor, we must determine
whether "under the most liberal view of the law and the facts, the
United States cannot establish its claim," Williams Packing, 370 U.S.
at 7; see also International Lotto Fund v. Virginia State Lottery Dep't,
20 F.3d 589, 592 n.3 (4th Cir. 1994) (recognizing that Anti-Injunction
Act destroys jurisdiction unless it is "clear that the government `could
in no circumstances ultimately prevail on the merits'" (quoting
American Friends, 419 U.S. at 10)). In this case, the IRS claims that
there is a deficiency in the Estate's return. In order to view the cir-
cumstances supporting this claim in the light most favorable to the
IRS, we will adopt its own characterization of the operative facts.
First, the IRS asserts that its collection efforts are based on the tax
assessed in its Closing Letter of July 31, 1992. In this letter--which
was issued after extensive negotiations between the IRS and the
Estate--the IRS assessed a net estate tax of $261,262.99. Second, the
IRS acknowledges that the Estate discharged a portion of that tax lia-
bility by providing the IRS with "proof of credit," which demon-
strated its payment of U.K. estate taxes in the amount of $228,939.50.
Before the district court, and again at oral argument of this appeal, the
IRS admitted that it does not contest the validity or amount of the for-
eign death tax credit that resulted from this payment. E.g., IRS
Motion to Dismiss ("The [IRS] agrees that this amount [$228,939.50]
_________________________________________________________________
4 Accord United States v. American Friends Serv. Comm., 419 U.S. 7
(1974); Commissioner v. "Americans United" Inc., 416 U.S. 752 (1974).
6
represents the correct amount of foreign death tax credit to which the
estate is entitled for U.S. federal estate tax purposes.").
Third, the Estate paid the balance of net taxes due, plus interest, all
as calculated by the IRS on the Estate Tax Computation sheet that it
issued. This cash amount, which the IRS admits receiving, totaled
$67,976. The IRS further concedes in its brief that payment of this
balance, taken together with the full amount of the foreign death tax
credit would satisfy the Estate's tax liability as assessed in the IRS's
Closing Letter. If, as the IRS contends, it did not thereafter assess any
additional taxes; and if, as the IRS concedes, the claimed foreign
death tax credit is valid and accurate; and if, as the IRS further con-
cedes, the taxpayer has paid the assessed balance of $67,976, then
there is no outstanding, assessed tax that the IRS may collect from the
Estate.
Nor does the IRS claim that it validly assessed additional taxes
after July 31, 1992. Instead, the IRS has conceded throughout these
proceedings that, at the time it discovered its claimed mistake in the
original assessment, the statute of limitations barred it from assessing
additional taxes. The IRS is undoubtedly correct on this point;
§ 6501(a) of the I.R.C. requires the IRS to make all assessments on
an estate tax return no later than three years after its filing. Here, the
Estate's return was filed on August 30, 1989. As a result, the IRS
could not assess additional taxes after August 30, 1992. Indeed, the
IRS notes in its letter of June 21, 1994, that "the normal statute of
limitations has expired." Because the IRS's own version of the facts
indicates that the Estate has paid all taxes that have been and could
ever be assessed on its return, the IRS's claim for further tax pay-
ments would appear to be doomed.5
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5 The dissent incorrectly asserts that we are "directing the IRS to forgo
the assessment and collection of taxes that all agree are owed by a
taxpayer." Post at 19 (emphasis added). To the contrary, the Estate does
not owe additional taxes, and we therefore do not agree that any addi-
tional taxes are owed. Had the IRS properly assessed the disputed
amount during the limitations period, the Estate may well have owed
those taxes. But as the IRS admitted in its June 21, 1994 letter, it did not,
during the period of limitations, assess taxes on the assets listed on
Schedules B, D, and F. Consequently, the statute of limitations not only
7
Nevertheless, the IRS argues that its reduction of the foreign death
tax credit and the resulting deficiency determination were authorized
by Lewis v. Reynolds, 284 U.S. 281 (1932). In Lewis, the IRS audited
an income tax return and, within the applicable statute of limitations,
assessed additional taxes. Id. at 283. The taxpayer paid the additional
amount and sued the IRS for a refund. In the meantime, the statute
of limitations ran, which prevented the IRS from assessing any further
taxes on the return. But in response to the refund suit, the IRS again
recalculated the taxes for the year in question, and it concluded that
the taxpayer still had underpaid its taxes. As a result, the IRS refused
the taxpayer's refund request.
The Supreme Court agreed with the IRS, holding that, although the
IRS had been powerless to assess or collect additional taxes at the
time of the refund suit, it was nevertheless permitted to recalculate
those taxes in order to determine whether the taxpayer had overpaid
its tax burden for the year in question:
An overpayment must appear before refund is authorized.
Although the statute of limitations may have barred the
assessment and collection of any additional sum, it does not
obliterate the right of the United States to retain payments
already received when they do not exceed the amount which
might have been properly assessed and demanded.
Id.
Thus Lewis simply provided the IRS with a "shield" it could use
to ward-off refund suits; it did not forge a "sword" with which the
IRS could assess or collect additional taxes in violation of § 6501(a).
Indeed, cases that follow Lewis have emphasized the difference
between refund suits and those in which the IRS seeks to collect a
deficiency: "A deficiency determination, by which the IRS seeks to
_________________________________________________________________
prevents the IRS from assessing these taxes in the future, it extinguishes
potential liability for all such time-barred taxes. Diamond Gardner Corp.
v. Commissioner, 38 T.C. 875 (1962) (cited in Ewing v. United States,
914 F.2d 499, 504 (4th Cir. 1990)). As a result, the taxes in dispute are
not now and cannot ever be owed.
8
establish a taxpayer's additional tax liability, is patently different
from a refund determination, by which the taxpayer seeks repayment
or credit from the IRS." Bachner v. Commissioner, 81 F.3d 1274,
1277 (3d Cir. 1996). Lewis simply authorizes the IRS to "retain" tax
payments in the face of a refund suit if, based on its calculations at
the time of that suit, the IRS determines that the taxpayer did not actu-
ally overpay its properly calculated tax burden.
But Lewis cannot support the IRS's actions in this case. While
Lewis does allow the IRS to refuse certain refunds, it does not allow
the IRS's "collection of any additional sum" after the limitations
period has expired, as it has sought to do here. Id.6 Such a reading of
Lewis would nullify the statute of limitations.
Lewis cannot be read as trumping § 6501(a), even taking the "most
liberal view of the law and facts." Williams Packing, 370 U.S. at 1129.7
Given the IRS's admission that Lewis is the only case which even
arguably authorizes its actions here, we conclude that the IRS's claim
for further payment on the Estate's return is baseless and certain to
fail on the merits.8
(Text continued on page 11)
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6 The district court sought to avoid this problem by referring to the
IRS's actions as a "setoff." This view mischaracterizes those actions.
Manifestly, the IRS may not set-off tax liability against the foreign death
tax credit unless it has validly assessed that tax liability. Here, the IRS
admits that it never assessed any additional tax liability to offset the
death tax credit--nor could it have done so under the statute of limita-
tions. Accordingly, the district court erred in characterizing the IRS's
actions as a proper setoff of liabilities.
7 Interestingly, the IRS's own reading of Lewis defeats its position here.
The IRS acknowledges that, in Lewis, the Supreme Court "held that . . .
the statute of limitations would bar the Government from collecting addi-
tional taxes from the taxpayer . . . ." IRS Br. at 15 (emphasis added).
Here, the IRS seeks to collect additional taxes by ignoring a tax credit
that the IRS admits is valid. Under its own reading of Lewis, then, the
IRS's claim for additional payment must fail.
8 We simply disagree with our dissenting colleague as to the proper
reading and application of the Supreme Court's decision in Lewis v.
Reynolds. In our view, the scope of the Lewis decision encompasses tax
refund litigation only, and in no event can it reach the factual underpin-
9
nings of this case. This limitation of scope is unmistakable from the plain
language of the Supreme Court's brief opinion.
The Court's three-sentence holding begins by acknowledging the
IRS's implied authority to reaudit a return in response to a refund suit:
"While the statutes authorizing refunds do not specifically empower the
Commissioner to reaudit a return whenever repayment is claimed,
authority therefor is necessarily implied." 284 U.S. at 283 (emphasis
added). The Court then states an axiom of refund suits: "An overpayment
must appear before refund is authorized." Id. (emphasis added). The
paragraph concludes with an explanatory sentence--also quoted by the
dissent--which simply confirms the IRS's authority to "retain payments
already received when they do not exceed the amount which might have
been properly assessed and demanded." Id. (emphasis added).
As a result, each sentence of the Lewis holding deals solely and
expressly with refunds. When applied in its intended context, the Court's
concise holding and its unadorned reasoning are perfectly clear.
Only when Lewis is conscripted into service outside the refund context
--as the dissent and the IRS seek to do here--can its reasoning be made
to seem "oblique." Post at 23. Tellingly, the analysis of Lewis made by
the dissent fails to mention the linch-pin term of that decision: "overpay-
ment." Having thus abstracted Lewis from the only context in which it
is relevant, the dissent somehow divines from the twin powers that Lewis
confers--the power to reaudit a return and the power to retain certain
"payments already received"--a new, third power, namely, the power to
affirmatively demand additional payments whenever the IRS discovers
an error in its original assessment.
This authority would be triggered, in the dissent's view, whenever the
taxpayer seeks "a reduction in the amount of tax previously assessed."
Post at 23. The dissent concludes that submission of a valid foreign tax
credit attempts such a reduction. Presumably, tendering a cash payment
of one's full tax burden also triggers this new authority, as such a pay-
ment would, like a valid tax credit, satisfy and"reduce" the assessed tax
burden. As a result, whenever a taxpayer discharges its tax burden--
either by writing a check or submitting a valid tax credit--the dissent
would permit the IRS to demand payment of any taxes it ever could have
assessed for the tax year in question, even if the applicable statute of lim-
itations then bars any such additional assessment. If the Lewis Court
intended to grant the IRS such a broad power, and thereby to silently
abrogate the statute of limitations, it has disguised those intentions well.
10
Nor could the IRS possibly fare any better if the Estate now paid
the alleged deficiency and sought a refund. Any such payments would
be "overpayments" under I.R.C. § 6401, thus would be subject to
mandatory refund. See I.R.C. § 6402. This is true regardless of which
of its actions--the July 31, 1992 Closing Letter or the June 21, 1994
reopening letter--the IRS relies on as the "assessment" being liti-
gated.
Presuming that the 1992 Closing Letter represents the operative
assessment, the IRS itself has admitted that this letter did not assess
the taxes on which its claimed deficiency is based. The IRS conceded
in its 1994 reopening letter that the calculation error had caused it not
to assess the taxes in question: "This error resulted in the estate's not
being assessed the tax on these assets in [the] first audit." Because the
Estate has, as shown above, undeniably discharged all taxes actually
assessed in the closing letter, any current payment by the Estate
would be payment of unassessed taxes.
The Estate would plainly be entitled to refund of any such amounts.
Ewing v. United States, 914 F.2d 499, 504 (4th Cir. 1990). In Ewing,
we were required to interpret I.R.C. § 6401, which specifies the con-
sequences of an assessment or collection made in violation of the stat-
ute of limitations:
The term "overpayment" includes that part of the amount of
the payment of any internal revenue tax which is assessed
or collected after the expiration of the period of limitations
properly applicable thereto.
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Since it was decided in 1932, Lewis has been cited in more than eighty
separate decisions of the Supreme Court and Circuit Courts of Appeals.
Nearly all of these decisions have arisen from refund disputes, like Lewis
itself; the rest have merely string-cited Lewis in general discussions of
standards of proof applicable to tax cases. Significantly, the dissent relies
on none of these decisions in support of its novel reading of Lewis. This
is a powerful indication that, even under the most liberal reading of
Lewis, the interpretation of that decision endorsed by the dissent and the
IRS cannot prevail.
11
I.R.C. § 6401. If a tax payment is an "overpayment," the IRS must
refund it. I.R.C. § 6402(a) ("In the case of any overpayment, the [IRS]
. . . shall . . . refund any balance."); Alexander v. United States, 44
F.3d 328, 331 (5th Cir. 1995) ("[P]ayments made after the limitations
period are defined as `overpayments' and, as such, must be
refunded.").
The taxpayers in Ewing had made certain payments to the IRS,
even though the IRS had never formally assessed those taxes. Some
payments were made within the limitations period, and others were
made after that period. Applying § 6401 to these facts, we concluded
that while the IRS could retain unassessed tax payments it received
within the limitation period, it must refund the other payments: "Since
the amounts paid in 1985 were `collected' by the IRS outside of the
period for assessment, with no assessment having been made, they
come within [§ 6401's] definition of `overpayment'." Ewing, 914
F.2d at 504.
Thus Ewing makes clear that, where a tax liability has not been for-
mally assessed, any payments of that liability submitted after the limi-
tations period are overpayments under § 6401 and must be refunded.
Here, the allegedly outstanding taxes were not assessed in the Closing
Letter; in fact, they have never been assessed. If the Estate nonethe-
less pays the deficiency now and seeks a refund of its payment, Ewing
would require the IRS to return those amounts. Ewing, 914 F.2d at
504.
The result of a refund suit is equally clear if the IRS relies on its
1994 reopening letter as the operative assessment. That letter was sent
more than three years after the Estate's return was filed in 1989. As
a result, any payment submitted in response to an assessment in that
letter would constitute collection of a tax assessed after the statute of
limitations, thus would be an overpayment under the plain language
of § 6401. See Alexander, 44 F.3d at 331. As a result, the Estate
would be entitled to a mandatory refund of any such payment.
It is undeniable, then, that the IRS cannot prevail against the Estate
under any reading of the law, whether applied to the status quo or in
the context of any future refund suit.
12
2.
But the Anti-Injunction Act still requires us to examine whether the
Estate will suffer irreparable injury if not granted the relief it seeks.
"Americans United", 416 U.S. at 758. The IRS contends that the
Estate cannot be irreparably injured because it has another, adequate
legal remedy. Cf. American Friends, 419 U.S. at 11 (inadequacy of
available remedies goes to prove irreparable harm). Specifically, the
IRS argues that the Estate may simply pay the disputed tax and seek
a refund, first from the IRS, then in district court if necessary.
Under ordinary circumstances, the availability of a refund suit does
negate any claim of irreparable injury. Id.; "Americans United", 416
U.S. at 762; Bob Jones Univ., 416 U.S. at 746; International Lotto
Fund, 20 F.3d at 591. These are not ordinary circumstances. In this
case the actions of the IRS are transparently baseless, in that it is pur-
suing this matter after the statute of limitations clearly has barred col-
lection or assessment of further taxes. A refund suit under such
circumstances is an inadequate remedy.
We must remember that this case began with the IRS's broken
promise to the Estate. The IRS and the Estate had agreed on the
Estate's tax liability after extensive negotiations. According to the
terms of the Closing Letter that followed those negotiations, the IRS
represented that it would not reopen the case "unless Revenue Proce-
dure 85-13 . . . applies."
Under Section 4 of Rev. Proc. 85-13, reopening by the IRS is per-
missible in only three circumstances.9 At oral argument, the IRS
_________________________________________________________________
9 Section 4 of Rev. Proc. 85-13 provides as follows:
The Internal Revenue Service will not reopen any case closed
after examination . . . to make an adjustment unfavorable to the
taxpayer unless:
1. There is evidence of fraud, malfeasance, collusion, conceal-
ment or misrepresentation of a material fact; or
2. The prior closing involved a clearly defined substantial error
based on an established Service position existing at the time of
the previous examination; or
3. Other circumstances exist that indicate failure to reopen
would be a serious administrative omission.
13
expressly disavowed the applicability of the first two prongs of Sec-
tion 4, relying solely on the third prong as the basis of its reopening.
By disavowing reopening premised on subsections 1 and 2 of Section
4, the IRS acknowledges that the taxpayer did not engage in fraud,
malfeasance, collusion, or concealment or misrepresentation of a
material fact. The IRS further acknowledges that the prior closing did
not involve a clearly defined substantial error based on an established
IRS position.
As noted, however, the IRS claimed at oral argument that it is enti-
tled to renege on its express representation to the taxpayer, embodied
in the Closing Letter, under the catch-all, third prong of Section 4 of
Rev. Proc. 85-13. Subsection 3 of Section 4 permits reopening when
"[o]ther circumstances exist that indicate failure to reopen would be
a serious administrative omission." This "other circumstances" pro-
viso of Rev. Proc. 85-13 is inappropriate and inadequate support for
the IRS's breach of its promise not to reopen the Estate's case. Under
these circumstances, we are skeptical of the bona fides of the IRS's
position that, when the applicable statute of limitations has expired,
failure to reopen the Estate's case for the purpose of increasing its tax
liability results in a "serious administrative omission."
Having reopened the case, the IRS then launched a thinly veiled
attempt, however described, to assess taxes in violation of the statute
of limitations. In its 1994 reopening letter, the IRS conceded that the
statute of limitations barred its assessment of additional taxes. Never-
theless, and "even though the normal statute of limitations has run,"
the IRS manufactured a deficiency by setting-off an admittedly valid
foreign death tax credit against time-barred taxes it never assessed. At
the end of the day, then, the IRS demanded additional taxes from a
taxpayer who--upon the facts admitted by the IRS--had discharged
all taxes that had ever been assessed against it. However the IRS
labels its actions, they amount to an illegal assessment of taxes. See
I.R.C. § 6501(a).
While this initial "mistake" is bad enough on its own, the IRS has
maintained its baseless position for five more years. In the taxpayer's
administrative appeal, before the district court, and again before this
court, the IRS has insisted--despite its utter lack of legal support--
that the Estate should pay it more money. Such actions can have one
of two possible causes: the IRS's shocking ignorance of the laws it
14
administers, or its utter disregard for the limits of those laws. What-
ever the cause, the effect on the Estate is to force it either to pay the
amount demanded or to continue fighting the IRS.
We simply will not, as the IRS requests, require the Estate to con-
tinue this fight in yet another forum. The IRS would have the tax-
payer assemble the substantial sum needed to pay its manufactured
deficiency--ten years after the Estate's return was originally filed--
and again pay its attorney to file a suit for refund of that payment. As
we have demonstrated above, the IRS is certain to lose any such suit;
it will have to refund all payments. We will not require this waste of
private, agency, and judicial resources.
Nor would forcing such a suit advance the purposes of the Anti-
Injunction Act. The Act is designed to promote efficient and timely
tax collection. It protects "the Government's need to assess and col-
lect taxes as expeditiously as possible with a minimum of preenforce-
ment judicial interference . . . ." Bob Jones Univ., 416 U.S. at 736
(emphasis added). Requiring taxpayers to file pointless refund suits to
retrieve taxes that are unquestionably time-barred when collected can-
not promote speedy tax collection. In fact, it would legitimize just the
opposite. See Williams Packing, 370 U.S. at 7 (where IRS cannot pre-
vail, "the central purpose of the [Anti-Injunction] Act is inapplica-
ble").
The Anti-Injunction Act also is meant to protect the IRS from liti-
gation pending a suit for refund. Id. at 8. Where, as here, the IRS acts
in complete disregard for the tax code, it should not be surprised to
find itself stripped of the code's protections.
Furthermore, it is the IRS's avoidance of the tax code's ordinary
assessment mechanism that has deprived the Estate of the opportunity
to contest the claimed deficiency without a refund suit. In the usual
case, when the IRS determines that additional taxes are due from an
estate, it mails the estate a Notice of Deficiency. I.R.C. § 6212. The
estate may then, without first paying the asserted deficiency, file a
petition in the Tax Court seeking redetermination of the deficiency.
I.R.C. § 6213.
Here, of course, the Estate could not avail itself of the usual pre-
payment remedy in the Tax Court because the IRS never issued a
Notice of Deficiency for the new amount. See Jensen v. IRS, 835 F.2d
196, 198 (9th Cir. 1987) (IRS failure to send notice of deficiency
15
deprived taxpayer of right to challenge deficiency in Tax Court). The
reason for the IRS's failure to mail a Notice of Deficiency is plain:
The limitations period of § 6501(a) barred its formal assessment of
additional taxes. By seeking additional payments despite § 6501(a),
then, the IRS not only ignored the limitations period, but it also
deprived the Estate of its usual, pre-payment remedy in the Tax
Court. The IRS cannot be permitted to force a more costly remedy on
the taxpayer by its own avoidance of the tax code.
Given the IRS's foreclosure of a pre-payment remedy, we are espe-
cially sensitive to the equities in this case. Both we and the Seventh
Circuit have discounted the IRS's argument that the taxpayer should
seek other remedies where the equities of the case heavily favor the
taxpayer:
We note that [the IRS's] adequate remedy argument comes
with particularly poor grace in the circumstances of this
case. "Even tax administration does not as a matter of prin-
ciple preclude considerations of fairness." Angelus Milling
Co. v. Commissioner of Internal Revenue, [325 U.S. 293,
297 (1945)]. A suit for mandamus may be governed by
equitable considerations . . . and the equities here are all on
the side of the taxpayers.
Vishnevsky v. United States, 581 F.2d 1249, 1255 (7th Cir. 1978)
(quoted in In re First Fed. Sav. & Loan Ass'n v. Baker, 860 F.2d 135,
139 (4th Cir. 1988)).
The current action is the only reasonable and efficient method by
which the Estate may defend its rights, and the Estate will be irrepara-
bly harmed without it. See American Friends, 419 U.S. at 11 (inade-
quacy of available remedies proves "irreparable injury, an essential
prerequisite for traditional equity jurisdiction"). Because the IRS also
is certain to fail on the merits of its position, the Estate's action falls
within the narrow exception to the Anti-Injunction Act. Bob Jones
Univ., 416 U.S. at 737. The district court therefore had jurisdiction to
decide the merits of the Estate's mandamus action. We now turn to
this mandamus issue.
16
III.
A plaintiff may invoke the federal courts' extraordinary power to
issue a writ of mandamus only by proving the co-existence of three
elements: "(1) the petitioner has shown a clear right to the relief
sought; (2) the respondent has a clear duty to do the particular act
requested by the petitioner; and (3) no other adequate remedy is avail-
able." Baker, 860 F.2d at 138. Where mandamus relief is sought
against a public official, "the alleged duty to act [must] involve a
mandatory or ministerial obligation which is so plainly prescribed as
to be free from doubt." Id. In assessing the Estate's claim, though, we
remain mindful that "the right to a writ of mandamus may turn on
equitable considerations." United States ex rel. Girard Trust Co. v.
Helvering, 301 U.S. 540, 543 (1937).
As our above discussion makes clear, the Estate showed that it has
a clear right to have the full amount of the foreign death tax credit
recognized, thus to be free from additional collection efforts. Further,
the IRS has a clear duty to provide such relief. The District Director
has no discretion in allowing the foreign death tax credit; instead the
tax code mandates this credit: "The tax imposed by section 2001 shall
be credited with the amount of any estate, inheritance, legacy, or suc-
cession taxes actually paid to any foreign country." I.R.C. § 2014(a).
Given the Director's lack of discretion, along with the baselessness
of the I.R.S.'s actions, the Director had a clear duty to act as the
Estate has requested.
As further stated above, no other avenue the Estate could pursue
would "afford[ ] a remedy equally adequate and complete." Girard
Trust Co., 301 U.S. at 544. Consequently, the Estate has no other rea-
sonable way to vindicate its clear right to the requested relief, and the
District Director has a clear duty to provide that relief. Finally, as in
Baker, "the equities here are all on the side of the taxpayer[ ]." 860
F.2d at 139 (quoting Vishnevsky, 581 F.2d at 1255). We therefore
conclude that the district court erred in dismissing the taxpayer's
mandamus suit.
In so ruling, we do not intend to broaden the narrow class of cases
for which mandamus relief is available. We have not declared "open
season" on mandamus suits against the IRS. However, the mandamus
17
remedy exists for extraordinary cases. We are satisfied that the law-
less actions attempted by the IRS here--while unsettling--truly are
extraordinary.10
IV.
We therefore reverse the judgment of the district court and remand
for further proceedings not inconsistent with this opinion.
REVERSED AND REMANDED
_________________________________________________________________
10 The dissent characterizes our opinion as "extraordinary." We make
two points in response.
First, as we have emphasized, we agree that this case is extraordinary.
Mandamus relief, even against the IRS, is proper in precisely such
extraordinary cases. See Baker, 860 F.2d 135 (granting mandamus
against IRS); Vishnevsky, 581 F.2d 1249 (same). And while the Supreme
Court-created exception to the Anti-Injunction Act is narrow, it does
exist, and for good reason. Thus the fact that mandamus suits enjoining
the IRS from assessing or collecting taxes ordinarily fail does not mean
that they are legally impossible; it simply means that, thankfully, facts
such as these almost never arise.
Second, although the dissent argues that Supreme Court precedent
forecloses our decision, the dissent has identified no case in which the
Supreme Court, or any other federal court, having concluded that the IRS
could not succeed under any view of the law or facts, nevertheless found
itself without equity jurisdiction to grant mandamus. As a result, we are
convinced that the uniqueness of these facts justifies the remedy we grant
today, which the dissent correctly characterizes as "extraordinary."
While the dissent also describes our decision as "unprecedented" and
"remarkable," it is hardly unprecedented or remarkable for courts to
require government agencies to comply with the law. And when govern-
ment agencies have acted in a lawless manner, it is neither unprecedented
nor remarkable for them to be directed to cease and desist from lawless
activity. In addition, it is hardly novel for government officials and gov-
ernment agencies to be expected to comply with their representations to
citizens, such as the representations made to the Estate by the IRS in the
Closing Letter. Importantly, the most remarkable aspect of this situation
and this decision must be that it involves an unprecedented and extraor-
dinary set of circumstances not likely to recur.
18
LUTTIG, Circuit Judge, dissenting:
Today, for the first time in history, a federal court of appeals orders
a federal district court to issue a writ of mandamus to the Internal
Revenue Service under the Mandamus and Venue Act (which, it bears
reminding, authorizes a court to compel an official only to perform
a "mandatory or ministerial obligation which is so plainly prescribed
as to be free from doubt"), in the face of the Tax Anti-Injunction Act
(which, it likewise bears reminding, withholds jurisdiction from the
federal courts over suits filed "for the purposes of restraining the
assessment or collection of any tax") directing the IRS to forgo the
assessment and collection of taxes that all agree are owed by a tax-
payer. And this, despite the fact that the taxpayer has the alternative
remedy of a postpayment refund action, as the majority itself
acknowledges, and thus has no irreparable injury, and that the IRS is
likely under no duty of law at all to forgo its assessment and collec-
tion efforts, but is certainly not under an indisputable discretionless
duty to do so.
The significance of today's decision is evident from the mere state-
ment of the court's holding. But it would be plain, if not from this,
then from the court's repeated uncomfortable protestations of the
"narrowness" of its holding and its own felt need to assure us (if
unconvincingly) that it has "not declared`open season' on mandamus
suits against the IRS." Ante at 17.
Because the court's extraordinary holding is directly and clearly
foreclosed by not one, but two, federal statutes, not even to mention
Supreme Court decisions, I dissent.
The two errors committed by the court in reaching its remarkable
holding -- its conclusions that there is no adequate alternative remedy
to mandamus relief in this case and that there is a legal certainty the
taxpayer will prevail in its dispute with the IRS-- are so manifest
that all of the bluster mustered by the majority toward the IRS cannot
disguise them and little by way of discussion is needed to explain
them.
First, although addressed second by the court for understandable
reasons, the court holds that the plaintiff estate will be "irreparably
19
injured" in the absence of injunctive relief because the estate does not
have an adequate alternative remedy to redress its alleged harm. The
sole substantive reason given by the court for this conclusion (and this
in barely two sentences, see ante at 13) is that "the actions of the IRS
are transparently baseless, in that [the statute of limitations has run on
the assessment and collection of additional taxes, and] [a] refund suit
under such circumstances is an inadequate remedy," id.
Of course, the "baselessness" of the IRS' actions, even if that it be,
but see infra at 21-24, is separate from and wholly irrelevant to the
only legally relevant question of whether the estate does in fact have
an adequate alternative remedy in the form of an administrative
refund procedure. And it is undisputed that the estate does possess
such a remedy: it can simply pay the unpaid balance of its assessed
tax liability and then commence a postpayment refund action, like
every other taxpayer must do. See I.R.C. §§ 6511, 6532, 7422. As the
Supreme Court held in Bob Jones University v. Simon:
These review procedures [a petition to the Tax Court or the
payment of taxes, exhaustion of IRS internal refund proce-
dures, and the filing of suit] offer petitioner a full, albeit
delayed, opportunity to litigate the legality of the Service's
[action].
416 U.S. 725, 746 (1974); see also United States v. American Friends
Serv. Comm., 419 U.S. 7, 11 (1974) (noting that plaintiffs will have
a "full opportunity to litigate" their tax liability in a refund suit);
Alexander v. "Americans United" Inc., 416 U.S. 752, 762 (1974)
(same).
For the remaining four pages of its treatment of the "irreparable
injury" requirement, see ante at 13-16, the majority turgidly com-
plains about the inefficiency due to delay and the unfairness due to
litigation costs of requiring the taxpayer to pursue this long-
established procedure for taxpayer challenges to the IRS. See, e.g., id.
at 15 ("We simply will not, as the IRS requests, require the Estate to
continue this fight in yet another forum, [forcing it to] assemble the
substantial sum needed to pay its manufactured deficiency . . . and
again pay its attorney to file a suit for refund of that payment."); id.
20
at 15 ("We will not require this waste of private, agency, and judicial
resources.").
The problem with invocation of this line of reasoning is that the
Supreme Court squarely rejected it twenty-five years ago in Bob
Jones, observing even at that time that "[t]he Court [had] dismissed
out of hand similar contentions nearly 60 years ago, and [that it
found] such arguments no more compelling [than it had] then." Bob
Jones, 416 U.S. at 746. In Bob Jones, the taxpayer, like the estate in
this case, contended that it would suffer irreparable injury if it were
forced to litigate the availability of a tax exemption in a postpayment
refund action. The Supreme Court rejected the taxpayer's arguments
that a refund action would be an inadequate remedy, despite the fact
that, as the Court recognized, such an action would "present serious
problems of delay" and "place [the taxpayer] in a precarious financial
position," id. at 747 -- the precise consequences relied upon by the
majority here to justify its conclusion that an administrative refund
action is inadequate. The delay and the resulting harm caused by a
requirement of postpayment prosecution were justified, said the
Court, "in light of the powerful governmental interests in protecting
the administration of the tax system from premature judicial interfer-
ence." Id.
Simply stated, the Supreme Court has confronted and rejected the
very arguments relied upon by the majority herein. The Court has
repeatedly held that the postpayment administrative refund action
available to the estate in this case is an adequate alternative remedy
to injunctive relief. The existence of this alternative remedy alone
confirms the singular inappropriateness of the extraordinary manda-
mus remedy ordered by the majority.
Although the majority is evidently more convinced of its conclu-
sion that the estate has a "certainty of success on the merits" of its dis-
pute with the IRS than it is of its conclusion that the estate lacks an
adequate alternative remedy, its error in this conclusion is no less pal-
pable. "[U]nder the most liberal view of the law and the facts" -- the
controlling standard of law, Enoch v. Williams Packing & Navigation
Co., 370 U.S. 1, 7 (1962); see also American Friends, 419 U.S. at 10
(noting that relevant inquiry is whether "it[is] clear that the Govern-
ment could in no circumstances ultimately prevail on the merits") --
21
it is not even tenable, given the Supreme Court's decision in Lewis
v. Reynolds, 284 U.S. 281 (1932), to maintain that the estate is legally
certain to succeed in its dispute with the Service. In fact, if there were
but two options (which of course there are not), it would be far more
tenable to maintain that the IRS, not the estate, is legally certain to
prevail in the action. But, as often is the case, the truth is actually
somewhere on the continuum between these two alternatives, with
neither party certain to succeed but the IRS more likely to do so than
the plaintiff.
In Lewis, the Commissioner initially allowed an estate administra-
tor's deduction for attorney's fees, but disallowed the administrator's
deduction for inheritance taxes paid to the state, and assessed a defi-
ciency. The administrator paid the deficiency and petitioned for a
refund, arguing that the disallowance of the inheritance tax deduction
was improper. In the ensuing refund proceeding, the Commissioner
agreed that his initial disallowance of the inheritance tax deduction
was improper, but reversed himself on the attorney's fees deduction,
disallowing it. As a result, the estate owed additional taxes beyond
those already paid. Accordingly, even though the statute of limitations
for the assessment and collection of taxes had run, the Commissioner
rejected the estate's petition for refund -- retaining, in payment of
taxes due as a result of the eventual disallowance of the attorney's
fees deduction, the monies that would otherwise have been refunded
to the estate due to the initial improper disallowance of the inheri-
tance tax deduction.
Upon certiorari to the Court of Appeals, which had affirmed the
trial court's determination that the Commissioner had had the author-
ity to redetermine and reassess the estate's tax even after the statute
of limitations had run, the Supreme Court affirmed, reasoning as fol-
lows:
Although the statute of limitations may have barred the
assessment and collection of any additional sum, it does not
obliterate the right of the United States to retain payments
already received when they do not exceed the amount which
might have been properly assessed and demanded.
Lewis, 284 U.S. at 283.
22
Lewis may well be dispositive, in the government's favor, of the
legitimacy of the IRS' actions in this case. Here, as in Lewis, the IRS
had, in its July 31, 1992, "Estate Tax Closing Letter," and well before
the statute of limitations ran, already assessed the tax owed by the
estate (in the amount of $261,262.99). In its original complaint, the
estate even concedes that this assessment had been made: "On July
31, 1992 an Estate Tax Closing letter was issued, by the District
Director, confirming, as per the above agreement, that the total Estate
taxes had now been assessed at $261,262.99." See J.A. at 4 (emphasis
added). Indeed, here, as in Lewis, the taxpayer had even agreed to
payment of the assessed tax. And here, in effect if not also as a matter
of law, as in Lewis, the taxpayer had actually paid the tax: in Lewis,
the taxpayer had forwarded to the IRS the entire assessed amount and,
here, the taxpayer forwarded a check in the amount of $67,976 and
proof of a foreign tax payment for which it expected a credit in the
amount of the remainder of the assessed and agreed-upon tax amount.
Finally, in both cases -- in response to the taxpayer's refund action
in Lewis and to the taxpayer's foreign tax credit request here -- the
IRS thereafter determined in the course of evaluating the taxpayer's
request for a reduction in the assessed amount that the taxpayer was
not entitled to the reduction because of the discovery of tax liabilities
which, in the words of the Supreme Court in Lewis, "might have been
properly assessed and demanded" but which were not, and therefore
denied the relief.
The Court in Lewis was oblique in its ultimate reasoning as to why
it authorized the IRS' actions in that case. It may well have been
because the Court concluded that the Service had not in any sense
assessed a tax through its disallowance of the attorney's fees deduc-
tion; rather, it had merely refused to reduce the previously assessed
tax amount. If this was the Court's rationale -- and, given that the
Court authorized the IRS' actions against a challenge that the Service
had assessed a tax after the statute of limitations on assessments had
run, it would seem almost certain that it was -- then the IRS' actions
in this case were unquestionably within its authority, because here,
too, the IRS did nothing more than deny the taxpayer's request for a
reduction in the amount of tax previously assessed. However, to the
extent that the Court did conclude that the IRS had effectively
assessed a tax because of the belated disallowance of the attorney's
fees deduction in Lewis, and nonetheless allowed that assessment
23
despite the statute of limitations, to that same extent would it appear
on the authority of that case that the IRS was allowed effectively to
assess a tax on the overlooked assets here. For, on the dispositive
question presented to the Court in Lewis and to this court of whether
there was an untimely assessment of tax, there is no more of an
assessment of tax outside the statute of limitations here than in Lewis
-- and the majority offers not a single word of explanation for its
conclusion otherwise.
Of course, that it appears on the authority of Lewis that the IRS
may well have acted lawfully in denying the estate's foreign tax credit
in the amount requested -- and most certainly appears to have done
so on the most "liberal" view of the law -- is dispositive of whether
the taxpayer estate is, as required for the issuance of a writ of manda-
mus in the face of the Anti-Injunction Act, "certain to succeed" on the
merits of its dispute with the Service. If it appears on the basis of the
extant Supreme Court authority that the IRS may well prevail on the
merits, or even that it is at least possible that it will do so (which pre-
sumably not even the majority could deny explicitly), then a fortiori
it cannot be said that the taxpayer is certain to succeed on the merits
of the suit.
Therefore, of the two hurdles that the plaintiff estate must over-
come to establish its entitlement to a writ of mandamus ordering the
IRS to terminate tax assessment and collection efforts, in the face of
the Tax Anti-Injunction Act, the plaintiff plainly does not clear either.
Whether one sympathizes or not with the majority's frontier
instincts in this case, see, e.g., ante at 14-15 ("[T]he IRS has insisted
-- despite its utter lack of legal support -- that the Estate should pay
it more money. Such actions can have one of two possible causes: the
IRS's shocking ignorance of the laws it administers, or its utter disre-
gard for the limits of those laws."); id. at 15 ("Where, as here, the IRS
acts in complete disregard for the tax code, it should not be surprised
to find itself stripped of the code's protections."), the IRS, no less
than any other litigant, is entitled to the protection of the law. On the
ground that the plaintiff has not even arguably satisfied the applicable
requirements of law, I would afford the Service that protection and
deny plaintiff the unprecedented mandamus relief it seeks, and now
-- even to its own surprise no doubt -- has received from this court.
I respectfully dissent.
24