Theobald, Robert A.

English

University of Denver

Denver Law Review Volume 15 Issue 5 Article 5 July 2021 The Reluctant Taxpayer - His Remedy by Injunction Robert A. Theobald Follow this and additional works at: https://digitalcommons.du.edu/dlr Recommended Citation Robert A. Theobald, The Reluctant Taxpayer - His Remedy by Injunction, 15 Dicta 137 (1938). This Article is brought to you for free and open access by the Denver Law Review at Digital Commons @ DU. It has been accepted for inclusion in Denver Law Review by an authorized editor of Digital Commons @ DU. For more information, please contact jennifer.cox@du.edu,dig-commons@du.edu. THE RELUCTANT TAXPAYERHIS REMEDY BY INJUNCTIONT HERE are few of us who are not reluctant taxpayers, but some of uswish to voice that reluctance by enjoining the collection of taxes,rather than paying and then suing for a refund. It is for those whowish to employ the injunction that this article is written, to show thetaxpayer what he may expect at the present time, in view of the vacillat-ing course the courts have run in the past. The situation as to Federaltaxes will be considered first and then the situation as to Colorado taxes.In 1867, as an amendment [which is still effective today] to theRevenue Act of 1866, a statute was passed of a prohibitory nature pro-viding, "And no suit for the purpose of restraining the assessment orcollection of a tax shall be maintained in any courts."'The courts immediately commended the policy behind the enact-ment of this statute, but in several early cases denying an injunction, thecourt began its policy of distinction and reservation under the statuteand indicated that the reluctant taxpayer's action would be successful ifthe actions of the collector were so capricious that the court would regardthe threatened imposition as a nullity rather than a tax.2A later distinction was approved by the Supreme Court in Lipke v.Lederer,3 where the court denied that the statute forbade an injunctionagainst penalties as distinguished from taxes. The use of this distinctionshould be confined to cases where the punitive element of the statuteclearly appears, otherwise the statute would lose its significance.These cases, however, throw no light on the question as to how atax expressly within the prohibitory law will be treated. Pullan v. Kin-singer,4 the second case decided under the statute, treated it as merely areenactment of the old equity rule, denying relief where there was anadequate remedy at law.5  This construction was later urged on theSupreme Court in Dodge v. O6born.6 In that case the court found nogrounds for equitable jurisdiction and clearly indicated that equity juris-diction alone was not sufficient to nullify the statute. It concluded withthe significant statement that the provisions could not be avoided, "Un-less by some extraordinary and entirely exceptional circumstance, its pro-visions are not applicable."Six years later these words were repeated in Bailey v. George,7 whichalso denied injunctive relief. Late in the same year a case of great hard-ship, Hill v. Wallace,8 was presented. It arose under the Future TradingAct, whereby grain exchanges were forced to submit to regulation by'14 Stat. 475 (1867). 26 U. S.C. A. 154 (1928), R. S. Sec. 3224.'Pullan v. Kinsinger, 20 Fed., Case No. 11,463 (C. C. S. D. Ohio 1870); Kin-singer v. Bean, 14 Fed., Case No. 7853 (C. C. E. D. Wis. 1875).'259 U. S. 557, Accord; Regal Drug Corp. v. Wardell, 260 U. S. 386.'20 Fed., Case No. 11,463 (C. C. S. D. Ohio 1870).51 Stat. 82 (1789), 28 U. S. C. A. 384 (1928).'240 U. S. 118 (1910).'259 U. S. 44 (1922).'259 U. S. 16, 20 (1922).137138 DICTAthe Secretary of Agriculture or sustain a prohibitive tax., Any actionwhich the exchanges could have taken, aside from obtaining an injunc-tion, would practically have ruined their futures business. Impressed bythis fact, the court seized on the hitherto lifeless phrase, and granted aninjunction on the grounds that the circumstances were "exceptional andextraordinary." The court considered as one element in the conclusionthe multiplicity of suits incident to recovering taxes on each of numerousdaily transactions. An analysis of this case in a Harvard Law Reviewarticle indicated that the court treated "exceptional circumstances" asbeing synonymous with multiplicity of suits. 10In Graham v. Dupont" the circumstances were again unusual. Thetaxpayer's remedy for a refund was barred by the statute of limitations.The court denied the injunction and stated that the Hill case was not inpoint because in that case a penalty was involved. But the more recentdecision of Miller v. Standard Nut Margarine Company1 2 indicates thatthere may be other situations in which the court will be unwilling toapply the restriction of the statute. The tax involved in the Margarinecase was of a prohibitory nature similar to that in Hill v. Wallace, henceon its facts it might seem to go no further than Hill v. Wallace. JusticeButler, however, in granting the injunction, asserted that the statute wasmerely declaratory of the pre-existing common law. In the absence ofstatutes, courts of equity would not enjoin the collection of a tax merelyon the grounds of illegality, but if an independent basis of equity juris-diction existed, relief would be granted. What the Federal courts con-sider to be the common law on this subject is shown by their decisions incases where they have enjoined the collection of state taxes, in stateswhere there were no statutes. They have enjoined the collection of anillegal tax if the taxpayer had no adequate remedy at law, or if the col-lection would lead to a multiplicity of suits'" or throw a cloud on title torealty. 4If the implications of the Margarine case are followed and the stat-ute treated as merely declaratory, the result may be a considerable enlarge-ment of the field in which the reluctant taxpayer may succeed by way ofinjunction against the collection of a Federal tax.In this state of the authorities, Congress passed the AgricultureAdjustment Act 5 authorizing the collection of processing taxes, whichresulted in more than 1,600 cases in the courts seeking injunctions.When Congress passed an amendment to this Act' 6 which would denyrecovery for taxes already due, there was an unprecedented rush forinjunctive relief. In acting upon these bills, no courts went so far as tosay that Section 3224 was without exception. Some U. S. District Court'42 Stat. 187 (1921).137 Harv. Law Review 255, 258."262 U. S. 234 (1923).-384 U. S. 498 (1932)."Travis v. Yale and Towne Mfg. Co., 252 U. S. 60 (1920)."Union Pacific Ry. Co. v. Cheyenne, 113 U. S. 516 (1885).1148 Stat. 31 (1933), 7 U. S. C. A. 601-22 (1934)."79 Cong. Rec., June 18, 1935, at 1991.DICTA 139judges thought that Miller v. Nut Margarine Company required morethan ordinary grounds of equitable jurisdiction before Section 3224could be disregarded, and since complainants could not show impendingruin, injunctive relief was refused. 1 7  To others the same case definedSection 3224 as a restatement of the old equity rule and upon a showingof a threatened multiplicity of suits or other inadequacy of the legalremedy, they granted the injunction."" A third group of district courtscited the Margarine case for the proposition that injunctions would issueonly in extraordinary and exceptional cases and then proceeded to re-strain collection upon mere proof of inadequacy of the legal remedy.1 9The policy of the Federal Government in collecting taxes of alltypes has been to require payment before the determination of the valid-ity of the taxing law. The law provides that Federal taxes are collec-tible by distraint without resort to the courts. 20  Hence, the taxpayer'sonly remedy was to pay under protest and then sue for the refund. Thenecessity for payment under protest was generally adhered to. 21 Thispractice justifies the position of the reluctant taxpayer and tends to worka very great hardship, because deficiency assessments are so large as tocause bankruptcy or a sale of a large portion of the taxpayer's assets be-fore validity of the tax is determined, and in any case a refund would notcompensate for the damage occasioned by collection of the illegal tax.There is no sound reason for this policy of government, since it obtainsno advantage in making collections it is going to return later.These objections became the more forceful when income and estatetaxes became the principal source of government revenue, since complexi-ties involved made disputes more numerous. To meet this situation, in1924 a separate tribunal named the Board of Tax Appeals was created22to pass upon the validity of deficiency assessments, before payment wasdemanded, although either party could have a later review by the courts.The Board's findings were in most cases accepted by the court. Popular-ity of the Board led to the extension of its powers. Collection of theassessed tax was made subject to injunction at the suit of the taxpayer,pending the Board's decision. This is a specific exception to Section3224. The Board's decisions were made final, though either party hadthe right to a review of the record by the Circuit Court of Appeals orthe Court of Appeals of the District of Columbia, from which the casemight be carried to the Supreme Court on certiorari.But this procedure was only applicable to income and estate taxes.The statutory procedure for the collection of other Federal taxes remainsunaltered except as changed by judicial decision."Colo. Mill and Elev. Co. v. Nicholas (D. Colo. July 23, 1935)."Gold Medal Foods, Inc. v. Landy, 11 F Supp. 65 (D. Minn. 1935)."Danahy Packing Co. v. McGowan, 11 F Supp. 920 (W. D. N. Y., July 271935).2026 U. S. C. A. 116, 20, 25.'Cheesebrough v. U. S., 192 U. S. 253 (1904)."26 U. S. C. A. 1048-54, 1100-4, 1211-22 (1926).226 U. S. C. A. 1224-28 (1928).140 DICTAA practical evasion of Section 3224 by our reluctant taxpayer hasresulted by the indirect method of a court's issuing an injunction restrain-ing payment of the tax at the suit of a stockholder against a corpora-tion.24 Since a suit for a refund can rarely be maintained unless the pay-ment was made under protest, equity will lend its aid to prevent a volun-tary payment which would be in the nature of a breach of trust. Thissame principle was applied in the case of the beneficiary of a trust enjoin-ing a trustee from paying an illegal tax voluntarily. 25  The legality ofthe tax is one of the issues involved in such a suit. These cases are recon-cilable only on the theory that they restrict "payment" rather than"assessment" or "collection," the practical result being to evade the Act.In Colorado, as in the Federal courts, the right to an injunction hasrevolved around the interpretation of a statute but, unlike the Federalstatute, Colorado provides a mode of recovery rather than denying in-junctive relief.26"Each county is responsible to the state for the full amount of taxlevied for state purposes, excepting such amounts as are certified to beunavailable, double or erroneous assessments, as provided in the RevenueAct of 1902, and in all cases where anyone shall pay any tax, interest orcost, or any portion thereof, that shall thereafter be found to be errone-ous or illegal, whether the same be due to erroneous assessment, to im-proper or irregular levying of the tax, or clerical, or other error or irregu-larities, the Board of County Commissioners shall refund the same with-out abatement or discount to the taxpayer."From the beginning, Colorado equity courts have held that thisstatute furnished an adequate legal remedy. 27  They said the statute cre-ated a completely new statutory right for the purpose of testing the legal-ity of all types of taxing statutes. This remedy is available in Federalcourts as well as state courts, 28 since it has been interpreted to create anew substantive right in the taxpayer. In fact, the Federal courts havegone so far as to say it supplanted the remedy equity previously affordedthe reluctant taxpayer.2 9While on its face this statute seems broad enough to relieve thereluctant taxpayer, yet in its interpretation the express wording has beenafforded little significance, so that the errors and irregularities have cometo mean simple illegality.ao Hence, when the question is one as towhether or not an assessment is too high, the statute is not of much helpand efforts should be made to'obtain relief from various administrativebodies, including the assessor, the county commissioners, and the taxcommission, as provided by statute.The necessity for exhausting administrative remedies is emphasizedin City and County of Denver v. Boettcher,"1 where pleading under Sec-"Pollock v. Farmers Loan and Trust Co., 157 U. S. 429 (1895).'Weeks v. Sibley, 269 Fed. 155 (N. D. Tex. 1920)."35 C. S. A., Ch. 142, Sec. 281.'Price v. Kramer, 4 Colo. 546."Singer Sewing Mach. Co. v. Benedict, 229 U. S. 481.'Idem."South Broadway National Bank v. Denver, 51 Fed. (2d) 703."99 Colo. 408.DICTA 141tion 281 was held defective because of petitioner's failure to state thatadministrative remedies had been exhausted. What constitutes exhaust-ing administrative remedies, however, is explained in Goldsmith, CountyTreasurer v. Standard Chemical Co.,32 where it is said that the statutoryprocedure need only be followed through the administrative officer as, inthat case, the assessor; and if he refuses relief, appeal to a court need notbe taken from his ruling, but a suit may be brought directly under Sec-tion 281, previously quoted. This will no doubt be followed by ourSupreme Court.Our court has recognized that there might be exceptions to thestatute33 which would give the reluctant taxpayer the right to go intoequity. "We do not hold that this section affords an adequate remedyto the taxpayer, in all cases founded upon an erroneous or illegal tax.We readily conceive that a case might arise in which complainant wouldnot have an adequate remedy by an action at law based on this section."The court went on to say that, "In addition to illegality, hardship orirregularity the case must be brought within some of the recognizedfoundations of equitable jurisdiction, and mere errors or excess in valua-tion or hardship or injustices of the law, or any grievances which can berendered in a suit at law, either before or after payment of taxes, will notjustify a court of equity to interpose by injunction to stay collection ofa tax."It has been held that the mathematical difficulty of giving the caseto a jury was no grounds for equity to act by injunction, though itmight properly hear the case.3 4There are circumstances under which the enforcement of the rightgiven by this section would lead to results against which equity will grantrelief.3 5  An example is found in the situation wherein the Boards ofEqualization were about to certify to a large number of counties, taxeswhich were shown to be illegal. When thus certified it became the dutyof local officers to enforce their payment. Complainants, to avail them-selves of this section, would have been compelled to maintain a largenumber of independent suits at law, and the right to go into equity isbased upon grounds of preventing this multiplicity of suits.When a statute like that in Colorado exists, complainants seekingto restrain the collection of a tax must do more than show some of theequitable circumstances which would support resort to equity if therewere no statute. It seems necessary to make out a case of an exceptionalcharacter such as appears in Cummings v. National Bank,3 which is citedwith approval in many decisions under our statute. The Supreme Courtsaid that compliance with the statute in that case would have resulted in"irreparable injury."'2 3 F (2nd) 313.'Board of County Commissioners v. A. T. 10 S. F. R. R. Co., 52 Colo. 609, 614."Union Pac. v. County Commissioners, 222 Fed. 651.'Taylor v. Louisville, etc. R. Co., 88 F 350 and Fargo v. Hart, 193 U. S. 490, asquoted in 222 F at 657 in U. P. v. Board of Commissioners."101 U. S. 153.142 DICTATallon v. Vindicator Consolidated Gold Mining Company3 7 laiddown the general principle that with few exceptions a tax must be primafacie void before equity will act by granting an injunction.The latest expression by our Supreme Court on the subject was inFairlamb v. Bowle, " in which the court held the method of assessmentproper and denied the injunction, saying that the remedy at law wasadequate.The question arises as to whether or not it is still necessary, as itwas at common law, to pay taxes under protest in order that the taxpayerwill be entitled to sue for a refund in case of illegality. It would seemunnecessary under the statute and was so held in a circuit court case, 9but as yet our Supreme Court has not ruled upon the question, exceptincidentally, 40 where the court allowed recovery though there had beenno protest, but the case did not comment upon the lack of "protest" asa grounds of defense. On the other hand, in Holly Sugar Corporationv. Board of Commissioners,4 1 the Federal court in commenting on theprocedure under the statute, says it is the duty of a property owner,where there has been a levy of an excessive tax, to pay under protest andbring an action against the county to recover the same. Colorado casesare cited in accord. 42 Since the question of protest was not involved inthese cases, it would seem that what the court says is only directory andwould represent a safe procedure to follow, and one which is followedin most cases.ROBERT A. THEOBALD.'59 Colo. 316, 339.'101 Colo. 135.'Union Pacific v. Board of Commissioners, 222 F 651.'"City of Denver v. Evans, Administratrix, 35 Colo. 490."10 F (2nd) 506.'Spaulding Mfg. Co. v. Board of Commissioners, 63 Colo. 438; Kendrick v.A. Y., etc. Milling Co., 63 Colo. 214.

The Reluctant Taxpayer - His Remedy by Injunction

https://digitalcommons.du.edu/cgi/viewcontent.cgi?article=6066&context=dlr

The Reluctant Taxpayer - His Remedy by Injunction

Abstract

Similar works

Full text

Available Versions

University of Denver