WAGERING TAXES AND THE ANTI-INJUNCTION ACT 635

The Supreme Court's interpretation of the Act has ranged from a literal construction permitting no exceptions55 to a construction that permits suits for injunctive relief to be brought in numerous situations.56 As a result, the cases cannot be reconciled. In 1962, the Court, in Enochs v. Williams Packing & Navigation Co., 57 attempted to resolve the confusion by setting forth an interpretation of the Act that it has subsequently stated was intended to be definitive.58 Nevertheless, the lower courts have disagreed as to both the effect of Williams Packing on previous decisions59 and the correct application of the Williams Packing test.60

A. The Williams Packing Exception to the Anti-Injunction Act

In Williams Packing, the Court held that a litigant seeking to enjoin the assessment or collection of a tax and thereby to avoid the bar of section 7421(a) must show (1) that it is apparent, under the most liberal view of the law and the facts, that the Government cannot ultimately establish its claim and (2) that equity jurisdiction otherwise exists.62 The Court expressly held that hardship to the taxpayer was not, by itself, a sufficient abrogating circumstance.63 The Court was careful to restrict the operation of its newly formulated exception to the Anti-Injunction Act to those instances in which it was truly obvious that the Government could not possibly win:

We believe that the question of whether the Government has a chance of ultimately prevailing is to be determined on the basis of the information available to it at the time of suit. Only if it is then apparent that, under the most liberal view of the law and the facts, during the Civil War. Revenue Act of 1867, ch. 169, § 10, 14 Stat. 475. It has remained in force, largely unchanged, through various codifications until the present day.

55 Snyder v. Marks, 109 U.S. 189, 193 (1883).

56 See, e.g., Allen v. Regents of the Univ. Sys., 304 U.S. 439 (1938) (the statute does not prohibit suit to enjoin collection of tax alleged to burden unconstitutionally a governmental activity of the state); Miller v. Standard Nut Margarine Co., 284 U.S. 498 (1932) (Act does not apply if collection of the tax would destroy the taxpayer's business); Hill v. Wallace, 259 U.S. 44 (1922) (Act does not prevent suit for injunction if collection of tax would ruin the Chicago Board of Trade).

57 370 U.S. 1 (1962).

58 Bob Jones Univ. v. Simon, 416 U.S. 725, 742 (1974).

59 In Lucia v. United States, 474 F.2d 565 (5th Cir. 1973) (en banc), the court discussed both Williams Packing and Miller v. Standard Nut Margarine Co., 284 U.S. 498 (1932), as if the two cases collectively set forth the circumstances that must be shown to exist to circumvent the statute. Lucia v. United States, supra at 573. Other courts have confined their inquiry to a consideration of Williams Packing, apparently considering it to be the only relevant test. E.g., Trent v. United States, 442 F.2d 405, 406 (6th Cir. 1971); Pizzarello v. United States, 408 F.2d 579, 582-83 (2d Cir.), cert. denied, 396 U.S. 986 (1969).

60

Compare James v. United States, 74-1 U.S. Tax Cas. ¶ 16,142 (W.D. Ky. 1974), aff'd per curiam, 75-1 U.S. Tax Cas. ¶ 16,179 (6th Cir. Feb. 12, 1975), petition for cert. filed, 43 U.S.L.W. 3501 (U.S. Mar. 8, 1975) (No. 74-1129) (assessment will not be enjoined unless the Government cannot possibly prevail under any circumstances), with Pizzarello v. United States, 408 F.2d 579 (2d Cir.), cert. denied, 396 U.S. 986 (1969) (assessment will be enjoined if arbitrary, capricious and excessive).

61 370 U.S. at 7.

62 Id. at 6.

"[S]uch a suit [to enjoin an assessment] may not be entertained merely because collection would cause an irreparable injury, such as the ruination of the taxpayer's enterprise." Id.

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BOSTON UNIVERSITY LAW REVIEW

the United States cannot establish its cam, may the suit for an injunction be maintained."

That is, considering the evidence on hand, a court should indulge in every possible presumption in favor of the Government's position.

Initially, it may be noted that this test seems an inappropriate method of determining when to apply section 7421 a). When equity jurisdiction is otherwise present, the test requires the litigant to establish that the Government could not possibly win if he paid the tax and sued for a refund. Such a test, which goes to the merits of the case, should have no bearing on the determination whether a particular jurisdictional statute is applicable. That the statute is jurisdictional, and not merely remedial, was clear to the Court: "The object of § 7421(a) is to withdraw jurisdiction from the state and federal courts to entertain suits seeking injunctions prohibiting the collection of federal taxes.”65 Whether a court has jurisdiction to entertain a lawsuit should not turn on what it perceives the ultimate outcome on the merits would be if the action were fully litigated. The test would be more appropriate in the summary judgment context, in which the parties could substantiate their claims through affidavits,67 This unsuitableness of the Williams Packing test has probably caused some of the disagreement concerning the proper scope of section 7421(a). However, the Supreme Court has recently reaffirmed its holding in Williams Packing, perhaps even broadening its reading of section 7421(a). Consequently, because it appears unlikely that the Court will abandon Williams Packing, this Note's analysis of the Anti-Injunction Act as it applies to wagering tax assessments will be restricted to a consideration of section 7421(a) as interpreted in that case.

B. Conflicting Readings of the Williams Packing Test

1. The "Good Faith" Standard

After setting forth its test for the application of the Anti-Injunction Act, the Court in Williams Packing added that requiring "more than good faith on the part of the Government would unduly interfere" with the collection of the revenue.69 Several courts have seized upon this language as the

64 Id. at 7. The "under the most liberal view of the law and facts" formulation of Williams Packing was recently reaffirmed by the Supreme Court in rejecting a suit for an injunction to prevent the revocation of a taxpayer's tax-exempt status. Bob Jones Univ, v. Simon, 416 UN. 725, 740 (1974).

65 Enochs v. Williams Packing & Navigation Co., 370 U.S. at 5.

66 See Bell v. Hood, 327 U.S. 678, 682 (1946); Gunther, The Subtle Vices of the "Passive Virtues"-A Comment on Principle and Expediency in Judicial Review, 64 Colum 1 Rev 1,19 (1964). But see Land v. Dollar, 330 U.S. 731, 735 (1947),

67 Fed. R. Civ. P. 56.

68 Alexander v. "Americans United" Inc., 416 U.S. 752 (1974), Bob Jones Univ v Simon, 416 U.S. 725, 742-46 (1974). Decisions in the lower federal courts since Bob Jones and mornam United" have tended to adopt a very strict reading of the Ann Injunction Act and the Wollowme Packing test. See, e.g., Cattle Feeders Tax Comm, v, Shultz, 504 F 24-402 0100 C» 1974). Lewk v. Sandler, 498 F.2d 395 (4th Cir. 1974),

69 370 U.S. at 7-8. This "good faith" formulation of the scope of the Ann Iugurton Act's at repeated in Bob Jones Univ. v. Simon, 416 U.S. 725,740(1974) It was,however, dearly dirtum

80-321 O 77 - 29

WAGERING TAXES AND THE ANTI-INJUNCTION ACT 637

proper standard for applying the "Government cannot ultimately prevail" test of Williams Packing. Accordingly, they have indicated that injunctions would be proper when the assessments were so arbitrary, capricious and excessive as to show a lack of good faith on the part of the assessing authority such that the Government could not ultimately prevail in a refund suit. Several other courts that appear to have applied a “good faith" gloss to the "Government cannot ultimately prevail" test have concluded that the assessments in question were bona fide and so dismissed the suits." 71

70

The two most significant cases that have placed a good faith gloss on the Williams Packing test are Pizzarello v. United States72 and Lucia v. United States. 73 The cases are significant because they appear to be the only instances in which a litigant has successfully persuaded a court that a wagering tax assessment ought to be enjoined. In both cases the assessments were very large and were made only after criminal convictionsin Lucia for failure to file wagering tax returns75 and in Pizzarello for failure to register and pay the occupational tax76—were overturned in light of Marchetti and Grosso.

74

In Pizzarello, the amount of tax liability was calculated from an extrapolation of three days' wagering receipts-as evidenced by betting slips seized in a raid-over five years." However, there was no evidence that Pizzarello had been involved in gambling for five years or that the threeday average represented his average daily business for the other 1,575 Elsewhere in the opinion, the Court seemed to be applying a "certainty of success on the merits" standard. Id. at 747-49; see notes 84-94 and accompanying text infra.

10 See Sherman v. Nash, 488 F.2d 1081, 1084 (3d Cir. 1973) (IRS does not have "complete license to act arbitrarily and in bad faith and for other than the purpose of preserving the revenue"); Lucia v. United States, 474 F.2d 565, 573 (5th Cir. 1973) (en banc); Pizzarello v. United States, 408 F.2d 579, 584-86 (2d Cir.), cert. denied, 396 U.S. 986 (1969). In neither of the latter two cases did the court actually state that it felt the Government's assessment showed an absence of good faith. However, in calling the assessments “arbitrary, capricious and without factual foundation," both courts appear to have felt that the assessments in question were not bona fide efforts at revenue collection.

"Iannelli v. Long, 487 F.2d 317, 318 (3d Cir.), cert. denied, 414 U.S. 1040 (1973) (Anti-Injunction Act "presupposes a bona fide attempt of the government to collect revenue"); Collins v. Daly, 437 F.2d 736, 738 (7th Cir. 1971) (section 7421(a) does not apply when "it is so obvious that the tax cannot be ultimately sustained that any effort to collect it calls into question the government's good faith"); Fiore v. Secretary of Treasury, 74-2 U.S. Tax Cas. ¶ 16,150 (E.D.N.Y. 1974); Pizzarello v. United States, 285 F. Supp. 147, 151 (S.D.N.Y. 1968), rev'd, 408 F.2d 579 (2d Cir.), cert. denied, 396 U.S. 986 (1969) (Government cannot ultimately prevail requirement "amounts to a showing of bad faith on the part of the government"). See also Shapiro v. Secretary of State, 499 F.2d 527, 535 (D.C. Cir. 1974), cert. granted, 43 U.S.L.W. 3446 (U.S. Feb. 18, 1975) (No. 74-744) (good faith standard applied to determine whether jeopardy assessment of income taxes should be enjoined).

12 408 F.2d 579 (2d Cir.), cert. denied, 396 U.S. 986 (1969).

13 474 F.2d 565 (5th Cir. 1973) (en banc).

14 Id. at 568 (assessment of $2,653,640); Pizzarello v. United States, 408 F.2d at 580 (assessment of $282,440.70).

15 447 F.2d 912, 913-16 (5th Cir. 1971), rev'd on rehearing, 474 F.2d 565.

16 Sce 408 F.2d at 581-82.

11 Id. at 583.

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the Wagering Taxes, 55 B.U.L. Rev. 387 (1975).

#1474 F.2d at 574.

$2 Id. at 573.

83 Id. at 575.

* 74-1 U.S. Tax Cas. ¶ 16,142 (W.D. Ky. 1974), aff'd per curum, 75 1 US
$16,179 (6th Cir. Feb. 12, 1975), petition for cert. filed, 43 US-LW 3501 (U.S. Mar 8-19
74-1129).

5 Id. In declining to follow Lucia and Pizzarello, the Sixth Circuit appear to he
rejected a strong argument by the petitiones that the Government For
making an assessment that was arbitrary and capricious Sex Reply Brick 4x
74-1 U.S. Tax Cas. at 84,501 ($929,000).

87

* Id. at 84,503.

WAGERING TAXES AND THE ANTI-INJUNCTION ACT 639

an assessment covering four years, rendered the assessment "arbitrary, capricious and without factual foundation."88 In one respect, however, James is arguably distinguishable from at least Pizzarello. Although Pizzarello's criminal conviction was overturned, James actually had pleaded guilty to one count of conspiracy to violate the gambling laws.89 The court seemed to feel that this prior successful criminal prosecution was important evidence that James was involved in gambling operations, despite strenuous arguments that James' guilty plea was not admissible in the civil suit. 90 However, James' prior guilty plea, if admissible, did not in any way indicate that he had been involved in gambling during the entire period for which tax liability had been determined; nor did it help to establish the factual validity of the calculations.

Apparently, the James court reached a result contrary to that reached in Lucia and Pizzarello because it applied a different standard in evaluating the plaintiff's argument that the challenged assessment came within the "Government cannot ultimately prevail" half of the Williams Packing test.o1 The court's formulation of the Williams Packing test was that, unless, “under the most liberal view of the law and the facts" based on information available at the time of the suit, it is clear that the Government cannot ultimately prevail, the assessment cannot be enjoined.92 A similarly strict standard has been applied in several other cases in which litigants sought to enjoin wagering tax assessments.93 Thus, it appears that the courts have applied two varying standards in evaluating the first half of the Williams Packing test: the “good faith" standard of Lucia and Pizzarello and the more stringent "under the most liberal view of the law and facts" standard of James. 94

88 Id.

89 Id.

90 See Brief for Appellant at 6-10. James' argument was based on the Supreme Court decision in North Carolina v. Alford, 400 U.S. 25 (1970), which held that a plea of guilty induced by a desire to avoid the hazards of trial-in Alford's case, the risk of the death penalty-and accompanied by repeated claims of innocence was essentially equivalent to a plea of nolo contendere. Id. at 37. Jaines' plea of guilty to one count of conspiracy was made with express reference to Alford and was coupled with protestations of innocence. Consequently, James argued that it was equivalent to a plea of nolo contendere. Normally, a plea of nolo contendere is not admissible in another proceeding as an aid to prove guilt or liability. United States v. Graham, 325 F.2d 922, 928 (6th Cir. 1963). See also Fed. R. Evidence 410 (not effective until Aug. 1, 1975). Thus, it was argued, James' guilty plea under the Alford rationale was not admissible in the civil tax assessment proceeding. 1 James v. United States, 74-1 U.S. Tax Cas. at 84,503.

92 Id.

93 Trent v. United States, 442 F.2d 405, 406 (6th Cir. 1971) (per curiam); Cole v. Cardoza, 441 F.2d 1337, 1341 (6th Cir. 1971); Mastro v. United States, 75-1 U.S. Tax Cas. ¶ 16,182 (D. Conn. Jan. 30, 1975) (to meet Williams Packing test taxpayer must show "certainty of success on the merits"); Lancoon v. Department of Treasury, 74-2 U.S. Tax Cas. ¶ 16,151 (S.D.N.Y. 1974) (taxpayer must show Government "cannot possibly win"); White v. United States, 363 F. Supp. 31, 34 (N.D. II. 1973) (taxpayer must show that "under no cir cumstances could the government prevail"); McAlister v. Cohen, 308 F. Supp. 517, 521 (S.D.W. Va. 1970), aff'd per curiam, 436 F.2d 422 (4th Cir. 1971) (same).

"The more stringent James standard would seem to be difficult to meet. In none of the cases cited as using a James-type standard was the taxpayer successful in having the tax enjoined. See cases cited note 93 supra. However, an income tax assessment was enjoined under a strict reading of Williams Packing when it was shown that the Government failed to