Recently Keith and Marilyn Ames wrote a separate subchapter in Saltzman and Book IRS Practice and Procedure addressing a district court’s authority to grant the government’s request for injunctive relief. These cases often arise when there are multiple quarters of unpaid employment taxes. In these cases, in addition trying to reduce an assessment to judgement, the government has requested broad injunctive relief to ensure future compliance. If a taxpayer fails to comply with the terms of the injunctive relief, the government can seek judicial sanctions, including imprisonment.
In US v Olson a federal district court in Indiana denied the government’s request for injunctive relief, finding that the government had failed to make the case that relief was necessary or appropriate.
Olson involves Bradley and Shirley Olson and their plumbing businesses. In its complaint the government alleged that the Olsons had about $300,000 in unpaid employment tax obligations over an almost ten-year period. The Olsons failed to respond, and the government requested that the court enter a default judgement for the unpaid assessed tax.
The government also sought injunctive relief, asking the court to compel the Olsons to follow the law in the future, report regularly to the IRS on their compliance, and grant the IRS the right to periodically inspect their books and records.
The district court reduced the assessment to judgement but denied the request for injunctive relief. The government asked the court to reconsider, and the court denied the request.
In denying, the court began its opinion with a tale from Aesop:
A Dog, to whom the butcher had thrown a bone, was hurrying home with his prize as fast as he could go. As he crossed a narrow footbridge, he happened to look down and saw himself reflected in the quiet water as if in a mirror. But the greedy Dog thought he saw a real Dog carrying a bone much bigger than his own.
If he had stopped to think he would have known better. But instead of thinking, he dropped his bone and sprang at the Dog in the river, only to find himself swimming for dear life to reach the shore. At last he managed to scramble out, and as he stood sadly thinking about the good bone that had been lost, he realized what a stupid Dog he had been.
It is very foolish to be greedy.
Aesop & Milo Winter, The Aesop for Children 96 (1919).
From Aesop to the Tax Code
As we have previously discussed (see, for example, Keith’s 11th Circuit Reverses and Imposes an Injunction Against a Corporation for Failing to Pay), Section 7402(a) gives district courts broad equitable powers “as may be necessary or appropriate for the enforcement of the internal revenue laws.” Under this statutory authority, the government has successfully obtained injunctive-type relief that has resulted in court orders compelling future employment tax compliance that is backstopped by an order requiring more regular taxpayer reporting so the government can keep close watch on any future missteps.
The Olson opinion acknowledges the statutory power, although its initial opinion on the matter focused on a slightly different statutory footing that addresses injunctive powers on third parties like preparers, a remedy that the government has also increasingly sought.
From there, the opinion discussed the standard in the Seventh Circuit to grant injunctive relief, looking to a balance of the harms test, considering the potential harm to the government, the public and the affected parties. In discussing that balancing test, the Olson court notes that the Seventh Circuit invokes the standards for injunctive relief under Federal Rules of Civil Procedure 65(b), which considers the following:
Under Rule 65, “injunctive relief is appropriate if the applicant demonstrates ‘(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.’”
Much of the discussion turns to the government’s allegations that absent an injunction, its remedies are inadequate. The court strongly disagreed, first noting that inadequate is not the same as ineffectual, but rather must be “seriously deficient as compared to the harm suffered.”
And on that standard, the complaint as well as a revenue officer’s declaration came up short:
Here, the Government argues that it does not have an adequate remedy at law because “the IRS’s efforts to bring the Olsons into compliance have failed and because the Olsons will likely continue to obstruct the execution of the federal tax laws through their non-compliance.” Maybe, but none of that proves an inadequate remedy at law. The Government has shown here its ability to calculate Defendants’ tax obligations and to obtain a judgment in that amount. There is no reason to believe the Government couldn’t do so later if it determined that Defendants continued to violate the tax laws.
The opinion distinguishes cases where there was an inadequate remedy stemming from a money judgement alone, looking to cases where the courts blessed injunctions that reached individuals who were peddling tax protestor schemes or who had set up a return preparer shop that specialized in bogus returns.
For good measure, the court sees its role differently than the government:
The Court sees no basis to exercise its discretion to issue the broad injunction requested by the Government. The Court does not read § 7402 as allowing the IRS to deputize the federal courts into its enforcement arm every time a taxpayer is delinquent. To do so would be a waste of this Court’s valuable time and resources. No matter the standard, then, the Government’s request for an injunction is denied.
Conclusion
The court noted that the government did a little better than the dog in Aesop’s fable as “it will keep its original bone—but it will be no more successful at grabbing the illusory bone in the river.”
Employment tax noncompliance is a major IRS compliance focus, and is a big part of the tax gap. It is not surprising that the government views the equities differently than the district court judge.
We will keep an eye on this to see if the government appeals.
For readers who want to dig deeper on the issue of injunctions, we review the differing standards that courts have applied in government requests for injunctive relief in Chapter 15 of Saltzman and Book.