FOR THE EASTERN DISTRICT OF PENNSYLVANIA
Z STREET, INC.,
DOUGLAS H. SHULMAN,
IN HIS OFFICIAL CAPACITY AS
COMMISSIONER OF INTERNAL
MEMORANDUM IN SUPPORT OF UNITED STATES’ MOTION TO DISMISS
Z Street contends that the Internal Revenue Service violated its First Amendment
rights by singling out its application for heightened scrutiny and possible denial based
upon the fact that its viewpoints are contrary to those of the Obama administration.
While the United States denies these allegations, even if they were true, Z Street’s
complaint must still be dismissed for each of the following reasons: 1) Z Street has
failed to identify a waiver of sovereign immunity; 2) equitable relief is inappropriate
because Z Street has an adequate remedy at law; and 3) the Anti-Injunction Act and the
Declaratory Judgment Act bar this Court from granting the declaratory and injunctive
relief Z Street seeks.
I. The Complaint Should Be Dismissed Because the United States Has Not Waived
Its Sovereign Immunity.
In a suit against the United States, a plaintiff must demonstrate that Congress has
explicitly waived its immunity from suit. See, e.g., Block v. North Dakota, 461 U.S. 273
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(1983) (“The basic rule of federal sovereign immunity is that the United States cannot be
sued at all without the consent of Congress.”); United States v. Dalm, 494 U.S. 596, 608
(1990); Lehman v. Nakshian, 453 U.S. 156, 160 (1981); United States v. Sherwood, 312
U.S. 584, 586-587 (1941). When an officer or employee of the United States is named as a
defendant in an action for acts done in his or her official capacity, the suit is in actuality
one against the United States and is subject to the doctrine of sovereign immunity.
Malone v. Bowdoin, 369 U.S. 643, 648 (1962); Larson v. Domestic & Foreign Commerce
Corp., 337 U.S. 682, 688 (1949).
Any waiver of sovereign immunity is not to be implied, but must be
unequivocally expressed by federal statute. United States v. Testan, 424 U.S. 392, 399
(1976). A waiver of sovereign immunity must be strictly construed in favor of the
sovereign, and any suit may be maintained only if brought in strict compliance with the
terms of the statute waiving immunity. Soriano v. U.S., 352 U.S. 270, 276 (1957); Orff v.
United States, 125 S. Ct. 2606, 2610 (2005). A plaintiff suing the United States bears the
burden of establishing an applicable waiver of sovereign immunity. Lewis v. Hunt, 492
F.3d 565, 570 (7th Cir. 2007); Holloman v. Watt, 708 F.2d 1399, 1401 (9th Cir. 1983). If
Congress has not waived the United States’ sovereign immunity for the suit, the court
lacks subject matter jurisdiction and dismissal is required. United States v. Nordic Vill.,
Inc., 503 U.S. 30, 33-34 (1992).
In the present case, plaintiff has not identified any statute that waives the United
States’ immunity from suit, and its complaint must therefore be dismissed. The plaintiff
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rests jurisdiction on two statutes: 28 U.S.C. § 1331 (federal question) and 28 U.S.C. §
2201 (the Declaratory Judgment Act). Neither statute, however, waives sovereign
immunity. See, e.g., Lonsdale v. U.S., 919 F.2d 1440, 1443 -1444 (10th Cir. 1990)(Section
1331 is not a waiver of sovereign immunity); Coggeshall Development Corp. v.
Diamond, 884 F.2d 1, 4 (1st Cir.1989)(same); B.K. Instrument, Inc. v. U.S., 715 F.2d 713,
724 (2nd Cir. 1983)(same); Hart v. U.S., 1997 WL 732466, 1 (E.D. Pa. 1997)(same);
Progressive Consumers Fed. Credit Union v. U.S., 79 F.3d 1228, 1230 (1st Cir.1996)(the
Declaratory Judgment Act is not a waiver of sovereign immunity); Stout v. U.S., 229
F.2d 918 (2nd Cir. 1956)(same); Anderson v. U.S., 229 F.2d 675, 677 (5th Cir. 1956)(same);
Balistrieri v. U.S., 303 F.2d 617, 619 (7th Cir. 1962)(same); Freistak v. Egger, 551 F.Supp.
238, 244-45 (M.D. Penn. 1982)(same); Robishaw Engineering Inc. v. U.S., 891 F.Supp.
1134, 1142 (E.D. Va. 1995)(same).
Admittedly, the United States has waived its immunity for a suit involving the
determination of whether an organization is tax-exempt under 26 U.S.C. § 501(c)(3). See
26 U.S.C. § 7428(a)(1)(A). Such a suit, however, must be brought in the United States
Tax Court, the United States Court of Federal Claims, or the United States District Court
for the District of Columbia. 26 U.S.C. § 7428(a). It cannot be maintained in this Court.
See id. Moreover, before bringing suit, a petitioner must exhaust its administrative
remedies. See 26 U.S.C. § 7428(b). A petitioner is deemed to have exhausted its
administrative remedies if it “has taken, in a timely manner, all reasonable steps to
secure [a tax-exempt] determination[,]” and has waited 270 days from the time it
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1 The United States recognizes that plaintiff is seeking a declaration that the
Service violated its First Amendment right and that plaintiff does not appear to be
seeking a declaration under Section 7428 that it is a tax-exempt organization. (See
generally Compl.) Regardless of the relief requested, however, plaintiff must identify a
clear, specific waiver of sovereign immunity. E.g., Hunt, 492 F.3d at 570. Section 7428
provides a limited waiver of immunity, but plaintiff’s complaint falls outside of that
waiver for the reasons discussed above.
submitted a substantially completed application. See id. & 26 C.F.R. § 601.201(n)(7).
See also Christian Stewardship Assistance, Inc. v. Comm’r of Internal Revenue, 70 T.C.
1037, 1045 (T.C. 1978)(“The 270-day period provided for in [§7428(b)(2)] is a minimum
period to enable respondent to consider determination requests without judicial
interference.”) As plaintiff did not submit its application until December 29, 2009,
(Compl. ¶ 4,) the 270-day period would not expire until September 25, 2010, a month
after plaintiff filed this suit. Because plaintiffs have filed suit in the wrong court and
have not waited the prescribed 270 days, they cannot rely on Section 7428 as a waiver of
sovereign immunity.1 Accordingly, Congress has not waived sovereign immunity, and
the complaint should be dismissed for lack of subject matter jurisdiction.
II. Plaintiff’s Request for Injunctive Relief Must Be Dismissed Because Plaintiff Has
An Adequate Remedy at Law.
Granting injunctive relief is an extraordinary exercise of a court’s equitable
powers. See, e.g., Weinberger v. Romero-Barcelo, 456 U.S. 305 (1982); Frank's GMC
Truck Center, Inc. v. General Motors Corp., 847 F.2d 100, 102 (3d Cir.1988)(Injunctive
relief is an “extraordinary remedy, which should be granted only in limited
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2 See, e.g., 26 U.S.C. §§ 6212 & 6213 (review of deficiency notices by the Tax
Court); 6226 & 6247 (judicial review of partnership determinations); 6234 (judicial
review of oversheltered returns); 7422 (suit for refund); 7426 (suit for wrongful levy);
7428 (declaratory judgment with respect to tax exempt organizations); 7429 (judicial
review of jeopardy levy and assessments); 7431 (suit for unauthorized disclosure or
inspection); 7433 (suit for wrongful collection activity).
3 See IRS Data Book at www.irs.gov/taxstats/article/0,,id=171961,00.html
circumstances.”). To qualify for such extraordinary relief, “[a] party seeking an
injunction from a federal court must invariably show that it does not have an adequate
remedy at law.” Northern California Power Agency v. Grace Geothermal Corp., 469
U.S. 1306 (1984). See also Beacon Theatres, Inc. v. Westover, 359 U.S. 500, 506-07 (U.S.
1959)(“The basis of injunctive relief in the federal courts has always been irreparable
harm and inadequacy of legal remedies.”); Wright & Miller, Federal Practice and
Procedure § 2942 (2010)(“[T]he main prerequisite to obtaining injunctive relief is a
finding that plaintiff is being threatened by some injury for which he has no adequate
legal remedy.”) In this case, plaintiff has one or more adequate remedies at law. Thus,
the Court should dismiss its claim for injunctive relief for failure to state a claim upon
which relief can be granted. See Fed. R. Civ P. 12(b)(6).
Congress has established a comprehensive system whereby aggrieved taxpayers
can seek judicial review of a vast array of Internal Revenue Service actions and
determinations.2 Given that more than 200,000,000 tax returns are filed each year,3
Congress, the Internal Revenue Service, and the courts have a compelling interest in
ensuring that taxpayers follow the statutory system when seeking judicial review. Z
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street has at least four avenues within this statutory system to seek redress apart from
First, plaintiff can file suit under 26 U.S.C. § 7428 and have the United States Tax
Court, the United States Court of Federal Claims, or the United States District Court for
the District of Columbia make a determination as to whether it qualifies for tax exempt
status without regard to the application of any “special policy” Z Street currently
complains of. See 26 U.S.C. § 7248; Centre for Intn’l Understanding, v. Comm’r of
Internal Revenue, 84 T.C. 279, 283 (Section 7428 “is intended to facilitate relatively
prompt judicial review of [whether an organization is exempt.]”)(citation ommitted).
Second, if a notice of deficiency is issued against Z Street, it can challenge the Service’s
determination that it does not qualify as an exempt organization in the Tax Court before
paying the deficiency. See 26 U.S.C. §§ 6212 & 13; Bob Jones University, 416 U.S. 725,
730 (1974). Third, if any tax is assessed, Z Street can pay the assessed tax and sue for a
refund in district court or the court of federal claims, again arguing that it should be a
tax exempt organization. See 26 U.S.C. §§ 7422; Bob Jones, 416 U.S. at 730. Fourth, if Z
Street is determined to be a taxable entity, a Z Street donor can make a donation, claim a
deduction, and sue for a refund when the deduction is disallowed. See id. Given these
statutory remedies, plaintiffs request for an injunction must be denied. Cf. Northern
California Power Agency, 469 U.S. at 1306 (1984)(“A party seeking an injunction from a
federal court must invariably show that it does not have an adequate remedy at law.”).
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III. The Anti-Injunction Act and the Declaratory Judgment Act Bar the Requested
A. The Anti-Injunction Act prohibits the injunctive relief plaintiff seeks.
The Anti-Injunction Act provides that “no suit for the purpose of restraining the
assessment or collection of any tax shall be maintained in any court by any person . . .”
26 U.S.C. § 7421(a)(emphasis added). The principal purpose of the Act is to protect the
“Government's need to assess and collect taxes as expeditiously as possible with a
minimum of preenforcement interference, and to require that the legal right to the
disputed sums be determined in a suit for refund. ” Bob Jones University v. Simon, 416
U.S. 725, 736 (1974)(internal quotations omitted). A “collateral objective of the Act” is to
protect the Internal Revenue Service “from litigation pending a suit for refund.” Id. at
737. The absolute language of the Anti-Injunction Act “could scarcely be more explicit,”
and is strictly enforced. Bob Jones, 416 U.S. 725.
To effectuate the purpose of the Anti-Injuction Act, courts have interpreted it
“broadly” applying it “not only to the assessment and collection of taxes, but to
activities which are intended to or may culminate in the assessment or collection of
taxes as well.” Linn v. Chivatero, 714 F.2d 1278, 1282 (5th Cir. 1983)(citing cases). See
also Alexander v. Americans United, Inc., 416 U.S. 752 (1974); Weinger v. Internal
Revenue Service, 986 F.2d 12, 13 (2nd. Cir. 1993). Bell v. Rossotti, 227 F.Supp.2d 315, 318
(M.D. Penn. 2002)(“Information gathering that may lead to the assessment or collection
of taxes falls within this tax anti-injunction provision.”).
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Plaintiff’s complaint falls within the strictures of the Anti-Injunction Act.
Plaintiff seeks to enjoin the Internal Revenue Service from applying the so called “Israel
Special Policy” to its application for tax-exempt status and to adjudicate its application
without regard to whether Z Street’s policies are “inconsistent with the policy positions
taken by the Obama administration.” (Compl. Prayer for Relief ¶¶ A & B.) Moreover,
Z Street seeks complete, public disclosure “regarding the origin, development,
approval, substance and application of the Special Policy.” (Id. ¶ C.)
The relief plaintiff seeks is precisely the type of “preenforcement interference”
that the Anti-Injunction Act prohibits. Bob Jones, 416 U.S. at 736. First, the injunctive
relief sought requires the Court to interject itself into the Service’s process by which it
determines whether Z Street is a tax exempt organization. Cf. Christian Stewardship, 70
T.C. at 1045 (“The 270-day period provided for in [§7428(b)(2)] is a minimum period to
enable respondent to consider determination requests without judicial interference.”)
Second, an injunction by the Court will delay and could frustrate the eventual
assessment of tax against Z Street if the Service concludes that it is not a tax-exempt
organization. Third, this suit runs counter to the “collateral objective” of the
Act—preventing the Internal Revenue Service from the costs and delays of litigation
“pending a refund claim.” Bob Jones, 416 U.S. at 737.
In sum, the Anti-Injunction Act precludes judicial review of the Service’s actions
in this case until 1) after the Service has made its determination, or 2) a complaint is filed
under 26 U.S.C. § 7428. This is true even though Z Street contends that the Service’s
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4 Many cases have held that the Anti-Injunction Act and the Declaratory
Judgment Act are “coterminous.” E.g., Nat’l Taxpayers Union, Inc. v. U.S.,
68 F.3d 1428, 1435 (D.C. Cir. 1995). But See Cohen v. U.S., 578 F.3d 1, 18 (D.C. Cir.
2009)(Kavanaugh, dissenting)(“By their terms, of course, the statutes are not
coterminous: § 2201(a) bars declaratory relief ‘with respect to Federal taxes,’ and the
Anti-Injunction Act precludes injunctive relief ‘restraining the assessment or collection
of any tax.’), Rehearing en banc Cohen v. U.S., 599 F.3d 652 (D.C. Cir. 2010).
actions are illegal or unconstitutional. See Yamaha Motor Corp., U.S.A. v. U.S., 779
F.Supp. 610, 613 (D.D.C. 1991)(The Anti-Injunction and Declaratory Judgment Acts
protect the “overall pre-enforcement assessment and collection process . . . even where
the legality of the agency's action is in question.”)(emphasis added)(citing cases); Vidra v.
Egger, 575 F.Supp. 1305, 1037 (E.D. Pa. 1982)(“The presence of constitutional issues is
immaterial.”). Accordingly, plaintiff’s complaint for injunctive relief should be
B. The Declaratory Judgment Act prohibits the relief plaintiff seeks.
The Declaratory Judgment Act provides that “[i]n a case of actual controversy
within its jurisdiction, except with respect to Federal taxes other than actions brought
under section 7428 of the Internal Revenue Code . . . any court of the United States,
upon the filing of an appropriate pleading, may declare the rights and other legal
relations of any interested party seeking such declaration . . .” 28 U.S.C. § 2201.
(emphasis added). The federal tax exception to the Declaratory Judgment Act is “at
least as broad as the Anti-Injunction Act.” Bob Jones, 416 U.S. at 732; McCabe v.
Alexander, 526 F.2d 963, 965 (5th Cir. 1976).4
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“The purpose of the tax exception to the Declaratory Judgment Act, like the
Anti-Injunction Act, is to prevent the disruption which would occur to the federal
revenue gathering processes if these processes were subject to judicial interference prior
to the actual determination, assessment and collection of tax liabilities.” Dietrich v.
Alexander, 427 F.Supp. 135, 137-38 (E.D. Penn. 1977). The legislative history to the Act
indicates that it was intended to “free [tax] determinations from judicial interference
apart from the statutory review system”. S.Rep.No.1240, 74th Cong., 1st Sess. 11 (1939-1
Cum.Bull. (Part 2) 651, 657). Thus, the Act protects the “overall pre-enforcement
assessment and collection process –even the early strategic and investigative stages and
even where the legality of the agency's action is in question.” Yamaha Motor Corp., 779
F.Supp. at 613 (D.D.C. 1991)(emphasis added)(citing cases). The presence of
constitutional issues “is immaterial” to the Declaratory Judgment Act’s federal tax
exception. Vidra, 575 F.Supp. at 1307 (E.D. Pa. 1982)(citing Commissioner v. Americans
United, Inc., 416 U.S. 752 (1974)).
Z Street’s request for declaratory relief, namely a declaration that the so called
“Israel Special Policy” violates the First Amendment of the Constitution, thus runs afoul
of the Declaratory Judgment Act. Whatever process the Service uses in determining an
organization’s tax exempt status is to remain free from “judicial interference apart from
the statutory review system.” S.Rep.No.1240, 74th Cong., 1st Sess. 11 (1939-1 Cum.Bull.
(Part 2) 651, 657). See also Dietrich, 427 F.Supp. at 137-38 (E.D. Penn. 1977). Even if the
Service had violated Z Street’s First Amendment rights and may inappropriately deny
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tax-exempt status to Z Street, there is a statutory scheme set up to adjudicate those
alleged violations. The Declaratory Judgment Act, however, like the Anti-Injunction
Act, requires that aggrieved litigants follow that scheme before the Courts can make a
declaratory judgment or issue an injunction. See Church of World Peace v. I.R.S., 715
F.2d 492 (10th Cir. 1983)(Action for declaratory judgment prohibited because church
had adequate remedy at law if the IRS tried to enforce its summons.) Because Z Street
has not followed that scheme (e.g., filed suit under 26 U.S.C. § 7428,) its complaint must
For the foregoing reasons, the Court should dismiss plaintiff’s complaint.
Date: November 1, 2010.
JOHN A. DiCICCO
Acting Assistant Attorney General
ZANE D. MEMEGER
United States Attorney
/s/ Duston K. Barton
DUSTON K. BARTON
Trial Attorney, Tax Division
U.S. Department of Justice
Post Office Box 227
Washington, DC 20044
Telephone: (202) 514-9961
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