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DOMINION TRUST CO. v. UNITED STATES

December 13, 1991

DOMINION TRUST COMPANY OF TENNESSEE
v.
THE UNITED STATES OF AMERICA, et al.



The opinion of the court was delivered by: THOMAS A. HIGGINS

 Before the Court is the motion re payment of income taxes of the plaintiff, Dominion, (filed April 1, 1991; Docket Entry No. 45) and the accompanying memorandum in support thereof (filed April 1, 1991; Docket Entry No. 46), in which the plaintiff seeks a determination from the Court in regard to its duty to file federal and state income tax returns for the year 1990 and to pay federal capital gains taxes.

 I. Background. *fn1"

 This is an interpleader action filed by Dominion for the determination of the appropriate disposition of assets held in trust by Dominion on behalf of the defendant, Mr. William T. Hardison, Jr. Dominion is the successor trustee of two testamentary trusts. Defendant Hardison has a one-half interest in the principal of each trust. *fn2" These trust assets have become vested in defendant Hardison and are subject to the competing claims of his creditors. Defendant First American Bank has a bankruptcy judgment against these assets for loans which Hardison fraudulently obtained from First American. Defendant United States of America, represented by the Internal Revenue Service, seeks to enforce its tax levy to satisfy its tax liens against defendant Hardison's property due to false tax returns filed by defendant Hardison in 1967, 1968, and 1969. By order entered April 18, 1991 (Docket Entry No. 53), the Court accepted and adopted the Report and Recommendation of the Magistrate Judge (entered January 11, 1991; Docket Entry No. 41), and found that First American's bankruptcy judgment has priority over the United States' tax liens.

 By order entered on December 28, 1989 (Docket Entry No. 9), the Court granted the motion of Dominion, as trustee, to be allowed to sell certain stocks and bonds, which constituted part of the trust assets. These securities were liquidated in January of 1990 at a capital gain of $ 1,202,610.00. See affidavit of Gail Smith Bradford, Vice President of Dominion (filed April 1, 1991; Docket Entry No. 47), p. 2. The issue before the Court is whether Dominion, as trustee, or defendant Hardison, as beneficiary, is responsible for paying the capital gains taxes incident to this sale. For the reasons set forth below, the Court finds that Dominion should pay the capital gains taxes, and orders the payment of such taxes from the trust assets.

 II. Discussion.

 A. Jurisdiction.

 In its response to Dominion's motion (filed April 4, 1991; Docket Entry No. 48), First American argues that this Court lacks subject matter jurisdiction by operation of the Declaratory Judgment Act as codified in 28 U.S.C. § 2201. *fn3" Under this Act, any federal court may declare the rights of any interested party "in a case of actual controversy within its jurisdiction, except with respect to Federal taxes. . . ." 28 U.S.C. § 2201(a) (emphasis added). First American argues that this Court lacks jurisdiction because (1) no actual controversy exists, and (2) Dominion's motion addresses issues "with respect to Federal taxes."

 First American argues that, because the IRS has taken no action to collect the tax in question, the question is not ripe for adjudication. See response of First American, p. 3. First American's position is without merit. As Dominion correctly argues, 26 U.S.C. §§ 1(e) and 641 impose an income tax on the taxable income of every trust. Further, the taxes in question became due and owning to the federal government as of April 15, 1991, by operation of statutory law. See 26 U.S.C. § 6072(a). That date, as well as the date of extension obtained from the IRS by Dominion, *fn4" has passed. Thus, the Court finds that Dominion's motion addresses an actual controversy within the meaning of the Declaratory Judgment Act. See Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 325, 56 S. Ct. 466, 473, 80 L. Ed. 688, 699 (1936).

 With respect to First American's second argument, neither the Sixth Circuit Court of Appeals, nor the lower district courts of this circuit, have addressed the applicability of the Declaratory Judgment Act in any case analogous to the facts here. However, the Court notes that the Act

 
neither provides nor denies a jurisdictional basis for actions under federal law, but merely defines the scope of available declaratory relief. The jurisdictional boundaries in tax cases are drawn by the Anti-Injunction Act, 26 U.S.C. § 7421, which provides . . . that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any count by any person, whether or not such person is a person against whom such tax was assessed."

 McCarthy v. Marshall, 723 F.2d 1034, 1037 (1st Cir. 1983). As the District Court for the Northern District of Ohio observed, the legislative history of the Declaratory Judgment Act indicates that "the congressional intent was to create a prohibition as to actions concerning federal taxes coterminous with that provided in the Anti-Injunction Act so as to preclude circumvention of the provisions of the Anti-Injunction Act through the maintenance of an action seeking declaratory relief only." Lugo v. Smith, 453 F. Supp. 677, 690 (N.D. Ohio 1978) (citing Eastern Kentucky Welfare Rights Organization v. Simon, 165 App. D.C. 239, 506 F.2d 1278, 1285 (D.C. Cir. 1974), vacated on other grounds, 426 U.S. 26, 96 S. Ct. 1917, 48 L. Ed. 2d 450 (1976)). See also Ecclesiastical Order of the ISM of AM, Inc. v. Internal Revenue Service, 725 F.2d 398, 404-05 (6th Cir. 1984) ("the two Acts, though not similarly worded are, as the majority notes, to be interpreted coterminously.") (Jones, J., concurring in part and dissenting in part; footnote omitted; citing Lugo v. Smith, supra). "Thus, despite its broad language, the Declaratory Judgment Act bars only declaratory relief sought 'for the purpose of restraining the assessment or collection of any tax.' " Church of Scientology of Celebrity Centre, Los Angeles v. Egger, 539 F. Supp. 491, 494 (D.D.C. 1982).

 In Henshel v. Guilden, 300 F. Supp. 470 (S.D.N.Y. 1969), a case remarkably similar to the issue presented by the instant motion, the plaintiff, a co-executrix of an estate, sought declaratory judgment that the defendant trust, and not the estate, was liable for an income tax deficiency. While the IRS was not a party to the federal action, the IRS had claimed the income tax deficiency against the estate in the New York Surrogate's Court. Henshel, 300 F. Supp. at 471-72.

 As one ground for dismissal of the plaintiff's action, the defendant argued that, because the plaintiff seeks a declaratory judgment with respect to Federal taxes, the plaintiff's action was barred by the Declaratory Judgment Act. The District Court rejected that argument.

 
The court is not being asked to declare whether any tax is due the United States, or, if so, how much, but only which of two entities is liable for the otherwise unchallenged assessments. The mere circumstance that a Federal tax assessment is a material element here does not bring this action between private parties within ...

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