Opinion
CIVIL ACTION NO. 04-2425.
July 8, 2004
MEMORANDUM
Presently before the Court are Plaintiffs' Motion for Preliminary Injunction, Defendant's Motion to Dismiss and Plaintiffs' Opposition to Defendant's Motion to Dismiss. For the reasons set forth below, Plaintiffs' Motion for Preliminary Injunction and Defendant's Motion to Dismiss are denied.
I. BACKGROUND
This case involves a dispute over the valuation of stock ("Stock") that Plaintiff Investec sold to two of its shareholders, Plaintiff Richard Hansen ("Hansen") and Plaintiff Mary Bowler ("Bowler"). After an audit of Investec's 1995 and 1996 tax returns, the Internal Revenue Service ("IRS") concluded that Investec sold the Stock to Hansen and Bowler at a price below market value. Based on its conclusion, the IRS determined that Investec, Hansen and Bowler all had tax deficiencies.
In May 1999, Plaintiffs appealed the IRS findings to the IRS Office of Appeals in Philadelphia. The parties were unable to resolve their differences and on July 30, 2003, the parties submitted the case to mediation, which was ultimately unsuccessful. On August 28, 2003, Plaintiffs requested that the matter be referred to binding arbitration, but the IRS rejected the request.
On April 12, 2004, the IRS issued notices of tax deficiency ("Deficiency Notices") to each of the Plaintiffs. Plaintiffs have ninety (90) days from the date of the Deficiency Notices to seek review by filing a petition in the United States Tax Court. Plaintiffs, however, filed the instant action seeking a preliminary injunction to have the Deficiency Notices withdrawn. Plaintiffs argue that the IRS arbitrarily and capriciously denied them the opportunity to arbitrate this matter. Subsequently, Defendant filed a Motion to Dismiss.
Plaintiffs' deadline to file a petition in Tax Court is July 12, 2004.
In deciding this motion, the Court accepts the Plaintiffs' version of the facts as true, as Defendant neither responded to the motion nor provided any facts to the contrary.
In order to prevail on a motion for preliminary injunction, the moving party must show: 1) a likelihood of success on the merits; 2) that it will suffer irreparable harm if the motion is denied; 3) that granting preliminary relief will not result in greater harm to the non-moving party; and 4) the public interest favors such relief. KOS Pharmaceuticals, Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004). Furthermore, "preliminary injunctive relief is an extraordinary remedy and should be granted only in limited circumstances." Id. A. Likelihood of Success on the Merits
Plaintiffs argue that they are likely to succeed on the merits of their claim that the IRS abused its discretion in denying Plaintiffs' arbitration request. Specifically, Plaintiffs argue that because they complied with the prerequisites of arbitration (as provided in IRS Announcements 2000-4 and 2002-60), the IRS can only reject the arbitration request if it does so with a rational basis.
The Court does not find Plaintiffs' argument persuasive. The wording in IRS Announcements 2000-4 and 2002-60 repeatedly state that the parties must "jointly request" arbitration. Plaintiffs have supplied no authority, and the Court has not located any authority, that requires the IRS to submit to arbitration as long as a taxpayer requests arbitration and meets the requirements. In fact, IRS Announcement 2000-4 specifically states that arbitration "is optional" and "must be agreed to in a formal agreement executed [by the parties.]" IRS Announcement 2000-4 further states that "arbitration is an optional process for resolving factual issues that are currently in the Appeals process." When explaining the "Arbitration Process," IRS Announcement 2000-4 states, "Arbitration is optional. A taxpayer or Appeals may request arbitration after both parties agree to arbitrate." (emphasis added). Based on the language in the IRS Announcements, the Court cannot find that Plaintiffs are likely to succeed on the merits of their claim. B. Irreparable Harm
IRS Announcement 2002-60 states that the option to arbitrate will only be extended for one year, starting on July 1, 2002. Plaintiffs' request for arbitration was not made until August 28, 2003, which is clearly outside the time frame. Neither party has raised the issue of timeliness in their briefs; however, the Court questions whether Plaintiffs' request was timely. Because the Court denies Plaintiffs' preliminary injunction on other grounds, the timeliness issue will not be addressed.
Plaintiffs argue that they will suffer irreparable harm if a preliminary injunction is not issued to have the Deficiency Notices withdrawn. Specifically, Plaintiffs state that without a preliminary injunction, they will be forced to file a petition in United States Tax Court by July 12, 2004. Pursuant to the rules on arbitration, once a case is docketed in Tax Court, arbitration is no longer available. Plaintiffs argue that if arbitration is not an option, they will suffer the loss of the "intangible benefits derived from the ability to arbitrate the controversy over the Stock." (Pls.' Mot. for Prelim. Inj. at 10-11.)
The Court finds that Plaintiffs have not met their burden of proving that they will be irreparably harmed. The sole dispute between these parties involves the valuation of stock. If Plaintiffs do not agree with the IRS's decision to issue Deficiency Notices, then Plaintiffs have the option to have their arguments heard in the United States Tax Court. Plaintiffs are not harmed by the IRS's decision not to arbitrate, as Plaintiffs have full and unfettered access to the Tax Court to have this dispute resolved. The Court cannot find that Plaintiffs are irreparably harmed simply because they consider arbitration to be more efficient, convenient and strategic.
Because Plaintiffs have failed to meet their burden of showing that they are likely to succeed on the merits of their claim, and because they have not shown that they will be irreparably harmed, the Court denies Plaintiffs' motion for preliminary injunction.
III. MOTION TO DISMISS
Defendant's primary argument for dismissal is that the Anti-Injunction Act bars this lawsuit. Specifically, Defendant argues that the Anti-Injunction Act "provides that `no suit for the purpose of restraining the assessment or collection of tax shall be maintained in any court by any person.' 26 U.S.C. § 7421(a)." (Def.'s Br. at 4.) Presumably, Defendant argues that Plaintiffs are attempting to restrain the assessment and collection of tax by seeking to have the Deficiency Notices withdrawn until their case can be heard on the arbitration issue.
Plaintiffs, on the other hand, argue that this suit does not seek to restrain the assessment or collection of taxes. Plaintiffs contend that "the complaint seeks to have the arbitration provisions of the Internal Revenue Code fairly applied and requests a preliminary injunction in order to provide this Court with sufficient time to rule on the Plaintiffs' claim." (Pls.' Opp'n Br. at 3.) Plaintiffs further argue that the Anti-Injunction Act does not apply if the primary purpose of the lawsuit does not seek to restrain the assessment and collection of taxes. (Id. at 4-5.)
The Court agrees with Plaintiffs' argument. In the instant case, Plaintiffs do not seek to restrain the assessment or collection of taxes. Rather, Plaintiffs seek judicial review of an IRS decision that Plaintiffs allege denied them their right to arbitrate this case. In this case, Plaintiffs have asked the Court to 1) review the IRS' decision to deny arbitration; and 2) issue an order rescinding the Deficiency Notices only so that the Court has time to consider Plaintiffs' claims. The Court agrees with Plaintiffs in that neither of these requests seeks to restrain the assessment or collection of tax. Right or wrong, Plaintiffs believe that they have a right to arbitrate this case, and this suit seeks judicial review of the IRS' denial of this alleged right. This case does not specifically dispute a tax liability or collection, and this case in no way seeks to have Plaintiffs relieved of their tax burden. The sole issue in this case is whether Plaintiffs are entitled to arbitrate their dispute. Accordingly, Defendant's motion to dismiss is denied.
Should the case ultimately be decided in Defendant's favor, Defendant would be entitled to reissue the Deficiency Notices.
IV. CONCLUSION
For the foregoing reasons, Plaintiffs' motion for preliminary injunction is denied and Defendant's motion to dismiss is denied. An appropriate Order follows.