CRAIG v. DETROIT POLICE DEPT

FITZGERALD, J.

The issues on appeal are whether the circuit court of the county of a taxpayer's residence has jurisdiction to entertain an action alleging that property has been illegally seized pursuant to the state jeopardy assessment procedures and, if so, what relief is obtainable by the taxpayer.

On March 8, 1972, the Michigan Department of Treasury prepared jeopardy tax assessments and a warrant of levy in the amount of $12,985.82 against plaintiffs. The jeopardy assessments and warrant of levy were issued under the authority of the Use Tax Act and the Income Tax Act. The jeopardy assessments claimed taxes due for the completed tax years 1967 through 1971 and additionally listed taxes due for the then-current 1972 taxable period.

On March 9, the warrant of levy was served on four banks thought by the Treasury to hold plaintiffs' funds and on the Detroit Police Department, then in possession of $2,560 which it had seized pursuant to a search warrant. As a result of the levy, Treasury acquired possession of $5,045.86. On March 11, the notices of assessment were sent by certified mail to plaintiffs.

On June 5, 1972, plaintiffs commenced an action in the Wayne Circuit Court requesting that Treasury be ordered to show cause why the confiscated funds should not be returned. In response, Treasury moved for accelerated judgment on the grounds that the circuit court lacked jurisdiction over the subject matter of the complaint.

On November 21, 1972, the circuit judge ruled that the circuit court possessed jurisdiction and issued a written opinion denying Treasury's motion for accelerated judgment. The court ordered the funds returned based on its finding that defendants had not followed the statutory requirements and therefore had violated plaintiffs' right to due process of law.

The Court of Appeals reversed at 49 Mich. App. 599; 212 N.W.2d 235 (1973), holding that plaintiffs had failed to exhaust their administrative remedies and that the Wayne Circuit Court had no jurisdiction, absent an unconstitutional statute. We reverse the Court of Appeals and remand this matter to the circuit court for further proceedings.

Normally, it is only after notice to the taxpayer and an opportunity for a departmental hearing that deficiencies, interest and penalties may be collected. The jeopardy assessment procedure, however, permits simultaneous demand for taxes claimed owing and seizure of the taxpayer's property to satisfy this demand. While the language of the jeopardy provisions of the Use Tax Act and the Income Tax Act vary slightly, the procedures are essentially the same. Treasury may make a finding that collection of taxes is in jeopardy due to some act of the taxpayer. The taxpayer is given notice of this finding and a demand for payment is made either personally or by certified mail addressed to the last known address of the taxpayer. Simultaneous with the mailing of notice and demand, a warrant may immediately issue for seizure of the taxpayer's property. The statutes do not provide for any prompt post-seizure hearing to determine whether the assessment for taxes owing has any basis in fact. There is no provision for taxpayer challenge of the departmental finding that an act tending to jeopardize collection has been or is about to be committed. Yet, it is this determination of jeopardy which sets into motion the extraordinary procedure permitting simultaneous demand and seizure. The potential for abuse or for injury due to mistake is obvious.

The statutes do permit the taxpayer to present evidence to the department that there is no default in the payment of any tax and that any tax found due will be paid. MCLA 206.423(2) refers to regulations to be promulgated by the department governing procedure by which the taxpayer might give such security. No such regulations have come forth from the department to date.

Because of the statutory deficiencies above noted, we disagree with the Court of Appeals which held that the Wayne Circuit Court had no jurisdiction of this matter because review had "otherwise been provided for by law". The statutes make no provision for a prompt post-seizure hearing into the factual basis for the assessment. Absent such a provision, the circuit court of the county of the residence of the taxpayer provides a logical forum for such a hearing. As will be discussed, infra, the only issues before the circuit court are whether irreparable injury exists and whether the assessment has a basis in fact. Assuming that seizure has injured a taxpayer in a way that could not be adequately remedied by a judgment in a refund suit, and assuming that there is no basis in fact for the assessment, it seems to us fair that the taxpayer not be required to pursue his property — seized with perfunctory notice and without hearing — beyond the county of his residence. The Legislature is free to provide otherwise by law for a prompt post-seizure hearing.

The United States Supreme Court has most recently dealt with the question of procedure under the Internal Revenue Code in the context of jeopardy terminations and assessments. In Laing v United States, 423 U.S. 161; 96 S Ct 473; 46 L Ed 2d 416 (1976), the Court construed the relevant statutes in such a way as to make the procedures for assessment and collection of jeopardy deficiencies under 26 U.S.C. § 6861 et seq. applicable when assessing and collecting unreported tax due after a jeopardy termination under 26 U.S.C. § 6851(a)(1). The procedural safeguards found necessary were: (1) taxpayer access to the Tax Court within 60 days of the jeopardy assessment; (2) taxpayer ability to stay collection of the amount assessed by posting an equivalent bond; and (3) prohibition on sale of any property seized pending final determination of the deficiency by the Tax Court. It is clear that such a statutory construction in Laing made decision as to the constitutionality of § 6851 absent such procedural safeguards unnecessary. Furthermore, in footnote 26 the Court posed but expressly did not answer the question of whether even these safeguards would be constitutionally adequate without the additional protection of a "prompt post-assessment hearing":

"The taxpayers do not question here, and we do not consider whether, even if the jeopardy assessment procedures of § 6861 et seq. are followed, due process demands that the taxpayer in a jeopardy assessment situation be afforded a prompt post-assessment hearing at which the Government must make some preliminary showing in support of the assessment. See North Georgia Finishing, Inc v Di-Chem, Inc, 419 U.S. 601, 607 [ 95 S Ct 719; 42 L Ed 2d 751] (1975); Mitchell v W T Grant Co, 416 U.S. 600, 610-611 [ 94 S Ct 1895; 40 L Ed 2d 406] (1974); Fuentes v Shevin, 407 U.S. 67, 72 [ 92 S Ct 1983; 32 L Ed 2d 556] (1972)."

See, also, the concurring opinion by Justice Brennan, 423 U.S. 161 at 185-188.

The issue of whether some opportunity for a prompt post-seizure hearing is required was addressed in Commissioner of Internal Revenue v Shapiro, 424 U.S. 614; 96 S Ct 1062; 47 L Ed 2d 278 (1976). The precise question there involved was the scope of the Internal Revenue Code's Anti-Injunction Act, 26 U.S.C. § 7421(a), in the context of a summary seizure of a taxpayer's assets pursuant to a jeopardy assessment. Looking to Enochs v Williams Packing Navigation Co, Inc, 370 U.S. 1; 82 S Ct 1125; 8 L Ed 2d 292 (1962), and its judicially created exception to the anti-injunction provision of the code, the Court held in Shapiro that a taxpayer may obtain injunctive relief against collection upon a finding by the trial court that (1) a taxpayer's remedy in a refund suit is "inadequate to repair any injury that might be caused by an erroneous assessment or collection of an asserted tax liability", and that (2) the tax assessment has no basis in fact. Resolution of the question of whether the assessment has a basis in fact will depend upon disclosure by the government of the information available to it at the time of suit. Disclosure may be made by affidavits "so long as they disclose basic facts from which it appears that the Government may prevail". If however the facts do not disclose probable cause to support the assessment, and equity jurisdiction otherwise exists, an injunction may issue in spite of the statute.

Although the Court in Shapiro did not base its holding on the Fifth Amendment, but rather on the Williams Packing exception to the Anti-Injunction Act, it was clear that its standard was "at least as favorable to the taxpayer as that required by the Constitution". In rejecting the government's claim that the district court was without jurisdiction to grant the injunctive relief requested, the Court said:

"[C]onstruing the Act to permit the Government to seize and hold property on the mere good-faith allegation of an unpaid tax would raise serious constitutional problems in cases, such as this one, where it is asserted that seizure of assets pursuant to a jeopardy assessment is causing irreparable injury. This Court has recently and repeatedly held that, at least where irreparable injury may result from a deprivation of property pending final adjudication of the rights of the parties, the Due Process Clause requires that the party whose property is taken be given an opportunity for some kind of predeprivation or prompt post-deprivation hearing at which some showing of the probable validity of the deprivation must be made. Here the Government seized respondent's property and contends that it has absolutely no obligation to prove that the seizure has any basis in fact no matter how severe or irreparable the injury to the taxpayer and no matter how inadequate his eventual remedy in the Tax Court."

The result of the Laing-Shapiro decisions in the context of Federal jeopardy assessments is that the taxpayer's property cannot be sold pending a judicial determination of the legality of the assessment and, because an injunction restraining collection may issue upon a finding of irreparable injury and lack of factual basis for the assessment, the taxpayer has a judicial forum for a prompt post-seizure hearing.

A statute prohibits the issuance of injunctions "to stay proceedings for the assessment and collection of any tax levied under" the Income Tax Act. Another statute prohibits the maintenance of an action for replevin of "any property taken by virtue of any warrant for the collection of any tax * * * in pursuance of any statute of this state". Following the reasoning of Shapiro, and because of the unique nature of summary seizures, we find that the state cannot lay valid claim to acting "under" or "pursuant to" statute if it is determined that there is no factual basis for the assessment. Accordingly, if the circuit court makes such a finding in favor of the taxpayer and equity jurisdiction otherwise exists, the court may enter an appropriate order for the return of the seized property.

The circuit court determined that plaintiffs had been denied due process of law because Treasury, contrary to the procedure set forth in the statutes, seized plaintiffs' property prior to notice by certified mail of the finding of jeopardy and prior to demand for immediate return and payment of the tax. However, it is clear that when plaintiffs filed their action on June 5, 1972, the levies were in technical compliance with the statute. Therefore, the issues more appropriately before the court on remand are whether plaintiffs' remedy in a refund suit is adequate and whether the tax assessment has a basis in fact. An affirmative finding on either issue will result in a dismissal of plaintiffs' suit. Plaintiffs have the burden of pleading and ultimately proving that a refund suit is an inadequate remedy. So also is it their burden of proving that the assessment lacked a factual basis — judged according to the information available to Treasury at the time of suit. The relevant facts in Treasury's possession must be made available to plaintiffs either through voluntary disclosure or discovery. Disclosure in the form of affidavits is sufficient, the question being whether they demonstrate probable cause to support the assessment.

The Court of Appeals is reversed, and the matter remanded to the circuit court for proceedings not inconsistent with this opinion. Costs to abide the outcome.

KAVANAGH, C.J., and WILLIAMS and LEVIN, JJ., concurred with FITZGERALD, J.

LINDEMER and RYAN, JJ., took no part in the decision of this case.