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Abuzaid v. Mattox

United States Court of Appeals, Second Circuit

August 12, 2013

ADEL ABUZAID, ZAID ABUZAID, ARREF H. KASSEM, MOHAMED MOHAMED, Plaintiffs-Appellees-Cross-Appellants,
v.
THOMAS H. MATTOX, Commissioner of the New York State Department of Taxation and Finance, [*] Defendant-Appellant-Cross-Appellee.

Argued: June 22, 2011

Defendant, the Commissioner of the New York State Department of Taxation and Finance, appeals from a judgment of the United States District Court for the Northern District of New York (Kahn, J.), enjoining Defendant from imposing penalties under N.Y. Tax Law § 481(1)(b)(i) on the ground that collection of the penalties from Plaintiffs Zaid Abuzaid and Arref H. Kassem would violate the Double Jeopardy Clause of the Fifth Amendment. The Court of Appeals (Leval, J.) concludes that the comity doctrine prohibits the district court from granting injunctive and declaratory relief to Plaintiffs, but that comity does not prohibit a federal court from denying relief on the merits because such a judgment does not interfere with state tax administration. Because the Court of Appeals finds that § 481(1)(b)(i) is a civil penalty rather than a criminal punishment and therefore does not implicate the Double Jeopardy Clause, the judgment of the district court is REVERSED and the case is REMANDED with instructions to dismiss the action with prejudice.

THOMAS MARCELLE, Albany, New York (Philip J. Vecchio, East Greenbush, New York, on the brief) for Plaintiffs-Appellees-Cross-Appellants.

KATE H. NEPVEU, Assistant Solicitor General of the State of New York (Andrew D. Bing, Deputy Solicitor General, Barbara D. Underwood, Solicitor General, and Andrew M. Cuomo, Attorney General of the State of New York, on the brief), Albany, New York, for Defendant-Appellant-Cross-Appellee.

Before: NEWMAN, LEVAL, and POOLER, Circuit Judges.

LEVAL, Circuit Judge

This appeal raises questions of the scope of the comity doctrine, which generally forbids federal courts from interfering with a state's enforcement of its tax laws and its criminal laws, and of whether a penalty imposed under New York's tax code is civil or criminal for purposes of the Double Jeopardy Clause of the Fifth Amendment. Defendant the Commissioner of the New York State Department of Taxation and Finance (the "Commissioner" or the "Department") appeals from a permanent injunction issued by the United States District Court for the Northern District of New York (Kahn, J.). The injunction forbids the Department from imposing penalties on Plaintiffs Zaid Abuzaid and Arref H. Kassem[1] pursuant to N.Y. Tax Law § 481(1)(b)(i). The penalty in question arises by reason of the Plaintiffs' violations of a New York law that taxes the sale of cigarettes and provides for the issuance of tax stamps evidencing payment of the required taxes.

Plaintiffs were prosecuted, convicted, and sentenced under criminal provisions of the New York tax law for their violations. Thereafter, under § 481(1)(b)(i), the Commissioner assessed the separate tax penalties at issue in this case. Plaintiffs brought this action seeking an injunction to bar the Department from collecting the § 481(1)(b)(i) penalties. Their suit contends that the imposition of the penalties would constitute a second punishment for their crimes and is thus prohibited by the Double Jeopardy Clause. The district court agreed and enjoined the imposition of the penalties. The Commissioner appealed.

We reverse the judgment. The district court was barred by the comity doctrine from granting injunctive and declaratory relief to Plaintiffs because such relief would interfere with the state's administration of its tax laws. Moreover, the district court erred in finding that § 481(1)(b)(i) constitutes a criminal penalty. We conclude instead that § 481(1)(b)(i) provides for a civil penalty and that Plaintiffs therefore did not suffer double jeopardy when the Department imposed the penalties on them. In view of our conclusion that Plaintiffs' claim is without merit, we dispose of this case by instructing the district court on remand to dismiss the suit with prejudice. The entry of such a ruling is not barred by comity because the dismissal with prejudice of an action challenging a state tax law in no way interferes with or disrupts the state's administration of its tax laws.

BACKGROUND

Plaintiffs Abuzaid and Kassem owned small newsstands, which sold cigarettes. The state of New York charges a cigarette tax of $15 per ten-pack carton of cigarettes. To collect the tax, the state sells Sales Tax Stamps to stamping agents who affix the stamps to the cigarettes and sell the stamped cartons to retailers such as Plaintiffs. See N.Y. Tax Law § 471. In a "sting" operation that spanned from May 2004 to August 2005, undercover agents from the Department sold 2, 505 cartons of cigarettes bearing counterfeit stamps to Abuzaid, and 720 cartons with counterfeit stamps to Kassem. Abuzaid and Kassem, among others, were arrested and charged under N.Y. Tax Law § 1814, which makes it a felony to "willfully attempt[] in any manner to evade or defeat the [cigarette] taxes" and to "willfully possess[ ] . . . for the purpose of sale" unlawfully stamped cigarettes. N.Y. Tax Law §§ 1814(a), (c). In May 2006, Abuzaid and Kassem separately pled guilty to violating N.Y. Tax Law § 1814(e)(2), a Class D felony.[2]Abuzaid received a sentence of probation not to exceed five years, and he agreed to forfeit certain assets that had been seized by the Department. Kassem was sentenced to a conditional discharge not to exceed three years, and he also agreed to forfeit certain assets seized by the Department. Neither Abuzaid nor Kassem contest their guilt or challenge their plea agreements.

In November 2006, pursuant to N.Y. Tax Law § 481(1)(b)(i), the Department sent Abuzaid a "Notice of Determination" informing him that he was being assessed a penalty of $267, 300 for possessing the unlawfully stamped cigarettes sold by the undercover agents during the "sting" operation. In the same month, Kassem received a similar notice informing him that he would be assessed a penalty of $108, 000. Section 481(1)(b)(i) provides, in relevant part, that "the commissioner may . . . impose a penalty of not more than one hundred fifty dollars for each two hundred cigarettes, or fraction thereof, in excess of one thousand cigarettes in unstamped or unlawfully stamped packages in the possession or under the control of any person . . . ."

On November 10, 2008, Plaintiffs brought this action in the United States District Court for the Northern District of New York to block the Department from collecting the penalty. They asserted that the § 481(1)(b)(i) penalties were punitive in nature and would thus amount to an unconstitutional second criminal punishment for the same wrongful conduct. The Department responded that § 481(1)(b)(i) provides for a civil penalty, which does not implicate the Double Jeopardy Clause. The Department also argued that the district court was prohibited from entertaining Plaintiffs' claim by the Tax Injunction Act ("TIA"), codified at 26 U.S.C. § 1341, and the comity doctrine.

As an initial matter, the district court found that the TIA, which prohibits a federal district court from interfering with the assessment or collection of state taxes when the state provides an adequate remedy, see 28 U.S.C. § 1341, does not apply to this case because § 481(1)(b)(i) is a penalty rather than a tax. See Abuzaid, 2010 WL 653307, at *6. The court did not address the issue of comity as a bar to granting relief to Plaintiffs. Turning to the merits of Plaintiffs' claim, the court concluded that § 481(1)(b)(i) is punitive under the multi-factor balancing test outlined in Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168-69 (1963). The court explained that, although the New York legislature did not intend that § 481(1)(b)(i) operate as a criminal sanction, the law is effectively a criminal punishment because it is meant to punish and deter criminal conduct, it covers conduct that is already a crime, and it requires scienter for the imposition of more severe penalties. See Abuzaid, 2010 WL 653307, at *7-9. Since Plaintiffs had already been subjected to a criminal ...


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