Appeal from the United States District Court for the Middle District of North Carolina, at Greensboro.
N. Carlton Tilley, Jr., District Judge. (CA-94-577-2)
Before RUSSELL, WIDENER, and MICHAEL, Circuit Judges.
Affirmed in part and reversed in part by published opinion. Judge Michael wrote the opinion, in which Judge Russell and Judge Widener joined.
The main question in this case is whether a North Carolina tax on illegal drugs is in reality a criminal penalty. North Carolina's Controlled Substance Tax (Drug Tax), N.C. Gen. Stat.Section(s) 105-113.105 through 105-113.113, imposes a special excise tax on"dealers" who illegally possess a sufficient quantity of a "controlled substance," as that term is defined in the state criminal code. The statute requires drug dealers to submit a form reporting their illegal possession and to pay the tax. In return, dealers are supposed to receive stamps to affix to the drugs before they are resold. Payment of the Drug Tax does not make possession or resale legal, however. It should come as no surprise that no drug dealer has ever filed a form and voluntarily paid this tax.
In 1993 North Carolina assessed a $390,000 tax liability against David Lynn, Jr. (Lynn) under the Drug Tax. Lynn and certain of his relatives filed a lawsuit against the state and two of its tax officials in the United States District Court for the Middle District of North Carolina challenging the constitutionality of the tax and alleging civil rights violations under 42 U.S.C. Section(s) 1983. The heart of the complaint is that the Drug Tax is a criminal penalty, not a tax. The district court properly dismissed part of the complaint for failure to state a claim and on the grounds of Eleventh Amendment immunity, but it erred in concluding that the Drug Tax is a true tax. This error led the court to invoke the Tax Injunction Act, 28 U.S.C. Section(s) 1341, and dismiss the claims for declaratory and injunctive relief. We hold that the Drug Tax is in reality a criminal penalty under Department of Revenue v. Kurth Ranch, 511 U.S. 767 (1994). Because the tax is a criminal penalty, federal court jurisdiction is not barred by the Tax Injunction Act.
We further hold that the Drug Tax, like any other criminal penalty, cannot be enforced without the constitutional safeguards that accompany criminal proceedings. We therefore affirm the district court in part and reverse in part.
On March 1, 1993, state law enforcement agents obtained a warrant to search Lynn's residence in Reidsville, North Carolina. When both state and federal agents executed the warrant later that day, they discovered 970 grams of cocaine. Lynn was thereafter convicted on federal drug charges in the United States District Court for the Middle District of North Carolina. In that same proceeding the United States also obtained an order of forfeiture for Lynn's house and furniture under the corresponding criminal forfeiture statute, 21 U.S.C. Section(s) 853.
The cocaine seized at Lynn's house on March 1, 1993, was worth about $25,000. On March 2, 1993, after receiving notice of the seizure from the Sheriff of Rockingham County, the North Carolina Department of Revenue assessed a $389,125.20 Drug Tax liability against Lynn for unpaid taxes, penalties, and interest. According to the Department, Lynn owed a tax of $200 per gram on the 970 grams of cocaine taken from his house ($194,000), plus a 100% penalty for failure to pay the tax on time ($194,000), plus interest ($1,125.20). On March 4, 1993, Janice Faulkner, the North Carolina Secretary of Revenue, filed a Certificate of Tax Liability with the clerk of the Superior Court of Rockingham County, where Lynn resided. See N.C. Gen. Stat. Section(s) 105-242(c) (1996). On the same day the Department of Revenue obtained a writ of execution in Rockingham County, directing the sheriff to seize Lynn's personal property in order to satisfy the $389,000 assessment.
Around March 18, 1993, Lynn filed an objection to the assessment with the Department of Revenue and requested an administrative hearing under N.C. Gen. Stat. Section(s) 105-241.1. The administrative hearing was held on March 15, 1994, before an Assistant Secretary of Revenue. The Assistant Secretary issued his decision on May 9, 1994, sustaining the assessment and declaring it "to be final and immediately due and collectible." Lynn did not petition for a review of the Assistant Secretary's decision before the Tax Review Board. See N.C.
Gen. Stat. Section(s) 105-241.2 (1996). In the meantime, on April 12, 1994, the Sheriff of Rockingham County (in an effort to collect the assessment) had already seized some items of Lynn's personal property, including televisions and VCRs, stereo and Nintendo equipment, a grandfather clock, and an oak cabinet.
The Revenue Department assigned further responsibility for collection of the Drug Tax assessment against Lynn to Deborah West, a Revenue Enforcement Officer in the Controlled Substance Tax Division of the Department. *fn1 In an effort to collect, West (in July and August 1994) seized two cars originally purchased by Lynn, a 1992 Mitsubishi 3000GT and a 1976 Mercedes Benz 450SL. Robin Dixon Lynn, Lynn's current wife, claims that a contract she and Lynn signed in February 1993 gave her sole ownership of the Mitsubishi before it was seized by West. Rodney Lynn, who is Lynn's brother, claims that he owned the Mercedes when it was seized. The Department of Revenue also seized (and sold at public auction) a commercial building belonging to Lynn. Roxanne Lynn, Lynn's ex-wife, claims an interest in that building under a judgment lien from her divorce case against Lynn. Lynn's father, David Lynn, Sr., claims that he owns some of the seized property, presumably certain of the personal items taken by the sheriff.
In October 1994 Lynn, along with his relatives and ex-wife mentioned above, went to federal court to try to block North Carolina from collecting the Drug Tax assessment. They sued the state, Enforcement Officer West, and Secretary Faulkner, seeking compensatory damages under 42 U.S.C. Section(s) 1983 for various constitutional violations. They also sought declaratory and injunctive relief on the grounds that under Department of Revenue v. Kurth Ranch, 511 U.S. 767 (1994), further enforcement of the Drug Tax would violate the Double Jeopardy Clause of the Fifth Amendment and the Due Process Clause of the Fourteenth Amendment. The district court dismissed the complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6)
and for lack of subject matter jurisdiction under Rule 12(b)(1). The district court concluded that (1) West, in her individual capacity, was entitled to qualified immunity, (2) North Carolina was immune from suit under the Eleventh Amendment, (3) West and Faulkner were entitled to Eleventh Amendment immunity on the claims for damages against them in their official capacities, and (4) the Tax Injunction Act, 28 U.S.C. Section(s) 1341, precluded subject matter jurisdiction over Lynn's claims for declaratory and injunctive relief. Lynn and the other plaintiffs appeal.
Roxanne Lynn, David Lynn, Sr., Robin Dixon Lynn, and Rodney Lynn (the relatives) allege that West, a Revenue Enforcement Officer, is liable for damages in her individual capacity because she afforded them no due process before seizing their property to satisfy a tax assessment against someone else. The relatives argue that West acted outside her lawful authority and "is not protected by Qualified Immunity [because] her actions were not justified under state law and were patently unreasonable under the circumstances of this case." Br. of Appellants at 12. The district court held that West is protected by qualified immunity and dismissed the Section(s) 1983 claims brought against her in her individual capacity for failure to state a claim. We review a dismissal for failure to state a claim de novo, construing the factual allegations in the light most favorable to the plaintiffs. See Biggs v. Meadows, 66 F.3d 56, 59 (4th Cir. 1995).
We agree that the complaint fails to state a claim against West in her individual capacity. On West's motion to dismiss in district court the parties fully developed their arguments on whether the relatives' complaint states a claim for deprivation of a property interest under state law. These arguments, which are repeated to us, make clear that we do not need to reach the immunity question. Even accepting the facts as alleged, and drawing all reasonable inferences in favor of the relatives, the complaint does not indicate that West deprived them of any of their property. As we will explain, the allegations of one of the relatives reveal that her interest was not affected by anything that West did. The other three do not allege anything to establish that they had an ownership interest in any of the property seized. Because the relatives cannot identify a property interest affected, they have not stated a claim under the Due Process Clause, and we need not consider whether the doctrine of qualified immunity applies to the claim. See DiMeglio v. Haines, 45 F.3d 790, 799 (4th Cir. 1995) (noting that claims directed at public officials may sometimes be dismissed at the pleading stage without considering immunity because"it may be readily apparent on the face of ...