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explaining that "the statute contemplates that the debt has arisen as a result of the rendition of a service or purchase of property or other item of value"
Summary of this case from Harney v. Kramer & Frank, P.C.Opinion
Civ 02-4087
March 19, 2003
MEMORANDUM OPINION AND ORDER
The United States of America ("United States") moves for dismissal of the Complaint which the Plaintiffs entitled "Petition for Damages." Among other things, the United States argues that the Plaintiffs failed to exhaust administrative remedies, that they lack standing and that the lawsuit is barred by the statute of limitations. The United States also asserts a counterclaim against the Plaintiffs, pursuant to section 6673(b)(1) of the Internal Revenue Code (26 U.S.C.), for a penalty not in excess of $10,000 against each of them for asserting frivolous and groundless claims. The Plaintiffs have not replied to the counterclaim. The Plaintiffs move for judgment on the pleadings. For the following reasons, the Court grants the United States' motion to dismiss.
BACKGROUND
The Court takes judicial notice of the court file relating to the criminal charges against Richard, Doyle and Scot Mathis (CR 91-30034). They pleaded guilty to conspiracy to defraud the government from 1985 to 1989 by impeding, impairing, obstructing and defeating the collection of taxes, in violation of 18 U.S.C. § 371, because they paid employees of Mathis Implement, Inc., cash wages without paying employment taxes. Each of them served a period of incarceration, home detention, and supervised release. The Eighth Circuit affirmed the sentences. United States v. Mathis, 980 F.2d 496 (8th Cir. 1992). The Court also takes judicial notice of the court file relating to the wrongful levy action filed by the Mathis family against the IRS in 1995 (CIV 95-4123). That file shows that, following the criminal proceedings, the IRS sent Notices of Levy on April 25, 1994 and August 23, 1994, to Farmers State Bank in Winner, South Dakota, for the account of Mathis Implement, Inc., in the amounts of $613,294.94 and $403,030.68. The IRS sent a third Notice of Levy on June 23, 1995, to Norwest Bank in Sioux Falls, South Dakota, for the account of Mathis Implement Trust, Alter Ego and/or Transferee of Mathis Implement, Inc., in the amount of $645,813.81. The Mathis family alleged in CIV 95-4123 that the IRS wrongfully obtained $10,225.70 through the first levy in April 1994 and $34,042.25 through the second levy in August 1994. This Court granted the IRS's motion for summary judgment in CIV 95-4123 because the Mathis family members did not have standing to sue for money taken from Mathis Implement, because the claims were time-barred, and because their double jeopardy claim was meritless. On appeal, the Eighth Circuit concluded that this Court correctly determined the Mathises lacked standing to maintain the wrongful levy action. Mathis v. Internal Revenue Service, 1998 WL 2455 (8th Cir. 1998). Finally, the Court takes judicial notice that, in 1996, the Honorable Charles Kornmann dismissed a wrongful tax collection suit brought by the Mathises under 26 U.S.C. § 7433 seeking damages for the 1994 and 1995 levies because the complaint did not "set forth a valid claim for wrongful collection activity." Mathis v. United States, 78 A.F.T.R.2d 96-7562 (D.S.D. 1996). The Eighth Circuit affirmed. Mathis v. United States, 1997 WL 286180 (8th Cir. 1997).
In the present case, Plaintiffs state that they received notice from the IRS in February of 2002 that additional collection efforts would be implemented in order to collect the taxes owed by Mathis Implement, Inc. The United States indicates that in October 2002 the IRS sent Mathis Implement, Inc. a notice of intent to levy and notice of right to hearing. (Doc. 10, Answer and Counterclaim.) Plaintiffs submitted documentation to the IRS that they allege shows both that Mathis Implement, Inc. did not exist from 1985 to 1989 and that all taxes owed for the period of 1985 to 1989 have been paid. Asserting jurisdiction under 26 U.S.C. § 7433, Plaintiffs seek to recover $69,000 allegedly levied upon by the government, and they request that all liens be removed from their property. Plaintiffs also seek damages for allegedly illegal, harassing and intimidating collection activities.
DISCUSSION
A prose complaint is to be liberally construed. Haines v. Kerner, 404 U.S. 519, 520-21 (1972), and the Court has liberally construed the Plaintiffs' pro se complaint in this case.
26 U.S.C. § 7433 provides a cause of action and civil damages for unauthorized collection activities of the IRS:
(a) In general — If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.
The United States first argues that the Court lacks subject matter jurisdiction because Plaintiffs have failed to exhaust their administrative remedies. Exhaustion is a jurisdictional prerequisite for a claim under 26 U.S.C. § 7433. 26 U.S.C. § 7433 (d)(1); see also Porter v. Fox, 99 F.3d 271, 274 (8th Cir. 1996). The exhaustion requirement is designed to "[protect] administrative agency authority and [promote] judicial efficiency," McCarthy v. Madigan, 503 U.S. 140, 145 (1992). The rationale of the doctrine is that an administrative agency should have the opportunity to apply its expertise, exercise the discretion delegated to it by Congress, and correct its own alleged errors in the first instance, with the possibility of avoiding resort to the courts altogether. Id. The exhaustion requirement also improves the possibility that a fully-developed factual record will be produced, facilitating judicial review and aiding the court in its evaluation and analysis of often technical matters. See McKart v. United States, 395 U.S. 185, 193-95 (1969); Peters v. Union Pac. R.R., 80 F.3d 257, 263 n. 3 (8th Cir. 1996).
The exhaustion of administrative remedies is addressed by 26 C.F.R. § 301.7433-1. In pertinent part, this regulation states:
(d) No civil action in federal district court prior to filing an administrative claim —
(1) Except as provided in paragraph (d)(2) of this section, no action under paragraph (a) of this section shall be maintained in any federal district court before the earlier of the following dates:
(i) The date the decision is rendered on a claim filed in accordance with paragraph (e) of this section; or
(ii) The date six months after the date an administrative claim is filed in accordance with paragraph (e) of this section.
(2) If an administrative claim is filed in accordance with paragraph (e) of this section during the last six months of the period of limitations described in paragraph (g) of this section, the taxpayer may file an action in federal district court any time after the administrative claim is Pled and before the expiration of the period of limitations.
(e) Procedures for an administrative claim — (1) Manner. An administrative claim for the lesser of $100,000 or actual, direct economic damages as defined in paragraph (b) of this section shall be sent in writing to the district director (marked for the attention of the Chief, Special Procedures Function) of the district in which the taxpayer currently resides.
(2) Form. The administrative claim shall include:
(i) The name, current address, current home and work telephone numbers and any convenient times to be contacted, and taxpayer identification number of the taxpayer making the claim;
(ii) The grounds, in reasonable detail, for the claim (include copies of any available substantiating documentation or correspondence with the Internal Revenue Service);
(iii) A description of the injuries incurred by the taxpayer filing the claim (include copies of any available substantiating documentation or evidence);
(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable (include copies of any available substantiating documentation or evidence); and
(v) The signature of the taxpayer or duly authorized representative.
* * * *
The Plaintiffs allege that they contacted the IRS before filing this lawsuit by submitting documentation showing that the 1993 tax assessment was illegal. (Doc. 1, ¶ 12.) Plaintiffs contend that the IRS agent they contacted chose to ignore the evidence presented by them, indicating that he would proceed with the collection. There is no evidence, however, that the Plaintiffs complied with any the procedures set forth in 26 C.F.R. § 301.7433-1 (e) or that they submitted a claim in the proper format. Since the Plaintiffs have not demonstrated that they exhausted their administrative remedies before filing this suit as required by 26 U.S.C. § 7433, this Court Jacks subject matter jurisdiction over their claims.
The United States next argues that the Court must dismiss Plaintiffs' claim for lack of standing because § 7433 of the Internal Revenue Code limits causes of action to "taxpayers." The statute provides that "[i]f, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the [IRS] recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under the title, such taxpayer may bring a civil action for damages against the United States. . . ." 26 U.S.C. § 7433 (a). A "taxpayer" is defined as "any person subject to any internal revenue tax." 26 U.S.C. § 7701 (a)(14). A corporation is considered a person under the statute. See 26 U.S.C. § 7701 (a)(1). "[A]ll of the courts that have addressed the issue, including the Ninth Circuit Court of Appeals, have held that Section 7433 confers jurisdiction only to the taxpayer at whom collection efforts were directed." Ludtke v. United States, 84 F. Supp.2d 294, 300 (D.Conn. 1999). In Allied/Royal Parking L.P. v. United States, 166 F.3d 1000, 1002 (9th Cir. 1999), the Ninth Circuit held that § 7433(a) requires that [the plaintiff] be `such taxpayer' from whom the IRS collected the tax. . .; that is, the direct taxpayer, not a third party." See also Ferrel v. Brown, 847 F. Supp. 1524, 1528 (W.D.Wash. 1993), aff'd, 40 F.3d 1049 (9th Cir. 1994) (the waiver of sovereign immunity under § 7433 is limited to claims by the direct taxpayer from whom the IRS collected the tax);" Wittmann v. U.S., 869 F. Supp. 726, 731 (E.D.Mo. 1994)("The plain language of § 7433 confers standing only on a taxpayer to sue for damages incurred in connection with the collection of his own taxes.").
Upon review of these cases, and finding no authority to the contrary, this Court concludes that Plaintiffs, individuals other than the person against whom the IRS is attempting to collect, do not have standing to assert a claim under § 7433, and the action must be dismissed for Jack of standing.
The Taxpayer Bill of Rights amended 26 U.S.C. § 7426 (h), effective July 22, 1998, to permit persons other than the taxpayer to bring a § 7433-type of claim for unauthorized collection actions. The law applies only to actions of officers or employees of the IRS after the date of its enactment. See Pub.L. 105-206, § 3102(d). Because the IRS activities about which the Plaintiffs complain took place prior to the Act's enactment in 1998, sovereign immunity had not yet been waived. See Hercules Inc. v. United States, 516 U.S. 417, 422 (1977) (United States is immune from suit except when it consents to be sued, and the terms of its consent defines the court's jurisdiction over the suit). Therefore, any potential § 7426(a)(4) claim for damages also will be dismissed. As stated earlier, any action based on potential future collections by the IRS is premature. Section 7426(h)(2) refers to § 7433(d) which requires exhaustion of administrative remedies within the Internal Revenue Service.
Even assuming both that this Court has jurisdiction because Plaintiffs exhausted their administrative remedies, and that the Plaintiffs have standing to sue on behalf of the corporation, the two-year statute of limitations for an unauthorized collection suit under 26 U.S.C. § 7433 (d)(3) bars any claim for damages arising over two years before this lawsuit was filed. A right of action for wrongful collection practices under § 7433 accrues when the plaintiff has a reasonable opportunity to discover the elements of that claim. 26 C.F.R. § 301.7433-1(g)(2). The Plaintiffs assert in their Complaint that the liens were placed on their property and that the allegedly illegal levies in which the "IRS confiscated $69,000" took place in 1994 and 1995. (Doc. 1, ¶ 4.) In Plaintiff's Reply to Defendant's Motion to Dismiss, they state that the IRS "confiscated" $69,000 from trust bank accounts and placed liens on trust properties in 1998, (Doc. 5, p. 5.) The Plaintiff's § 7433 claims arising from the alleged 1994, 1995 and 1998 actions are barred by the two year statute of limitations because the Plaintiffs knew about them well over two years before filing this civil action. Any claim arising out of the recent notice sent by the IRS would be premature as the Plaintiffs have not shown that they have exhausted their administrative remedies or that they have suffered any economic loss.
The United Stales also contends that § 7433 provides for a civil action for damages resulting from a wrongful collection of federal taxes, not for the wrongful assessment of taxes on which Plaintiffs base their claim in this case. The Court agrees that the Plaintiffs challenge the collection of the taxes not because of unlawful collection practices, but because, according to Plaintiffs, the assessment was invalid. For this reason, the Court finds that Plaintiffs have failed to state a claim under § 7433. See Miller v. United States, 66 F.3d 220, 222-23 (9th Cir, 1995) (holding that § 7433 can only be used to attack unlawful collection practices, not the validity or merits of an assessment); Shaw v. United States, 20 F.3d 182, 184 (5th Cir. 1994)(same).
If Plaintiffs' claim could be construed as a claim for a tax refund suit under 28 U.S.C. § 1346 (a)(1) (waives sovereign immunity in civil action against United States for recovery of tax allegedly erroneously or illegally assessed or collected) and 26 U.S.C. § 7422 (civil action for refund), it would also be barred at this time for lack of subject matter jurisdiction. The Supreme Court considers a tax refund suit to be "a post deprivation remedy, available only if the taxpayer has paid the Government in full." United States v. Williams, 514 U.S. 527, 538 (1995), citing Flora v. United States, 362 U.S. 145 (1960). The Plaintiffs have not shown that the full amount of the federal income tax which was assessed against Mathis Implement has been paid, and thus subject matter jurisdiction over a refund suit does not lie. Koss v. United States, 69 F.3d 705, 708 (3d Cir. 1995); Humphreys v. United States, 62 F.3d 667, 672 (5th Cir. 1995).
In addition, § 7422(a) precludes any action to obtain a tax refund unless administrative procedures are first exhausted. "No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . until a claim for refund or credit has been duly filed with the Secretary. . . ." 26 U.S.C. § 7422 (a). See generally Sigmon v. Southwest Airlines Co., 110 F.3d 1200, 1203 (5th Cir. 1997) ("The Internal Revenue Code governs tax refund suits. Under Section 7422(a) of the Code, a taxpayer who seeks a refund of federal taxes must first make an administrative refund claim with the Secretary of the Treasury."). Plaintiffs do not contend that they have exhausted their administrative remedies. As with the § 7433 claim, any potential § 7422 claim also must be dismissed.
To the extent that Plaintiffs are seeking an injunction precluding the IRS from collecting the income tax deficiency in the future, that claim is barred by the Anti-Injunction Act, 26 U.S.C. § 7421, which states, "no suit for the purpose of restraining the assessment and collection of any tax shall be maintained in any court by any person. . . ." A judicially created exception to the Anti-Injunction Act permits federal courts to enjoin the collection of taxes only if the plaintiff establishes first, that under no circumstances could the government ultimately prevail on its tax claim and second, that equity jurisdiction otherwise exists i.e., irreparable harm to the plaintiff and no adequate legal remedy. Enochs v. Williams Packing Navigation Co., 370 U.S. 1, 5 (1962). "The burden is on the plaintiff to show that his case falls within this exception to the Anti-Injunction Act." Hatley v. Department of Treasury, I.R.S., 876 F. Supp. 1262, 1269 (S.D.Ala. 1995), citingBowers v. United States, 423 F.2d 1207 (5th Cir. 1970). In United States v. American Friends Service Committee, 419 U.S. 7, 10 (1974), the Supreme Court explained:
The Anti-Injunction Act, 26 U.S.C. § 7421 (a), provides that no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed. In Bob Jones, supra, we rejected an appeal to create judicial exceptions to § 7421(a) other than that carved out in Enochs v. Williams Packing Navigation Co., Inc., 370 U.S. 1, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962). We noted that Williams Packing was the `capstone' of judicial construction of the Act and spelled an end to cyclical departures from the Act's plain meaning. Bob Jones University v. Simon, supra, 416 U.S. at 742, 94 S.Ct. at 2048. hi `Americans United' Inc., supra, we stated that a pre-enforcement injunction against the assessment or collection of taxes could be granted only if it were clear that the Government could in no circumstances ultimately prevail on the merits, and that equity jurisdiction existed. `Unless both conditions are met, a suit for preventive injunctive relief must be dismissed.' Commissioner v. `Americans United' Inc., 416 U.S., at 758, 94 S.Ct., at 2057.
Plaintiffs in this case have not shown that the United States cannot establish its claim or that the Plaintiffs have no adequate legal remedy. Thus, any potential claim for an injunction must be dismissed.
Plaintiffs allege in their Complaint that the United States violated the provisions of 15 U.S.C. § 1692g(4)(b) by failing to give the Plaintiffs, within five days of notice of collection, written verification that the debt was valid. The Fair Debt Collection Practices Act ("Act" or "FDCPA") addresses abusive debt collection practices. 15 U.S.C. § 1692 (a). "Debt collectors" under the Act do not include federal officers and employees who collect debts as part of their official duties. 15 U.S.C. § 1692a(6)(C). The Act defines "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes. . . ." 15 U.S.C. § 1692a(5). Courts have held that taxes are not debts within the meaning of the Act. See Staub v. Harris, 626 F.2d 275, 278 (3rd Cir. 1980). In Staub, the Third Circuit held that "at a minimum, the statute contemplates that the debt has arisen as a result of the rendition of a service or purchase of property or other item of value. The relationship between taxpayer and taxing authority does not encompass that type of pro tanto exchange which the statutory definition envisages." Id. at 278. This Court is persuaded by the reasoning in Staub and finds that the Plaintiffs do not have a cause of action against the United States under the FDCPA for the collection of the taxes owed by Mathis Implement because the taxes are not debts and the IRS agents are not debt collectors within the meaning of the Act. See also Pollice v. Nat'l Tax Funding, L.P., 225 F.3d 379, 401 (3rd Cir. 2000) (homeowner's property tax obligations do not constitute "debts" under the FDCPA); IRS v. Westberry, 215 F.3d 589, 591 (6th Cir. 2000) (income taxes should not be considered consumer debt for purposes of the § 1301 codebtor stay); Beggs v. Rossi, 145 F.3d 511, 512 (2nd Cir. 1998) (tax on automobiles not a transaction" for purposes of the FDCPA because "the tax is not levied upon the purchase or registration of the vehicle per se, but rather upon the ownership of the vehicle by the citizen").
CONCLUSION
For all of these reasons the Court will dismiss Plaintiffs' "Petition for Damages," leaving for determination the United States' counterclaim against the Plaintiffs seeking penalties for asserting frivolous and groundless claims. Accordingly,
IT IS ORDERED:
(1) that the United States' Motion to Dismiss is granted (Doc. 3);
(2) that the Plaintiffs' Motion for Judgment on the Pleadings is denied (Doc 7); and
(3) that the United States shall inform (he Court and Plaintiffs how it intends to proceed on the counterclaim.