Snyder & Assocs. Acquisitions LLC v. United States

• Decision Date: 16 June 2017
• Docket Number: No. 15-56011,15-56011
• Citation: 859 F.3d 1152
• Parties: SNYDER & ASSOCIATES ACQUISITIONS LLC, a California limited liability company; Total Tax Preparations, Inc., a California corporation, Plaintiffs–Appellants, v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

859 F.3d 1152

SNYDER & ASSOCIATES ACQUISITIONS LLC, a California limited liability company; Total Tax Preparations, Inc., a California corporation, Plaintiffs–Appellants,

v.UNITED STATES of America, Defendant–Appellee.

No. 15-56011

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 7, 2017 Pasadena, California

Filed June 16, 2017

Jeffrey Adams Robinson (argued) and Gregory E. Robinson, Robinson & Robinson, Irvine, California, for Plaintiffs–Appellants.

Gretchen M. Wolfinger (argued) and Joan I. Oppenheimer, Attorneys; Caroline D. Ciraolo, Acting Assistant Attorney General; Tax Division, Department of Justice, Washington, D.C.; for Defendant–Appellee.

Before: Susan P. Graber, Jay S. Bybee, and Morgan Christen, Circuit Judges.

Concurrence by Judge Bybee

OPINION

CHRISTEN, Circuit Judge:

In 2010, the Internal Revenue Service set a trap to catch people filing for fraudulent tax refunds. The IRS enlisted the assistance of plaintiffs' tax preparation and refund-advance businesses. It warned that refusal to cooperate would interfere with a federal criminal investigation, it used millions of plaintiffs' dollars as bait, and it promised to reimburse them for any losses. Plaintiffs cooperated, but the IRS never returned their money. Instead, at the conclusion of the sting operation, the IRS subpoenaed more than 5,000 of plaintiffs' documents to assist with its prosecution efforts and revoked one plaintiff's electronic tax filing privileges—at the beginning of the tax preparation season—forcing both plaintiffs into bankruptcy.

Plaintiffs sued the IRS under the Federal Tort Claims Act (FTCA), alleging several causes of action, but the district court granted the government's motion to dismiss. The court ruled that the IRS is immune from liability for its conduct because 28 U.S.C. § 2680(c) bars claims against the government "arising in respect of the assessment or collection of any tax." We disagree. Because § 2680(c) does not confer absolute immunity on the IRS, and because, construing the facts in the light most favorable to plaintiffs, the IRS's sting operation did not "aris[e] in respect of the assessment or collection of any tax," we reverse the district court's judgment and remand for further proceedings.

I. BACKGROUND¹

A. The Tax Fraud Sting

Total Tax Preparation, Inc. (TTP) was a tax return preparation business. Its affiliate, Snyder & Associates Acquisitions LLC (SAA) made loans to taxpayers who were awaiting income tax refunds. TTP prepared its clients' federal income tax returns and referred clients who wanted refund advances to SAA. When SAA loaned money based on anticipated tax refunds, its clients instructed the IRS to send their refund checks to SAA. Kerry Snyder was TTP's president and SAA's managing member.

In 2010, Nancy Hilton, a tax preparer who worked as an independent contractor, referred several clients to SAA for refund anticipation loans. When one of her clients tried to cash a check issued by SAA, the bank notified Snyder that Hilton's client was using fake identification. Snyder asked the bank to hold the check and immediately contacted Hilton. Hilton admitted to Snyder that she was working with IRS Criminal Investigations Special Agent Matt Daniels in an undercover sting operation, to catch people making fraudulent claims for tax refunds. Snyder realized that the IRS was unlikely to issue refunds for the fraudulent tax returns filed on behalf of Hilton's clients, and that SAA's ability to collect on its refund anticipation loans was in jeopardy. Snyder requested that the bank stop payment on all checks SAA had issued to Hilton's clients.

According to the complaint, Agent Daniels contacted Snyder and informed him that stopping payment would interfere with a federal criminal investigation. Agent Daniels asked Snyder to allow the checks to clear the bank, and assured Snyder that SAA would be repaid. When Snyder called an IRS supervisor to confirm Agent Daniels's representations, the supervisor vouched for the sting operation and for Agent Daniels. Snyder authorized SAA to issue new checks to Hilton's clients, and Agent Daniels and another IRS agent made additional assurances that SAA "would be made whole."

TTP and SAA quickly began to experience negative repercussions from their agreement to cooperate with the IRS. First, TTP's and SAA's bank informed them that it was closing their business accounts because of an inquiry the bank made to the IRS about the investigation of TTP's and SAA's clients. Plaintiffs allege that the IRS failed to inform the bank that TTP and SAA were aiding the sting operation at the IRS's request. TTP and SAA incurred $12,777 in bank and attorneys' fees to keep their bank accounts open. The IRS ignored TTP's and SAA's repeated requests for written confirmation of its promise to repay SAA, and also ignored their requests to reimburse the advanced funds and plaintiffs' bank and attorneys' fees.

Plaintiffs allege that the IRS responded to their requests by serving subpoenas for more than 5,000 pages of their tax return and loan records. TTP and SAA produced the subpoenaed documents at significant additional expense. The IRS later notified TTP that it was suspending TTP's ability to file tax returns electronically through the IRS's "e-filing" system, because fraudulent returns had been filed using TTP's electronic filing identification number. The letter notifying TTP of the suspension directed all inquiries to Agent Daniels.

The suspension prevented TTP from filing tax returns electronically for clients, just as the 2011 tax preparation season began. Initially, the suspension put TTP at a significant competitive disadvantage. But on January 1, 2011, the IRS began requiring all paid tax preparers to file all returns electronically, and at that point, the suspension effectively put TTP out of business. TTP's failure deprived SAA of its most significant source of referrals, and SAA soon failed as well. TTP successfully appealed the IRS's suspension of its e-filing privileges, but the damage already had been done.

The complaint alleges that the IRS never issued refunds for Hilton's clients, never repaid the funds Snyder's company advanced for refund anticipation loans, and never compensated TTP and SAA for any of their other losses.

B. District Court Proceedings

TTP and SAA submitted an administrative claim to the IRS for $2,608,078, and later filed suit in the United States District Court for the Central District of California. They concurrently filed an action in the Court of Federal Claims for an uncompensated taking and for breach of contract, pursuant to the Tucker Act, 28 U.S.C. § 1491.²

In this action, the IRS argued that the district court should dismiss TTP's and SAA's tort claims for four reasons: (1) the lawsuit is barred by 28 U.S.C. § 2680(c), the tax assessment and collection exception to the FTCA; (2) claims based on the IRS's misrepresentations are barred by the provisions of 28 U.S.C. § 2680(h) ; (3) plaintiffs failed to state a claim for things wrongfully acquired, conversion, or abuse of process under California law; and (4) plaintiffs' suit is barred by 28 U.S.C. § 2680(a), the discretionary function exception to the FTCA. The district court granted the government's motion and dismissed plaintiffs' claims pursuant to Federal Rule of Civil Procedure 12(b)(1). The court accepted the argument that 28 U.S.C. § 2680(c) shields the IRS from TTP's and SAA's claims. TTP and SAA timely appealed.

II. STANDARD OF REVIEW

We review de novo a district court's decision to grant a motion to dismiss for lack of subject matter jurisdiction. Lacano Invs., LLC v. Balash , 765 F.3d 1068, 1071 (9th Cir. 2014). Because the government's motion was filed pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), we accept as true all facts alleged in the complaint and construe them in the light most favorable to plaintiffs, the non-moving party. See Leite v. Crane Co. , 749 F.3d 1117, 1121 (9th Cir. 2014) ("The district court resolves a facial attack as it would a motion to dismiss under Rule 12(b)(6) : Accepting the plaintiff's allegations as true and drawing all reasonable inferences in the plaintiff's favor, the court determines whether the allegations are sufficient as a legal matter to invoke the court's jurisdiction."). Under 28 U.S.C. § 1291, we have jurisdiction to review the district court's order.

III. DISCUSSION

A. TTP's and SAA's Claims Do Not Arise in Respect of the Assessment or Collection of Any Tax.

The FTCA waives the United States' sovereign immunity for tort claims against the federal government in cases where a private individual would have been liable under "the law of the place where the act or omission occurred." 28 U.S.C. § 1346(b)(1). Section 2680 provides for several exceptions that "severely limit[ ]" the FTCA's waiver of sovereign immunity. Morris v. United States , 521 F.2d 872, 874 (9th Cir. 1975). "If a plaintiff's tort claim falls within one of the exceptions, the district court lacks subject matter jurisdiction." Id. Among § 2680's several exceptions is § 2680(c), which prevents lawsuits against the federal government for "[a]ny claim arising in respect of the assessment or collection of any tax."

We have "broadly construed" § 2680(c) to encompass actions taken during the scope of the IRS's tax assessment and collection efforts. Wright v. United States , 719 F.2d 1032, 1035 (9th Cir. 1983), abrogated on other grounds as recognized by Gasho v. United States , 39 F.3d 1420 (9th Cir. 1994). For example, in Morris , we held that 2680(c) barred not just claims based on literal collection activity, but also a taxpayer's claim that IRS agents wrongfully told his creditors of his purported tax liability during an audit of his business. 521 F.2d at 874–75. Other circuits also have read § 2680(c) expansively. See Aetna Cas. & Sur. Co. v. United States , 71 F.3d 475, 478 (2d Cir. 1995) ("We understand the § 2680(c) exception to cover claims arising...