Adams v. Johnson

Decision Date22 January 2004
Docket NumberNo. 02-35509.,02-35509.
PartiesCharles ADAMS; Josephine Sotro; Daniel Abelein; Susan Abelein; William E. Allen; Lars Andres; Gurbaksh Singh; Henry Andrew; Gurmit Singh; Karla Andrew; Joe Sotro, Sr.; Robert Andrews; Joe Sotro, Jr; Carol Andrews; Cynthia Sotro; Curt D. Barnes; Roy Barnes; Richard Steele; Antoinette Barnes; Wanda Steele; Wilbur Steen; Ernest Bartak; Laura Steen; Ann Bartak; James Stroud; Clarence Beardsley; Mary Stroud; Janice Beardsley; Jerry Bergamyer; Silas Suits; Nadine Bergamyer; Bette Suits; Robert Bergevin; Catherine Tharin; Grace Bergevin; Larry Thompson; Donald Berry; Judy Thompson; Robert Tulp; Claudette Tulp; Gary Blackburn; Daniel Vash; Margaret Blackburn; Eugene Botkins; Carla Vash; Dale Warner; Gordon Bradberry; Margaret Warner; Linda Bradberry; Richard Wenborne; David Britton; Noreen Wenborne; Judy Britton; Mike Williams; Kenneth Brown; Sheryl Williams; Elizabeth Brown; Gene R. Wolford; Kenneth Buehner; Dan Wyatt; John Bufis; Darlene Wyatt; Penny Bufis; Bruce Bulger; Dorene Bulger; Charles Byrd; Jackie Byrd; Robert Capehart; Ingrid Capehart; Roger Carter; Lora Carter; Roger Catlow; Mary Catlow; Boyd Chisholm; Anita Chisholm; Donald Clayton; Yvonne Clayton; Richard Collan; Jacob Conner; Barbara Conner; Scott J. Conner; Tom Costello; Mary Costello; Michael Dale; Ellen Dale; Thomas Emerson; Lydia Emerson; Helen Foy; Marvin Franklin; Barbara Franklin; Gordon Freeman; Ilene Freeman; Joseph Gilmore; Alan Gott; Linda Gott; James K. Hall; Gary Hamm; Mary Hamm; James Harper; Gilbert Hay, III; Kenneth Herman; David Higdon; Sena Higdon; Keith Hodnett; William Holzendorf; Barbara Holzendorf; Brent Hubbard; Dorinda Hubbard; John Ittner; Eleanor Ittner; Robert Jenkins; Eyonne Jenkins; Bobbie Johnson; Martha Johnson; Timothy Kaczocha; Kim Holmes; Michael Keller; Jin Keller; Neal Kempt; Karen Kemp; James Lindley; Ann Lindely; Travis Lindley; Barbara Lindley; Marcus Lowe; Susan Lowe; Dan Lynch; Florence Lynch; Alfred Malinowski; Walter Marlatt; Audrey Marlatt; Glenn Matherne; Merril Matherne; Gary Mcdonough; Edwin Mcgifford; Verna Mcgifford; Thomas Mcintyre; Deborah Mcintyre; Fred Mcnatt; Patricia Mcnatt; Gerald Mcneely; Deborah Mcneely; John Mekulsia; Roger Meier; Karren Meier; James Moffett; Frances Moffett; John B. Moody; Glenn Mortensen; Helen Nash; Curt Nelson; Lawrence Noble; Mary Noble; Gary Parker; Larry Pauly; Dale Pemberton; Irene Pemberton; Mike Ponder; Debbie Ponder; Larry Potts; Shirley Potts; Daniel Quinones; A. Don Ray; Bernice Ray; Jay Schndieder; Leon Shepard; Mary Shepard; Ron Shiplet; Louetta Shiplet; Judith Parker, Plaintiffs-Appellants, v. Norman S. JOHNSON; Brad Lyle; William Mcdevitt; John Meek; Daniel Mulhall; David Osgrod; Jill Page; Wes Pohl; Harry Potter; Deborah Richie; Robert Spooner; Lavonne Tobia; Marilyn Ulbright; Candice Mack; Larry Lindelof; Thomas Ballard; Teresa Castro, Deceased on 10/3/01; Chris Coones; Colleen Haddigan; John Hall; Thomas Healy; Walter J. Hoyt, III; Sue Hullen; Blake Johnson, Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Wendy S. Pearson, Pearson Merriam, P.C., Seattle, WA, for the plaintiffs-appellants.

Anthony T. Sheehan, United States Department of Justice, Tax Division, Washington, DC, for the defendants-appellees.

Appeal from the United States District Court for the District of Oregon, James A. Redden, District Judge, Presiding. D.C. No. CV-99-01717-RE.

Before ALDISERT,* GRABER, and GOULD, Circuit Judges.

GOULD, Circuit Judge:

Partners in cattle partnerships organized and managed by breeder Walter J. Hoyt, III (the "Hoyt partnerships") brought suit against Hoyt and more than twenty Internal Revenue Service ("IRS") agents (the "federal defendants") in the United States District Court for the District of Oregon asserting claims for money damages under Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971). Plaintiffs alleged that the IRS's audits of the partnerships and the IRS's assessment and collection of partnership taxes violated plaintiffs' rights to procedural due process, substantive due process, and conflict-free representation under the Fifth Amendment, and access to the courts under the First Amendment.

The federal defendants moved to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim for which relief could be granted. The district court granted this motion, concluding that the federal defendants were entitled to qualified immunity, because of the district court's view that the facts alleged in the complaint did not show any violation of a constitutional right. The district court entered judgment for the federal defendants. This appeal followed. We have jurisdiction under 28 U.S.C. § 1291, and we affirm the district court's judgment. We hold that Bivens relief is unavailable for challenges to IRS partnership tax assessment and collection activities.

I1

Hoyt was a well-known sheep and cattle breeder in Burns, Oregon. Between 1971 and 1996, Hoyt organized and sold to investors partnership interests in hundreds of investment partnerships that owned and raised livestock that Hoyt bred. Each partner was expected to benefit from the partnership in two ways. First, Hoyt assigned each partner part of his cattle operation's expenses, which the partners were able to claim as a tax deduction, lowering their tax liability on income from other sources. Second, in later years the partnerships were expected to produce a profit as each partnership liquidated the livestock that it had been assigned.

Hoyt was accredited by the IRS as an enrolled agent, thereby permitting Hoyt to prepare federal income tax returns for the partnerships and to represent the partners in dealings with the IRS. Hoyt was also the tax matters partner ("TMP") for each of the partnerships. See 26 U.S.C. § 6231(a)(7). Under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), Pub.L. No. 97-248, §§ 402-406, 96 Stat. 324, a TMP is charged with representing a partnership in all dealings with the IRS, including the filing of the partnership's tax returns, and a TMP in some matters can bind other partners to agreements and settlements negotiated with the IRS. See 26 U.S.C. § 6224(c); T.C. Rule 248. Hoyt's partners also executed powers of attorney empowering Hoyt to act on their behalf on partnership matters.

In the late 1970's, the IRS began the first of a series of audits of the Hoyt partnerships. These audits continued through the 1980's and 1990's, spanning 24 distinct tax years. The IRS audits concluded that all the cattle partnerships were shams that were overvalued, that failed to substantiate tax items, and that lacked economic viability and profit motive. In early 1984, the IRS Criminal Investigation Division began investigating Hoyt's tax reporting on these partnerships. This investigation lasted until August 12, 1987, when the Department of Justice declined to prosecute Hoyt. A second IRS criminal investigation of Hoyt commenced in 1989, but also ended without prosecution. The plaintiffs, now appellants, alleged in their complaint that Hoyt believed that he was under investigation for the duration of the partnership audit process, because he was never notified that the criminal investigations into his practices had ended. In 1999, as the complaint alleged, Hoyt was indicted for bankruptcy fraud, mail fraud, and money laundering, crimes for which he was later convicted. However, Hoyt was never indicted for tax crimes investigated by the IRS.

Plaintiffs alleged that the IRS, until 1995, allowed the tax refunds claimed by Hoyt on behalf of the Hoyt partnerships, in order to encourage more investment in these partnerships.

The plaintiffs alleged that this process resulted in more audits and corresponding tax adjustments of the partnership investors which, combined with late-payment penalties and interest on the adjusted tax due from the audits, exceeded the tax that would have been due from plaintiffs in the absence of their participation in the Hoyt partnerships. Many of the Hoyt partnership investors subsequently filed for bankruptcy. Stated another way, plaintiffs alleged a theory that the IRS, by an initial conspiratorial auditing of the Hoyt partnerships, let plaintiffs as partnership investors be drawn into taking tax deductions from the partnerships that were later determined by the IRS on audit to be improper, yielding not only liability on the taxes that should have been due, but also interest and penalties.

Plaintiffs alleged that the IRS achieved success in these cattle partnership audits by exploiting Hoyt's conflict of interest in serving as TMP for the Hoyt partnerships while he was the subject of an IRS criminal investigation. Plaintiffs further alleged that, despite Hoyt's conflict, the federal defendants took no action to remove Hoyt as TMP, nor did they act to enjoin Hoyt's continued promotion of the partnerships or inform plaintiffs that Hoyt was engaging in tax fraud. Thus plaintiffs contended that the federal defendants used the threat of their criminal investigation of Hoyt to gain concessions from Hoyt that facilitated the IRS's civil audits of the Hoyt partnerships, to plaintiffs' detriment.

Plaintiffs also alleged that, in exploiting Hoyt's conflict of interest, the federal defendants conspired with Hoyt to audit and process tax claims against the Hoyt partnerships. Plaintiffs alleged that the federal defendants knew that it was against Hoyt's personal interest to resolve tax claims so as to eliminate the need for future audits and that Hoyt sought settlements that would protect him from tax penalties, allow him to continue promoting the Hoyt partnerships, and permit him to retain his status as an enrolled agent. Plaintiffs further alleged that Hoyt protected his personal interest by...

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