Arnett v. US, 94-4140-SAC
| Decision Date | 11 May 1995 |
| Docket Number | No. 94-4140-SAC,94-4040-SAC.,94-4140-SAC |
| Citation | 889 F. Supp. 1424 |
| Parties | Rodney ARNETT, Plaintiff, v. UNITED STATES of America, Defendant (Two Cases). |
| Court | U.S. District Court — District of Kansas |
Justice B. King and Betty J. Mick, Fisher, Patterson, Sayler & Smith, Topeka, KS, for Rodney E. Arnett.
James J. Long, Office of Sp. Litigation, Tax Div., Washington, DC, and Virginia M. Navarrete, U.S. Dept. of Justice, Office of Sp. Litigation — Tax Div., Washington, DC, for the U.S.
On July 26, 1993, Arnett commenced a civil action against the United States, essentially challenging a tax assessment made by the Internal Revenue Service (IRS). See Arnett v. United States, Case No. 93-4160-SAC. On February 18, 1994, this court entered a memorandum and order requiring Arnett to file a memorandum setting forth in detail the factual and legal basis of his contention that he had filed a claim for a refund and a claim for damages, thereby exhausting his administrative remedies prior to commencing that suit. See Arnett v. United States, 845 F.Supp. 796 (D.Kan.1994). On April 1, 1994, rather than attempt to satisfy the court's February 18, 1994, memorandum and order, Arnett and the United States reached an agreement stipulating to the dismissal without prejudice of all of Arnett's claims, each party to bear its own costs.
On March 16, 1994, Arnett filed a second complaint against the United States, Case No. 94-4040-SAC. That complaint is essentially based upon the same events forming the basis of Arnett's complaint in Case No. 93-4160-SAC.1 On July 29, 1994, Arnett filed a third complaint against the United States, Case No. 94-4140-DES. That complaint is very similar to the amended complaint filed in Case No. 94-4040-SAC. The plaintiff's complaints in each case only seek damages under 26 U.S.C. § 7433. On December 7, 1994, Judge Saffels transferred Case No. 94-4140-DES to this court; that case now bears Case No. 94-4140-SAC. On that same day, Case No. 94-4140-DES Case No. 94-4140-SAC was consolidated with Case No. 94-4040-SAC.
Basically, Arnett's complaint in each of the pending cases alleges that the IRS has erroneously assessed a penalty in the amount of $21,590.72 pursuant to 26 U.S.C. § 6672.2 Contrary to the position taken by the IRS, Arnett contends that he was not "`a person required to collect, account for, and pay over withheld taxes'" on behalf of TSP, Inc., a Kansas Corporation. Arnett contends that despite extensive evidence that he was not liable under § 6672, the IRS nevertheless assessed the penalty. Arnett contends that because the defendant's actions "constitute reckless and intentional disregard of Internal Revenue Code § 6672," he "is entitled to recover his direct economic damages sustained as a result of the defendant's reckless and intentional actions, and his costs in this matter," as well as reasonable attorney's fees pursuant to 26 U.S.C. § 7430.
On October 12, 1995, the United States filed a motion to dismiss in Case No. 94-4140-SAC pursuant to Fed.R.Civ.P. 12(b)(1) and Fed.R.Civ.P. 12(b)(6). In Case No. 94-4040-SAC, the parties have filed cross-motions for summary judgment.
On March 10, 1995, the court entered a memorandum and order denying without prejudice, the United States' motion to dismiss (Dk. 2). The court indicated that it would, sua sponte, set aside that order and reconsider the motion to dismiss on the merits after each of the parties responded in writing to the following questions:
In accordance with that order, the parties have responded.3 The court now sua sponte sets aside its March 10, 1995, order denying without prejudice the United States' motion to dismiss and reconsiders the motion to dismiss on the merits.
The United States contends that this court lacks jurisdiction over Arnett's complaint as he has failed to exhaust his administrative remedies pursuant to 26 U.S.C. § 7433. In the alternative, the United States contends that the plaintiff fails to state a claim upon which relief can be granted. Specifically, the United States contends that § 7433 only recognizes a cause of action arising out of the wrongful "collection" of taxes, not their "determination." Because Arnett essentially challenges the IRS' "determination" that he is liable under § 6672, his complaint in each case fails to state a claim. Arnett opposes the defendant's motion. Arnett contends that he has exhausted his administrative remedies. Arnett also contends that his complaint states a valid claim under § 7433.
The United States filed a reply, and Arnett, without seeking leave of the court, filed a surreply.
Does the plaintiff state a claim pursuant to § 7433?
Assuming, arguendo, that the plaintiff has exhausted his administrative remedies,4 the viability of his complaint turns on the interpretation of § 7433. In both complaints, Arnett challenges the IRS' determination that he is liable under § 6672 for unpaid withholding taxes. The few courts considering the same or similar issues to those presented in the case at bar have not reached uniform interpretations of § 7433.
Title 26, section 7433 provides in pertinent part:
(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 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.
"A penalty under I.R.C. § 6672 is considered a `tax' within the meaning of I.R.C. §§ 7421-7434." Le Premier Processors, Inc. v. U.S., 775 F.Supp. 897, 902 n. 6 (E.D.La.1990) (citing Souther v. Mihlbachler, 701 F.2d 131, 132 (10th Cir.1983) (per curiam)).
Only a few courts have considered the precise issue presented by this case. Some courts have concluded that § 7433 does not create a cause of action for reckless or intentional conduct by an IRS employee in the determination of a federal tax, but that the statute only permits a cause of action for reckless or intentional conduct by an IRS employee in the collection of a federal tax. In Shaw v. United States, 20 F.3d 182 (5th Cir.), cert. denied, ___ U.S. ___, 115 S.Ct. 635, 130 L.Ed.2d 540 (1994), the IRS wrongfully assessed a penalty against Billie A. Shaw for her failure to pay taxes owed by her husband's separately owned company. Mrs. Shaw chose to challenge the assessment but she and her attorney failed to follow the formal appeal procedure outlined in the IRS notice. In short, despite Mrs. Shaw's attempts to contest the assessment and explain the government's error, the IRS prepared a levy against her private residence and eventually sold the property at auction to satisfy the tax liability assessed against her. Eventually, the IRS recognized that the original tax assessment was improper, and Mrs. Shaw received a refund of all of the money collected and the remaining tax liability was abated. However, as a result of her problems with the IRS, Mrs. Shaw's credit rating was adversely affected. 20 F.3d at 183.
Mrs. Shaw filed suit against the United States for damages under 26 U.S.C. § 7433, alleging that the IRS had wrongfully assessed tax penalties against her for the tax liabilities of her husband's corporation. After concluding that the district court had erred by dismissing Mrs. Shaw's claims for failure to exhaust administrative remedies, the Fifth Circuit held that the conduct of the IRS was not actionable under § 7433:
Section 7433 — by its specific words — allows a taxpayer to sue the government only if, "in connection with any collection of Federal Tax with respect to a taxpayer, any officer or employee of the IRS recklessly or intentionally disregards any provision of this title, or any regulation promulgated under this title...." 26 U.S.C. § 7433(a) (1989). The plain language of the statute is well supported by the statute's legislative history. Although in its early form the statute granted taxpayers the right to sue "for damages in connection with the determination or collection of any Federal tax," H.R.CONF.REP. NO. 100-1104, 100th Cong., 2d Sess. 228 (1988), reprinted in 1988 U.S.C.C.A.N. 4515, 5288 (emphasis added), Congress later deleted that portion of the statute that referred to determination of taxes. As the Conference Agreement states, § 7433 H.R.CONF.REP. NO. 100-1104, 100th Cong., 2d Sess. 229 (1988), reprinted in 1988 U.S.C.C.A.N. 4515, 5289 (emphasis added). Therefore, based upon the plain language of the statute, which is clearly supported by the statute's legislative history, a taxpayer cannot seek damages under § 7433 for an improper assessment of taxes. See also Miller v. United States, 763 F.Supp. 1534 at 1543 (N.D.Cal.1991) (). In this case, although the IRS improperly assessed tax liability against Mrs. Shaw, it did not engage in improper collection procedures. Thus, Mrs. Shaw cannot collect damages under § 7433.
20 F.3d at 184 (footnote omitted).
In Gonsalves v. I.R.S., 975 F.2d 13 (1st Cir.1992), the plaintiff attempted to claim damages under § 7433 as a result of the government's refusal to...
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