Bennett v. U.S.

• Decision Date: 29 March 2005
• Docket Number: No. CIV.A. 7:04CV00705.,CIV.A. 7:04CV00705.
• Citation: 361 F.Supp.2d 510
• Parties: Matthew J. BENNETT, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Virginia

361 F.Supp.2d 510

Matthew J. BENNETT, Plaintiff, v. UNITED STATES of America, Defendant.

No. CIV.A. 7:04CV00705.

United States District Court, W.D. Virginia, Roanoke Division.

March 29, 2005.

Matthew J. Bennett, Troutville, VA, pro se.

Charles H. Keen, United States Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

CONRAD, District Judge.

Michael J. Bennett ("Bennett") brings this action pursuant to 26 U.S.C. § 7433 claiming that the Internal Revenue Service ("IRS") improperly requested that his employer disregard his W-4 and withhold federal income taxes in accordance with its direction. Bennett seeks an injunction to prevent the IRS from continuing its action as well as the return of all funds withheld in accordance with IRS instructions. This case is before the court on defendant's motion to dismiss pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). For the reasons stated below, the court will grant defendant's motion to dismiss.

FACTUAL BACKGROUND

In a letter dated December 5, 2003, Stephen P. Warner, an Operations Manager, Collection, with the Questionable W-4 Program at the Internal Revenue Service office in Fresno, California requested that Roanoke County Fire & Rescue, the employer of Matthew J. Bennett, disregard Bennett's W-4 and withhold tax as if he were claiming single filing status with zero allowances. Bennett's employer complied with the IRS's request. Bennett believed that the IRS had taken an unauthorized action and wrote a series of letters communicating his position to Stephen Warner; Marilyn Brincefield at Fresno Compliance Services; Representative Bob Goodlatte; the Inspector General for Tax Administration; and the Commissioner of the IRS.

In March of 2004, the Fresno IRS office forwarded Bennett's initial letter to the IRS Appeals Office in Fresno. The Appeals Officer incorrectly believed that Bennett was appealing a $500 penalty assessed because of an incorrect W-4 form. Bennett responded that he was not appealing a penalty but was contesting the validity of the IRS's instruction to his employer. On July 13, 2004, the Appeals Officer sent a second letter to Bennett informing him that the appeal procedure did not apply to refusals to comply with the tax laws because of constitutional or similar grounds. The Appeals Office then returned Bennett's file to the W-4 Unit as a premature referral.

On August 1, 2004, Bennett reiterated his position in another letter to Stephen Warner at the Questionable W-4 Unit in Fresno. Bennett stated that he believed the IRS had no authority to override his W-4 and to require his employer to withhold federal income tax in accordance with its instructions. In a letter dated August 25, 2004, Warner responded that the IRS did have the authority to enact regulations to administer and enforce the tax laws and that those regulations gave the IRS the authority to determine whether withholding certificates are correct. In a final letter sent on September 6, 2004, Bennett again stated his position and requested that the IRS rescind its earlier request to his employer. Bennett then filed this suit on November 30, 2004.

On February 14, 2005, the United States filed its motion to dismiss claiming that Bennett's suit is barred by the doctrine of sovereign immunity, the court lacks subject matter jurisdiction, and the complaint seeks prohibited declaratory and injunctive relief. Bennett filed a timely response to the government's motion on March 7, 2005.

STANDARD OF REVIEW

When deciding a motion to dismiss under Rule 12(b)(6), the court must determine "whether the complaint, under the facts alleged and under any facts that could be proved in support of the complaint, is legally sufficient." Eastern Shore Markets, Inc. v. J.D. Assocs., Ltd. Partnership, 213 F.3d 175, 180 (4th Cir.2000). The court must accept the allegations in the complaint as true, and draw all reasonable factual inferences in favor of the plaintiff. The court should not dismiss a complaint for failure to state a claim, unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).

DISCUSSION

I. Was the action of the IRS a collection action to which the remedy afforded by 26 U.S.C. § 7433 applies?

A taxpayer may bring an action against the United States in a district court if an officer or employee of the IRS, in connection with the collection of any federal tax, recklessly, intentionally, or negligently disregards any statutory or regulatory provision. 26 U.S.C. § 7433(a) (emphasis added). This waiver of sovereign immunity, however, "must be strictly observed and construed in favor of the sovereign." Gonsalves v. I.R.S., 975 F.2d 13, 15 (1st Cir.1992) (internal citations omitted). Therefore, the United States Court of Appeals for the Fourth Circuit has held that "§ 7433 provides for a `civil action' only for damages arising from the `collection' of taxes, not for damages arising from the investigation and determination of tax liability." Judicial Watch, Inc. v. Rossotti, 317 F.3d 401, 411 (4th Cir.2003). Furthermore, liability under that section arises only "where an IRS agent has violated the taxing statutes or the regulations promulgated under them." Gonsalves v. I.R.S., 975 F.2d 13, 16 (1st Cir.1992).

The government contends that the withholding process is a pre-assessment process and not a collection of tax in the usual sense of the word. The government also points out that a taxpayer need not initiate a lawsuit to recover excess withholdings because any excess withheld would be returned to the taxpayer when he filed his income tax return. The government concludes that, because there has been no collection action, the court lacks jurisdiction over Bennett's cause of action and his suit should be dismissed accordingly. Bennett responds that the correspondence he received from the IRS as well as various Internal Revenue Code sections do characterize withholding payments as "collections," not assessments or determinations of tax.

The assessment of a tax is "the decision to impose tax liability," while collection activity describes the "conduct of an agent trying to collect the taxes owed." Shaw v. United States, 20 F.3d 182, 184 (5th Cir.1994). If Bennett were disputing the withholding at issue here solely because he believed the IRS had improperly determined the correct number of allowances or his filing status, he would have no claim under § 7433 because such a claim would relate to the decision to impose tax liability and the determination of tax, rather than its collection.

In this case, however, Bennett claims that he is disputing the method of the withholding in that he claims the IRS improperly overrode his W-4 with its own instructions to his employer. In Gonsalves, supra, the Court described IRS action with regard to that plaintiff's income taxes as "collections" of the taxes withheld from the plaintiff's salary. 975 F.2d at 14. In fact, Title 26, Chapter 1, Subchapter C of the Code of Federal Regulations deals with the withholding of employment taxes and is entitled "Employment Taxes and Collection of Income Tax at the Source." (Emphasis added). It appears that the withholding of income taxes and the subsequent payment of those taxes to the government by an employer does fall within the definition of collection activities rather than assessment activities. Therefore, Bennett's claim properly falls under 26 U.S.C. § 7433.

II. Did Bennett fail to properly exhaust his administrative remedies?

The government contends that Bennett failed to properly exhaust his administrative remedies and that, therefore, the court does not have jurisdiction to hear his claims. A taxpayer may not bring suit under 26 U.S.C. § 7433 until he has exhausted the administrative remedies available within the IRS. 26 U.S.C. § 7433(d)(1). Internal Revenue regulations lay out the proper procedure for bringing an administrative claim against the United States. See 26 C.F.R. § 301.7433-1(e). The regulations state that any administrative claim must be sent in writing to the Area Director, Attn: Compliance Technical Support Manager of the area in which the taxpayer resides. 26 C.F.R. § 301.7433-1(e)(1). A 2003 Internal Revenue Bulletin changed this provision and stated that claims should be sent to the case processing site for the area in which the taxpayer resides.2003-19, 2003-14 IRB 703, April 7, 2003.

The administrative claim must include the following information:

(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 [];

(iii) A description of the injuries incurred by the taxpayer filing the claim [];

(iv) The dollar amount of the claim, including any damages that have not yet been incurred but which are reasonably foreseeable []; and

(v) The signature of the taxpayer or duly authorized representative.

26 C.F.R. § 301.7433-1(e)(2). The regulations go on to state that a taxpayer may not bring an action in federal district court for any amount in excess of that sought in the administrative claim, unless the taxpayer can show that "the increased amount is based upon newly discovered evidence not reasonably discoverable at the time the administrative claim was filed, or upon allegation and proof of intervening facts relating to the amount of the claim." 26 C.F.R. § 301.7433-1(f).

The government contends that Bennett failed to properly present his claim as required by the regulations. The government notes that, even if Bennett's letters were to be construed as a claim under § 7433, they fail to satisfy all of the requirements of the regulation. Specifically, none of Bennett's letters were sent to the correct place, only some contain the...