Goldberg v. United States

• Decision Date: 31 January 2018
• Docket Number: No. 16-3032,16-3032
• Parties: Ronald M. GOLDBERG, et al., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

881 F.3d 529

Ronald M. GOLDBERG, et al., Plaintiffs-Appellants,

v.UNITED STATES of America, Defendant-Appellee.

No. 16-3032

United States Court of Appeals, Seventh Circuit.

Argued September 14, 2017

Decided January 31, 2018

David Wilson Hepplewhite, Attorney, DAVID W. HEPPLEWHITE, P.C., Chicago, IL, for Plaintiffs-Appellants.

Teresa Marie Abney, OFFICE OF THE UNITED STATES ATTORNEY, Civil Division, Regina S. Moriarty, Francesca Ugolini, Attorneys, DEPARTMENT OF JUSTICE, Tax Division, Appellate Section, Washington, DC, for Defendant-Appellee.

Before Wood, Chief Judge, and Ripple and Hamilton, Circuit Judges.

Hamilton, Circuit Judge.

Plaintiffs Ronald M. Goldberg, Sherwin Geitner, and Phillip C. Leavitt failed to pay federal income taxes they owed for a business partnership for the year 1994. After a criminal investigation touched that partnership, these plaintiffs reached a civil settlement with the Internal Revenue Service in 2003 by agreeing to pay back taxes. Nearly ten years later, however, they filed this suit seeking to invalidate the settlement and to collect other damages by claiming the IRS violated the tax code in assessing their tax liability. Plaintiffs seek relief in the form of both claims for refund under 26 U.S.C. § 7422 and claims for damages under 26 U.S.C. § 7433. The district court granted the government’s motion to dismiss. The court dismissed the refund claims on the pleadings for lack of jurisdiction for failure to exhaust administrative remedies with the IRS. The court dismissed the claims for damages, also on the pleadings, because they alleged IRS errors only in assessing taxes, not in collecting them, so that the claims fall outside the scope of § 7433, which is limited to errors in collecting taxes. We affirm.

I. Factual and Procedural Background

Since the district court decided the jurisdictional issue on the pleadings and dismissed the § 7433 claims on the pleadings for failure to state a claim, we accept as true the plaintiffs’ well-pleaded factual allegations and review de novo the district court’s legal conclusions. Meade v. Moraine Valley Community College , 770 F.3d 680, 684 (7th Cir. 2014) ; Kikalos v. United States , 479 F.3d 522, 525 (7th Cir. 2007). We thus do not vouch for the objective truth of the plaintiffs’ allegations summarized here.

Decades ago the plaintiffs formed a company called the Fredericksburg partnership to search for oil. The plaintiffs were the sole owners of the Fredericksburg partnership, but they did not manage the company’s operations. Instead, they contracted with Kraft Oil Management for management services.

The activities of the Fredericksburg partnership and Kraft Oil Management eventually drew the attention of the IRS, which began a criminal investigation of the Fredericksburg partnership, Kraft, and Kraft principals Carl Valeri and Bentley Blum. In 2003, the plaintiffs and the IRS settled allegations against the Fredericksburg partnership in exchange for the payment of taxes for the tax year 1994. By that time, the statute of limitations for 1994 tax liability had expired, but the IRS had obtained a waiver of the statute of limitations from Valeri for the plaintiffs’ tax liability.

In this lawsuit, the plaintiffs allege that the IRS’s tactic violated the tax code because the IRS did not sign the agreement and Valeri could not waive the statute of limitations on plaintiffs’ behalf. See 26 U.S.C. § 6229(a) – (b). The plaintiffs allege that the IRS violated another tax code provision because it never sent required notices to the plaintiffs informing them that the IRS had begun an administrative proceeding focused on the partnership’s tax liability. See 26 U.S.C. § 6223(a). Plaintiffs claim further that they did not discover these alleged violations until 2009, six years after they signed the civil settlement.

The plaintiffs never sent formal refund claims to the IRS as required by the tax code and agency regulations. See § 7422(a). Instead, they and others sued the IRS in 2012. (The case was delayed by extended debates over venue but eventually wound up in the Northern District of Illinois.) On appeal plaintiffs seek relief by two separate paths. The first is a claim for a refund of taxes paid under § 7422. The second is a claim for damages for harm supposedly caused by IRS agents failing to follow all the tax code’s requirements in assessing the tax liability while negotiating the settlement.

The district court granted the government’s motion to dismiss. The court determined it lacked jurisdiction to hear the plaintiffs’ claim for a refund under § 7422 because the plaintiffs had failed to exhaust administrative processes for claiming refunds before filing the suit. It ruled that the plaintiffs failed to assert a viable claim under § 7433 because that provision offers a remedy for wrongful actions only in collecting taxes, while the plaintiffs had alleged that "the IRS and its agents wrongfully assessed their tax burden."

II. Analysis

The federal income tax laws are complicated. Taxpayers make mistakes when filing returns and paying taxes, and the IRS makes mistakes when assessing and collecting them. An essential element of the revenue system is the power Congress has given the IRS to resolve these problems internally through reasonable procedures of the agency’s design. See 26 U.S.C. §§ 7422(a), 7433(d)(1) (requiring exhaustion of administrative remedies before filing suit). Congress also imposed a statute of limitations that requires refund claims to be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever is later. 26 U.S.C. § 6511(a). Only taxpayers who have filed timely refund claims and then exhausted these administrative procedures may sue the government for tax refunds in federal court under 28 U.S.C. § 1346 and 26 U.S.C. § 7433.

Regulations specify how taxpayers must file refund claims. See 26 C.F.R. § 301.6402-2(b)(1). Under these regulations, a taxpayer must affirm that the substance of the refund claim is true, "set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof," and file the claim before the statute of limitations expires. Id. The plaintiffs’ complaint concedes that they failed to meet these requirements. Nevertheless, the plaintiffs claim that two exceptions—the "informal claim doctrine" for tax refunds and damages claims under § 7433—provide them routes to relief in federal court. We disagree on both points.

A. The Informal Claim Doctrine

We consider first the plaintiffs’ claims for refunds under § 7422. Taxpayers fearing that the IRS will reject their otherwise timely refund claims for failure to dot an i need not worry that the statutory time limit will expire before they can cure any defects. The informal claim doctrine allows a taxpayer’s claim for a refund to survive so long as the taxpayer files some "notice fairly advising the Commissioner of the nature of the taxpayer’s claim" within the limitations period and later makes sure that all "formal defects and lack of specificity have been remedied" by a fully compliant refund claim. United States v. Kales , 314 U.S. 186, 194, 62 S.Ct. 214, 86 L.Ed. 132 (1941) ; accord, Kikalos v. United States , 479 F.3d 522, 526 (7th Cir. 2007). In this case, however, even taking at face value plaintiffs’ allegation that the IRS had sufficient informal notice to apprise the agency of their claim, plaintiffs have failed to perfect their claim.

In applying the informal claim doctrine, we have emphasized the importance of the requirement that a taxpayer perfect an informal administrative claim by remedying the formal defects. In Greene-Thapedi v. United States , 549 F.3d 530, 533 (7th Cir. 2008), we wrote that the "informal claim doctrine is predicated on the expectation that any formal deficiency will at some point be corrected." The plaintiffs have conceded here their failure to perfect. In their complaint, they offered for the first time to file formal refund claims if the court determined they were necessary: "If the Court requires service to the IRS of formal, written notices pursuant to 26 U.S.C. § 7422(a) in addition to th[e] earlier notice, [plaintiffs] will serve the requisite notices. [Plaintiffs] understand that the law does not require this service once the earlier notice to the IRS is established." Cmplt. ¶ 39. Plaintiffs have provided no legal authority to support this understanding. Nor have they offered any independent reason to abandon the perfection requirement.

We see no such reason. The perfection requirement ensures that the pragmatic judicial doctrine of informal notice does not disrupt unduly the regulatory regime created by Congress and the IRS for resolving tax disputes. If unhappy taxpayers could get around the administrative exhaustion requirement of § 7422 by sending deficient claims to the IRS and never following up, then § 7422 and the regulations governing the refund process at the IRS would be more difficult to administer. The district court properly dismissed plaintiffs’ refund claims under § 7422 because they failed to exhaust administrative remedies.

B. Section 7433

The plaintiffs also cannot recover damages under § 7433. The statute allows taxpayers to sue the government for damages 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 the Internal Revenue Code or IRS regulation promulgated under the Code. 26 U.S.C. § 7433(a). Like § 7422, § 7433 requires a plaintiff to exhaust administrative remedies through IRS procedures before a court can award relief. See § 7433(d)(1). We have held that the exhaustion requirement in § 7433 is not jurisdictional, so federal courts can hear a § 7433 claim even if a plaintiff has failed to exhaust administrative...