Govig & Assocs. Inc. v. United States
| Decision Date | 13 October 2020 |
| Docket Number | No. CV-19-05185-PHX-SMB,CV-19-05185-PHX-SMB |
| Parties | Govig & Associates Incorporated, et al., Plaintiffs, v. United States of America, et al., Defendant. |
| Court | U.S. District Court — District of Arizona |
Pending before the Court is the United States' Motion to Dismiss and Supporting Memorandum and responsive pleadings. Despite the parties' independent requests, the Court elects to rule without oral argument. See L.R. Civ 7.2(f). This Order also considers Plaintiff's related Motion for Judicial Notice of Adjudicative Facts, (Doc. 29), to which the Government responded. (Doc. 30.)
The core dispute in the motion before the Court is one of subject matter jurisdiction. Plaintiffs, Govig & Associates Incorporated, et al. ("Govig"), brought the underlying action to set aside and declare unlawful IRS Notice 2007-83 based on alleged violations of the Administrative Procedures Act (APA). The Government argues that the jurisdictional limitations of this Court under the Anti-Injunction Act ("AIA"), 26 U.S.C. § 7421, and the "tax exception" to the Declaratory Judgement Act ("DJA"), 28 U.S.C. § 2201, prevent the Court from hearing the case. As is further explained below, the Court finds the AIA does bar this Court from hearing the case as doing so would inhibit the assessment or collection of a tax assessed under 26 U.S.C. § 6707A.
Out of necessity, the federal tax system is built upon "a system of self-reporting," United States v. Bisceglia, 420 U.S. 141, 145 (1975), and is prone to the shortcomings inherent in any honor system. "It would be naive to ignore the reality that some persons attempt to outwit the system, and tax evaders are not readily identifiable." Id. Fully recognizing this weakness, Congress has enacted legislation granting the Internal Revenue Service ("IRS") authority to establish procedures for information gathering that require taxpayers to disclose participation in certain transactions. 26 U.S.C. §§ 6011, 6707A. Thus, 26 U.S.C. § 6011 mandates that, when IRS regulations require it, a taxpayer "shall make a return or statement" providing the IRS with information. Drawing on their statutory authority, the IRS has since promulgated regulations requiring taxpayers to disclose participation in certain "reportable transactions" the IRS believes could be used for tax avoidance. See 26 CFR 1.6011-4. A subset of these "reportable transactions" are "listed transactions," which are defined as "a transaction that is the same as or substantially similar to one of the types of transactions that the [IRS] has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction." Id.
Failure to comply with IRS reporting requirements comes at significant cost to a non-reporting taxpayer. Under 26 U.S.C. § 6707A, Congress added a penalty provision strengthening the IRS's ability to obtain information by "encourag[ing] voluntary disclosure of listed transactions." Interior Glass Sys. v. United States, 927 F.3d 1081, 1087 (9th Cir. 2019), cert. denied, 140 S. Ct. 606, 205 L.Ed.2d 390 (2019). Taxpayers who fail to submit information regarding "listed transactions" to the IRS face penalties of "75 percent of the decrease in tax shown on the return as a result of such transaction" up to a $200,000 maximum. 26 U.S.C. §§ 6011, 6707A(b). However, taxpayers who believe penalties are assessed against them in error are not without remedy. Congress provided amechanism for challenging an assessment via a "refund suit." See 26 U.S.C. § 7422. A taxpayer who fails or declines to submit the required report may pay the penalty and sue for a refund, after which time a court can consider the legality of the regulation. Id.
This regulatory scheme intersects with the present case due to a provision of CFR 1.6011-4 defining listed transactions as those "similar to tax avoidance transactions" and "identified by notice...as a listed transaction." On October 17, 2007, the IRS issued Notice 2007-83 (the "Notice") which informed taxpayers that tax benefits claimed for a category of trust arrangements were not allowable for federal tax purposes. See 2007-45 I.R.B. 960, 2007 WL 3015114 (Oct. 17, 2007). Specifically, the Notice designated as "listed transactions" certain trust arrangements that had been "promoted to small businesses and other closely held businesses as a way to provide cash and other property" to owners "on a tax-favored basis."1 2007 WL 3015114, at *2. The Notice targeted transactions where businesses use trusts to create welfare benefit funds that included cash-value life insurance policies. Id. The trust would collect the businesses contributions then pay the insurance policy premiums. Id. at 3-4. With the passage of time, the arrangement could be terminated, and the accumulated cash-value life insurance policies, cash, or other trust property could be distributed to participating employees—which were often the business owners themselves. Id. at 4. Because under the Notice these trust arraignments were now defined as "listed transactions," participants in the trusts were required to file a Form 8886 disclosure of their involvement in the trust transaction with the IRS. Id. Failure to do so could trigger the penalty provision of § 6707A outlined above.
The Plaintiffs in this case are participants in trusts that have been designated as "listed transactions" under the notice. The Plaintiff Govig is a privately held executive recruiting firm whose shareholders are trusts associated with each of the individual plaintiffs. Though the trusts in question were "listed transactions" under the Notice, the Plaintiffs failed to file the requisite disclosure (form 8886) during 2015. Because of this alleged violation of the reporting requirement during the 2015 year, on August 23, 2019, the IRS sent Govig a notice of federal tax due which it noted was a penalty charge under 26 U.S.C. § 6707A. The individual Plaintiffs were likewise assessed penalties on August 26, 2019. All Plaintiffs eventually paid the penalty for the 2015 tax year. At the time in which Plaintiffs filed their complaint, the IRS was in the process of investigating whether the Plaintiffs owed a similar penalty for the 2016 and 2017 tax years.
Plaintiffs brought this action challenging the reporting requirement imposed by the Notice and asking this Court to set aside the Notice and declare it unlawful. (Doc. 1. at 29.) As grounds for such action, Plaintiffs allege the Notice was created in violation of the Administrative Procedures Act (APA) in that it violates the notice-and-comment provisions of the APA, is arbitrary and capricious, and ultra vires in nature. See 5 U.S.C. §§ 553; 706(2)(A). Defendant responded with a motion under Rule 12(b)(1) arguing that the Court lacks subject matter jurisdiction to hear the case. (Doc. 23. at 1.) Defendant's motion was based on provisions of the AIA and the DJA which prevent federal courts from granting prospective relief in suits "for the purpose of restraining the assessment or collection of any tax." 26 U.S.C. § 7421; 28 U.S.C. § 2201. Plaintiffs responded arguing neither the AIA nor the DJA apply to this action because they were not challenging the collection of a tax but merely challenging the reporting requirement imposed by the Notice. (Doc. 26. at 7-8.) Plaintiffs further argued that even if this action would normally be prevented by the AIA, Plaintiffs' unique circumstances justified this Court in applying the exceptions to the AIA bar created by the Supreme Court in South Carolina v. Regan, 465 U.S. 367 (1984) and Enochs v. Williams Packing & Navigation Co., Inc., 370 U.S. 1(1962). (Id. at 8.) To further support the application of such exceptions, Plaintiffs have filed a motion asking this Court to "take judicial notice of the incontrovertible fact that Plaintiffs are subject to potential criminal sanctions" based on their non-compliance with the Notice. (Doc. 29. at 2.) Defendant has responded arguing Plaintiffs' request is both procedurally improper and unmerited given the facts of the case. (Doc. 30. at 4-5.) Both parties now await this Court's decision.
Under Federal Rule of Civil Procedure 12(b)(1), a party may move to dismiss a claim for lack of subject-matter jurisdiction. "Federal courts are courts of limited jurisdiction" and may only hear cases as authorized by the Constitution or Congress. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). The party asserting jurisdiction bears the burden of proof. Indus. Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990). When the plaintiff does not meet the burden of showing the court has subject-matter jurisdiction, the court must dismiss the action. Fed. R. Civ. P. 12(h)(3). "Because subject-matter jurisdiction involves a court's power to hear a case, it can never be forfeited or waived." United States v. Cotton, 535 U.S. 625, 630 (2002). "A Rule 12(b)(1) jurisdictional attack may be facial or factual." Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). A facial attack "asserts that the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction." Id. The court "accept[s] the plaintiff's allegations as true" and "determines whether the allegations are sufficient as a legal matter to invoke the court's jurisdiction," "drawing all reasonable inferences in the plaintiff's favor." Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2014). In a facial attack, our inquiry is confined to the allegations in the complaint, while a factual attack permits the court to look beyond the complaint. Savage v. Glendale Union High Sch., 343 F.3d 1036, 1039 n.2 (9th Cir. 2004).
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