Gray v. United States

• Decision Date: 30 September 2013
• Docket Number: No. 12–3523.,12–3523.
• Parties: Carol Diane GRAY, Plaintiff–Appellant, v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

723 F.3d 795

Carol Diane GRAY, Plaintiff–Appellant,
v.
UNITED STATES of America, Defendant–Appellee.

No. 12–3523.

United States Court of Appeals,
Seventh Circuit.

Argued April 30, 2013.
Decided July 23, 2013.
July 23, 2013.
Rehearing and Rehearing En Banc Denied Sept. 30, 2013.

[723 F.3d 796]

Jonathan P. Decatorsmith (argued), Attorney, Chicago Kent College of Law, Chicago, IL, Carol Diane Gray, Fox Lake, IL, pro se.

Bruce R. Ellisen, Attorney, Kenneth L. Greene, Attorney, Curtis C. Pett (argued), Attorney, Department of Justice, Washington, DC, for Defendant–Appellee.

Before FLAUM, WOOD, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

Since she failed to file federal income tax returns and failed to pay taxes for several years, Carol Gray has been involved in a long siege with the Internal Revenue Service. In this case, Gray alleges that IRS employees engaged in wide-ranging wrongdoing in connection with disputes over her delinquent taxes and returns. Initially, she did not file an administrative claim for damages with the IRS. Instead, she brought suit in the Northern District of Illinois claiming she was entitled to relief under 26 U.S.C. § 7433, which allows taxpayers to recover damages for unauthorized tax collection. More than six months later, after the government moved to dismiss for failure to exhaust administrative remedies, she finally filed an administrative claim. The applicable IRS regulation requires exhaustion of administrative remedies before suit. Eventually, the district court dismissed Gray's suit, in part for failure to state a claim, in part as untimely, and in part for lack of subject-matter jurisdiction based on Gray's failure to exhaust administrative remedies.

On appeal, Gray argues that the regulation requiring exhaustion before suit contradicts the statutory text, which she says allows her to go to court first and exhaust administrative remedies later. The IRS counters that Gray's failure to exhaust before suit not only doomed her claims but also deprived the court of jurisdiction. We view the case slightly differently. In our view, § 7433's exhaustion requirement is not actually jurisdictional, but it is still mandatory. The IRS is entitled to insist that a plaintiff comply with its exhaustion procedures. In creating these procedures, the IRS permissibly interpreted the statute to require exhaustion of administrative remedies before suit was filed. Because Gray did not exhaust administrative remedies, we affirm the dismissal of her suit under § 7433.

I. Factual and Procedural Background

This case focuses on two periods of several years during which Gray did not file

[723 F.3d 797]

income tax returns or pay taxes and on the later disputes over these unpaid taxes and unfiled returns. The first period ran from 1992 to 1995, for which Gray did not file her tax returns until October 1996 and did not begin payment until the following year. She blames her now ex-husband for the failure to file these returns and pay these taxes on time. Gray also did not timely report and pay her taxes during a second period, from 2001 to 2004. Again blaming her by-then ex-husband, she asserts that she did not file tax returns for this second period because of a lengthy legal dispute with him about who would pay their son's college tuition and who could list their son as a dependent. Gray claims that she believed she could not file her tax returns or even pay her taxes until she resolved this dispute with her ex-husband. (Without deciding the merits, we must note our doubt that tax law should be interpreted to excuse filing and payment when ex-spouses reach such stalemates in divorce cases.)

Gray sued the IRS pro se in May 2011, alleging that IRS agents engaged in widespread misconduct during the decade that it has sought to collect Gray's arrearages. Among other things, she says, IRS employees: refused to honor a written IRS commitment that, she believes, establishes that she owed no taxes for the first period; orally abused her about her overall tax debt; threatened her with a perjury prosecution for contesting her debt; conducted an “unauthorized” audit in May 2009 when she attempted to revise her tax returns for the first period of tax debt; and incorrectly told her that she could not sue the IRS.

More than six months into this lawsuit, after the government had moved to dismiss for failure to exhaust, Gray submitted an administrative claim to the IRS. Raising allegations that overlap with but do not perfectly match her lawsuit's charges, she accused IRS agents of collecting taxes “illegally” in four ways: (1) they conducted an “illegal” audit in May 2009 for the 1992–95 tax years; (2) they demanded payment for amounts incorrectly reflected in the audit; (3) they inaccurately asserted in a Tax Court case that Gray owed arrearages; and (4) they refused to bind the IRS to a supposed earlier determination that she owed no money for the years in question. A month after she filed her administrative claim, the district court dismissed Gray's complaint without prejudice on grounds including failure to exhaust administrative remedies, and gave her one month to amend the complaint.

With the assistance of counsel, Gray then filed a second amended complaint seeking relief under three statutes: 26 U.S.C. § 7422 (providing for refunds), § 7432 (authorizing damages for unreleased tax liens), and § 7433 (authorizing damages for unauthorized tax collections). Gray makes no discernible argument on appeal under the first two statutes, so she has abandoned those claims. See Fed. R.App. P. 28(a)(9); Cole v. Comm'r, 637 F.3d 767, 772–73 (7th Cir.2011). The following month, the IRS rejected Gray's administrative claim. The government then moved to dismiss Gray's counsel-assisted complaint on grounds that once again included failure to exhaust administrative remedies. Gray opposed the motion to dismiss but did not contest that the administrative claim attached to the motion to dismiss was the claim that she had filed.

The district court granted the government's motion to dismiss. With respect to the § 7433 claims at issue in this appeal, the court concluded that none of them stated a claim for relief because they principally challenged the assessment rather than the collection of taxes. The court also concluded that other claims in the complaint should be dismissed either as unexhausted or, in the case of the claim relating to a May 2009 audit, as untimely.

[723 F.3d 798]

II. Discussion

Gray presents a handful of arguments on appeal, but in our view, the decisive issue in this case is whether she exhausted administrative remedies. Gray argues that she did enough to exhaust because § 7433 permitted her to file her administrative claim after she filed her lawsuit. The government responds that exhaustion is a jurisdictional prerequisite to suit, that Gray filed suit before exhausting administrative remedies, and that the district court thus lacked jurisdiction. In our view, neither party is entirely correct, but we affirm the dismissal of Gray's claims.

Exhaustion of administrative remedies is a condition of the federal government's waiver of sovereign immunity for suits for damages under § 7433 for unauthorized tax collection. Congress has permitted suits for damages alleging that, “in connection with any collection of Federal tax,” an IRS employee negligently, recklessly, or intentionally “disregard[ed] any provision of this title, or any regulation promulgated under this title.” 26 U.S.C. § 7433(a). Congress has specified that a “judgment for damages shall not be awarded ... unless the court determines that the plaintiff has exhausted the administrative remedies available to such plaintiff within the Internal Revenue Service.” § 7433(d)(1).

Although a plaintiff must exhaust administrative remedies to recover damages under § 7433, exhaustion is not a jurisdictional requirement. After struggling with the issue in many contexts for many years, the Supreme Court articulated a bright-line rule to determine whether a statutory limitation is truly jurisdictional: “when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.” Arbaugh v. Y & H Corp., 546 U.S. 500, 516, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006); see also Rabe v. United Air Lines, Inc., 636 F.3d 866, 869 (7th Cir.2011). Section 7433 contains no language suggesting that Congress intended to strip federal courts of jurisdiction when plaintiffs do not exhaust administrative remedies. Thus, in the wake of Arbaugh, our colleagues in the Sixth Circuit overruled circuit precedent and concluded that the exhaustion requirement in § 7433 is not jurisdictional. Hoogerheide v. IRS, 637 F.3d 634, 636–39 (6th Cir.2011); see also Kim v. United States, 632 F.3d 713, 718–20 (D.C.Cir.2011) (concluding that, under § 7433, a plaintiff need not plead exhaustion to survive a motion to dismiss). This conclusion is consistent with our view that, because sovereign immunity can be waived, the defense is not jurisdictional. See Collins v. United States, 564 F.3d 833, 837–38 (7th Cir.2009); Parrott v. United States, 536 F.3d 629, 634 (7th Cir.2008).

While exhaustion of administrative remedies is not a jurisdictional prerequisite to suit, which would mean the requirement could not be waived and the courts would be required to raise the issue on their own initiative, exhaustion is still a statutory requirement for recovery, § 7433(d)(1), and a condition of the government's waiver of sovereign immunity. The government...