Neece v. I.R.S., 95-5174

• Decision Date: 13 September 1996
• Docket Number: No. 95-5174,95-5174
• Citation: 96 F.3d 460
• Parties: -6474, 97-2 USTC P 50,777 Peggy NEECE and Buel H. Neece, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE of the United States of America; United States of America; and First National Bank of Turley, N.A., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 460

96 F.3d 460

78 A.F.T.R.2d 96-6474, 97-2 USTC P 50,777

Peggy NEECE and Buel H. Neece, Plaintiffs-Appellants, v. INTERNAL REVENUE SERVICE of the United States of America United States of America; and First National Bank of Turley, N.A., Defendants-Appellees.

No. 95-5174.

United States Court of Appeals Tenth Circuit.

Sept. 13, 1996.

E. John Eagleton (James R. Eagleton, Eagleton, Eagleton & Harrison, with him on the briefs), Tulsa, OK, for Plaintiffs-Appellants.

David English Carmack, Tax Division (John J. McCarthy, Tax Division, with him on the brief), Department of Justice, Washington, DC, for Defendants-Appellees United States of America and Internal Revenue Service.

Jerry Reed, Tulsa, OK (Joseph R. Farris and Jody R. Nathan, Feldman Hall Franden Woodard & Farris, with him on the brief), for Defendant-Appellee First National Bank of Turley.

Before KELLY, ENGEL ^* and LOGAN, Circuit Judges.

LOGAN, Circuit Judge.

Plaintiffs Buel and Peggy Neece, husband and wife, appeal from the district court's judgment denying as damages attorney's fees they assert they incurred because of defendants', the Internal Revenue Service (IRS) and First National Bank of Turley (bank), violation of the Right to Financial Privacy Act of 1978 (RFPA), 12 U.S.C. §§ 3401-3422.

I

This case is before us for the third time. In 1986 a jury found Buel Neece guilty of income tax evasion for the years 1979, 1980 and 1981. Before the IRS filed any civil deficiencies, Buel Neece discussed some potential transactions and provided documents to defendant bank's president, Mikel Hoffman, which aroused his suspicions. Hoffman contacted an IRS agent, Gary Benuzzi, related his conversations with Buel Neece, and gave Benuzzi copies of some of the Neeces' financial documents. One of the documents indicated that many of the Neeces' real estate holdings had been transferred to a revocable family trust. Soon thereafter the IRS filed a jeopardy assessment against plaintiffs, seizing some of their property. See 26 U.S.C. § 6861 (a jeopardy assessment allows the IRS, under specific circumstances, to seize property of taxpayers before a determination of tax liability). Plaintiffs filed a complaint challenging the jeopardy assessment. After a hearing the district court concluded that an investigation of the family trust "would have revealed that the government was in no worse position relative to the subject properties than without the [t]rust," thus the jeopardy assessment was unreasonable. V App. tab 80.

Meanwhile plaintiffs received the notice of deficiency required under 26 U.S.C. § 6861(b) to be issued within sixty days after a jeopardy assessment. Taxpayers challenged that deficiency in the Tax Court. Plaintiffs also filed a petition for voluntary bankruptcy in an attempt to consolidate their tax litigation.

Plaintiffs then filed the instant suit against the IRS and the bank, alleging a violation of the RFPA. The RFPA prohibits a financial institution from disclosing a customer's financial records--defined in 12 U.S.C. § 3401(2) as an original, a copy of or "information known to have been derived from" any record held by the bank pertaining to the customer's relationship with the bank--to a governmental authority "unless either the customer authorizes the disclosure of such information or the government obtains a valid subpoena or warrant." United States v. Frazin, 780 F.2d 1461, 1465 (9th Cir.), cert. denied, 479 U.S. 844, 107 S.Ct. 158, 93 L.Ed.2d 98 (1986). The RFPA provides, however, that an officer of the bank can notify a governmental authority that they have information that may be relevant to a possible criminal violation; but such information is limited to identifying "the individual, corporation, or account involved [ ] and the nature of any suspected illegal activity." 12 U.S.C. § 3403(c). The RFPA also allows an exemption for "disclosure of financial records in accordance with procedures authorized by Title 26." Id. § 3413(c). The district court granted summary judgment in favor of defendants, reasoning that the bank's cooperation with the IRS was a "procedure" under Title 26 and thus an exemption under 12 U.S.C. § 3413(c).

On appeal we reversed and remanded, holding that the bank and the IRS were "not exempted under 12 U.S.C. § 3413(c) from [the] procedural requirement merely because the financial institution voluntarily chooses to allow the IRS, pursuant to 26 U.S.C. § 7602(a)(1), to examine financial records pertaining to a taxpayer." Neece v. IRS, 922 F.2d 573, 578 (10th Cir.1990). On remand the district court found that defendants violated the RFPA. It imposed the $100 statutory penalty against both defendants and awarded $1580 actual damages for the plaintiffs' personal property seized pursuant to the jeopardy assessments, plus costs and reasonable attorney's fees for the RFPA action. The district court denied as actual damages plaintiffs' attorney's fees incurred in the jeopardy assessment action, stating that those fees were denied in the jeopardy assessment action and that decision was res judicata as to those fees.

Plaintiffs appealed again, and we held, inter alia, that the district court's denial of the attorney's fees incurred in the jeopardy assessment abatement proceeding as barred by res judicata was erroneous because the record did not reflect any order in that abatement proceeding denying a request for attorney's fees. Therefore, we reversed and remanded on this issue with instructions for the district court to determine whether to award as damages the attorney's fees in the abatement proceeding as well as those in the Tax Court and bankruptcy actions, if plaintiffs claimed those fees in the district court. Neece v. Internal Revenue Serv., 41 F.3d 1396, 1400 & n. 2 (10th Cir.1994).

This brings us to the district court decision now before us. On remand the district court addressed whether defendants' violation of the RFPA proximately caused plaintiffs' attorney's fees in any of the three legal proceedings. The district court's factual finding included the following:

2. Bank President Mikel Hoffman testified that, previous to turning over the [plaintiffs'] file, he became concerned over certain transactions that Mr. Neece was wanting to enter into. He called IRS agent Gary Benuzzi, and told him that Mr. Neece had sought information about mortgaging his homestead as additional collateral for a commercial loan with the bank, and that Mr. Neece stated that the purpose of the proposed mortgage was to enable hi[m] to take an interest deduction for his commercial loan under the home equity law. Mr. Hoffman also told agent Benuzzi that Mr. Neece had told him that the IRS was getting ready to move against Mr. Neece and therefore, he wanted to have a mortgage on his homestead.

3. Mr. Hoffman informed agent Benuzzi that Mr. Neece had told another bank employee that the loan was for the purpose of paying the Internal Revenue Service, but that the loan application stated that the loan was for debt consolidation. Mr. Hoffman requested that the agent keep his contact confidential.

4. Subsequently, agent Benuzzi visited Mr. Hoffman and requested Mr. Hoffman's file which was turned over without a subpoena. The file turned over to agent Benuzzi contained 1) a copy of the recorded mortgage on the Neece Homestead, 2) a memo by Mr. Hoffman dated November 18, 1987 to Bank personnel advising them not to put credence in the Neece homestead mortgage, 3) the residential loan application of Mr. Neece, 4) an unsigned financial statement for Mr. Neece [which included reference to a family trust]; and 5) a letter by Mr. Hoffman of April 25, 1988 denying the loan application.

5. Agent Benuzzi then recommended a Jeopardy Assessment and certain of the Neece's [sic] assets were seized by the IRS. The IRS informed the Neeces that it was making the jeopardy assessment because: 1) Mr. Neece had recently been convicted of tax evasion for the years 1979, 1980, and 1981; 2) Mr. Neece had previously converted checks to cash to conceal flow of funds, used a fictitious name and a nominee trust to conceal assets and income; 3) Mr. Neece had attempted recently to encumber valuable assets by granting a mortgage against his home; 4) Mr. Neece had recently attempted to convert into cash real assets valued at $350,000.

I App. tab 2 at 2-4.

The district court stated that "[t]hese reasons for making the jeopardy assessment were not based on the documents produced in violation of the RFPA, but rather upon the oral information provided by Mr. Hoffman." Id. at 4. The district court thus impliedly found that disclosure of the oral information was not a violation of the RFPA. The district court then concluded that "the oral tip by Mr. Hoffman, among other things known by the IRS (i.e., Mr. Neece's conviction for tax evasion) was the cause of the jeopardy assessment." Id. at 5. The district court also stated that the jeopardy assessment was set aside because the IRS had failed to fully investigate the revocable family trust. The court concluded that "the violation of the RFPA was not the cause of either the jeopardy assessment or its abatement, and thus, was not the proximate cause of the attorney's fees incurred in the jeopardy assessment proceeding." Id.

The district court also found that the Tax Court case was the result of plaintiffs' failure to pay taxes, rejecting plaintiffs' claims that the jeopardy assessment foreclosed reaching a settlement on their tax liability before going to Tax Court. The court cited the ongoing difficulties with the IRS in rejecting plaintiffs' assertion that the Tax Court case was proximately caused by the RFPA violation. Finally, the district court concluded the bankruptcy was not proximately caused by the RFPA violation.

On appeal plaintiffs challenge the district court's findings that the documents the IRS obtained from the bank in violation...