United States v. Gordon
| Decision Date | 05 December 2019 |
| Docket Number | CIVIL ACTION NO. 3:18-CV-00734-GNS-CHL |
| Parties | UNITED STATES OF AMERICA PLAINTIFF v. CURTIS GORDON, JR. DEFENDANT |
| Court | U.S. District Court — Western District of Kentucky |
This matter is before the Court on Plaintiff's Motion to Dismiss (DN 14), Defendant's Motion for Leave to File Amended Counterclaim (DN 23), and Defendant's Motion for Leave to File Amended Response to Plaintiff's Motion to Dismiss (DN 26). These motions are ripe for adjudication. For the reasons that follow, Plaintiff's motion is GRANTED and Defendant's motions are DENIED.
On October 22, 2010, a jury found Defendant Curtis Gordon, Jr. guilty of filing false income tax returns. (Pl.'s Mot. Dismiss Ex. 2, at 1-2, DN 14-4). In preparation for Gordon's sentencing phase of trial, his expert witness prepared two sets of demonstration tax returns to be utilized in Gordon's defense: one set demonstrating Gordon's "exaggerated" income amount the government attributed to Gordon and the other a "more realistic" income amount he asserted was the correct amount. ). Believing that he would be able to use that demonstrative evidence during his sentencing phase, Gordon presented the demonstration returns to the Court and the Assistant United States Attorney ("AUSA") prosecuting his case. ). The Court ruled the demonstration returns inadmissible and returned the Court's copies to Gordon. ). Gordon claims that the AUSA's Office did not return its copies. ).
Gordon alleges that the set of demonstration returns prepared by his expert representing the government's "exaggerated" income attributed to Gordon somehow fell into the hands of an unknown third party, perhaps a government official, who fraudulently filed the demonstration returns under his name with the IRS. . Gordon claims the IRS then used those demonstration returns to levy the tax assessments against Gordon that are the basis for the IRS's tax collection claim in this case. (Answer & Countercl. ¶ 32).
The United States filed this tax collection action against Gordon. (Compl. 1, DN 1). Gordon has asserted a counterclaim alleging unauthorized disclosure and inspection of tax return information under 26 U.S.C. § 7431(a). . The United States moved for dismissal of that counterclaim on March 26, 2019. (Pl.'s Mot. Dismiss 2, DN 14). Gordon responded to that motion on April 14, to which the United States replied on April 30. .
Gordon then subsequently moved for leave to file an amended counterclaim and an amended response to the United States's motion to dismiss on September 27. (Def.'s Mot. Leave File Am. Countercl. 1, DN 23; Def.'s Mot. Leave File Am. Resp. 1, DN 29). The United States responded on October 18. (. The Court granted Gordon leave to file a belated reply, and Gordon has since filed that reply. (Order, DN 30; Pl.'s Reply Mot. Leave File Am. Countercl., DN 31).
To the extent this Court possesses jurisdiction over this matter, it is through federal question jurisdiction pursuant to 28 U.S.C. § 1331.
In its motion to dismiss, the United States proffers two arguments as to why Gordon's Section 7431(a) claims should be dismissed. First, the United States asserts that the claims are time barred by the two-year statute of limitations for bringing such claims set forth in Section 7431(d). Second, the United States contends that Section 7431(a) does not afford Gordon the relief he seeks. The United States also argues that Gordon's proposed amendments to his counterclaim and response to its motion to dismiss are futile and should not be allowed.
Federal law prohibits the inspection or disclosure of any "return or return information" with respect to a taxpayer by an officer or employee of the United States. 26 U.S.C. § 7431(a). A "return" is "any tax or information return . . . which is filed with the Secretary by, on behalf of, or with respect to any person . . . ." 26 U.S.C. § 6103(b)(1) (emphasis added). The term "return information" refers to any information "received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability." Id. § 6103(b)(2)(A) (emphasis added). The portions of the statutes emphasized in the prior two sentences form the "pass through the IRS" rule followed by all courts who have ruled on this issue. See, e.g., Bankcroft Glob. Dev. v. United States, 330 F. Supp. 3d 82, 97-99 (D.D.C. 2018); Stokwitz v. United States, 831 F.2d 893, 897 (9th Cir. 1987); Lomont v. O'Neill, 285 F.3d 9, 15 (D.C. Cir. 2002); Ryan v. United States, 74 F.3d 1161, 1163 (11th Cir. 1996). The United States moves for dismissal of Gordon's Section 7431(a) claim based on application of this rule pursuant to Fed. R. Civ. P. 12(b)(6).
To survive dismissal for failure to state a claim under Fed. R. Civ. P. 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks omitted) (citation omitted). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. When considering a defendant's motion to dismiss, the Court will "accept all the [plaintiff's] factual allegations as true and construe the complaint in the light most favorable to the [plaintiff]." Hill v. Blue Cross & Blue Shield of Mich., 409 F.3d 710, 716 (6th Cir. 2005). Iqbal, 556 U.S. at 678 (internal quotation marks omitted) (citation omitted).
The application of the "pass through the IRS" rule appears to be an issue of first impression in the Sixth Circuit. The "pass through the IRS" rule can be stated at follows: "Since section 6103 applies only to information filed with and disclosed by the IRS," only if a third party obtains a taxpayer's information "directly or indirectly from the IRS" does Section 7431(a)'s private right of action exist for a violation of Section 6103. Stokwitz v. United States, 831 F.2d 893, 897 (9th Cir. 1987); see also Ryan v. United States, 74 F.3d 1161, 1163 (11th Cir. 1996) . Using this "pass through the IRS" rule, the Ninth Circuit in Stokwitz held that Section 7431(a)'s private right of action for a violation of Section 6103 did not apply to hold naval officials liable for seizing Stokwitz's tax returns from him personally because that information was "not obtained directly or indirectly from the IRS . . . ." Stokwitz, 831 F.2d at 897. Until taxpayer information "passes through" the IRS, that information cannot constitute "return or return information" so as to afford a taxpayer a private right of action for the disclosure or inspection of that information.
Gordon here pleads his claim in two specific ways. First, Gordon alleges that the government incurred Section 7431(a) liability for whatever happened with the demonstration returns after being in the possession of the AUSA but before being in the possession of the IRS. ). But if those demonstration returns had not yet been in the possession of the IRS, those returns cannot constitute "return or return information," and any act occurring in conjunction with those demonstration returns committed by a third party, government official or not, does not give rise to Section 7431(a) liability. Although Gordon alleges that the AUSA and the IRS Special Agent were representatives of the IRS when prosecuting him, meaning that the demonstration returns were purportedly in the possession of the IRS when in the hands of those individuals, "information collected by the United States Attorney's Office, even with the assistance of an IRS Special Agent, is not information belonging to the Secretary of the Treasury—it is within the custody of the Attorney General or the Department of Justice." Ryan, 74 F.3d at 1163. It is only the purported subsequent inspections and disclosures of the demonstration returns occurring after the information was or had been in the possession of the IRS that potentially give rise to liability owed under Section 7431(a), not inspections and disclosures of information that has never been in the possession of the IRS. Gordon's claim in this regard fails.
Gordon secondly asserts his Section 7431(a) claim by alleging that the IRS improperly used or disclosed the demonstration returns in conjunction with collection efforts. Although the Sixth Circuit has never dealt with this issue, courts appear to be in uniform agreement that a suit for unlawful disclosure or inspection occurring in connection with tax collection activity may only be maintained under 26 U.S.C. § 7433, not Section 7431. See, e.g., Shwarz v. United States, 234 F.3d 428, 432-33 (9th Cir. 2000) (...
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