Western Reserve Oil & Gas Co. v. New

• Decision Date: 17 July 1985
• Docket Number: No. 84-6272,84-6272
• Citation: 765 F.2d 1428
• Parties: -5518, 85-2 USTC P 9653 WESTERN RESERVE OIL & GAS CO., Trevor M. Phillips and 1983 Western Reserve Oil & Gas Co., Ltd., Plaintiffs-Appellants, v. H. Steven NEW, Bobbie J. Tadlock, Mary Saavedra, Mary Ellen Deners, Howard Chin, Richard M. McKeever, William H. Connett, Scott J. Crabtree, Donald W. Wolf, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1428

765 F.2d 1428

56 A.F.T.R.2d 85-5518, 85-2 USTC P 9653

WESTERN RESERVE OIL & GAS CO., Trevor M. Phillips and 1983 Western Reserve Oil & Gas Co., Ltd., Plaintiffs-Appellants, v. H. Steven NEW, Bobbie J. Tadlock, Mary Saavedra, Mary Ellen Deners, Howard Chin, Richard M. McKeever, William H. Connett, Scott J. Crabtree, Donald W Wolf, Defendants-Appellees.

No. 84-6272.

United States Court of Appeals Ninth Circuit.

Argued and Submitted June 4, 1985.

Decided July 17, 1985.

Robert Berg, Robert Hagelshaw, H. Renton Rolph, Frederick Mahan, Inc., San Francisco, Cal., for plaintiffs-appellants.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Charleton D. Powell, Thomas Gick, Dept. of Justice, Washington, D.C., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before ALARCON and POOLE, Circuit Judges, and ORRICK, ^* District Judge.

ALARCON, Circuit Judge:

Western Reserve Oil and Gas Co., 1983 Western Reserve Oil and Gas, Ltd., and Trevor M. Phillips (hereinafter collectively referred to as Phillips) seek reversal of the district court order dismissing Phillips' suits for damages against individually named agents of the Internal Revenue Service (hereinafter IRS) pursuant to Fed.R.Civ.P. 12(b)(6). Phillips contends that the district court erred because the claim alleging deprivation of a liberty and property interest without due process of law was one on which relief could be granted. ¹

I STANDARD OF REVIEW

The appropriate standard of review is not in dispute. A dismissal for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6) is a ruling on a question of law and as such is reviewable de novo. Guillory v. County of Orange, 731 F.2d 1379, 1381 (9th Cir.1984); North Star International v. Arizona Corp. Commission, 720 F.2d 578, 580 (9th Cir.1983). The review is limited to the contents of the complaint. North Star, 720 F.2d at 581. To affirm this type of dismissal, it must appear to a certainty that the plaintiff would not be entitled to relief under any set of facts that could be proved. Halet v. Wend Investment Co., 672 F.2d 1305, 1309 (9th Cir.1982). All allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. North Star, 720 F.2d at 580.

II FACTS

On May 3, 1984, Phillips filed an action in the district court seeking monetary damages from individually named IRS agents for issuance of "pre-filing notification letters." The basis for relief, as pleaded, was for damages for violation of his constitutional rights by a federal agent under Bivens v. Six Unknown Narcotics Agents, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 (1971).

Phillips is the sole general partner of two companies in the business of producing and developing oil and gas; Western Reserve Oil and Gas Co. and 1983 Western Reserve Oil and Gas Co., Ltd. Both companies are also California limited partnerships in which various individuals (hereinafter partners) purchased limited partnership interests from the years 1981-1983.

In a letter dated March 22, 1984, the IRS advised Phillips that its investigation showed that there was a basis for concluding that a claim by the Phillips partners for tax benefits for the year 1983 would not comply with the income tax laws. ² Phillips was notified on April 4, 1984, that, pursuant to Rev.Proc. 83-78, 1983-2 Cum.Bull. 595 (hereinafter Rev.Proc. 83-78) he would be afforded an opportunity to meet with IRS agent Bobbie J. Tadlock (hereinafter Tadlock) and District Counsel attorney Steve New (hereinafter New) to present any facts or legal arguments to demonstrate that the claimed tax benefits complied with federal income tax laws. ³

Phillips attempted to obtain specific information concerning the factual basis for the IRS determination that his company may be operating as an abusive tax shelter. The IRS, however, refused to give Phillips the information he sought. On April 4, 1982, Phillips met with the IRS agents to dissuade them from issuing any pre-filing notification letters to the limited partners in his companies. This attempt was unsuccessful. On April 11, the IRS sent pre-filing notification letters to the Phillips' partners in Western Reserve Oil and Gas Co. ⁴ The partners in 1983 Western Reserve Oil and Gas Co., Ltd. did not receive pre-filing notification letters.

The complaint as amended alleges that Phillips was denied his Fifth Amendment right to liberty and property because (1) the mailing of the letters had the "irreversible consequence of destroying the means by which Phillips secure[d] his livelihood"; (2) the letters had a "chilling effect" because investors would withdraw; and (3) the letters had the same damaging effect on his livelihood as a "jeopardy assessment."

The complaint states that the agents acted "under color of authority" when they issued the pre-filing notification letters to the investors. It further alleges, however, that the actions undertaken in compliance with Rev.Proc. 83-78, were motivated by a "personal hate and vendetta" directed towards Phillips' business partner, Terry Mabile, a former IRS agent. Phillips alleges that the deprivation occurred because the agents knew that through the use of their "power with the IRS" they could "most effectively injure, embarrass and destroy Mabile and those with whom he was associated." The complaint also alleges that the April 4 meeting with the IRS and the procedures available for review following issuance of the letters did not provide him with an adequate predeprivation hearing or sufficient notice of the specific legal theory or factual basis in violation of his right to procedural due process.

III DISCUSSION

Phillips contends that the mailing of the pre-filing notification letters resulted in the deprivation of his liberty and property without adequate notice and opportunity to be heard in violation of his right to due process.

Bivens v. Six Unknown Narcotics Agents, 403 U.S. 388, 91 S.Ct. 1999, 29 L.Ed.2d 619 authorizes the filing of an action against individual federal agents by a citizen "suffering a compensable injury to a constitutionally protected interest." Butz v. Economou, 438 U.S. 478, 504, 98 S.Ct. 2894, 2909, 57 L.Ed.2d 895 (1978) (emphasis added). We are required to dismiss a complaint brought pursuant to Bivens unless it appears from the face of the complaint that the citizen "has stated a cause of action which asserts ... [a constitutionally protected] right." Davis v. Passman, 442 U.S. 228, 234, 99 S.Ct. 2264, 2271, 60 L.Ed.2d 846 (1979).

A. Property Or Liberty Interest

To establish a cognizable property interest within the meaning of the due process clause of the Fifth Amendment, "a person clearly must have more than an abstract need or desire for it. He must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it." Board of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 2709, 33 L.Ed.2d 548 (1972) (emphasis added).

Phillips claims that the right to continue the operation of a business is a cognizable property interest. We disagree.

The same argument was rejected by the Sixth Circuit in Mid South Music Corp. v. Kolak, 756 F.2d 23 (6th Cir.1984). The facts in Mid South Music Corp. are virtually identical to those before this court. In Mid South Music Corp., the appellant brought suit against the United States and various federal officials of the IRS seeking compensatory and punitive damages for a violation of its constitutional rights. The alleged violations arose from the pre-filing notification letter sent by the IRS to investors in the company advising them that deductions from their investment in Mid South would not be allowed. The complaint alleged that the pre-filing notification letter caused destruction of business thereby depriving the company of property in violation of the Fifth Amendment. The Sixth Circuit held as follows: "No constitutional claim is stated against the individual defendants because the plaintiff has alleged no property interest cognizable under the Fifth Amendment." Id. at 25. ⁵ The Court noted that "[t]he plaintiff is in effect claiming that its business interests should be protected from IRS communications intended to convey to taxpayer investors information which will prevent them being penalized for erroneously taking deductions on their income tax returns." Id. The Sixth Circuit also concluded that "the causal connection between IRS' actions and the alleged business injury is attenuated. Here, there was no IRS action directly depriving the plaintiff of property." Id. Phillips has failed to plead facts showing that he had a "legitimate claim of entitlement" to operate a business in violation of the tax laws.

Our holding that Phillips has failed to allege a cognizable property interest is also supported by the decision of the Circuit Court for the District of Columbia in Investment Annuity, Inc. v. Blumenthal, 609 F.2d 1, 7 (D.C.Cir.1979), cert. denied, 446 U.S. 981, 100 S.Ct. 2961, 64 L.Ed.2d 837 (1980). In Investment Annuity, Inc., the Court held that annuity sellers did not have a sufficient "property interest" to support a claim that the IRS violated due process rights by notifying annuity buyers of recent IRS positions on disallowance of deductions. Id. at 7. The court concluded in Investment Annuity, Inc. that the actions taken by the IRS were too attenuated to constitute a deprivation of the alleged property interest. Id. at 7.

Phillips further claims that a constitutionally recognized liberty interest was denied by the actions of the IRS agents. This claim is grounded upon the same assertion as the property interest claim; i.e. that the issuance of pre-filing notification letters destroyed Phillips' business. Phillips relies on Sanderson v. Village of Greenhills, 726 F.2d 284 (6th Cir.1984) to support this contention. This reliance is misplaced.

In Sanderson, the...