Yates v. United States

• Court: District Court, N.D. California
• Decided: May 22, 2020
• Docket: 5:19-cv-06384
• Status: Unknown

Opinion

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 8 MICHAEL J. YATES, Case No. 19-cv-06384-VKD

9 Plaintiff, ORDER GRANTING IN PART AND 10 v. DENYING IN PART DEFENDANT’S MOTION TO DISMISS AMENDED 11 UNITED STATES OF AMERICA, COMPLAINT 12 Defendant. Re: Dkt. No. 15

13 14 Plaintiff Michael Yates sues the United States for alleged illegal collection activities by the 15 Internal Revenue Service (“IRS”) and seeks a refund of tax penalties he claims he paid. The 16 government now moves to dismiss Mr. Yates’s amended complaint, the operative pleading, 17 arguing that he has not exhausted his administrative remedies and fails to state a claim for relief. 18 Upon consideration of the moving and responding papers, as well as the arguments of counsel, the 19 Court grants the motion to dismiss in part and denies it in part.1 20 I. BACKGROUND 21 The present action arises out of the IRS’s assessment of penalties against Mr. Yates for the 22 alleged failure to report participation in certain life insurance plans on his tax returns for the years 23 2008, 2009, 2010 and 2011. According to Mr. Yates’s amended complaint, the basis for the 24 penalty imposed for 2008 was that he failed to report his participation in the Income Security 25 Program (“ISP”), a program that Mr. Yates acknowledges is a reportable transaction. Dkt. No. 27 26

27 1 All parties have expressly consented that all proceedings in this matter may be heard and finally 1 ¶ 9. Mr. Yates contends that he properly reported the ISP transaction for the year 2008. Id. ¶ 28. 2 He further alleges that the basis for the imposition of the penalties for the years 2009-2011 was his 3 alleged failure to disclose a different reportable transaction under a Group Term Life Insurance 4 Plan (“GTLP”). Id. Mr. Yates maintains that he did not participate in a reportable transaction for 5 the years 2009-2011, and that the only participant in the GTLP was Interior Glass, Inc. (“Interior 6 Glass”).2 Id. 7 The amended complaint alleges that although Mr. Yates fully paid the assessed penalties 8 for all four tax years in July 2014, the IRS subsequently assessed the same penalties for 2010 and 9 2011 a second time in June 2017, and then filed tax liens to collect those penalties in April 2018. 10 Id. ¶¶ 6, 8, 10. Mr. Yates says that upon learning of the liens, he timely requested a Collection 11 Due Process (“CDP”) hearing, which he says should have suspended all collection efforts. Id. 12 ¶ 12. While the CDP process was pending, the IRS reportedly acknowledged that the new 13 penalties assessed in 2017 were the same penalties Mr. Yates paid in July 2014, but nonetheless 14 proceeded to seize $26,886 from his 2017 tax refund to pay for the 2010 and 2011 penalties Mr. 15 Yates says he had already paid years before. Id. ¶¶ 14, 15. Mr. Yates alleges on information and 16 belief that “on March 20, 2019, the IRS approved the refund of the improperly seized $26,886 plus 17 interest.” Id. ¶ 21. Nevertheless, he contends that the penalties for all four tax years were 18 wrongfully assessed in the first place, and that “[n]o part of the penalties paid in July 2014 has 19 been refunded.” Id. ¶ 7. 20 Mr. Yates asserts two claims for relief. His first claim is based on 26 U.S.C. § 7433 for 21 alleged illegal collection actions and concerns the duplicative penalties assessed for the years 2010 22 and 2011. Mr. Yates claims that the IRS not only wrongfully assessed penalties for those tax 23 years a second time, but in the process of collecting those penalties, also failed to provide him 24 with certain letters and notices required by the IRS’s own rules and regulations. 25 In his second claim for relief under 26 U.S.C. § 6707A, Mr. Yates seeks a refund of the 26 penalties he says he paid. As alleged in his amended complaint, Mr. Yates sought a refund for the 27 1 penalties assessed for all four tax years 2008, 2009, 2010 and 2011. As discussed below, 2 however, Mr. Yates concedes that only the years 2008 and 2011 are at issue in his claim for a 3 refund. The amended complaint alleges that Mr. Yates is entitled to a refund of the penalties paid 4 for those two tax years on several grounds. As noted above, Mr. Yates claims that he properly 5 reported the ISP transaction for 2008 and maintains that he did not participate in the GTLP for the 6 year 2011. Additionally, Mr. Yates contends that he is entitled to a refund because the IRS 7 “[s]ubjected [him] to disparate treatment” by applying its rules and audit guidelines differently 8 than it applies those same rules and guidelines to other taxpayers; failed to show that the initial 9 assessment of penalties was personally approved in writing by the supervisor or other person 10 required to approve assessment of a penalty, pursuant to 26 U.S.C. § 6751(b)(1); and allegedly 11 entrapped him into filing his 2011 tax return without reporting the GTLP. With respect to this last 12 allegation, Mr. Yates claims that by March 2012 the IRS determined that the GTLP was a 13 reportable transaction, but intentionally delayed informing him of that decision until after he had 14 already filed his 2011 tax return in October 2012. Id. ¶¶ 28-32. 15 With respect to Mr. Yates’s first claim for alleged illegal collection activities, the 16 government argues that this claim should be dismissed pursuant to either Rule 12(b)(1) or 12(b)(6) 17 for failure to exhaust administrative remedies and for failure to state a claim for relief. As for his 18 second claim for a refund, the government contends that Mr. Yates is collaterally estopped from 19 seeking relief based on matters that have already been adjudicated in prior litigation filed by 20 Interior Glass. Additionally, the government argues that Mr. Yates is jurisdictionally barred from 21 seeking a refund based on any other grounds because those grounds were either not raised in his 22 administrative claims or were raised only in untimely amended administrative claims. 23 II. LEGAL STANDARD 24 A. Rule 12(b)(1) 25 A Rule 12(b)(1) motion to dismiss challenges a federal court's jurisdiction over the subject 26 matter of a plaintiff's complaint. A jurisdictional challenge under Rule 12(b)(1) may be made 27 either on the face of the pleadings (a “facial attack”) or by presenting extrinsic evidence (a “factual 1 White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000)). “In a facial attack, the challenger asserts that 2 the allegations contained in a complaint are insufficient on their face to invoke federal jurisdiction. 3 By contrast, in a factual attack, the challenger disputes the truth of the allegations that, by 4 themselves, would otherwise invoke federal jurisdiction.” Safe Air for Everyone v. Meyer, 373 5 F.3d 1035, 1039 (9th Cir. 2004). In resolving a factual attack on jurisdiction, the district court 6 may review evidence beyond the complaint and is not required to presume the truthfulness of the 7 plaintiff's allegations. Id. The party asserting federal subject matter jurisdiction bears the burden 8 of establishing its existence. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 9 (1994). 10 B. Rule 12(b)(6) 11 A motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) tests the legal 12 sufficiency of the claims in the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). 13 Dismissal is appropriate where there is no cognizable legal theory or an absence of sufficient facts 14 alleged to support a cognizable legal theory. Id. (citing Balistreri v. Pacifica Police Dep’t, 901 15 F.2d 696, 699 (9th Cir. 1990)). In such a motion, all material allegations in the complaint must be 16 taken as true and construed in the light most favorable to the claimant. Id. 17 However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere 18 conclusory statements, do not suffice.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Moreover, 19 “the court is not required to accept legal conclusions cast in the form of factual allegations if those 20 conclusions cannot reasonably be drawn from the facts alleged.” Clegg v. Cult Awareness 21 Network, 18 F.3d 752, 754-55 (9th Cir. 1994). 22 Rule 8(a)(2) requires only “a short and plain statement of the claim showing that the 23 pleader is entitled to relief.” This means that the “[f]actual allegations must be enough to raise a 24 right to relief above the speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 25 (2007) (citations omitted). However, only plausible claims for relief will survive a motion to 26 dismiss. Iqbal, 556 U.S. at 679. A claim is plausible if its factual content permits the court to 27 draw a reasonable inference that the defendant is liable for the alleged misconduct. Id. A plaintiff 1 the-defendant-unlawfully-harmed-me accusation.” Id. at 678. 2 Documents appended to or incorporated into the complaint or which properly are the 3 subject of judicial notice may be considered along with the complaint when deciding a Rule 4 12(b)(6) motion. Coto Settlement v. Eisenberg, 593 F.3d 1031, 1038 (9th Cir. 2010). 5 III. DISCUSSION 6 A. Alleged Illegal Collection Activities, 26 U.S.C. § 7433 7 The government contends that this claim, based on duplicate penalties assessed for the 8 years 2010 and 2011, must be dismissed because Mr. Yates did not exhaust his administrative 9 remedies. Additionally, the government notes that it returned to Mr. Yates the levied $26,886, 10 plus interest, and that the amended complaint fails to state any basis for damages. 11 Before filing a claim under 26 U.S.C. § 7433, a taxpayer must first exhaust all 12 administrative remedies available. 26 U.S.C. § 7433(d)(1). To exhaust administrative remedies 13 for claims brought under 26 U.S.C. § 7433, the relevant regulation requires a taxpayer to 14 (1) submit a written claim to the director of the district in which the taxpayer resides, including the 15 following information: (a) the taxpayer’s contact information and convenient times to be 16 contacted; (b) the grounds, in reasonable detail, for the claim, (c) a description of the taxpayer’s 17 claimed injuries and any substantiating documentation; (d) the dollar amount of the claim, and 18 (e) the signature of the taxpayer or a duly authorized representative. 26 C.F.R. § 301.7433-1(e). 19 A lawsuit may not be filed in a district court until the date of the IRS’s decision on the 20 administrative claim or six months after the filing date of the administrative claim, whichever is 21 earlier. 26 C.F.R. § 301.7433-1(d)(1). 22 Although the parties dispute whether the exhaustion requirement under 26 U.S.C. § 7433 is 23 jurisdictional in nature,3 this Court need not resolve that issue. At oral argument, Mr. Yates 24 contended that he had raised this matter with the IRS prior to filing the present suit, but if 25 exhaustion as specified in § 7433 is required, then he agreed it would be appropriate to dismiss 26

27 3 Mr. Yates points out that other circuits have concluded that exhaustion is not jurisdictional, but 1 this claim without prejudice, pending administrative exhaustion of the claim. Mr. Yates has not 2 cited any authority indicating that the filing of his request for a CDP hearing is sufficient to 3 exhaust his administrative remedies as specifically required under 26 U.S.C. § 7433, and at least 4 some courts appear to have rejected such arguments. See Harris v. United States, No. 06-288 5 Erie, 2009 WL 866848, at *5 (W.D. Pa. Mar. 30, 2009) (“Harris’ position appears to be that, by 6 mistakenly offering him the right to apply for a CDP hearing, the IRS created a right to such a 7 hearing, thereby establishing an alternative mechanism for exhausting his administrative remedies 8 notwithstanding the requirements of 26 C.F.R. § 301.7433–1(e). Harris cited no authority to 9 support such a proposition, and it is flatly inconsistent with the authority cited above.”); Bullard v. 10 United States, 486 F.Supp.2d 512, 518 (D. Md. 2007) (“Though Bullard alleges in his papers that 11 he has pursued every administrative remedy available to him, it is clear to the Court that he has not 12 complied with the specific administrative procedures set forth under the regulations in order to 13 preserve a claim for damages. While he did take a number of steps seeking primarily to stop the 14 levy, his failure to follow the specific procedures for pursuing a damage claim deprives this Court 15 of jurisdiction to hear it.”). 16 Accordingly, Mr. Yates’s claim for alleged illegal collection activities is dismissed without 17 prejudice to administratively exhaust his claim. However, nothing in this order should be 18 construed as requiring the government to address or respond to any such administrative claim 19 other than as the law may require. 20 B. Claim for Refund, 26 U.S.C. § 6707A 21 The government acknowledges that Mr. Yates filed administrative claims and amended 22 administrative claims for a refund with the IRS prior to filing this lawsuit. See 26 U.S.C. 23 § 7422(a) (providing that a taxpayer may not file a lawsuit for a refund “until a claim for refund or 24 credit has been duly filed with the Secretary, according to the provisions of law in that regard, and 25 the regulations of the Secretary established in pursuance thereof.”). “The requirement for filing a 26 proper refund claim is designed both to prevent surprise and to give adequate notice to the [IRS] 27 of the nature of the claim and the specific facts upon which it is predicated, thereby permitting an 1 1355, 1363 (Fed. Cl. 2006) (internal quotations and citation omitted). However, the government 2 argues that Mr. Yates is collaterally estopped from asserting arguments made in his original 3 administrative claims because those matters have already been adjudicated in prior litigation 4 brought by Interior Glass over penalties that the IRS separately assessed against the company in 5 connection with the same insurance transactions. See Interior Glass Sys., Inc. v. United States, 6 927 F.3d 1081 (9th Cir. 2019); Interior Glass Sys., Inc. v. United States, No. 5:13-cv-05563-EJD, 7 2016 WL 4717765 (N.D. Cal. Aug. 12, 2016). Additionally, the government argues that Mr. 8 Yates is jurisdictionally barred from asserting arguments made in his untimely filed amended 9 administrative claims, as well as any arguments that were not asserted in either his original or 10 amended administrative claims. 11 Preliminarily, the parties dispute whether this Court properly may consider copies of Mr. 12 Yates’s administrative claims, which the government has submitted in support of its present 13 motion (see Dkt. Nos. 15-1 to 15-3). Although Mr. Yates’s amended complaint did not append 14 these administrative claims, it expressly references his submission of administrative claims for a 15 refund. Dkt. No. 9 ¶ 26. The viability of Mr. Yates’s action against the United States depends 16 upon those claims and their contents, and he does not dispute the authenticity of the documents the 17 government submitted in connection with the present motion. Accordingly, the Court concludes 18 that it properly may consider Mr. Yates’s administrative claims under the incorporation by 19 reference doctrine. See Wright v. City of Santa Cruz, No. 13-cv-01230-BLF, 2014 WL 3058470, 20 at *4 (N.D. Cal. July 3, 2014) (considering the plaintiff’s administrative tort claims under the 21 incorporation by reference doctrine). 22 With respect to Mr. Yates’s original administrative claims, the government argues that, in 23 view of rulings made in the prior Interior Glass litigation, Mr. Yates is collaterally estopped from 24 asserting the only two arguments made in those administrative claims, i.e., that the GTLP is not a 25 reportable transaction and that Interior Glass relied on the advice of tax professionals in filing its 26 tax returns. Mr. Yates does not appear to dispute this argument, although he notes that his 27 amended complaint does not assert either of these grounds as a basis for his refund claim. As 1 2008 and 2011, and not all four years as alleged in his amended complaint. 2 The remainder of the parties’ arguments focus on Mr. Yates’s amended administrative 3 claims, which Mr. Yates admittedly did not timely file within the period prescribed by statute. A 4 taxpayer must file a refund claim with the IRS within three years from the time the pertinent return 5 was filed or two years from the time the relevant tax was paid, whichever is later. 26 U.S.C. 6 § 2611(a). Mr. Yates’s amended complaint alleges that he paid the subject penalties in July 2014 7 and then filed an administrative claim for refund in August 2014, followed by his amended claims 8 in July 2017. Dkt. No. 9 ¶¶ 25-26. His amended administrative claims therefore were filed more 9 than three years from the time his 2008 and 2011 tax returns were filed, and more than two years 10 after he says he paid the subject penalties in July 2014. The key point of contention is whether, 11 under the variance doctrine, Mr. Yates nonetheless may pursue arguments made in his untimely 12 amended administrative claims because those untimely arguments are “germane” to those made in 13 his timely original claims to the IRS. 14 The variance doctrine “permits consideration of a claim for refund despite failure to timely 15 file detailed formal claims with the IRS when a substantial variance from the requirements of the 16 regulation [requiring the filing of timely and proper claims] is not involved.” Computervision 17 Corp., 445 F.3d at 1364. “In many cases, the issue is whether there is a substantial variance from 18 a timely filed claim.” Id. at 1364 n.8. However, untimely claims are saved “only in four limited 19 situations,” each of which “has itself come to be identified as a separate doctrine.” Id. at 1364. At 20 issue here is whether Mr. Yates’s untimely administrative claims fall within the “germaneness 21 doctrine,” which applies only where the taxpayer:

22 (1) files a formal claim within the limitations period making a specific claim; and (2) after the limitations period but, while the IRS still has 23 jurisdiction over the claim, files a formal amendment raising a new legal theory—not specifically raised in the original claim—that is 24 “germane” to the original claim, that is, it depends upon facts that the IRS examined or should have examined within the statutory period 25 while determining the merits of the original claim. 26 Id. at 1370. Under the germaneness doctrine, the inquiry “is not whether the particular legal 27 theory for recovery has been considered by the IRS during the limitations period but whether the 1 the IRS in considering the original claim during the limitations period.” Id. (emphasis added). 2 Mr. Yates’s amended complaint states that the IRS denied all of his administrative claims in 3 February 2018 (Dkt. No. 9 ¶ 26); and, for present purposes, no one disputes that Mr. Yates 4 submitted his amended claims to the IRS at a time when the IRS still had jurisdiction over his 5 original claim. But the parties disagree whether his amended claims depend on facts that the IRS 6 examined or should have examined while considering the merits of his original claim. 7 Putting aside those arguments which Mr. Yates appears to concede he is estopped from 8 pursuing in this litigation, the government contends that the remaining assertions in his untimely 9 amended administrative claims are entirely distinct from those asserted in his timely original 10 claims. As noted above, Mr. Yates’s original administrative claims asserted that the subject 11 transactions were not reportable events, as well as reliance on the advice of tax professionals. Dkt. 12 No. 15-2. In his amended complaint filed in this Court, Mr. Yates asserts the following as grounds 13 for a refund: 14 • He properly reported the transaction on his 2008 tax return. 15 • Interior Glass was the only participant in the transaction, and any IRS regulation or 16 rule that treats Mr. Yates as a participant is unreasonable, arbitrary and capricious. 17 • The IRS applied its rules and guidelines differently with respect to Mr. Yates, than 18 it has applied those same rules and guidelines to other taxpayers. 19 • The IRS entrapped Mr. Yates into filing his 2011 return without reporting the 20 GTLP, by failing to inform him that it had determined that the GTLP is a reportable 21 transaction. 22 • The IRS has not demonstrated that the initial assessment of penalties was approved 23 by a supervisor, as Mr. Yates claims is required by 26 U.S.C. §6751(b)(1). 24 Dkt. No. 9 ¶¶ 28-32. 25 Turning first to Mr. Yates’s last allegation, it is entirely distinct from the two grounds 26 asserted in his timely original claims. Moreover, no such assertion appears in any of Mr. Yates’s 27 administrative claims for relief. See Quarty v. United States, 170 F.3d 961, 972 (1999) (“If the 1 raise that question in a refund suit.”) (internal quotations and citation omitted). Mr. Yates’s 2 reliance on Chai v. Comm’r of Internal Revenue, 851 F.3d 190 (2d Cir. 2017) for the proposition 3 that he is entitled to raise alleged noncompliance with 26 U.S.C. § 6751(b) at any time, is 4 misplaced. The taxpayer in Chai raised noncompliance with 26 U.S.C. § 6751(b) for the first time 5 in post-trial briefing before the Tax Court, whereas Mr. Yates seeks to raise this argument for the 6 first time in his suit for a refund in this Court. Accordingly, the government’s motion to dismiss is 7 granted as to Mr. Yates’s assertion that the IRS failed to demonstrate that the initial assessment of 8 penalties was approved by a supervisor, as Mr. Yates claims is required by 26 U.S.C. §6751(b)(1). 9 As for the amended complaint’s remaining asserted grounds for a refund, these assertions 10 do appear to have been made in Mr. Yates’s untimely amended administrative claims to the IRS.4 11 Mr. Yates contends that the IRS had sufficient facts and notice of the matters raised in his 12 amended administrative claims and could in no way have been unfairly surprised by those 13 arguments. As an example, Mr. Yates claims that the IRS has his 2008 tax return records and 14 should have discovered for itself that he made a proper disclosure. The government raises 15 legitimate concerns that Mr. Yates’s amended claims raise new theories that would require the IRS 16 to consider facts that it might not otherwise consider in connection with Mr. Yates’s original 17 administrative claims. Moreover, the Court is not convinced that simply possessing the facts 18 necessary to investigate a particular assertion is sufficient to bring Mr. Yates’s untimely amended 19 administrative claims within the germaneness doctrine. See Computervision Corp., 455 F.3d at 20 1371 (“Even if the IRS possessed the facts necessary to make this computation, it is not enough 21 that somewhere under the Commissioner’s roof is the information which might enable him to pass 22 on a claim for refund.”) (internal quotations and citation omitted). However, the parties’ dispute 23 involves questions of fact—i.e., what information the IRS examined or should have examined 24 within the statutory period while determining the merits of Mr. Yates’s original claims—that 25 26 4 The government correctly notes that Mr. Yates’s administrative claims do not contain an 27 assertion that IRS rules and regulations are unreasonable, arbitrary and capricious. However, that 1 cannot be resolved at the pleading stage.* 2 Accordingly, the Court denies the United States’ motion to dismiss as for the remaining 3 || grounds for a refund asserted in Mr. Yates’s amended complaint. However, the Court will 4 || consider permitting the United States to file a dispositive motion with respect to Mr. Yates’s 5 second claim for a refund after the parties have had the opportunity to conduct limited, targeted 6 || discovery on the issues presented. 7 || IV. CONCLUSION 8 Based on the foregoing, the Court grants in part and denies in part the government’s 9 || motion to dismiss as follows: 10 1. With respect to Mr. Yates’s claim for alleged illegal collection activities, 26 U.S.C. 11 § 7433, the government’s motion to dismiss is granted without prejudice. 12 2. With respect to Mr. Yates’s second claim for a refund, 26 U.S.C. § 6707A, the 13 || government’s motion to dismiss is granted as to Mr. Yates’s allegation of noncompliance with 26 14 U.S.C. § 26 U.S.C. §6751(b)(1), but is otherwise denied. 3 15 IT IS SO ORDERED. a 16 || Dated: May 22, 2020

VIRGINIA K. DEMARCHI 19 United States Magistrate Judge 20 21 22 23 24 25 26 > Mr. Yates suggests that he did not learn about certain of the asserted grounds for a refund until after receiving discovery in the Interior Glass litigation. Neither party was prepared to address 97 || whether the timing of Mr. Yates’s claimed discovery of the asserted bases for a refund should have any impact on the Court’s resolution of the government’s motion to dismiss for lack of 2g || Jurisdiction.