Opinion
NO. CIV. S-07-1536 WBS JFM.
November 2, 2007
ORDER RE: MOTION TO DISMISS
Plaintiff Timothy Edward Hodgson brought this action against defendant United States of America alleging the violation of the "Fair Tax Collection Practices" statute, 26 U.S.C. § 6304, and seeking declaratory relief. Defendant now moves to dismiss the complaint for failure to state a claim upon which relief may be granted under Federal Rule of Civil Procedure 12(b)(6) and for lack of subject matter jurisdiction pursuant to Rule 12(b)(1).
I. Factual and Procedural Background
On June 1, 2000, plaintiff entered into an offer-in-compromise ("OIC") with the Internal Revenue Service ("IRS") for unpaid tax liabilities from the tax years 1992 through 1998. (Compl. ¶ 6.) Under the terms of the offer, plaintiff was required to pay $30,000 and to file tax returns and pay all taxes owed on time for five years from the date the offer was accepted. (Id. ¶¶ 7, 13, 14.) Plaintiff subsequently failed to file the required tax returns and pay the taxes owed for the 2003 and 2004 tax years on a timely basis. (Id.)
On July 26, 2005, the IRS sent a notice letter to plaintiff warning him that the OIC for the tax years 1992 through 1998 would be terminated if the delinquent tax returns and payments were not submitted within thirty days of the letter. (Id. ¶ 13, Ex. 2.) The IRS also sent this notice to Robert L. Goldstein, Esq. — plaintiff's representative with respect to the offer, negotiation, and acceptance of plaintiff's OIC in June of 2000. (Id. ¶ 17.) However, the letter to Mr. Goldstein was sent to an old, inactive address. (Id.) On or about September 15, 2005, the IRS sent another letter directly to plaintiff and a copy of the letter to Mr. Goldstein (at the same inactive address) notifying them that the OIC had been terminated and that the unpaid balance of the liabilities for the 1992 through 1998 tax years had been reinstated. (Id. ¶¶ 19-21, Ex. 3.)
On July 26, 2007, plaintiff filed his complaint in this action alleging that the IRS "recklessly or intentionally, or by reason of negligence" disregarded 26 U.S.C. § 6304(a) by failing to "readily ascertain' his attorney's correct address from their records and failing to mail the July 26, 2005 notice letter to his attorney at the correct address. (Id. ¶¶ 50-52.) Plaintiff contends that this violation caused him to miss the thirty day grace period — as offered by the July 26, 2005 notice letter — to submit the delinquent returns and taxes owed for the 2003 and 2004 tax years, thereafter constituting a default of the OIC. (Id.)
II. Discussion
A. Legal Standards
1. Rule 12(b)(6) Motion to Dismiss for Failure to State a Claim
On a motion to dismiss for failure to state a claim, the court must accept the allegations in the complaint as true and draw all reasonable inferences in favor of the pleader. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Cruz v. Beto, 405 U.S. 319 (1972). To survive a motion to dismiss, a party needs to plead "only enough facts to state a claim to relief that is plausible on its face."Bell Atl. Corp. v. Twombly, 127 S. Ct. 1955, 1974 (2007). Dismissal is appropriate, however, where the pleader fails to state a claim supportable by a cognizable legal theory.Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1988).
2. Rule 12(b)(1) Motion to Dismiss for Lack of Subject Matter Jurisdiction
Federal courts are courts of limited jurisdiction only authorized to adjudicate those cases which the Constitution and Congress permit. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). "A federal court is presumed to lack jurisdiction in a particular case unless the contrary affirmatively appears." Stock W., Inc. v. Confederated Tribes of the Colville Reservation, 873 F.2d 1221, 1225 (9th Cir. 1989) (citing Cal. ex rel. Younger v. Andrus, 608 F.2d 1247, 1249 (9th Cir. 1979)). On a motion to dismiss an action for lack of subject matter jurisdiction, the plaintiff bears the burden of establishing that subject matter jurisdiction exists. Kokkonen, 511 U.S. at 377.
B. Improper Communication with Plaintiff
When the IRS knows that a taxpayer has retained an authorized representative and can "readily ascertain" the representative's name and address, § 6304(a) prohibits the IRS from directly communicating with the taxpayer "in connection with the collection of any unpaid tax" "[w]ithout the prior consent of the taxpayer given directly to the [IRS] or the express permission of a court of competent jurisdiction." 26 U.S.C. § 6304(a).
Subsection (c) of § 6304 goes on to provide that civil actions based on violations of § 6304 be brought pursuant to 26 U.S.C. § 7433. In turn, § 7433 permits taxpayers to bring the civil action against the United States for actual, direct economic damages sustained as a proximate result of the IRS's reckless, intentional, or negligent violation of § 6304. 26 U.S.C. § 7433.
The crux of plaintiff's complaint is not that the IRS improperly communicated directly with him, but that it failed to properly communicate with his attorney. The harm which is alleged resulted not from improperly sending the notice letter to plaintiff, because he claims that because of personal problems he never opened it. Rather the alleged harm — i.e., the reinstatement of his tax liability in the amount of $101,659.67 when his OIC defaulted — is alleged to have resulted from the failure of the IRS to properly send the notice to his attorney.
Plaintiff contends that had Mr. Goldstein received the IRS's July 26, 2005 notice letter detailing the thirty day grace period, "Mr. Goldstein would have immediately contacted plaintiff and filed the required returns . . . which would have avoided the termination of plaintiff's [OIC] and the [IRS's] current demand for $101,659.67 in unpaid taxes resulting therefrom." (Compl. ¶ 48.)
While communicating directly with a taxpayer who is represented by counsel may indeed constitute a violation of § 6304, the failure to communicate with counsel at the correct address does not. The congressional intent of § 6304 was to address the concerns regarding abusive or harassing contact with taxpayers. S. Rep. No. 105-174, at 93 (1998). Thus, the objective of § 6304(a) is to prevent bypassing a taxpayer's representative for the purpose of harassing or abusing the taxpayer with respect to collection of his or her tax liability, and the significance of awarding civil damages against the government for violations must be limited to this very conduct. See Allied/Royal Parking L.P. v. United States, 166 F.3d 1000, 1003 (9th Cir. 1999) (asserting that civil damage provisions under section 7433 "must be read narrowly").
As a result, § 6304 — in concert with § 7433 — creates a cause of action only for civil damages that proximately result from the IRS's improper communication with a represented taxpayer. To expand § 7433 to confer a civil remedy for the IRS's failure to properly send notice to the taxpayer's representative would be beyond this court's limited jurisdiction over these cases. See Buaiz v. United States, 471 F. Supp. 2d 129, 135-36 (D.D.C. 2007) (noting that district courts should read § 7433 narrowly to stay "consistent with Congress's broad intent that the federal judiciary have limited jurisdiction over cases involving the assessment and collection of income taxes").
Accordingly, the court will grant defendant's motion to dismiss plaintiff's first cause of action for failure to state a claim.
C. Declaratory Relief
Plaintiff seeks declaratory relief under 28 U.S.C. § 2201 in order to invalidate a Treasury Regulation, 26 C.F.R. § 601.506(a)(3), which plaintiff alleges is in conflict with the express terms and congressional intent underlying § 6304(a). (Compl. ¶¶ 60-63.) The Declaratory Judgment Act permits a court to "declare the rights and other legal relations of any interested party seeking such declaration" "[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986." 28 U.S.C. § 2201 (emphasis added). Section 7428 relates to declaratory judgments involving the status and classification of certain tax exempt organizations under 26 U.S.C. § 501(c)(3), and thus is inapplicable to the instant action. Therefore, plaintiff's second claim does not fall within the narrow waiver of sovereign immunity for federal tax issues provided in 28 U.S.C. § 2201. See E.J. Friedman Co., Inc. v. U.S., 6 F.3d 1355, 1358-59 (9th Cir. 1993) (holding that because the case at bar involved federal taxes, 28 U.S.C. § 2201 cannot serve as a waiver of sovereign immunity, and thus declaratory relief is unavailable).
"Failure to give notice or other written communication to the recognized representative of a taxpayer will not affect the validity of any notice or other written communication delivered to a taxpayer." 26 C.F.R. § 601.506(a)(3).
Accordingly, the court will also grant defendant's motion to dismiss plaintiff's second cause of action for lack of subject matter jurisdiction.
IT IS THEREFORE ORDERED that defendant's motion to dismiss plaintiff's complaint be, and same hereby is, GRANTED.
Plaintiff is given 30 days from the date of this order to file an amended complaint consistent with this order.