Opinion
Civil Action No. 99-1751
March 16, 2000
MEMORANDUM
I
In this civil action, plaintiff, Nicholas Sabat, who is proceeding pro se, seeks a declaration that he has not violated any procedures of the Internal Revenue Service (IRS), making plaintiff eligible to participate in the IRS electronic filing program for individual income tax returns. Presently, before the court is defendants' motion to dismiss plaintiffs' complaint under Fed.R.Civ.P. 12(b)(6), and plaintiff's motion for default judgment. After consideration, the court concludes that defendants' motion to dismiss should be granted. Based on this conclusion, it is not necessary for the court to address plaintiff's motion for default judgment.
II
In summary, plaintiff's complaint alleges, and the exhibits to the complaint establish, the following facts:
In September, 1998, plaintiff filled out an application to participate in the IRS electronic filing program for individual income tax returns. In Question 4 of the application, applicants are asked, inter alia, whether they have ever been convicted of a monetary crime or any criminal offense under the United States Internal Revenue laws. Plaintiff answered both questions in the negative. (Complaint, Exh. A).
On October 7, 1998, the IRS sent a letter to plaintiff, indicating that it had received his application to participate in the electronic filing program and noting that the first part of the process in considering an application is a "suitability check" to protect the integrity of the program and its participants, which can take up to 45 days. (Complaint, Exh. B).
A "suitability check" includes a credit check, a tax compliance check and a fingerprint check. Rev.Proc. 97-60, § 4.09(4), 1997-2 C.B. at 604.
When the suitability check was performed in connection with plaintiff's application, the fingerprint check revealed that plaintiff had been arrested numerous times between 1982 and 1995, and that he had been convicted of rape in 1983 and recklessly endangering another person in 1990. As a result of these convictions, plaintiff served 10 1/2 years in state prison and was released from custody in 1994. (Complaint, Exhs. L and M). In addition, the tax compliance check showed that plaintiff had failed to file income tax returns up to 1995. (Complaint, Exh. C). Based on the information revealed in the fingerprint check and the tax compliance check, the Criminal Investigation Division of the IRS recommended that plaintiff's application to participate in the electronic filing program be denied. (Complaint, Exh. C).
On November 25, 1998, plaintiff was notified by Thomas M. Quinn, Director of the IRS Andover Service Center, that his application to participate in the IRS electronic filing program had been denied "based on the information received from the Federal Bureau of Investigation, which indicated conduct of a disreputable nature reflected by your arrest record." In the letter, Mr. Quinn also informed plaintiff of his right to appeal the decision to deny his application. (Complaint, Exh. E).
On November 26, 1998, plaintiff filed an appeal from the denial of his application to participate in the IRS electronic filing program, arguing that an arrest record does not establish disreputable conduct. (Complaint, Exh. F). Subsequently, by letter dated December 28, 1998, plaintiff was notified by Mr. Quinn that his appeal was denied based on the determination "that the facts and circumstances stated in [their] previous letter continue to support [their] decision to suspend [plaintiff] from participation in the electronic filing program." Again, Mr. Quinn informed plaintiff that he could appeal the adverse decision. (Complaint, Exh. H).
On January 12, 1999, plaintiff appealed from the IRS' December 28, 1998 decision, raising the same argument he raised in the first appeal: namely, that an arrest record does not establish disreputable conduct. (Complaint, Exh. I). On February 4, 1999, plaintiff's appeal was forwarded by the IRS Andover Service Center to the IRS Director of Practice for review. (Complaint, Exh. J).
Following plaintiff's second appeal, he was contacted by Mr. Barrone, an IRS employee, and instructed to file a Freedom of Information Act request to receive a copy of the FBI report relied upon by the IRS to deny his application to participate in the electronic filing program. Mr. Barrone also supplied plaintiff with two cases that he indicated supported the IRS' decision to deny plaintiff's application.
Apparently, after the initial denial of his application to participate in the IRS' electronic filing program, plaintiff requested, on several occasions, a copy of the FBI report relied upon by the IRS in rendering its decision, but it was not provided to plaintiff by the IRS.
On March 11, 1999, plaintiff filed a Freedom of Information Act request, seeking access to the documents relied upon by the IRS to deny his application to participate in the electronic filing program. (Complaint, Exh. K). In response to plaintiff's request, on May 7, 1999, defendant Patrick W. McDonough, IRS Director of Practice, sent a copy of every record in plaintiff's IRS file, including plaintiff's arrest record that had been provided to the IRS by the FBI. (Complaint, Exh. L).
According to Mr. McDonough's May 7, 1999 letter, plaintiff's entire file with the IRS consisted of 49 pages. (Complaint, Exh. L).
On May 17, 1999, plaintiff sent a letter to Mr. Barrone. Apparently, in a previous conversation with plaintiff, Mr. Barrone had asked plaintiff to provide a chronology of his convictions. In response to this request, in his letter, plaintiff confirmed that he had been convicted of rape in 1983 and sentenced to 5 to 10 years in state prison, and that he had been convicted of recklessly endangering another person in 1990 and sentenced to 1 to 2 years in state prison. (Complaint, Exh. M).
On September 28, 1999, plaintiff was notified by defendant McDonough that the decision of the Director of the IRS Andover Service Center to deny plaintiff's application to participate in the electronic filing program was sustained. In his decision, defendant McDonough states:
IN THE MATTER OF:
Nicholas J. Sabat ) Appellant ) DECISION ON APPEAL
This matter is before the Office of Director of Practice for decision on appeal from the denial of Nicholas J. Sabat (Appellant) to participate in the Internal Revenue Service Form 1040 Electronic Filing (ELF) Program as a preparer of individual income tax returns.
Revenue Procedure 97-60 prescribes the eligibility requirements, standards of conduct, the scope of authority and the circumstances and conditions under which an Electronic Filer may exercise the privilege of electronically filing Federal income tax returns (Forms 1040). Pursuant to Section 4 of the Revenue Procedure, the Service reserves the right to deny the electronic filing privilege of any Electronic Filer who violates any provision of this revenue procedure.
Among the reasons for which an applicant may be denied participation is disreputable conduct or other facts that would reflect adversely on the Form 1040 ELF program. (Revenue Procedure 97-60 Section 4.19(6)).
Section 14 of the Revenue Procedure provides that requests for administrative review of ineligibility decisions may be submitted to the Office of Director of Practice for decision. Such decision will be final.
By letters dated November 25, 1998 and December 28, 1998 the Director, Andover Service Center of the Internal Revenue Service, notified Appellant his participation in the Form 1040 (ELF) Program was being denied. The Director's determination was based on the fact that, Appellant's arrest record is conduct of a disreputable nature, and that such conduct would reflect adversely on the Form 1040 ELF Program.
A request for administrative review of the Director's decision was made by Appellant on January 12, 1999. In support of such request, Appellant admits that he has an arrest record, but states inter alia, that such arrest record can not legally be used against him. Information provided by Andover Service Center confirms that Appellant has an arrest and conviction record.
Further Appellant's arrest and conviction record supports Andover Service Center's assertion that such a record is an indication of disreputable conduct and that such conduct would reflect adversely on the Form 1040 ELF Program. Based on the above, the basis for the denial is consistent with the provisions of the Revenue Procedure. Such basis has not been overcome by Appellant.
As an example to the taxpaying public, trust must be placed on Electronic Filers to possess a high degree of integrity as well as to be in compliance with the Revenue Procedure. Conduct of a disreputable nature and other facts that would reflect adversely on the Form 1040 ELF Program, does not reflect the degree of compliance which the Form 1040 (ELF) Program has been established and constitutes a failure to satisfy the minimum requirements necessary for participation in the Electronic Filing Program.
Accordingly, the decision of the Director, Andover Service Center of the Internal Revenue Service, to deny the participation of Appellant in the Form 1040 ELF Program is hereby sustained.
SEP 28, 1999 Vincent J. Simone Date For Patrick W. McDonough Director of Practice
(Complaint, Exh. N)
Plaintiff does not challenge the validity of the Revenue Procedures. Rather, he challenges the manner in which the procedures were applied to him. Plaintiff also maintains that the failure of the IRS to provide a hearing before its denial of his application to participate in the electronic filing program violates his right to due process of law.
III
In deciding a motion to dismiss under Fed.R.Civ.P. 12(b)(6), this court accepts as true the facts pleaded in the complaint and any reasonable inferences derived from those facts. Unger v. National Residents Matching Program, 928 F.2d 1392, 1400 (3d Cir. 1991). The court is to construe the complaint in the light most favorable to the plaintiff. Colburn v. Upper Darby Twp., 838 F.2d 663, 665 (3d Cir. 1988), cert. denied, 489 U.S. 1065 (1989). A claim should not be dismissed pursuant to Rule 12(b)(6) for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts to support his or her claim for relief. Unger, 928 F.2d at 1395. Keeping this standard in mind, the court turns to defendants' motion to dismiss.
IV
With respect to plaintiff's contention that the crimes of which he was convicted do not constitute "disreputable conduct" within the meaning of the Revenue Procedure, under the Administrative Procedure Act, 5 U.S.C. § 702 et seq., the court must affirm the IRS' decision denying plaintiff's application to participate in the electronic filing program on this basis, unless the decision is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). Applying this standard in the present case, the court concludes that the IRS' decision must be affirmed.
The IRS rejected plaintiff's application to participate in the electronic filing program under Revenue Procedure 4.19(6), which provides that an application may be rejected for "disreputable conduct or other facts that would reflect adversely on the Form 1040 ELF Program." Plaintiff concedes that he has two felony convictions. Under the circumstances, the court is compelled to conclude that the IRS' determination that these convictions reflect on plaintiff's integrity, and, thus, disqualify him from participating in the electronic filing program under Revenue Procedure, § 4.19(6), is not arbitrary or capricious.
To the extent plaintiff is relying on the definition of "disreputable conduct" in 31 C.F.R. § 10.51, the reliance is misplaced. This regulation is part of the Treasury Regulations governing practice before the IRS, and, in particular, the rules applicable to disciplinary proceedings. The regulation applies to attorneys, certified public accountants, enrolled agents and enrolled actuaries, who are admitted to practice before the IRS. It does not apply to applicants or participants in the electronic filing program.
Turning to plaintiff's due process claim, the court concludes that plaintiff has failed to state a claim upon which relief may be granted. The Fifth Amendment to the United States Constitution provides, in relevant part, that the government may not deprive any person "of life, liberty, or property, without due process of law." As noted by defendants, to prevail on a due process claim, a plaintiff must establish: (a) a constitutionally protected life, liberty or property interest; (b) governmental deprivation of that interest; and (c) the inadequacy of the procedures accompanying the deprivation. See,, e.g., Lehr v. Robertson, 463 U.S. 248, 256 (1983). (Brief in Support, p. 6) In the present case, plaintiff has failed to establish a constitutionally protected liberty or property interest in participating in the IRS electronic filing program. In addition, the court agrees with the government that, even if plaintiff had established a protected liberty or property interest, his procedural due process rights were not violated because the denial was authorized by a provision of the Revenue Procedure, and plaintiff was notified of his appeal rights and exercised them. (Brief in Support, p. 9). Under the circumstances, plaintiff's complaint will be dismissed under Fed.R.Civ.P. 11(b)(6).
See Forehand v. IRS, 877 F. Supp. 592 (M.D.Ala. 1995) (participation of tax preparer in electronic filing program did not amount to property interest for due process purposes, and suspension from the program did not violate protected liberty interest); Ekanem v. IRS, 81 A.F.T.R.2d 98-1173 (D.Md. 1998) (suspension from electronic filing program for violation of two provisions of Revenue Procedure did not violate plaintiff's procedure or substantive due process rights).
An order follows.
ORDER
AND NOW, this 16th day of March, 2000, in accordance with the foregoing memorandum, it is hereby ORDERED as follows:
1. The motion of defendants to dismiss plaintiff's complaint (Document No. 4) is granted.
2. The motion of plaintiff for default judgment (Document No. 8) is denied.
3. The Clerk shall mark the above-captioned case closed.