Bailey v. United States of America et al

MOTION to Dismiss Case , MOTION to Dismiss for Failure to State a Claim , MOTION to Dismiss for Lack of Jurisdiction

D. Ariz.March 24, 2017

1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 DAVID A. HUBBERT Acting Assistant Attorney General NITHYA SENRA, CA SBN 291803 Trial Attorney, Tax Division U.S. Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044 Telephone: (202) 307-6570 Facsimile: (202) 307-0054 E-mail: nithya.senra@usdoj.gov Attorneys for the United States of America, Theodore Spencer, Van Nguyen, Amy Matchison, Segrid Settles, and Philip Ward ELIZABETH A. STRANGE Acting United States Attorney District of Arizona Of Counsel IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Donald D. Bailey Plaintiff, v. United States of America, Theodore Spencer, Van Nguyen, Amy Matchison, Segrid Settles, Lorie Hale, Philip Ward; Defendants. Case No. 4:17-cv-00032-EJM MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION, FAILURE TO STATE A CLAIM, AND INSUFFICIENT SERVICE OF PROCESS The United States of America (“United States”), the real party in interest, on its own behalf, and on behalf of the individually named defendants, Theodore Spencer, Van Nguyen, Amy Matchison, Segrid Settles (sic), and Philip Ward, hereby moves to dismiss this action for lack of subject-matter jurisdiction, failure to state a claim upon which Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 1 of 14 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 relief can be granted, and insufficient service of process, pursuant to Fed. R. Civ. P. 12(b)(1), 12(b)(6) and 12(b)(5). I. Background Plaintiff Donald D. Bailey initiated this action on January 19, 2017 seeking a refund of certain return preparer penalty assessments relating to the 2008, 2009, and 2010 tax years, and also seeking a monetary judgment for alleged damages to Mr. Bailey’s reputation and accounting practice. (Dkt. 1, p. 13). Various federal employees have been named, and this appears to be Mr. Bailey’s attempt to litigate generalized grievances from decades old litigation involving the Internal Revenue Service. The Complaint includes a number of exhibits that make clear that Mr. Bailey seeks damages related to a 2005 civil case, and other civil cases from the 1990s. See Bailey v. United States, CV-05- 310-TUC-CKJ; Bailey v. United States, CV-95-267-TUC-RMB; Bailey v. United States, CV-00-37-TUC-JMR. By way of background, Mr. Nguyen was involved in conducting audit examinations that resulted in the return preparer penalties assessed for the 2008, 2009 and 2010 tax years, and Mr. Spencer was his supervisor. The exhibits to the Complaint imply that Mr. Nguyen and Mr. Spencer’s involvement was in 2012 or 2013. Further, Ms. Matchison, Ms. Settle, and Ms. Hale were involved in a completely different matter, which was Mr. Bailey’s personal income tax refund claim for tax year 1992 which resulted in Bailey v. United States, CV- 05-310-TUC-CKJ). Philip Ward, who was involved in another action brought by Mr. Bailey involving the assertion of tax return preparer penalties involving other clients and other years. That matter also resulted in Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 2 of 14 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 litigation, both a refund action for the penalties asserted (Bailey v. United States, CV-95- 267-TUC-RMB) and later actions against Mr. Ward and others individually for their alleged fraud and misconduct (Bailey v. United States, CV98-123-TUC-JMR; Bailey v. United States, CV-00-37-TUC-JMR). The latter resulting a finding in Mr. Ward’s favor. II. No Jurisdiction for Refund of Return Preparer Penalties (26 U.S.C. § 6694) In this action, Plaintiff alleges that he has only paid 15% of the $70,000 in penalty assessments (i.e. he seeks a refund of $10,500 and abatement of the $59,500 balance of assessment). See Dkt. 1, p. 13. He has not made any allegations that he has since fully paid the outstanding liabilities, and the relief sought implies that he has not in fact done so. Given that the Plaintiff has not alleged that he has fully paid the contested tax assessments, this Court lacks subject matter jurisdiction over this action. See Flora v. United States, 362 U.S. 145, 176-77 (1960) (to establish the District Court’s jurisdiction to consider a tax refund claim, a taxpayer first must fully pay the contested tax assessment). Because the United States is a sovereign, it is immune from suit unless it has expressly waived its immunity and consented to be sued. See Dunn & Black, P.S. v. United States, 492 F.3d 1084, 1087-88 (9th Cir.2007). Furthermore, Plaintiff is unable to maintain this action under any exception to the Flora full-pay rule set forth in 26 U.S.C. § 6694(c), because he did not bring this action within 30 days of the expiration of six months after he filed his refund claim with the IRS, as required under 26 U.S.C. § 6694(c)(2). Because he did not do so, under 28 U.S.C. § 1346, the Plaintiff must fully pay the penalties at issue before bringing an action challenging those penalties. This was the same reason a prior civil action, filed in 2014, Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 3 of 14 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 that sought a refund of the same penalties, was dismissed. See Bailey v. United States, 2016 WL 7743404, 118 A.F.T.R.2d 2016-6956 (No. CV-14-02471-TUC-RCC) (Order dated Dec. 6, 2016). Section 6694(c) allows a return preparer to bring a refund action in District Court after paying only 15% of the penalty imposed under this section, provided that the return preparer has followed the section’s other requirements. Under § 6694(c)(2), however, he must bring that challenge by the earlier of either (1) 30 days after six months from the date of filing his refund claim with the IRS or (2) 30 days from the date the IRS denies his refund claim. See Bailey v. United States, 2016 WL 7743404, Taylor v. Comm’r, 2016 WL 4419125, 118 A.F.T.R.2d 2016-5331 (E.D. Wash., No. 4:16-cv-5023-SMJ); Kline v. United States, 586 F. Supp. 338, 340 (N.D. Ohio 1984) (“An action in district court [under § 6694(c)] must be brought within 30 days of the earlier occurrence of either the rejection of the claim by the IRS, or the expiration of six months after the claim is filed without a determination by the IRS.”). As the Court found in the prior action, it is undisputed that on March 28, 2014, Plaintiff filed a refund claim and request for penalty adjustment with the IRS and paid an amount equal to 15 percent of the penalties assessed. See Bailey v. United States, 2016 WL 7743404, *1. On November 17, 2014 the IRS issued the Plaintiff a letter denying his refund claim and request for penalty adjustment. Id. Plaintiff did not bring this action within the time specified in § 6694(c)(2). Thirty days after six months from the date of the claim’s filing, therefore, was October 28, 2014. Plaintiff did not file the Complaint in this action until January 19, 2017. As Plaintiff has not paid the full amount of the Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 4 of 14 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 penalties in dispute, and no exception under 6694(c) applies, this Court lacks subject matter jurisdiction over this suit under Flora. See Taylor v. Comm’r, 2016 WL 4419125 (finding lack of jurisdiction where Plaintiff did not pay the full penalty owed and did not timely file suit pursuant to 26 U.S.C. 6694(c)). III. Common Law Fraud Claims a. Federal Tort Claims Act The Federal Tort Claims Act allows a private litigant to bring causes of action, for common law torts like fraud, against the United States and its employees acting in the scope of their employment. See 28 U.S.C. § 1346(b). However, the Federal Tort Claims Act does not apply to “[a]ny claim arising in respect of the assessment or collection of any tax or customs duty . . .” 28 U.S.C. § 2680(c); see also Fishburn v. Brown, 125 F.3d 979, 982 (6th Cir. 1997); Perkins v. United States, 55 F.3d 910, 913 (4th Cir. 1995). All of the damages plaintiff alleges arise out of the assessment and collection of taxes, and Plaintiff’s suit is therefore not authorized by the FTCA. See Krieg v. Mills, 117 F. Supp. 2d 964, 968 (N.D. Cal. 2000) (aff’d, 8 F. App’x 663 (9th Cir. 2001)). With respect to tort claims against employees acting on behalf of the United States, the Federal Tort Claims Act, 28 U.S.C. § 2671 (2006) et seq. (the “FTCA”) is “the exclusive remedy for the [tort] claimant, thus precluding any other action or civil suit against the Federal employee or his estate based upon the same conduct.” H.R. Rep. No. 100700, 100th Cong., 2d Sess. 2 (1988); id. § 2679(b)(1). The FTCA “provides that an ‘action shall not be instituted upon a claim against the United States for money damages’ unless the claimant has first exhausted his administrative remedies.” McNeil v. United Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 5 of 14 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 States, 508 U.S. 106, 107 (1993) citing 28 U.S.C. § 2675(a). Under the FTCA, a suit against the United States is the exclusive remedy for such a cause of action. Here, each named individual defendant was acting on behalf of the United States, and thus for any common law tort claim, the exclusive remedy is against the United States. Except in very limited circumstances, neither the United States nor its federal employees are subject to suit on torts occurring during tax determination or collection. 28 U.S.C. § 2680(c). The waiver of sovereign immunity in the FTCA does not extend to any “claim arising in respect of the assessment or collection of any tax . . .” Id. This language is broad enough to encompass any activities of an IRS employee even remotely related to her official duties. Soghomonian v. United States, 82 F. Supp. 2d 1134, 1143 (E.D. Cal. 1999), citing Morris v. United States, 521 F.2d 872, 874 (9th Cir. 1975), and Capozzoli v. Tracey, 663 F.2d 654, 658 (5th Cir. 1981). Additionally, the availability of remedies under the Internal Revenue Code preclude plaintiff from bringing a Bivens action against the individually named defendants. Adams v. Johnson, 355 F. 1179 (9th Cir. 2004) (no Bivens remedy available for alleged constitutional violations in the assessment and collection of taxes); Krieg v. Mills, 117 F. Supp. 2d 964, 967 (N.D. Cal. 2000) (aff’d, 8 F. App’x 663 (9th Cir. 2001) (availability of remedies under the Internal Revenue Code preclude plaintiffs from bringing actions against IRS agents). This action should be dismissed for lack of subject matter jurisdiction over any common law fraud claims, as the only proper party for such claims is the United States, and there is no waiver of sovereign immunity for common law torts arising in respect to the assessment or collection of any tax. Furthermore, leave to amend to bring any other Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 6 of 14 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 tort type cause of action is futile, and accordingly the individually named defendants should be dismissed with prejudice. b. Failure to State a Claim for Fraud While plaintiff cannot maintain a claim for fraud, as there is no waiver of sovereign immunity to maintain such a claim, the United States notes that the present Complaint is subject to dismissal pursuant to Fed. R. Civ. P. 12(b)(6) for failure to comply with the heightened pleading standards set forth in Fed. R. Civ. P. 9(b). When a plaintiff alleges claims that are rooted in fraud, even those arising under state law, he must comply with the heightened pleading standard of Rule 9(b). Cafasso, United States ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1054 (9th Cir. 2011); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103 (9th Cir. 2003) (“[W]hile a federal court will examine state law to determine whether the elements of fraud have been pled sufficiently to state a cause of action, the Rule 9(b) requirement that the circumstances of the fraud must be stated with particularity is a federally imposed rule.”) (internal citations omitted). Therefore, state law fraud claims must also comply with the pleading standards of Rule 9(b). Plaintiff has failed to plead any fraud committed by any of the named defendants with specificity. His exhibits to his complaint imply that he simply disagrees with the conclusions of the IRS regarding his liability for return preparer penalties and income taxes, and have failed to allege any specific conduct on the part of the named defendants or the United States that amounted to fraud. Accordingly, this action should be dismissed pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim for fraud. // Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 7 of 14 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 c. Statute of Limitations There are no allegations of any fraudulent conduct on the part of the United States or any nominal individual defendant that took place within three years of the filing of the present action. A review of the exhibits makes clear that plaintiff disagrees with the conclusions of the IRS, with respect to various tax assessment activities, but he has not included any specific allegation of conduct on the part of any named individual defendants within three years of the initiation of this action. As Plaintiff appears to be pursuing a claim of common law fraud, Arizona Revised Statute 12-543 sets a three-year statute of limitation on relief on grounds relating to fraud. Another ground for dismissal of any fraud-related claims is failure to file within the appropriate statute of limitations pursuant to Fed. R. Civ. P. 12(b)(6). Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980); see Avco Corp. v. Precision Air Parts, Inc., 676 F.2d 494, 495 (11th Cir. 1982), cert. denied, 459 U.S. 1037(1982). d. Res Judicata The allegations of “false declarations” upon which Plaintiff relies to support his claim of fraud, including any alleged misconduct occurring in the 2005 civil tax case or the 1990s litigation, clearly could have been (or were) raised in the prior action, and therefore are barred by res judicata. See Bettis v. Kelly, No. 04-4979, 2005 WL 975899, at *1 (2nd Cir. Apr. 28, 2005) (“[R]es judicata bars relitigation of issues that ‘could have been raised’ in a prior action.”) (citation omitted). Moreover, Mr. Bailey has been informed in prior litigation involving the IRS, such allegations of false statements and fraud are barred by principles of res judicata and/or collateral estoppel. See Donald Bailey v. Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 8 of 14 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Internal Revenue Serv., 188 F.R.D. 346, 354 (D. Ariz. 1999), aff'’d, 232 F.3d 893 (9th Cir. 2000) (CV-98-123-TUC-RTT-JMR) (when fraud alleged is intrinsic, it goes to the merits of prior proceeding which the moving party should have guarded against at the time). IV. Qualified Immunity and Absolute Immunity To the extent Plaintiff is alleging any cause of action that is not already precluded by application of the FTCA and sovereign immunity, the individually named defendants should be dismissed on qualified immunity grounds under Fed. R. Civ. P. 12(b)(6). Where government officials are sued in their individual capacities for civil damages, a court must “begin by taking note of the elements a plaintiff must plead to state a claim ... against officials entitled to assert the defense of qualified immunity.” Ashcroft v. Iqbal, 556 U.S. 662, 675 (2009) Government officials are entitled to qualified immunity unless the plaintiff can allege the violation of a “clearly established” constitutional right. Pearson v. Callahan, 555 U.S. 223, 232 (2009). Under a qualified immunity analysis, a court must inquire into “whether plaintiff’s allegations, if true, establish a constitutional violation.” Hope v. Pelzer, 536 U.S. 730 (2002). The other inquiry a court must undertake is whether the defendant’s actions “violate ‘clearly established statutory or constitutional rights of which a reasonable person would have known.’” Id. at 739 (quoting Harlow v. Fitzgerald, 457 U.S. 800, 818 (1982)). In this case, Plaintiff has not made any specific allegations of any particular right being violated by any of the named federal employees. Nor are there any allegations that any officer of the United States violated any sort of constitutional right. Plaintiff’s Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 9 of 14 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 allegations point to nothing but the assessment and collection of taxes by the Internal Revenue Service. Plaintiff has not met his burden of proving the existence of a clearly established right with respect to the IRS assessment or collection actions here. As is the case here, no constitutional right was violated, the inquiry is at an end, and each of the named officials are entitled to qualified immunity because Plaintiff’s allegations against individually-named federal defendants relate to activities involving the assessment or collection of federal taxes. Furthermore, absolute immunity serves as a bar to suit against defendant Matchison, who is named as a defendant for alleged misconduct in civil case CV05-310- TUC-CKJ, where she served as a trial attorney for the government in a tax refund suit relating to Mr. Bailey’s 1992 income taxes. Absolute immunity attaches to a “government attorney’s initiation and handling of civil litigation in a state or federal court . . . [when] the government attorney is performing acts ‘intimately associated with the judicial phase’ of litigation.” Shiraishi v. United States, Civ. No. 11-00323 JMS-BMK, 2011 WL 4527393, at *5 (D.Haw. Sept. 27, 2011). Accordingly, all of the individually named defendants should be dismissed with prejudice on qualified immunity grounds, and defendant Matchison should alternatively be dismissed on absolute immunity grounds. If this case is permitted to proceed at all, it should proceed only against the United States. V. Insufficient Service of Process Plaintiff has failed to properly serve the United States in this action, and has not filed any proof of service indicating that Segrid Settles, Lorie Hale or Philip Ward have Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 10 of 14 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 been served. Fed. R. Civ. P. 4(i)(3) provides that “To serve a United States officer or employee sued in an individual capacity for an act or omission occurring in connection with duties performed on the United States’ behalf (whether or not the officer or employee is also sued in an official capacity), a party must serve the United States and also serve the officer or employee under Rule 4(e), (f) or (g).” To serve the United States, Fed. R. Civ. P. 4(i)(1) provides that plaintiff must serve both the U.S. Attorney for the District of Arizona, and the Attorney General of the United States in Washington D.C. There is no record that Plaintiff has served the Attorney General. While Plaintiff has filed a proof of service (Dkt. 6) with respect to defendant Amy Matchison, the proof of service does not demonstrate that the requirements of Fed. R. Civ. P. 4(i)(3) have been met, specifically that Ms. Matchison has been properly served pursuant to Rule 4(e). It claims defendant Matchison was served by delivering a copy of the summons and Complaint to an individual at the U.S. Attorney’s office in Tucson, who the server identifies as authorized to accept service on behalf of “U.S. Department of Justice.” Ms. Matchison is an individual, and serving the U.S. Attorney’s office does not demonstrate that Ms. Matchison was properly served in accordance with Rule 4(e). Accordingly, lack of service is a reason to dismiss this action.1 See Fed. R. Civ. P. 12(b)(5). // // 1 The United States recognizes that the time-limit for service set in Fed. R. Civ. P. 4(m) has not yet passed. Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 11 of 14 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 WHEREFORE, the United States respectfully requests that this Court enter an order as follows: (i) DISMISS any claims for the refund of tax return preparer penalties (26 U.S.C. § 6694(c)) relating to the 2008, 2009, and 2010 tax years (assessments totaling $70,000, and made in 2014) for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1) for lack of full-payment of the assessed tax penalties; (ii) DISMISS WITH PREJUDICE all common law tort claims for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1), because all individually named defendants were acting on behalf of the United States, the exclusive remedy is against the United States, and there is no waiver of sovereign immunity for common law tort claims arising out of the assessment or collection of tax; (iii) Alternatively, DISMISS WITH PREJUDICE for failure to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6) on statute of limitations and qualified immunity grounds and failure to meet the pleading standards set forth in Fed. R. Civ. P. 9(b); (iv) Alternatively, DISMISS with PREJUDICE, defendants Matchison, Ward, Hale and Settles under principles of res judicata; (v) Alternatively, DISMISS WITH PREJUDICE, defendant Matchison on absolute immunity grounds; Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 12 of 14 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 (vi) Alternatively, DISMISS this action pursuant to Fed. R. Civ. P. 12(b)(5) for insufficient service of process; DATED this 24th day of March, 2017. Respectfully submitted, DAVID A. HUBBERT Acting Assistant Attorney General /s/ Nithya Senra NITHYA SENRA (CA SBN 291803) Trial Attorney, Tax Division U.S. Department of Justice ELIZABETH A. STRANGE Acting United States Attorney for the District of Arizona Of Counsel Attorneys for the United States of America, Theodore Spencer, Van Nguyen, Amy Matchison, Segrid Settles, and Philip Ward Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 13 of 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 CERTIFICATE OF SERVICE IT IS HEREBY CERTIFIED that service of the foregoing MOTION TO DISMISS, has been made this 24th day of March, 2017 upon the following parties by depositing a copy thereof in the United States Mail in a postage prepaid envelope addressed to: Donald D. Bailey 7510 E. Calle Los Arboles Tucson, AZ 85750 /s/ Nithya Senra NITHYA SENRA Trial Attorney, Tax Division United States Department of Justice Case 4:17-cv-00032-EJM Document 10 Filed 03/24/17 Page 14 of 14