PETER C. McKITTRICK, Bankruptcy Judge.
This matter came before the Court on April 28, 2017, on the United States' Motion to Dismiss filed on behalf of the Internal Revenue Service (IRS). In his Amended Complaint, plaintiff-debtor Peter Szanto seeks relief against the IRS for allegedly improperly assessed taxes, damages resulting from that assessment, a refund of taxes already paid, and injunctive relief.
Plaintiff has a long history of litigating against the IRS for the assessment of taxes in multiple tax years. This particular adversary proceeding focuses on the tax year 2007 and whether the IRS had agreed in 2012 to settle plaintiff's 2007 tax liability for a lesser amount than it now claims in its proof of claim. The complaint also asserts tort claims based on the IRS's conduct in assessing taxes for 2007, and its filing of an amended pleading in tax court for the tax year 2009.
This case raises interesting and complex legal issues, including the intersection of the Federal Tort Claims Act (FTCA), § 106 of the Bankruptcy Code, and 26 U.S.C. § 7433 of the Internal Revenue Code.
For the reasons stated below, the IRS's motion will be granted as to all the individual defendants and as to the United States as to all affirmative claims. Plaintiff will be granted leave to replead his claims for fraud and malicious prosecution consistent with this Memorandum Opinion. All other claims will be dismissed with prejudice.
Plaintiff filed a chapter 11
In addition, the proof of claim asserts that plaintiff owes $26,230.47 in penalties.
In response to the IRS's proof of claim, plaintiff filed this adversary proceeding, asserting three claims against the IRS as the single defendant: breach of contract, fraud, and intentional or negligent infliction of emotional distress. When the IRS filed a motion to dismiss, plaintiff obtained leave to file this amended complaint. In it, he added individual defendants who he claims are employees of the IRS, and asserted four claims: breach of contract, fraud, malicious prosecution, and intentional or negligent infliction of emotional distress. His complaint also sought an injunction against defendants and a refund of taxes paid. Although not separately stated as a claim for relief, the complaint also says that it is an objection to the IRS's proof of claim.
Plaintiff asserts that in 2013, the IRS wrongfully assessed additional taxes for the 2007 tax year after he had completely settled his 2007 tax liability earlier in 2012. He also claims that the IRS attempted to amend an answer in a tax court proceeding involving his 2009 tax liability by asserting an additional $380,161 of income for that tax year. Plaintiff argues that these acts by the IRS support claims for breach of contract, fraud, and malicious prosecution. Plaintiff also alleges that he has made payments to the IRS, which have been credited to his 2007 disputed tax lability, so he also seeks a refund of those amounts paid based on the theory that the 2007 assessment beyond the amount agreed upon in 2012 was wrongful.
The IRS on its own behalf and on behalf of defendant Hedstand, filed a motion to dismiss the amended complaint on the basis that: (1) plaintiff named the wrong party; (2) the claims against the individual defendants should be dismissed because the activities complained of were allegedly taken by IRS employees in their official capacities; (3) plaintiff's breach of contract claim should be dismissed for lack of subject matter jurisdiction; (4) alternatively, the contract claim should be dismissed for failure to state a claim; (5) plaintiff's tort claims should be dismissed for lack of subject matter jurisdiction; (6) alternatively, plaintiff's tort claims should be dismissed for failure to state a claim; (7) plaintiff's assertion that he is entitled to a refund of taxes paid is barred by statute; and (7) plaintiff's claim for injunctive relief is barred by the anti-injunction statute.
A party may move to dismiss a claim under Fed. R. Bankr. P. 7012(b), which makes Fed. R. Civ. P. 12(b)(1) and (6) applicable to adversary proceedings.
Pursuant to Fed. R. Civ. P. 12(b)(1), a court must dismiss a case if it lacks subject matter jurisdiction. A federal court is presumed to lack subject matter jurisdiction until the party asserting it establishes otherwise.
Pursuant to Fed. R. Civ. P. 12(b)(6), a complaint will be dismissed for "failure to state a claim upon which relief can be granted." The complaint must contain "a short and plain statement of the claim showing that the pleader is entitled to relief[.]" Fed. R. Civ. P. 8(a)(2). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'"
IRS is the incorrect party
The United States correctly states that the IRS is not subject to suit in a United States District Court.
Plaintiff argues that the IRS is the correct party, because the proof of claim filed in this case was filed by the Department of Treasury, Internal Revenue Service. Although plaintiff refers in the complaint to the proof of claim and says that the complaint is acting as an objection to the proof of claim, the adversary complaint goes well beyond defeating the proof of claim. It asserts numerous affirmative claims for relief and seeks monetary damages and injunctive relief. Consequently, the identification of the creditor on the proof of claim does not override the well-established authority that a suit against the IRS is deemed to be a suit against the United States.
The court shall substitute the United States as the defendant.
Dismissal of claims against individual defendants
In addition to naming the IRS as a defendant, in his amended complaint plaintiff also named several individuals whom plaintiff asserts are or were employees of the IRS. Where a suit is against IRS employees in their official capacity, it is essentially a suit against the United States.
Plaintiff argues that, under
Plaintiff also argues that 26 U.S.C. § 7433(a) authorizes suit against individual IRS employees. However, that statute provides that a "taxpayer may bring a civil action for damages against the United States. . . ." (emphasis supplied). It does not authorize suit against individual agents of the IRS.
Accordingly, all claims against the individual defendants will be dismissed.
Defendant concedes that "there is no dispute that this Court has jurisdiction to adjudicate an objection to the IRS Claim filed in this case," but argues that this court lacks jurisdiction to hear any complaint for relief beyond the adjudication of plaintiff's claim objection. Defendant further argues that plaintiff's contract claim fails to state a claim for relief. For the reasons discussed below, I conclude that, by filing a proof of claim in this case, the United States waived sovereign immunity, but that plaintiff failed to state a claim for relief. Accordingly, plaintiff's contract claim will be dismissed with prejudice.
11 U.S.C. § 106 governs sovereign immunity as it applies in bankruptcy. Section 106 addresses three distinct types of claims: (1) claims that arise under the Bankruptcy Code; (2) claims that are in the nature of compulsory counterclaims when the IRS has filed a proof of claim; and (3) claims that are in the nature of permissive counterclaims, which may be used only as an offset to the amounts claimed under the proof of claim.
A claim is a compulsory counterclaim when it bears a "logical relationship" to the claim.
Defendant argues that McGuire stands for the proposition that "bankruptcy courts lack subject matter jurisdiction to hear Tucker Act claims against the Federal government." United States Reply at p.10. The Tucker Act addresses claims brought against the United States in civil actions for damages not sounding in tort which exceed $10,000.
Defendant is correct that "[t]he express, specific waivers in § 106 suggest that Congress did not intend to broadly consent to suit in bankruptcy court for any claim that falls under the Tucker Act."
Plaintiff alleges that the 2007 tax liability asserted in the IRS's proof of claim exceeds the amount agreed upon by the parties under the alleged settlement agreement. Plaintiff asserts that defendants' efforts to collect amounts outside that alleged agreement constitute a breach of the settlement agreement for which plaintiff is entitled to damages. Because the IRS's proof of claim and plaintiff's contract claim both address plaintiff's 2007 tax liability, plaintiff's claim "arises from the same aggregate set of operative facts as the initial claim,"
Because plaintiff's claim is a compulsory counterclaim, § 106(b) applies and sovereign immunity is waived as to plaintiff's contract claim.
However, defendant also moves to dismiss the contract claim under Fed. R. Civ. P. 12(b)(6) for failure to state a claim.
As discussed above, "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'"
Plaintiff's complaint alleges that he entered into a valid contract with the IRS settling the amount owed for the 2007 tax year and the IRS breached the agreement when the agency attempted to collect amounts related to the 2007 tax year beyond the amount set out in the agreement. As proof of the agreement, plaintiff attached as Exhibit A to his amended complaint a Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Deficiency and to Accept Overassessment. The form is signed by plaintiff, plaintiff's wife and the Appeals Team Manager for the IRS.
Defendant argues that this form is legally insufficient to constitute the contract plaintiff alleges he entered into with the IRS. Defendant is correct.
There are no allegations in the amended complaint that the parties complied with the procedures specified under 26 U.S.C. §§ 7121 or 7122 for either a closing agreement or an offer-in-compromise. Indeed, the amended complaint is express that the contract allegedly entered is the document attached as Exhibit A.
Exhibit A does not meet the requirements for a legally binding contract with the IRS. Accordingly, even assuming all facts as alleged are true and construing them in the light most favorable to plaintiff, his claim for breach of contract does not state a claim for relief. Moreover, because plaintiff does not argue that he could allege that he complied with the procedures outlined in 26 U.S.C. §§ 7121 and 7122 required to establish a contract with the IRS, any amendment to the complaint would be futile. Accordingly, plaintiff's breach of contract claim will be dismissed with prejudice.
Plaintiff's remaining claims are for fraud, malicious prosecution and intentional or negligent infliction of emotional distress. In his response to the motion to dismiss, plaintiff indicated his intent to withdraw his emotional distress claim. Plaintiff's Response at p.18. Accordingly, that claim will be dismissed. The remaining claims for fraud and malicious prosecution are tort claims ("Tort Claims").
The United States argues that, despite the waiver of sovereign immunity contained in §§ 106(b) and (c), both the FTCA and 26 U.S.C. § 7433 of the Internal Revenue Code provide jurisdictional limitations barring plaintiff's claims.
The FTCA serves as a general waiver of the United States' sovereign immunity with respect to tort claims filed against it and provides for recovery against the United States
28 U.S.C. § 2679(b)(1). However, several exceptions apply to this waiver. 28 U.S.C. § 2680. If a claim falls within one of the listed exceptions, federal courts lack subject matter jurisdiction.
Section 2680(c) precludes "[a]ny claim arising in respect of the assessment or collection of any tax. . . ." This includes activity that goes "beyond the normal scope of authority and amount[s] to tortious conduct. . . ."
Plaintiff's fraud and malicious prosecution claims fit squarely within this exception. For his fraud claim, plaintiff alleges:
Complaint, ¶ 50. For his malicious prosecution claim, plaintiff alleges "there was no probable cause for any attempted addition of that $380,161."
Additionally, 28 U.S.C. § 2680(h) precludes any claim arising out of malicious prosecution, misrepresentation or deceit, among other causes of action. Accordingly, plaintiff's malicious prosecution and fraud claims fall also within this exception to the sovereign immunity waiver contained in the FTCA.
Plaintiff's response that his malicious prosecution claims are unrelated to the collection of any tax is facially incorrect and without merit, based on the allegations of the amended complaint. Further, plaintiff's argument regarding these claims is replete with references to audits and assessment attempts by the IRS.
Plaintiff also argues that, because no investigative or law enforcement officers were involved, § 2680(h) does not apply. Plaintiff misreads the exception. No such involvement is required for the exception to apply. The exception applies to "any claim." The proviso related to investigative or law enforcement officers is inapplicable in this case and does not otherwise limit the exception.
Because together these two exceptions apply to deprive this court of subject matter jurisdiction to hear plaintiff's claims for fraud and malicious prosecution under the FTCA, unless the § 106 waiver of sovereign immunity overrides the FTCA's exceptions to waiver of sovereign immunity, plaintiff's claims are barred under the FTCA.
The Tenth Circuit court of appeals' decision in
Noting that other cases have indicated that certain provisions of the FTCA, such as exhaustion of remedies, are superseded by § 106's waiver of sovereign immunity, the
Plaintiff's fraud and malicious prosecution claims in this case suffer similar defects as those presented by the
Plaintiff also asserts that this court has jurisdiction to consider the Tort Claims under 26 U.S.C. § 7433. The United States argues that 26 U.S.C. § 7433 does not provide subject matter jurisdiction, because plaintiff did not exhaust his administrative remedies as required under § 7433. 26 U.S.C. § 7433 states, in relevant part, "Judgment for damages shall not be awarded . . . unless the court determines that the plaintiff has exhausted the administrative remedies available to such plaintiff within the Internal Revenue Service." 26 § U.S.C. 7433(d)(1). The United States also cites the applicable regulations promulgated by the Secretary of the Treasury, which outline the administrative claim process. 26 C.F.R. § 301.7433-(1)(e)(1). The United States argues that plaintiff's failure to exhaust his administrative remedies is jurisdictional and is fatal to his claims.
I disagree. By filing a proof of claim, the IRS invoked the provisions of §§ 106(b) and 106(c). The exhaustion of remedies provisions in 26 U.S.C. § 7433 are similar to the exhaustion of remedies provisions found in the FTCA. These provisions are not a substantive bar to the assertion of the claims, but rather a requirement that encourages efficient administration of claims against the IRS. Allowing those same claims to proceed in bankruptcy court rather than through the administration process does not bequeath rights to plaintiff that do not exist outside of bankruptcy; rather, it shifts the forum for hearing the dispute. This conclusion is supported by
Having concluded that § 106 abrogates the exhaustion of remedies requirement under 26 U.S.C. § 7433, the next issue is whether plaintiff's Tort Claims fit within the waiver contained in § 106(b), and may therefore be used as a mechanism of recover damages, or fit within the more limited terms of § 106(c), in which case the claims may only be used as an offset to the IRS's proof of claim. In order for the Tort Claims to be asserted affirmatively to recover damages, plaintiff must show that the claims asserted are in the nature of compulsory counterclaims as required under § 106(b).
Cases that address whether a counterclaim may be asserted under the FTCA when the United States asserts an affirmative claim against a party are helpful in analyzing the breadth of the waiver contained in § 106(b). Indeed, the language in § 106(b) adopts the same test, requiring the court to determine first whether a claim is a compulsory counterclaim.
Once the United States brings a suit, it waives sovereign immunity to the extent that defendants have a claim for recoupment or a compulsory counterclaim.
Although the case law interpreting the applicability of
However, given the broad language in § 106(c), which provides that ANY claim may be used as an offset, plaintiff can still proceed with his Tort Claims as permissive counterclaims under § 106(c) in an amount capped by the set-off limitation.
As with his claims under the FTCA, in order to proceed on claims under § 7433, and notwithstanding the waiver of sovereign immunity under § 106(c), plaintiff must show that he has a cognizable claim for relief. As pleaded, plaintiff's amended complaint fails to do so.
26 U.S.C. § 7433 allows a plaintiff to recover "[i]f,
Request for Refund
Without alleging a specific claim for relief or additional facts related to his request for a refund, plaintiff states in his amended complaint that he "seeks return of money paid to the IRS based on payments for non-existent taxes," Amended Complaint, ¶ 41, and "to recover money and property belonging to the debtor Peter Szanto's Bankruptcy estate. (ie.[
Section 505 of the Bankruptcy Code establishes bankruptcy court jurisdiction for adjudicating tax claims. Plaintiff argues that § 505's jurisdictional grant applies in his case. However, plaintiff's argument overlooks § 505(a)(2)(B), which excepts from this jurisdictional grant the authority to determine:
The jurisdictional requirement of properly requesting a refund is also well established elsewhere in statute and case law. Although 26 U.S.C. § 1346(a) provides the district court with jurisdiction to hear claims against the United States for recovery of taxes alleged to have been erroneously or illegally assessed or collected, under 26 U.S.C. § 7422:
26 U.S.C. § 7422(a).
The Supreme Court has held that, unless a claim for refund has been properly filed within the applicable time period, a suit for refund "may not be maintained in any court."
Plaintiff argues in his response that he has "made many administrative claims." Plaintiff's Response at p.9. He also argued at the hearing on the motion to dismiss that he had made a substantial effort to pursue his refund and performed what he termed the "functional equivalent" of exhausting his claims. However, the statute does not provide for "functional equivalency." Plaintiff has failed to allege facts sufficient to meet the requirements of § 505 of the Bankruptcy Code and establish jurisdiction for his refund claim. Accordingly, plaintiff's claim for a refund will be dismissed.
Request for Injunctive Relief
As with his claim for a refund, plaintiff does not specifically set out a claim for an injunction, but rather simply requests injunctive relief. Amended Complaint, ¶ 24. To the extent plaintiff is making a claim for injunctive relief, the claim for relief will be dismissed for the following reasons.
Injunctions against the assessment or collection of any tax are governed by the Anti-Injunction Act, 26 U.S.C. § 7421(a), which provides:
None of the statutory exceptions set out above apply in this case. There are two judicially created exceptions: "(1) where the taxpayer lacks alternative means to contest the legality of a particular tax or (2) if it is clear that under no circumstances could the Government ultimately prevail, and the taxpayer will suffer irreparable injury without injunctive relief."
Plaintiff has not alleged that he lacks alternative means to contest the legality of a particular tax. In fact, his allegations suggest the opposite, since he has appealed to the Tax Court in the past. Amended Complaint, Exh. E. Nor do the allegations of the amended complaint show that it is clear that the taxpayer will ultimately prevail or that he will suffer irreparable injury without injunctive relief.
Accordingly, even assuming all facts as alleged are true and construing them in the light most favorable to plaintiff, his claim for injunctive relief does not state a claim for relief. Moreover, any amendment to the complaint would be futile. Accordingly, plaintiff's claim for injunctive relief will be dismissed with prejudice.
Section 105 Jurisdiction
In addition to the specific statutory provisions discussed above, plaintiff alleges that this court has general jurisdiction to hear his claims pursuant to its "inherent jurisdiction to facilitate debtor's recovery of debtor's estate assets" and its equitable power under § 105. Complaint, ¶¶ 25, 39-40. However, "§ 105(a) is not a roving commission to do equity. A bankruptcy court's equitable powers must and can only be exercised within the confines of the Bankruptcy Code."
The court will substitute the United States as the defendant in this case.
Plaintiff's claims against the individual defendants will be dismissed with prejudice. Plaintiff's claims against the United States for breach of contract, refund and injunctive relief will be dismissed with prejudice. Plaintiff's claims for fraud and malicious prosecution will be dismissed without prejudice and with leave to replead. However, any such claims will be limited in their recovery to the amounts asserted in the IRS proof of claim pursuant to § 106(c).
Plaintiff may file a Second Amended Complaint against the United States curing the deficiencies discussed herein, which he must do within 14 days of the date of entry of the order dismissing the claims.
Failure to meet the 14-day deadline to file an amended complaint or failure to cure the deficiencies identified in this Memorandum Opinion will result in a dismissal of all claims with prejudice. Plaintiff may not add new causes of action or parties without leave of the court or stipulation of the United States pursuant to Fed. R. Civ. P. 15.
Counsel for the United States should submit the order.