Snyder & Associates Aquisitions LLC v. United States

          Argued and Submitted February 7, 2017 Pasadena, California

         Appeal from the United States District Court for the Central District of California Cormac J. Carney, District Judge, Presiding D.C. No. 8:14-cv-01350-CJC-RNB

          Jeffrey Adams Robinson (argued) and Gregory E. Robinson, Robinson & Robinson, Irvine, California, for Plaintiffs-Appellants.

          Gretchen M. Wolfinger (argued) and Joan I. Oppenheimer, Attorneys; Caroline D. Ciraolo, Acting Assistant Attorney General; Tax Division, Department of Justice, Washington, D.C.; for Defendant-Appellee.

          Before: Susan P. Graber, Jay S. Bybee, and Morgan Christen, Circuit Judges.

         SUMMARY^[*]

         Tax

         The panel reversed the district court's dismissal on immunity grounds of an action brought by tax preparation and refund-advance businesses against the IRS under the Federal Tort Claims Act, and remanded for further proceedings.

         As part of a sting operation aimed at catching people filing for fraudulent tax refunds, the IRS enlisted the assistance of plaintiffs' tax preparation and refund-advance businesses. The operation involved using millions of plaintiffs' dollars as bait under the promise of reimbursement, which did not happen, and the revocation of one of plaintiffs' electronic tax filing privileges, which forced plaintiffs into bankruptcy.

         The panel held that 28 U.S.C. § 2680(c) does not confer absolute immunity on the IRS, and, construing the facts in a light most favorable to appellees, the sting operation did not "aris[e] in respect of the assessment or collection of any tax."

         The panel also declined to accept the IRS's alternative arguments for affirming the district court's judgment. The panel held that § 2680(h) does not bar plaintiffs' claims for negligence, conversion, and failure to restore things wrongfully acquired because plaintiffs did not allege that the IRS obtained their money through deceit. The panel also held that the allegations in plaintiffs' complaint sufficiently stated claims for failure to restore things wrongfully acquired, for conversion, and abuse of process under California law. The panel did not reach the government's argument that § 2680(a)'s discretionary function exception bars plaintiffs' claims and, at the very least, some discovery on this issue is warranted.

         Judge Bybee concurred in the judgment. He wrote separately to address his concern that the majority's blanket conclusion-that the IRS was not engaged in "the assessment or collection of any tax" simply because no refunds were due to the subjects of the IRS investigation-is an unduly narrow construction of what constitutes tax assessment and collection under § 2680(c). Judge Bybee agreed that plaintiffs should have an opportunity to show why they can maintain their tort suit against the IRS.

          OPINION

          CHRISTEN, CIRCUIT JUDGE:

         In 2010, the Internal Revenue Service set a trap to catch people filing for fraudulent tax refunds. The IRS enlisted the assistance of plaintiffs' tax preparation and refund-advance businesses. It warned that refusal to cooperate would interfere with a federal criminal investigation, it used millions of plaintiffs' dollars as bait, and it promised to reimburse them for any losses. Plaintiffs cooperated, but the IRS never returned their money. Instead, at the conclusion of the sting operation, the IRS subpoenaed more than 5, 000 of plaintiffs' documents to assist with its prosecution efforts and revoked one plaintiff's electronic tax filing privileges-at the beginning of the tax preparation season-forcing both plaintiffs into bankruptcy.

         Plaintiffs sued the IRS under the Federal Tort Claims Act (FTCA), alleging several causes of action, but the district court granted the government's motion to dismiss. The court ruled that the IRS is immune from liability for its conduct because 28 U.S.C. § 2680(c) bars claims against the government "arising in respect of the assessment or collection of any tax." We disagree. Because § 2680(c) does not confer absolute immunity on the IRS, and because, construing the facts in the light most favorable to plaintiffs, the IRS's sting operation did not "aris[e] in respect of the assessment or collection of any tax, " we reverse the district court's judgment and remand for further proceedings.

         I. BACKGROUND^[1]

         A. The Tax Fraud Sting

         Total Tax Preparation, Inc. (TTP) was a tax return preparation business. Its affiliate, Snyder & Associates Aquisitions LLC (SAA) made loans to taxpayers who were awaiting income tax refunds. TTP prepared its clients' federal income tax returns and referred clients who wanted refund advances to SAA. When SAA loaned money based on anticipated tax refunds, its clients instructed the IRS to send their refund checks to SAA. Kerry Snyder was TTP's president and SAA's managing member.

         In 2010, Nancy Hilton, a tax preparer who worked as an independent contractor, referred several clients to SAA for refund anticipation loans. When one of her clients tried to cash a check issued by SAA, the bank notified Snyder that Hilton's client was using fake identification. Snyder asked the bank to hold the check and immediately contacted Hilton. Hilton admitted to Snyder that she was working with IRS Criminal Investigations Special Agent Matt Daniels in an undercover sting operation, to catch people making fraudulent claims for tax refunds. Snyder realized that the IRS was unlikely to issue refunds for the fraudulent tax returns filed on behalf of Hilton's clients, and that SAA's ability to collect on its refund anticipation loans was in jeopardy. Snyder requested that the bank stop payment on all checks SAA had issued to Hilton's clients.

         According to the complaint, Agent Daniels contacted Snyder and informed him that stopping payment would interfere with a federal criminal investigation. Agent Daniels asked Snyder to allow the checks to clear the bank, and assured Snyder that SAA would be repaid. When Snyder called an IRS supervisor to confirm Agent Daniels's representations, the supervisor vouched for the sting operation and for Agent Daniels. Snyder authorized SAA to issue new checks to Hilton's clients, and Agent Daniels and another IRS agent made additional assurances that SAA "would be made whole."

         TTP and SAA quickly began to experience negative repercussions from their agreement to cooperate with the IRS. First, TTP's and SAA's bank informed them that it was closing their business accounts because of an inquiry the bank made to the IRS about the investigation of TTP's and SAA's clients. Plaintiffs allege that the IRS failed to inform the bank that TTP and SAA were aiding the sting operation at the IRS's request. TTP and SAA incurred $12, 777 in bank and attorneys' fees to keep their bank accounts open. The IRS ignored TTP's and SAA's repeated requests for written confirmation of its promise to repay SAA, and also ignored their requests to reimburse the advanced funds and plaintiffs' bank and attorneys' fees.

         Plaintiffs allege that the IRS responded to their requests by serving subpoenas for more than 5, 000 pages of their tax return and loan records. TTP and SAA produced the subpoenaed documents at significant additional expense. The IRS later notified TTP that it was suspending TTP's ability to file tax returns electronically through the IRS's "e-filing" system, because fraudulent returns had been filed using TTP's electronic filing identification number. The letter notifying TTP of the suspension directed all inquiries to Agent Daniels.

         The suspension prevented TTP from filing tax returns electronically for clients, just as the 2011 tax preparation season began. Initially, the suspension put TTP at a significant competitive disadvantage. But on January 1, 2011, the IRS began requiring all paid tax preparers to file all returns electronically, and at that point, the suspension effectively put TTP out of business. TTP's failure deprived SAA of its most significant source of referrals, and SAA soon failed as well. TTP successfully appealed the IRS's suspension of its e-filing privileges, but the damage already had been done.

         The complaint alleges that the IRS never issued refunds for Hilton's clients, never repaid the funds Snyder's company advanced for refund anticipation loans, and never compensated TTP and SAA for any of their other losses.

         B. District Court Proceedings

         TTP and SAA submitted an administrative claim to the IRS for $2, 608, 078, and later filed suit in the United States District Court for the Central District of California. They concurrently filed an action in the Court of Federal Claims for an uncompensated taking ...