Snyder & Associates Aquisitions LLC, a California limited liability company; Total Tax Preparations, Inc., a California corporation, Plaintiffs-Appellants,
v.
United States of America, Defendant-Appellee.
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 ...