SHIPPENSBURG URBAN DEVELOPERS v. UNITED STATES OF AMERICA; TRINITY HOUSING, INC. v. UNITED STATES OF AMERICA
CIVIL ACTION NO. 19-4775; CIVIL ACTION NO. 19-4976
IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
DECEMBER 30, 2020
McHUGH, J.
These are two consolidated actions for wrongful levy of taxes under
Now, approximately one year later, Plaintiffs seek to amend their Complaints with two additional counts seeking damages for unauthorized collection actions under
I. Factual and Procedural Background
Plaintiffs are both Pennsylvania corporations, which buy, develop, and sell real estate. Shippensburg Compl. ¶ 4; Trinity Compl. ¶ 4. At some point, the IRS concluded that the Plaintiffs were “alter-egos” of taxpayer Troy A. Beam, who had been subject to multiple tax assessments for the taxable periods from 1997-2006. Shippensburg Compl. ¶¶ 1, 26, 28; Shippensburg Prop. Am. Compl. 27; Trinity Compl. ¶¶ 1, 22-24. Beam was a shareholder of Shippensburg from 1994-1996. Shippensburg Compl. ¶ 2. Trinity was formed in 2017 by Attorney Lee Stivale for the benefit of Beam‘s family. Trinity Compl. ¶ 30. Both Plaintiffs are clients of the Stivale Law Office. Shippensburg Compl. ¶ 35; Trinity Compl. ¶ 32.
In late June 2019, the IRS filed Notices of Federal Tax Lien against the Plaintiffs as “alter egos” of Troy Beam. Shippensburg Compl. ¶ 28; Trinity Compl. ¶ 24. Next, on September 26, 2019, the IRS served Notices of Levy upon an escrow account of Plaintiffs’ lawyer in which counsel held funds belonging to each of Plaintiffs. Shippensburg Compl. ¶ 34; Trinity Compl. ¶ 29. The Notices state that “this isn‘t a bill for taxes you owe. This is a Notice of Levy we are using to collect money owed by the taxpayer named above.” That section refers to “Troy Beam, and/or [Plaintiffs] . . . as alter egos of Troy A. Beam.” Shippensburg Compl., Ex. A; Trinity Compl, Ex. C.
In response to the Notices of Levy, the Plaintiffs filed separate actions to quiet title (Count I) and for wrongful levy of taxes (Count II) on October 15, 2019, and October 24, 2019, respectively. Shippensburg Compl. ¶¶ 41-56; Trinity Compl. ¶¶ 36-51. These actions, in essence, challenge the government‘s determination that Plaintiffs acted as alter-egos of Beam. Shippensburg Compl. ¶¶ 41-56; Trinity Compl. ¶¶ 36-51. As relief, Plaintiffs seek to prohibit enforcement of the agency‘s levies, as well as a return of the property of which the government has taken possession, a judgment for the amount levied upon, and damages in an unspecified amount. Shippensburg Compl. 7-8; Trinity Compl. 7-8.
On October 19, 2020, Plaintiffs filed administrative claims with the IRS for damages. Shippensburg Prop. Am. Compl. ¶¶ 61, 66, Trinity Prop. Am. Comp. ¶¶ 58, 63. Just two days later, on October 21, 2020, Plaintiffs filed nearly identical motions to amend their respective complaints, seeking to add two counts for unlawful collection actions under
II. Standard of Review
Where the time limits for amending pleadings as a matter of course have expired, “a party may amend its pleading only with the opposing party‘s consent or the court‘s leave.” Fed. R. Civ. P. 15(a)(2). The Rule provides that the court should freely give leave when justice so requires, but the court, in its discretion, may deny leave to amend when there is undue delay, prejudice, bad faith, or futility. Id.; Foman v. Davis, 371 U.S. 178, 182 (1962); Mullin v. Balicki, 875 F.3d 140, 149-50 (3d Cir. 2017). Where “it is apparent from the record that . . . the amendment would be futile,” leave to amend may be denied. Lake v. Arnold, 232 F.3d 360, 373 (3d Cir. 2000) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). “An amendment is futile if the amended
III. Discussion
A. Plaintiffs’ Amended Count III for Unlawful Collection Action under 26 U.S.C. § 7426(h) is futile because Plaintiffs have failed to exhaust administrative remedies and have thus failed to obtain a waiver of the Government‘s sovereign immunity.
1. Sovereign Immunity
Plaintiffs seek to add a count for damages under
Under settled principles of sovereign immunity, “the United States, as sovereign, ‘is immune from suit, save as it consents to be sued.‘” United States v. Dalm, 494 U.S. 596, 608 (1990) (internal citations omitted). Moreover “[a] waiver of the Federal Government‘s sovereign immunity must be unequivocally expressed in statutory text . . . [and] will be strictly construed, in terms of scope, in favor of the sovereign.” Lane v. Pena, 518 U.S. 187, 192 (1996) (internal
The statute and accompanying regulations set forth by the Department of Treasury are clear about the prerequisites to maintain an action under Section 7426(h)—and thus the terms by which the Government consents to be sued. See
Here, Plaintiffs seek to add a claim for damages under Section 7426(h) on October 21, 2020, just two days after filing their administrative complaint. Shippensburg Prop. Am. Compl. ¶¶ 61, 66, Trinity Prop. Am. Comp. ¶¶ 58, 63. It is therefore clear that they do not meet the criteria set forth by Section 7433(d) and the accompanying regulations, which allow for a claim against the Government only after the administrative decision has been rendered, or “six months after the administrative claim is filed.”
Nor do the Plaintiffs fall within the exception recognized by the regulation, where a claimant “during the last six months of the period of limitations . . . may file an action in a district court.”
Having failed to meet the exhaustion requirements of Section 7433(d), Plaintiffs cannot maintain their Section 7426(h) claim. See Barry v. Koskinen, No. 3:18-CV-14276-BRM, 2019 WL 4297796, at *7 (D.N.J. Sept. 11, 2019) (dismissing plaintiff‘s claim for failure to exhaust administrative remedies set forth in Section 7433(d)); Shah, 2013 WL 1869095, at *7 (dismissing Section 7426 claim and denying motion to amend as futile due to plaintiff‘s failure to exhaust administrative remedies set forth in Section 7433(d)); Slutter v. United States, No. CIV.A. 11-1161, 2012 WL 5960837, at *4 (E.D. Pa. Nov. 29, 2012) (“If these requirements [of Section 7433(d)] are not satisfied, there will be no waiver of sovereign immunity“); Gray v. United States, 723 F.3d 795, 798-99 (7th Cir. 2013) (“While exhaustion of administrative remedies is not a jurisdictional prerequisite to suit . . . , exhaustion is still a statutory requirement for recovery [under Section 7433(d)] . . . and a condition of the government‘s waiver of sovereign immunity.“); Rotte v. United States, 615 F. Supp. 2d 1347, 1353-54 (S.D. Fla. 2009), aff‘d sub nom. Rotte v. I.R.S., 368 F. App‘x 73 (11th Cir. 2010) (granting summary judgment where plaintiffs failed to exhaust administrative remedies per Section 7433(d));
I am not persuaded by Plaintiffs’ arguments to the contrary. First, Plaintiffs argue that because administrative exhaustion is not jurisdictional, the statutory administrative exhaustion requirements “need not be satisfied for the district court to entertain claims under Section 7426.” Pls.’ Reply 3 (citing Hassen v. Gov‘t of the Virgin Islands, 861 F.3d 108 (3d Cir. 2017)). Plaintiffs contend that Hassen allows them to proceed with an action under Section 7426(h) so long as they do not receive an award of damages until they have exhausted their administrative remedies. Pls.’ Reply 3-4. In advancing this position, Plaintiffs would have me focus on one aspect of Hassen while ignoring an equally salient point. Hassen itself reiterates that “a taxpayer must exhaust the administrative remedies set forth in § 7433(d). While such exhaustion is not a jurisdictional requirement, it is mandatory.” 861 F.3d at 111. Indeed, Hassen cites Kim v. United States for the proposition that Section 7433(d) is an affirmative defense, id. at 114 (citing 632 F.3d 713, 718 (D.C. Cir. 2011)), and one which the Government rightfully asserts.
Plaintiffs simply ignore the clear language of the regulations, which prevent them from “maintain[ing]” an action under Section 7426(h), absent compliance with requirements that they have clearly not met. See
In short, the cases cited by the Government remain persuasive, despite having been decided prior to Hassen. Ultimately, though the defense of sovereign immunity may not be jurisdictional in the context of failure to exhaust, it remains a viable affirmative defense. See Barry, 2019 WL 4297796, at *7; Shah, 2013 WL 1869095, at *7; Slutter, 2012 WL 5960837, at *4; Gray v. United States, 723 F.3d at 789-99; Rotte, 615 F. Supp. 2d at 1354; Zinstein, 2013 WL 5504418 at *5; Gaines, 424 F. Supp. 2d at 223-24.
Next, Plaintiffs argue that the authority cited by the Government is distinguishable, involving taxpayers who had not yet filed administrative claims when they filed their claims in federal court. Pls.’ Reply 6-7; see Shah, 2013 WL 1869095, at *7; Slutter, 2012 WL 5960837, at *4; Gray v. United States, 723 F.3d at 789-99; Rotte, 615 F. Supp. 2d at 1354; Zinstein, 2013 WL 5504418 at *5; Gaines, 424 F. Supp. 2d at 223-24. I disagree.
First, the Plaintiffs’ summary of the relevant decisions is not entirely accurate. For example, the plaintiff in Zinstein had in fact filed an administrative complaint some months prior to filing claims in federal court, but still suffered dismissal. 2013 WL 5504418 at *1-2, 5. Second, rather than contend with the clear language of the regulation, which speaks to would-be plaintiffs’ ability to “maintain[]” an action, Plaintiffs have opted simply to ignore it, despite Third Circuit precedent to the contrary.
2. Judicial Estoppel
Finally, Plaintiffs argue that principle of judicial estoppel should prevent the Government from holding them to the clear language of the regulation, arguing that it has taken an inconsistent position in past litigation. Pls.’ Reply 4-6. I strongly disagree.
Under the doctrine of judicial estoppel, “where a party assumes a . . . position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position, especially if it be to the prejudice of the party who has acquiesced in the position formerly taken by him.” See New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (emphasis added). “Because the rule is intended to prevent ‘improper use of judicial machinery,’ . . . judicial estoppel ‘is an equitable doctrine invoked by a court at its discretion.‘” Id. at 750 (internal citations omitted). The Third Circuit has “consistently stated that the doctrine should only be applied to avoid a miscarriage of justice.” Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. Gen. Motors Corp., 337 F.3d 314, 319 (3d Cir. 2003). It has also laid out a number of considerations in determining whether to employ this equitable doctrine:
First, the party to be estopped must have taken two positions that are irreconcilably inconsistent. Second, judicial estoppel is unwarranted unless the party changed his or her position “in bad faith —i.e., with intent to play fast and loose with the court.” Finally, a district court may not employ judicial estoppel unless it is “tailored to address the harm identified” and no lesser sanction would adequately remedy the damage done by the litigant‘s misconduct.
Krystal Cadillac, 337 F.3d at 319. The Supreme Court has also set forth several factors to be considered before invoking the doctrine. New Hampshire, 532 U.S. at 750-51. First, the “party‘s later position must be ‘clearly inconsistent’ with its earlier position.” Id. (internal citations omitted). “Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party‘s earlier position, so that judicial acceptance of an inconsistent position in a later proceeding would create ‘the perception that either the first or the second court was misled.‘” Id. (internal citations omitted). “A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.” Id. at 751.
In the broadest sense, Plaintiffs have failed at the outset to establish that the Government has taken an inconsistent position in this litigation than it has taken in previous litigation—let alone a position that is “irreconcilably inconsistent.” Krystal Cadillac, 337 F.3d at 319. They cite Politte v. United States, arguing that some twelve years ago the Government took a different position in the Southern District of California. No. 07-CV-1950-JLS (CAB), 2008 WL 11338361, at *1 (S.D. Cal. Dec. 15, 2008). In Politte, the parties agreed that the plaintiffs failed to exhaust their administrative remedies under Section 7426(h), but also agreed that “[o]nce Plaintiff‘s administrative claims are filed with the IRS, Plaintiffs’ Damages Claims . . . may be maintained in this Court” under the exception outlined in
In practice, the position taken by government agencies in different cases very much depends on the facts. Holding them to a single position nation-wide over long periods of time would needlessly constrain their exercise of prudent discretion. Typically, therefore, the doctrine of judicial estoppel is applied in litigation involving the same parties. See New Hampshire, 532 U.S. at 749; Krystal Cadillac, 337 F.3d at 319 (“[A] plaintiff, who has obtained relief from an adversary by asserting and offering proof to support one position, may not be heard later . . . to contradict himself in an effort to establish against the same adversary a second claim inconsistent with his earlier contention“) (internal citations omitted).
Because Plaintiffs could not survive a motion to dismiss for their proposed amended claim under Section 7426(h), I will deny Plaintiffs’ motions seeking to add a cause of action under that provision. See Kanter, 489 F.3d at 181.6
B. Plaintiffs’ Amended Count IV for Unlawful Collection Actions under 26 U.S.C. § 7433 is futile because Plaintiffs are not the “taxpayer” entitled to relief.
Section 7433 is unambiguous as to who may bring a claim against the Government and under what circumstances:
If, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title, such taxpayer may bring a civil action for damages against the United States in a district court of the United States.
Plaintiffs agree that the Notices of Levy explicitly state they were issued “to satisfy money owed by Beam.” Shippensburg Compl. ¶ 28, 48; Trinity Compl. ¶¶ 24, 43. The underlying liens were based on tax assessments against Beam from 1999-2006. Shippensburg Compl. ¶¶ 1, 26, 28; Shippensburg Prop. Am. Compl. 27; Trinity Compl. ¶¶ 1, 22-24. Their theory of the case is that they are entities that exist entirely apart from Beam, which necessarily means that they are not the “taxpayer.” See
Because Plaintiffs could not survive a motion to dismiss for their proposed amended claim under Section 7433, I will deny Plaintiffs’ motions to the extent that they seek to add a cause of action under that provision. See Kanter, 489 F.3d at 181 (futility alone is sufficient ground to deny leave to amend).
IV. Conclusion
Plaintiffs’ motions to amend their complaints will be denied. An appropriate Order will be entered in each action.
/s/Gerald Austin McHugh__
United States District Judge
Notes
(h) Recovery of damages permitted in certain cases.—
(1) In general.--Notwithstanding subsection (b), if, in any action brought under this section, there is a finding that any officer or employee of the Internal Revenue Service recklessly or intentionally, or by reason of negligence, disregarded any provision of this title the defendant shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000 ($100,000 in the case of negligence) or the sum of—
(A) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional or negligent disregard of any provision of this title by the officer or employee (reduced by any amount of such damages awarded under subsection (b)); and
(B) the costs of the action.
(f) Period of limitations—(1) Time for filing. A civil action under paragraph (a) of this section must be brought in a district court of the United States within two years after the date the cause of action accrues.
(2) Right of action accrues. A cause of action under paragraph (a) of this section accrues when the plaintiff has had a reasonable opportunity to discover all essential elements of a possible cause of action.
Plaintiffs further cite two district cases from other circuits, neither of which I find persuasive. First, attempting to support the proposition that they can maintain an action under Section 7426(h) without exhausting administrative remedies, they cite Gass v. United States Dep‘t of the Treasury, 1999 U.S. Dist. LEXIS 4009, at *29-30 (D. Colo. 1999). There, a magistrate judge recommended that failure to exhaust should not bar a claim, but the claim was abandoned and this question never addressed by the district court. Id.
Second, Plaintiffs cite Poplawski v. Comm‘r of IRS, 2013 U.S. Dist. LEXIS 105919, at *5-6 (S.D. Ohio July 29, 2013). There, however, the claimants had affirmatively pleaded exhaustion. Id. Here, because Plaintiffs allege that they filed administrative claims only two days prior to filing the instant motions, under the controlling test of plausibility, Fowler, 578 F.3d at 211, I construe that as a tacit admission that the plaintiffs have not exhausted their administrative remedies.