Yates v. United States

Background

Michael J. Yates sued the United States over Internal Revenue Service penalties connected to alleged failures to report participation in life-insurance-related plans on tax returns for 2008 through 2011. He alleged that he properly reported the Income Security Program transaction for 2008 and did not personally participate in the Group Term Life Insurance Plan for 2009 through 2011. He also alleged that the IRS assessed the 2010 and 2011 penalties a second time, filed tax liens, and seized $26,886 from his 2017 tax refund. According to the complaint, the IRS later approved a refund of that seizure plus interest, but Yates alleged that the penalties paid in July 2014 had not been refunded.

Yates asserted two claims. His first claim, under 26 U.S.C. § 7433, alleged illegal collection activities concerning the duplicate 2010 and 2011 penalties. His second claim, under 26 U.S.C. § 6707A, sought refunds of penalties for 2008 and 2011 on several grounds, including proper reporting, lack of personal participation in the transaction, unequal application of IRS rules, alleged entrapment, and failure to show the required supervisory approval under 26 U.S.C. § 6751(b)(1).

The government’s motion

The United States moved to dismiss the illegal-collection claim under Federal Rule of Civil Procedure 12(b)(1), which challenges subject-matter jurisdiction, or Rule 12(b)(6), which tests whether the complaint states a legally sufficient claim. It argued that Yates had not exhausted the administrative procedures required for a § 7433 claim and that the complaint did not establish a basis for damages. For the refund claim, the government argued that some issues were barred because related matters had been decided in earlier litigation involving Interior Glass, while other arguments were not timely or had not been included in Yates’s administrative refund claims.

Court’s analysis

The court held that a taxpayer bringing a § 7433 claim must first submit a written administrative claim containing specified information and wait until the IRS decides that claim or six months pass, whichever occurs first. Yates argued that his request for a Collection Due Process hearing satisfied this requirement, but he cited no authority establishing that position. He agreed at oral argument that dismissal would be appropriate if the specified exhaustion requirement applied. The court dismissed the illegal-collection claim without prejudice to administrative exhaustion and stated that the order did not require the government to address any later administrative claim except as required by law.

For the refund claim, the court considered the administrative claims submitted by the United States because the complaint referred to them, the claim depended on their contents, and Yates did not dispute their authenticity. The court concluded that Yates could not pursue his argument that the IRS failed to demonstrate supervisory approval under § 6751(b)(1), because he had not raised that argument in his administrative claims. The court therefore granted the motion to dismiss as to that allegation.

The court declined at the pleading stage to dismiss the remaining refund grounds. Yates’s amended administrative claims were filed late, and the parties disputed whether those claims were sufficiently related to his timely original claims under the “germaneness doctrine.” That doctrine can permit an untimely new legal theory when it depends on facts the IRS examined or should have examined while considering the timely original claim. The court found factual disputes about what information the IRS examined or should have examined, and it denied the motion to dismiss the remaining refund grounds. The court indicated that it would consider allowing the United States to file a later dispositive motion after limited, targeted discovery.

Disposition

The court granted in part and denied in part the motion to dismiss as follows:

1. For the § 7433 illegal-collection claim, the motion to dismiss was granted without prejudice. 2. For the § 6707A refund claim, the motion to dismiss was granted as to the allegation of noncompliance with § 6751(b)(1), but was otherwise denied.

Classification rationale

This is a procedural order because the court ruled on a motion to dismiss based on administrative exhaustion and the adequacy and timeliness of pleaded claims. It did not decide the ultimate merits of whether the penalties were properly assessed or whether the IRS’s collection actions were unlawful.