Baxter v. United States

JOSEPH GARY BAXTER AND PATRICIA MARY BAXTER, Plaintiffs, v. UNITED STATES OF AMERICA, et al., Defendants.

Case No. 15-cv-02138-YGR

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

August 22, 2016

ORDER GRANTING MOTION TO DISMISS FIRST AMENDED COMPLAINT WITH PREJUDICE AND WITHOUT LEAVE TO AMEND

Re: Dkt. No. 32

On February 8, 2016, the Court granted defendants' motion to dismiss with leave to amend plaintiffs Joseph and Patricia Baxter's ("Baxters") complaint after determining that the Court lacked subject matter jurisdiction. (Dkt. No. 26.) On March 23, 2016, plaintiffs filed a First Amended Complaint. (Dkt. No. 30 ("FAC").) Similar to the original complaint, the FAC alleges claims against the United States of America, the Internal Revenue Service ("IRS"), John Koskinen in his capacity as Commissioner of the IRS, and Alan Dubois¹ in his capacity as Director of the IRS's National Research Program ("NRP") (collectively, "defendants"). Plaintiffs challenge defendants' use of the NRP to audit plaintiffs as an invalid and unconstitutional exercise of the IRS's authority. Plaintiffs seek declaratory and injunctive relief to prohibit the IRS from continuing the NRP audit, as well as attorney's fees and costs.

Defendants have brought a motion to dismiss the FAC for lack of subject matter jurisdiction under Rule 12(b)(1), and for failure to state a claim under Rule 12(b)(6). (Dkt. No. 32.) Having carefully considered the papers submitted and the pleadings in this action, for the reasons highlighted below, the Court GRANTS defendants' motion WITH PREJUDICE AND WITHOUT LEAVE TO AMEND.

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I. BACKGROUND

Plaintiffs allege that the IRS randomly chose them as participants for a NRP audit for the 2011 tax year. (FAC ¶ 28) The IRS conducts yearly NRP audits at random for research purposes. (Id. ¶ 10.) These audits are intended to be exhaustive, addressing all aspects of a taxpayer's return and requiring an in-depth examination of all books and records. (Id. ¶¶ 11-12.) Plaintiffs allege that as individuals "in excess of 65 years old," they are "more susceptible of the adverse effects of stress" and the adverse effects of an NRP audit. (Id. ¶ 29.) They allege that the stress of the NRP audit has increased Mr. Baxter's risk of suffering a heart attack, blindness, and organ damage. (Id. ¶¶ 30-32.)

The FAC alleges six claims, three of which are against the United States and IRS and brought under the APA. (Counts 1, 2, and 4.)² The next claim is also against the United States and IRS, but brought under the U.S. Constitution. (Count 5.) The final claims are against individual defendants Koskinen and Dubois for exceeding their statutory authority under the tax code and the U.S. Constitution. (Counts 3 and 6.)³

II. MOTION TO DISMISS UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(b)(1)

A. Legal Standard

A motion to dismiss pursuant to Rule 12(b)(1) is a challenge to the court's subject matter jurisdiction. "Federal courts are courts of limited jurisdiction," and it is "presumed that a cause lies outside this limited jurisdiction." Kokkonen v. Guardian Life Ins.Co. of Am., 511 U.S. 375, 377 (1994). The party invoking the jurisdiction of the federal court bears the burden of establishing that the court has the requisite subject matter jurisdiction to grant the relief requested. Id. A challenge pursuant to Rule 12(b)(1) may be facial or factual. See White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). In a facial attack, the jurisdictional challenge is confined to the allegations pled in the complaint. See Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004). The challenger asserts that the allegations in the complaint are insufficient "on their face" to invoke federal jurisdiction. Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). To resolve this challenge, the court assumes the allegations in the complaint are true and draws all reasonable inferences in favor of the party opposing dismissal. See Wolfe, 392 F.3d at 362.

With regard to leave to amend, it is liberally granted, but may be denied if amendment would be futile. Foman v. Davis, 371 U.S. 178, 182 (1962); Chodos v. West Pub. Co., 292 F.3d 992, 1003 (9th Cir. 2002); Smith v. Pac. Props. & Dev. Corp., 358 F.3d 1097, 1101 (9th Cir. 2004).

1. Waiver of Sovereign Immunity Standard

To establish subject matter jurisdiction in an action against the United States, plaintiffs must show both (1) a waiver of sovereign immunity, and (2) "statutory authority vesting a district court with subject matter jurisdiction." Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1016 (9th Cir. 2007). The Administrative Procedure Act ("APA"),⁴ 5 U.S.C. section 702 allows a person "suffering legal wrong because of an agency action, or adversely affected or aggrieved by an agency action" to bring a claim against the United States in federal court. 5 U.S.C. § 702. However, the APA's waiver of sovereign immunity only extends to challenges of agency action that are "final," as required by 5 U.S.C. section 704. See Gallo Cattle Co. v. U.S. Dept. of Agriculture, 159 F.3d 1194, 1198 (9th Cir. 1998) ("the APA's waiver of sovereign immunity contains several limitations...[including] § 704, which provides that only '[a]gency action made reviewable by statute and final agency action for which there is no other adequate remedy in a court, are subject to judicial review'"). Agency action is final if it marks the consummation of the agency's decision-making process, and the action is one by which plaintiffs' rights or obligations have been determined, or from which legal consequences will flow. Bennett v. Spear, 520 U.S. 154, 177-78 (1997).⁵

Conflicting Ninth Circuit authority exists regarding whether Section 704 limits the APA's waiver of sovereign immunity. In The Presbyterian Church (U.S.A.) v. United States, 870 F.2d 518, 524-25 (9th Cir. 1989), which involved a suit seeking injunctive relief against the Immigration and Naturalization Service for violation of First and Fourth Amendment rights, the Ninth Circuit did not limit section 702's sovereign immunity waiver to "agency action" as narrowly defined in 5 U.S.C. § 551(13)—i.e., "an agency rule, order, license, sanction, relief, or the equivalent or denial thereof." Later in Gallo Cattle Co. v. U.S. Dep't of Agriculture, 159 F.3d 1194, 1198 (9th Cir. 1998), the Ninth Circuit noted that an agency action is reviewable if "it constitutes 'final agency action' for which there is no other adequate remedy in a court." The Ninth Circuit has since recognized the conflict, but has not resolved it. See Gros Ventre Tribe v. United States, 469 F.3d 801, 808-809 (9th Cir. 2006) ("We now recognize that there is a conflict in our caselaw regarding this issue; however, we need not resolve it as we affirm the district court on its alternative.")

In light of this conflict, the Court finds the reasoning of its sister court instructive:

"The...principled way to reconcile the cases is to acknowledge that the claims in Gallo Cattle were brought under the APA, and were necessarily limited by § 704's requirement of finality. Thus, the holding of Gallo Cattle is that for claims brought under the APA, the sovereign immunity waiver is no broader than the scope of allowable claims-challenges to final agency action. Where the allegation is that the agency action violates another law—be it statutory, constitutional, or common law—the waiver of sovereign immunity is not so limited, but rather is the broad, unqualified waiver described in Presbyterian Church and suggested in the plain language of the statute."

Valentini v. Shinseki, 860 F. Supp. 2d 1079, 1101 (C.D. Cal. 2012). Thus, applying the Valentini court's reasoning, a court has subject-matter jurisdiction over a plaintiff's non-APA claims brought on constitutional grounds regardless of the finality of the challenged agency actions.

Finally, where a federal employee is named as a defendant in his official capacity and a judgment necessarily would operate against the government, the suit is considered to be one against the United States, for which there must be a waiver of sovereign immunity allowing the suit to be maintained. Land v. Dollar, 330 U.S. 731, 737-38 (1947); State of Hawaii v. Gordon, 373 U.S. 57, 58 (1963) (action against federal official was against United States because "relief sought nominally against an officer is in fact against the sovereign [because] the decree would operate against the latter"). An exception to this rule exists where: (1) the action by officers was beyond their statutory powers, or (2) even though within the scope of their authority, the powers themselves or the manner in which they were exercised was constitutionally void. See Larson v. Domestic & Foreign Commerce Corp., 337 U.S. 682, 689-91 (1949).

2. Anti-Injunction Act

The Anti-Injunction Act ("AIA") provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." 26 U.S.C. § 7421(a). The primary purpose of the AIA is to protect "the Government's need to assess and collect taxes as expeditiously as possible with a minimum of pre-enforcement judicial interference, and to require that the legal right to the disputed sums be determined in a suit for refund." Bob Jones Univ. v. Simon, 416 U.S. 725, 736 (1974) (internal quotations omitted); Church of Scientology of Cal. v. United States, 920 F.2d 1481, 1484-85 (9th Cir. 1990). The "statutory ban against judicial interference with the assessment and collection of taxes 'is equally applicable to activities which are intended to or may culminate in the assessment or collection of taxes.'" Church of Scientology, 920 F.2d at 1486 (citation omitted). It also applies equally to actions for injunction and declaratory judgment. Bob Jones Univ., 416 U.S. at 732 n.7. Where the AIA bars a suit, the court lacks jurisdiction to hear the claim or to grant the relief requested. Church of Scientology, 920 F.2d at 1491.

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