Franklin v. United States

49 F.4th 429

James FRANKLIN, Plaintiff—Appellant,

v.UNITED STATES; Charles Rettig, in his official capacity as Commissioner of Internal Revenue; Antony Blinken, Secretary, U.S. Department of State; Janet Yellen, Secretary, U.S. Department of Treasury, Defendants—Appellees.

No. 21-11104

United States Court of Appeals, Fifth Circuit.

FILED September 15, 2022

Jason B. Freeman, Freeman Law, P.L.L.C., Frisco, TX, for Plaintiff-Appellant.

Kathleen Eileen Lyon, Bruce Raleigh Ellisen, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC, Curtis Cutler Smith, U.S. Department of Justice, Tax Division, Dallas, TX, Allison Turbiville, Belle Fourche, SD, for Defendant-Appellee United States.

Kathleen Eileen Lyon, Bruce Raleigh Ellisen, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC, Allison Turbiville, Belle Fourche, SD, for Defendants-Appellees Charles Rettig, in his official capacity as Commissioner of Internal Revenue, Antony Blinken, Secretary, U.S. Department of State, Janet Yellen, Secretary, U.S. Department of Treasury.

Before King, Elrod, and Southwick, Circuit Judges.^*

King, Circuit Judge:

James Franklin appeals from the dismissal of his claims challenging tax penalties assessed against him, as well as the revocation of his passport pursuant to those penalties. He also appeals from the denial of an award of attorneys' fees under the Freedom of Information Act. For the following reasons, we AFFIRM.

I.

The Internal Revenue Service (IRS) found that James Franklin had failed to file accurate tax returns and had not reported a foreign trust of which he was the beneficial owner, and so it assessed penalties against him. Those penalties, assessed under 26 U.S.C. § 6677 on July 18, 2016, totaled $421,766. In 2018, the IRS began its collection efforts against Franklin, filing a federal tax lien and later levying on Franklin's Social Security benefits. The IRS also certified to the Department of State that Franklin had a "seriously delinquent tax debt" per 26 U.S.C. § 7345 (enacted under the Fixing America's Surface Transportation ("FAST") Act), which led the State Department to revoke Franklin's passport.

In response to the penalties, Franklin, through counsel, filed a Freedom of Information Act ("FOIA") request seeking: "(1) ‘All relevant files and their contents ... for the tax periods 1998 through 2017, including the entire administrative file relating to any auditor investigation’ and (2) ‘All relevant files, reports, letters, documents, or workpapers related to any penalty assessment under I.R.C. § 6677.’ " In response, the IRS provided several documents from Franklin's administrative file and tax records; according to Franklin, those documents demonstrate that the IRS did not comply with statutory procedural requirements that must be satisfied before the assessment of penalties under § 6677.

Franklin did not file an administrative appeal of the IRS's response to his FOIA request; instead, he took the response at face value and assumed that the IRS had not complied with the procedural requirements (namely, that the penalties be approved in writing by a supervisor of the determining agent under 26 U.S.C. § 6751(b) ). Franklin therefore filed an offer-in-compromise for a nominal sum, asserting a doubt of liability based on the purported procedural deficiencies. The IRS returned the offer without processing it, sending two separate letters that said respectively that (1) the IRS lacked jurisdiction to process the offer because "[i]t is regarding a foreign return and/or related issues," and (2) "[o]ther investigations are pending that may affect the liability sought to be compromised or the grounds upon which it was submitted." Franklin then sent a second offer-in-compromise based on the same grounds and offering the same nominal settlement.

After these offers-in-compromise were unsuccessful, Franklin filed this suit. He asserted various claims related to the alleged procedural failure under § 6751(b) (collectively, the " § 6751(b) Claims"); those claims were brought under 26 U.S.C. §§ 7345, 7432, and 7433 ; 28 U.S.C. § 2410 ; the Declaratory Judgment Act; and the Administrative Procedure Act. Franklin also challenged the constitutionality of the FAST Act's passport-revocation scheme, asserting that it violated his rights under the Fifth Amendment. Franklin later amended his complaint to seek attorneys' fees under FOIA after the Government, in its Motion for Partial Dismissal, attached exhibits that had not been produced in response to Franklin's FOIA request, which the Government asserted demonstrated that the penalties had been approved by the relevant supervisor. In addition to its assertions that the procedural requirements had been satisfied, the Government's motion also sought dismissal of the § 6751(b) Claims for lack of jurisdiction; the Government later updated its motion and sought either dismissal or summary judgment on Franklin's constitutional and FOIA claims.

The district court dismissed all of Franklin's claims. It first found that it lacked jurisdiction over each of the various § 6751(b) claims, finding that each was a prohibited collateral attack on the existence or validity of Franklin's tax liability for which the United States had not waived sovereign immunity. While the district court found that it did have jurisdiction over Franklin's Fifth Amendment challenge to the FAST Act's passport-revocation scheme, it also dismissed that claim after finding that the law was constitutional under rational-basis review.¹ Lastly, the district court found that while Franklin was eligible for attorneys' fees under FOIA (because his lawsuit prompted the IRS to release documents it alleged showed compliance with § 6751(b)'s procedural requirements), he was not entitled to an award of fees. Franklin timely appeals.

II.

We first consider whether the district court was correct to find that it lacked subject-matter jurisdiction over Franklin's various claims challenging the tax penalties. "We review questions of subject matter jurisdiction, including sovereign immunity determinations, de novo." Daniel v. Univ. of Tex. Sw. Med. Ctr. , 960 F.3d 253, 256 (5th Cir. 2020). When considering whether the United States has waived its default sovereign immunity, Franklin "bear[s] the burden of showing Congress's unequivocal waiver." Freeman v. United States , 556 F.3d 326, 334 (5th Cir. 2009) (quoting St. Tammany Parish ex rel. Davis v. Fed. Emergency Mgmt. Agency , 556 F.3d 307, 315 (5th Cir. 2009) ). His claims must be "brought in exact compliance with the terms of a statute under which the sovereign has consented to be sued." Lewis v. Hunt , 492 F.3d 565, 571 (5th Cir. 2007) (quoting Hussain v. Bos. Old Colony Ins. Co. , 311 F.3d 623, 629 (5th Cir. 2002) ).

Franklin's panoply of claims share a common thread: he asserts he is entitled to damages for various IRS actions because they were based on penalty assessments that were invalid ab initio due to the IRS's failure to follow § 6751(b)'s procedural requirements. The district court was correct to find that each of these claims was a prohibited attempt to collaterally attack the actual penalties assessed. Under the Anti-Injunction Act, Congress has provided that, absent limited exceptions, "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). Thus, when challenging the validity of a tax liability, the general rule is that a taxpayer must "pay first and litigate later." Flora v. United States , 362 U.S. 145, 164, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). "[O]nce a tax has been assessed, [a] taxpayer ... has no power to prevent the IRS from collecting it"; instead, the taxpayer must "pay the tax in full, and then sue for a refund." Jones v. United States , 889 F.2d 1448, 1449–50 (5th Cir. 1989). Courts have zealously guarded this rule, recognizing the importance of the government's ability "to assess and collect taxes alleged to be due without judicial intervention" so that "the United States is [assured] of prompt collection of its lawful revenue." Enochs v. Williams Packing & Navigation Co. , 370 U.S. 1, 7, 82 S.Ct. 1125, 8 L.Ed.2d 292 (1962).

We do not shirk that duty today. Each of Franklin's claims impliedly challenges the validity of the tax assessment itself. It does not matter that the procedural deficiency Franklin alleges occurred can technically be construed as occurring in a separate examination phase or can be characterized as occurring "pre-assessment." The Supreme Court has clarified these discrete steps, see Direct Mktg. Ass'n v. Brohl , 575 U.S. 1, 9–10, 135 S.Ct. 1124, 191 L.Ed.2d 97 (2015), and held that a challenge to reporting requirements backed by a tax penalty can proceed, CIC Servs., LLC v. IRS , ––– U.S. ––––, 141 S. Ct. 1582, 1588–89, 209 L.Ed.2d 615 (2021). But it has reaffirmed that a challenge to the assessment or collection of a tax itself is still barred. See id. at 1589.

Thus, the distinctions of the various phases of the tax process found in those cases do not aid Franklin here. This is so because Franklin's case is based on a cascade of inferences that necessarily includes a challenge to the assessment itself: proper procedures were not followed, therefore the IRS was not allowed to assess the penalties, therefore the assessed penalties were invalid, and therefore the IRS engaged in a cavalcade of actions based on the invalid penalties for which Franklin is owed damages. Franklin cannot state a claim without following that line of logic, as his challenges are all based on the alleged procedural deficiency that rendered the assessment void from the start. And that chain of reasoning features a defective link: it is based on an assumption that the assessment itself was void. Thus, his claims represent a challenge to the validity of the assessment over which the courts do not have jurisdiction.

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