Hohman v. Eadie

894 F.3d 776

Jodi C. HOHMAN; JHohman, LLC; You Got Busted By Me, LLC; Terry Miller, Plaintiffs–Appellants,

v.Maurice EADIE, et al., Defendants,United States of America; Department of Treasury; Internal Revenue Service, Defendants–Appellees.

No. 17-1869

United States Court of Appeals, Sixth Circuit.

Argued: April 26, 2018

Decided and Filed: July 5, 2018

ARGUED: Stuart M. Schwartz, CLARK HILL PLC, Detroit, Michigan, for Appellants. Paul A. Allulis, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees. ON BRIEF: Stuart M. Schwartz, CLARK HILL PLC, Detroit, Michigan, for Appellants. Paul A. Allulis, Michael J. Haungs, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

Before: MERRITT, WHITE, and DONALD, Circuit Judges

MERRITT, Circuit Judge.

This appeal raises a highly technical issue arising from a potential conflict between the Internal Revenue Code and the Federal Right to Financial Privacy Act of 1978, 12 U.S.C. §§ 3401 – 3422.¹ The IRS issued two "John Doe" summonses without first obtaining approval in a federal district court as required by the Internal Revenue Code ("Code"), see I.R.C. § 7609(f). The IRS served the summonses on Chase Bank to obtain financial records relating to two limited liability companies ("LLCs"). Plaintiffs, the LLCs and subjects of the John Doe summonses, alleged that the IRS’s use of the John Doe summonses to obtain their financial records violated the Right to Financial Privacy Act ("Act"). The district court granted the government’s motion to dismiss for lack of subject matter jurisdiction after determining that sovereign immunity barred Plaintiffs' claims under the Act. The issues on appeal are (1) whether the IRS is subject to the Act when it fails to follow its own procedures under the Code, and (2) whether LLCs fall within the Act’s waiver of sovereign immunity. We AFFIRM the district court on sovereign immunity grounds.

I. FACTUAL AND PROCEDURAL BACKGROUND

The Internal Revenue Code permits the IRS to serve administrative summonses on third parties to produce records related to taxpayers whom the IRS is investigating. See I.R.C. § 7603. Generally, these summonses must identify the person whose records are sought. See I.R.C § 7609. However, the IRS may also serve a John Doe summons, which does not identify the person whose records are sought. I.R.C. § 7609(f). This type of summons may be served only after a federal district court proceeding in which the IRS establishes that:

(1) the summons relates to the investigation of a particular person or ascertainable group or class of persons,

(2) there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and

(3) the information sought to be obtained ... is not readily available from other sources.

Id.

On September 25, 2015, the IRS served a John Doe summons on Chase Bank that sought financial records for two separate accounts (the "First John Doe Summons"). Five days later, on September 30, the IRS served a second John Doe summons that sought financial records for a single account (the "Second John Doe Summons"). The three accounts involved were identified only by account numbers. The IRS failed to seek approval from a federal district court prior to issuing either of the John Doe summonses.

In October 2015, Chase Bank notified Jodi C. Hohman ("Hohman") and her company JHohman, LLC that it had received the First John Doe Summons from the IRS and that the summons sought records for accounts relating to them. On November 25, 2015, Hohman and JHohman, LLC filed a petition in federal district court to quash the summons. In the petition to quash, Hohman and JHohman, LLC argued that the First John Doe Summons did not meet the requirements listed in I.R.C. § 7609(f), which requires the IRS to obtain approval from a federal court before serving a John Doe summons.

In response to the petition to quash, the IRS produced sworn declarations from the IRS agents who had issued the First John Doe Summons. It attached a partially-redacted copy of the First John Doe Summons to the declarations. The document revealed the first account number listed on the summons, but the second account number was redacted. Hohman and JHohman, LLC reviewed the document and determined that the first account number on that summons belonged to JHohman, LLC. Because the second account number remained masked, they were unable to determine who owned that account. Their subsequent investigation led them to believe that the second account either belonged to Terry Miller ("Miller"), individually, or his company, You Got Busted By Me, LLC ("Busted, LLC"). Miller is the sole member and owner of Busted, LLC.

The proceeding also revealed that the IRS had served the Second John Doe Summons on Chase Bank. The IRS attached an unredacted copy of the Second John Doe Summons to the declarations. Hohman and JHohman, LLC determined that the summons sought records relating to an account belonging to Hohman, individually. They later withdrew their petition to quash.

Plaintiffs Hohman, JHohman, LLC, Miller, and Busted, LLC (collectively, "Plaintiffs") filed suit against the United States, two IRS employees, and unnamed Jane and John Does, on April 20, 2016, alleging that the IRS violated the Right to Financial Privacy Act, the Privacy Act of 5 U.S.C. § 552a, the Fourth and Fifth Amendments of the Constitution, and the Internal Revenue Code’s prohibition of the unauthorized disclosure of tax return information.

On June 24, 2016, the government moved to dismiss the complaint. After a hearing, the district court granted this motion in regards to the claims under the Privacy Act, the Fourth and Fifth Amendments, and the Code’s prohibition of the unauthorized disclosure of return information. Hohman v. Eadie , No. 16-cv-11429, 2016 WL 10906875, at *1 (E.D. Mich. Nov. 7, 2016). However, the district court denied the motion to dismiss as to the Right to Financial Privacy Act claim, which is the sole claim at issue on appeal. The court dismissed the IRS employees from the suit and held that the sole remaining defendant was the United States.

In its motion to dismiss, the government argued that the Right to Financial Privacy Act was inapplicable to claims arising out of the issuance of IRS summonses. Specifically, the United States's argument rests upon the following language from the Act:

"Nothing in this chapter prohibits the disclosure of financial records in accordance with procedures authorized by Title 26 [the Internal Revenue Code]." 12 U.S.C. § 3413(c). According to the government, because the Internal Revenue Code authorizes the service of John Doe summonses, see I.R.C. § 7609(f), its service of such summonses in this case was "in accordance with procedures authorized by [the Code]," and, thus, exempt from the Act. The district court disagreed. Hohman , 2016 WL 10906875, at *2–3. It determined that the IRS’s service of the John Doe summonses without prior judicial approval was not "in accordance with" the Code because it was fundamentally inconsistent with the procedures authorized by the Code. Id. Therefore, the court held that the service was not exempt from the Act and denied the motion as to the claim under the Act. Id. at *3.

On January 17, 2017, the United States filed a second motion to dismiss for lack of subject matter jurisdiction. The resolution of this motion is the only issue on appeal. The government contended that sovereign immunity divested the court of subject matter jurisdiction over Plaintiffs' claim against the United States. Plaintiffs responded to the government’s motion by arguing that the waiver of sovereign immunity applied and requested that the district court grant them jurisdictional discovery before ruling on the motion. Specifically, Plaintiffs asked to conduct discovery to determine whether Miller, individually, or Busted, LLC, owned the account whose account number was redacted in the First John Doe Summons. Plaintiffs also requested discovery to determine whether the IRS actually obtained any documents in response to the Second John Doe Summons, which sought documents related to an account owned by Hohman, individually. The district court authorized both discovery requests. Hohman v. United States , No. 16-cv-11429, 2017 WL 2954713, at *4–5 (E.D. Mich. July 11, 2017).

Additionally, Plaintiffs asked that the district court allow them to subpoena other banks where Hohman and Miller maintained accounts to determine whether the IRS had improperly subpoenaed these banks as well. Further, Plaintiffs requested to conduct discovery with respect to four other individuals whom, based on Plaintiffs' investigation, likely had John Doe summonses issued for their accounts, but were not parties to the lawsuit. The district court denied these discovery requests and instead chose to confine the discovery to Plaintiffs' accounts at Chase Bank because those accounts were the subject of the lawsuit and because the court wanted to limit discovery to allow it to answer the jurisdictional question.

After reviewing the documents produced by discovery, the district court determined that Busted, LLC—not Miller, individually—owned the second account listed on the First John Doe Summons. Thus, the three accounts relating to the two summonses belonged to JHohman, LLC, Busted, LLC, and Hohman. The court also concluded that Chase Bank did not actually send the IRS any financial records or information relating to Hohman’s individual account in response to the Second John Doe Summons. Because Hohman did not allege that the IRS actually obtained any financial records relating to an account owned by Hohman as required by section 3417 of the Act, the court determined that Hohman, individually, had failed to state a claim.²

The district court also found that the United States was immune from the claims by JHohman, LLC and Busted, LLC because section 3417’s waiver of...