We welcome back guest blogger Sarah Lora, Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon. Today Sarah (with the help of 3L Katelynn Clements of Lewis and Clark Law School) examines a recent federal district court decision from Colorado. She argues that the court wrongly categorized a tort claim against the Transportation Security Administration as a tax refund claim, and so should not have dismissed the case for lack of jurisdiction. As we have discussed before on PT, the prerequisites to a successful tax refund suit are insurmountable for many taxpayers. Sarah points out that the taxpayer here may actually have a chance with the IRS. The record does not tell us if he’s tried that route yet. Christine
If the TSA removes from luggage and negligently misplaces tax papers that are essential to prove your claim for refund, sorry friend, you are out of luck. This, according to the federal district court in Schlieker v. Transportation Safety Administration, is the state of the law.
On February 17, 2016, Mr. John Schlieker flew from Phoenix to Denver on Southwest Airlines. According to his complaint and documents attached to it, Mr. Schlieker checked luggage that contained “a multitude of green hanging files containing manila folders filled with documenting receipts, paperwork, check registers, charitable contribution receipts, medical and dental receipts, property interest confirmation; all the things needed to appropriately file [his 2015] tax return.” When he arrived in Denver, instead of those documents, Mr. Schlieker found a TSA notice of bag inspection stating that his bag “was among those selected for physical inspection.”
On May 19, 2016, Mr. Schlieker filed a claim for damage with the TSA for $5,000, representing the amount of refund he estimated he could have obtained had the TSA not misplaced his papers. TSA sent Mr. Schlieker a letter on December 1, 2016 denying his claim “after careful evaluation of all the evidence” and directing him to file a lawsuit in U.S. District Court if he was dissatisfied with the denial. Mr. Schlieker was dissatisfied. He then filed a lawsuit in the U.S. District Court for the District of Colorado against the TSA under the Federal Tort Claims Act for $5,000.
The court dismissed the lawsuit holding it lacked subject matter jurisdiction because Mr. Schlieker did not claim the refund with the IRS first. Assuming that the allegations in his complaint are true, as the law requires when considering a motion to dismiss, the papers that the TSA lost were necessary to file a claim for refund. Mr. Schlieker stated in his complaint that he could not “completely, honestly, and truthfully” sign a return claiming the refund without the papers the TSA took. How could he file a claim for tax refund when the TSA took the very documents he needed to assert the claim?
Mr. Shlieker’s actions are not unique. In many cases, even for sole proprietorships, a taxpayer may not keep any “books” detailing their profits, losses, or expenses. Instead, the taxpayer will save receipts and other records throughout the year which they then give to their tax preparer every April. This is not ideal, but it happens routinely.
Citing I.R.C. § 7422(a) and a long list of cases dismissing suits based on that statute, the court reasoned that Mr. Schlieker’s lawsuit was really a claim for a tax refund and should therefore be dismissed. The statute reads:
No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary [of the Treasury], according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.
The cases the court cites, which cite this statute as the reason for their decision to dismiss, fall into two inapposite categories. The first are cases in which a third party, either an employer or an airline, is acting as an agent of the IRS to collect and pay over taxes. In those cases, the courts have held that § 7422(a) protects those agents, who are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so, from civil lawsuits relating to the collection of those taxes. Sigmon v. Southwest Airlines (dismissing class action against Southwest for improperly charging excise taxes to passengers); see also Kaucky v. Southwest Airlines (same); Chalfin v. St. Joseph’s Healthcare Sys. (dismissing case against employer who improperly withheld FICA from medical residents working at a hospital).
In Mr. Schlieker’s case, the TSA was not acting as an agent of the IRS to collect and pay over taxes. It did not confiscate Mr. Schlieker’s documents in order to perform some duty it believed it owed to the IRS. Assuming the allegations in the complaint are true, the TSA committed a tort, plain and simple, when it took Mr. Schlieker’s documents out of his luggage and did not return them. For that reason, those agency cases are not persuasive.
The second group of cases hold that plaintiff must timely exhaust administrative remedies, by filing a claim for refund, prior to filing suit for the refund of taxes. See United States v. Clintwood Elkhorn Mining Co; United States v. Dalm; Strategic Hous. Fin. Corp. v. United States. The court misses the mark with this line of cases as well. TSA, by means of tortious conduct, took the means for filing a claim for refund away from Mr. Schlieker. To require Mr. Schlieker to file a return without supporting documents violates the letter of IRC §7206(1):
any person who . . . [w]illfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe true and correct as to every material matter . . . shall be guilty of a felony. . . .
In reality, even if Mr. Schlieker’s claim survived the initial motion to dismiss, he still might have lost or received only limited damages. In a case like this, TSA may argue that its seizure of the records was not the proximate cause of Mr. Schlieker’s loss. After all, with today’s technology, could he not have reconstructed his records well enough to file his tax return? Copies of bank records, dental and medical bills, mortgage interest paid, etc. are likely readily available online. I do not see much in the multitude of green hanging files that he could not replace with some headache and hassle. It is possible he could still get those documents and file his claim for refund before April 15, 2019. Perhaps the damages in a case like this should be measured by the cost to replace the documents, a reasonable estimate of the lost refund attributable to any irreplaceable documents, and perhaps any non-economic damages such as emotional distress.