The Implications of the Supreme Court’s Direct Marketing Decision for the Interpretation of the Tax Exception in the Federal Tort Claims Act

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Today’s  guest post is from Patrick J. Smith of Ivins, Phillips & Barker. Pat builds on his earlier posts in PT and his other articles discussing the courts’ evolving approach to the Anti-Injunction Act. Here, Pat explores the developments’ possible implications to the tax exception in the Federal Tort Claims Act. Les

In a post here in March, I discussed the implications of the Supreme Court’s Direct Marketing decision for the interpretation of the Anti-Injunction Act. Although Direct Marketing dealt with the Tax Injunction Act rather than the Anti-Injunction Act, nevertheless, because of the strong similarities between the two provisions and the fact that the Court’s reasoning in Direct Marketing was based almost entirely on these similarities and on giving the terms “assessment” and “collection,” which appear in both provisions, the narrow technical meaning these terms have in the Internal Revenue Code, I argued that the narrow reading the Court gave to the Tax Injunction Act in Direct Marketing should mean that a similarly narrow reading will now be given to the Anti-Injunction Act, rather than the very broad reading this provision has been given since two 1974 Supreme Court decisions, Bob Jones University and “Americans United.” Recently I published an article in Tax Notes elaborating on that argument. On Friday of last week, Les had a post here about the recent D.C. Circuit oral argument in Z Street, Inc., where the application of the Anti-Injunction Act is the main issue, and during which the judges on the panel made clear that they believed that the Direct Marketing decision was centrally relevant to the resolution of that issue.

Earlier last week, in Snyder & Associates v US a district court in California issued an opinion in a case involving the “tax exception” to the Federal Tort Claims Act “FTCA.” This tax exception provides that the provisions of the FTCA do not apply to “[a]ny claim arising in respect of the assessment or collection of any tax.”

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The district court decision is in a suit brought under the FTCA by Snyder & Associates Acquisitions LLC (“Snyder”), a financial lender that provides refund anticipation loans (“RALs”) to taxpayers, whereby Snyder lends money to taxpayers based on their expectation of receiving tax refunds. Snyder obtains prospective borrowers through referrals from tax return preparers.

Snyder determined that one of the referrals was using a fraudulent identity and issued stop payment orders on all the loan checks issued to customers referred by the same tax return preparer. When Snyder contacted that tax return preparer, she told Snyder that she was working with the IRS in an undercover sting operation to identify instances of fraudulent tax returns. The IRS agent with whom she was working asked Snyder to cancel the stop payment orders in order to assist the investigation and assured Snyder that it would not suffer any losses as a result of their cooperation with the investigation. However, the IRS did not make good on the $2.6 million in losses Snyder claimed to have suffered as a result of its cooperation with the investigation.

The district court agreed with the government that Snyder’s FTCA suit was barred by the tax exception to the FTCA (See Ama Sarfo, IRS Cooperator Left To Eat $2.6 Cost In Fraud Investigation, Law360, June 3, 2015). The district court agreed with the government that the interpretation of the tax exception was governed by cases such as Capozzoli v. Tracey 663 F.2d 654, 658 (5th Cir. 1981), which have held that the tax exception is applied broadly to “encompass any activities of an IRS agent even remotely related to his or her official duties.”

However, the connection to Direct Marketing is that cases such as Capozzoli v. Tracey clearly rely on the interpretation given to the Anti-Injunction Act by Bob Jones University as the basis for their interpretation of the tax exception to the FTCA:

The language of 28 U.S.C. § 2680(c) is identical to that of another U.S.Code provision, 26 U.S.C. § 7421(a), which prohibits any “suit for the purpose of restraining the assessment or collection of any tax” (emphasis added). In construing Section 7421(a), the Supreme Court in Bob Jones University v. Simon, 416 U.S. 740 (1974) interpreted the phrase “assessment and collection of taxes” broadly to preclude judicial interference with any phase of IRS activities. We believe that both 26 U.S.C. § 7421(a) and 28 U.S.C. § 2680(c) reflect the government’s strong interest in protecting the administration of its tax system from the burden of constant litigation. This interest would be completely frustrated if we were to read Section 2680(c) as providing an immunity for only certain narrowly defined activities of the IRS.

Capozzoli v. Tracey 663 F.2d 654, 657 (5th Cir. 1981).

If, as I believe, the Direct Marketing decision means that the Anti-Injunction Act will no longer be given the broad reading suggested by Bob Jones University, the same conclusion holds for the tax exception to the FTCA. Under the narrow interpretation of the tax exception to the FTCA that Direct Marketing would suggest, it seems very clear that the facts in the Snyder case would not come within the tax exception, since fraudulent tax returns do not involve the “assessment” or “collection” of any actual tax. However, neither the government nor the plaintiff in Snyder cited Direct Marketing in their briefs in the district court, and the district court opinion likewise did not cite Direct Marketing.

It is notable, however, that the plaintiffs’ brief did include a reference to the Wall Street Journal article reporting on the D.C. Circuit oral argument in the Z Street case, and their brief in fact included a copy of that article as an appendix. It is unfortunate that the plaintiffs apparently did not understand the full implications for their case of what was being discussed in that oral argument.

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