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Courtney v US Illustrates Limits of Taxpayer Challenges to Allegedly Improper IRS Collection

Posted on Sep. 27, 2022

The recent unpublished Fifth Circuit opinion in Courtney v US nicely illustrates the challenges that taxpayers face when they allege that the IRS has taken improperly used its administrative collection powers.

Courtney pled guilty to income tax evasion from over a million dollars of improper employer reimbursements for personal expenses that he disguised to look like service payments to a company that he controlled. After a district court restitution order, a 2012 notice of deficiency, and an assessment, the IRS began to try to collect on the unpaid taxes.

Those efforts included a levy on Courtney’s personal individual retirement account, a notice of a federal tax lien, an attempt to seize assets from an irrevocable trust which benefits his wife and children, and levies against two limited liability companies affiliated with Courtney.

In the fall of 2021, Courtney sued the IRS, seeking damages under Section 7433 for allegedly improper collection and an injunction barring further collection actions against him, the limited liability companies and the irrevocable trust.

The district court tossed the suit for two main reasons. First, Courtney had failed to exhaust his administrative remedies before seeking damages under Section 7433. Second, it held that the Anti Injunction Act barred his demand that the IRS cease collection. In affirming the district court, the Fifth Circuit expanded on why Courtney could not use the courts at this stage to examine the IRS’s conduct.

Section 7433 requires that taxpayers file a claim with the IRS before going to court. In responding to the government’s argument that he neglected to meet that requirement, Courtney argued that bringing an administrative claim would be futile. Some cases have held that futility can lead a court to overlook the statutory requirement to file a clam with the IRS before going to court.

In rejecting that argument, the Fifth Circuit noted that the futility doctrine is extremely narrow. Even assuming that the “IRS has been unresponsive, difficult to work with, and disingenuous of previous arrangements agreed upon by the parties” it was insufficient. Futility requires a court to conclude that the filing of a claim would be a useless formality, and Courtney did not meet that standard.

As to the Anti-Injunction Act preventing his demand that the IRS cease collection, Courtney argued that his claims fit under the Enochs v. Williams Packing exception “which applies only if “(1) it is clear that under no circumstances could the Government ultimately prevail…[and] (2) equity jurisdiction otherwise exists.”

Both prongs are difficult to meet; the first requiring a court to prove with certainty that the plaintiff would prevail on the merits and the second requiring a showing of irreparable harm.

The Fifth Circuit declined to find that the Enochs v. Williams Packing exception applied, concluding that it was not a certainty that it would decide on the merits that the government’s collection efforts were improper. Courtney claimed that the government failed to refute his allegations that the levies against the trust and LLCs were improper. In rejecting Courtney’s claim, the court noted that while the government must prove some factual connection between the LLCs, the trust and Courtney, the taxpayer bears the ultimate burden of persuasion. Here, the government had done enough to link Courtney with the entities and Courtney himself had possession of facts necessary for a court to determine whether any collection efforts were lawful.

If Courtney had plausibly alleged that the government had obstructed his ability to prove that the government’s collection actions were improper, perhaps the court would have addressed prong two of the Enochs v. Williams Packing test. That prong is not easily satisfied anyway, with courts often reflexively stating that refund procedures are adequate, regardless of the taxpayer’s ability to pay.

Given Courtney’s long history with the IRS, it was unsurprising that he went to court. As the opinion reflects, outside CDP, it is not easy to get a court to consider the IRS’s collection, and taxpayers must follow the preliminary path of bringing allegations of improper conduct to the agency itself.

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