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Date: 06-16-2017

Case Style: Snyder & Associates Aquisitions, LLC v. United States of America

Case Number: 15-65011

Judge: Morgan Christen

Court: United States Court of Appeals for the Ninth Circuit on appeal from the Central District of California (Los Angeles County)

Plaintiff's Attorney: Jeffrey Adams Robinson (argued) and Gregory E. Robinson,
Robinson & Robinson, Irvine, California, for Plaintiffs-
Appellants.

Defendant's Attorney: Gretchen M. Wolfinger (argued) and Joan I. Oppenheimer,
Attorneys; Caroline D. Ciraolo, Acting Assistant Attorney
General; Tax Division, Department of Justice, Washington,
D.C.; for Defendant-Appellee.

Description: In 2010, the Internal Revenue Service set a trap to catch
people filing for fraudulent tax refunds. The IRS enlisted the
assistance of plaintiffs’ tax preparation and refund-advance
businesses. It warned that refusal to cooperate would
interfere with a federal criminal investigation, it used millions
of plaintiffs’ dollars as bait, and it promised to reimburse
them for any losses. Plaintiffs cooperated, but the IRS never
returned their money. Instead, at the conclusion of the sting
operation, the IRS subpoenaed more than 5,000 of plaintiffs’
documents to assist with its prosecution efforts and revoked
one plaintiff’s electronic tax filing privileges—at the
beginning of the tax preparation season—forcing both
plaintiffs into bankruptcy.
Plaintiffs sued the IRS under the Federal Tort Claims Act
(FTCA), alleging several causes of action, but the district
court granted the government’s motion to dismiss. The court
ruled that the IRS is immune from liability for its conduct
because 28 U.S.C. § 2680(c) bars claims against the
government “arising in respect of the assessment or collection
of any tax.” We disagree. Because § 2680(c) does not confer
absolute immunity on the IRS, and because, construing the
facts in the light most favorable to plaintiffs, the IRS’s sting
operation did not “aris[e] in respect of the assessment or
collection of any tax,” we reverse the district court’s
judgment and remand for further proceedings.
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 5
I. BACKGROUND1
A. The Tax Fraud Sting
Total Tax Preparation, Inc. (TTP) was a tax return
preparation business. Its affiliate, Snyder & Associates
Aquisitions LLC (SAA) made loans to taxpayers who were
awaiting income tax refunds. TTP prepared its clients’
federal income tax returns and referred clients who wanted
refund advances to SAA. When SAA loaned money based on
anticipated tax refunds, its clients instructed the IRS to send
their refund checks to SAA. Kerry Snyder was TTP’s
president and SAA’s managing member.
In 2010, Nancy Hilton, a tax preparer who worked as an
independent contractor, referred several clients to SAA for
refund anticipation loans. When one of her clients tried to
cash a check issued by SAA, the bank notified Snyder that
Hilton’s client was using fake identification. Snyder asked
the bank to hold the check and immediately contacted Hilton.
Hilton admitted to Snyder that she was working with IRS
Criminal Investigations Special Agent Matt Daniels in an
undercover sting operation, to catch people making fraudulent
claims for tax refunds. Snyder realized that the IRS was
unlikely to issue refunds for the fraudulent tax returns filed
on behalf of Hilton’s clients, and that SAA’s ability to collect
on its refund anticipation loans was in jeopardy. Snyder
1 The government filed a facial attack on the court’s jurisdiction,
based on the four corners of the complaint. We accept as true all facts
alleged in the complaint and draw all reasonable inferences in plaintiffs’
favor. See Leatherman v. Tarrant Cty. Narcotics Intelligence &
Coordination Unit, 507 U.S. 163, 164 (1993); Safe Air for Everyone v.
Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004).
SNYDER & ASSOCS. AQUISITION 6 V. UNITED STATES
requested that the bank stop payment on all checks SAA had
issued to Hilton’s clients.
According to the complaint, Agent Daniels contacted
Snyder and informed him that stopping payment would
interfere with a federal criminal investigation. Agent Daniels
asked Snyder to allow the checks to clear the bank, and
assured Snyder that SAA would be repaid. When Snyder
called an IRS supervisor to confirm Agent Daniels’s
representations, the supervisor vouched for the sting
operation and for Agent Daniels. Snyder authorized SAA to
issue new checks to Hilton’s clients, and Agent Daniels and
another IRS agent made additional assurances that SAA
“would be made whole.”
TTP and SAA quickly began to experience negative
repercussions from their agreement to cooperate with the IRS.
First, TTP’s and SAA’s bank informed them that it was
closing their business accounts because of an inquiry the bank
made to the IRS about the investigation of TTP’s and SAA’s
clients. Plaintiffs allege that the IRS failed to inform the
bank that TTP and SAA were aiding the sting operation at the
IRS’s request. TTP and SAA incurred $12,777 in bank and
attorneys’ fees to keep their bank accounts open. The IRS
ignored TTP’s and SAA’s repeated requests for written
confirmation of its promise to repay SAA, and also ignored
their requests to reimburse the advanced funds and plaintiffs’
bank and attorneys’ fees.
Plaintiffs allege that the IRS responded to their requests
by serving subpoenas for more than 5,000 pages of their tax
return and loan records. TTP and SAA produced the
subpoenaed documents at significant additional expense. The
IRS later notified TTP that it was suspending TTP’s ability to
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 7
file tax returns electronically through the IRS’s “e-filing”
system, because fraudulent returns had been filed using
TTP’s electronic filing identification number. The letter
notifying TTP of the suspension directed all inquiries to
Agent Daniels.
The suspension prevented TTP from filing tax returns
electronically for clients, just as the 2011 tax preparation
season began. Initially, the suspension put TTP at a
significant competitive disadvantage. But on January 1,
2011, the IRS began requiring all paid tax preparers to file all
returns electronically, and at that point, the suspension
effectively put TTP out of business. TTP’s failure deprived
SAA of its most significant source of referrals, and SAA soon
failed as well. TTP successfully appealed the IRS’s
suspension of its e-filing privileges, but the damage already
had been done.
The complaint alleges that the IRS never issued refunds
for Hilton’s clients, never repaid the funds Snyder’s company
advanced for refund anticipation loans, and never
compensated TTP and SAA for any of their other losses.
B. District Court Proceedings
TTP and SAA submitted an administrative claim to the
IRS for $2,608,078, and later filed suit in the United States
District Court for the Central District of California. They
concurrently filed an action in the Court of Federal Claims for
SNYDER & ASSOCS. AQUISITION 8 V. UNITED STATES
an uncompensated taking and for breach of contract, pursuant
to the Tucker Act, 28 U.S.C. § 1491.2
In this action, the IRS argued that the district court should
dismiss TTP’s and SAA’s tort claims for four reasons: (1) the
lawsuit is barred by 28 U.S.C. § 2680(c), the tax assessment
and collection exception to the FTCA; (2) claims based on the
IRS’s misrepresentations are barred by the provisions of
28 U.S.C. § 2680(h); (3) plaintiffs failed to state a claim for
things wrongfully acquired, conversion, or abuse of process
under California law; and (4) plaintiffs’ suit is barred by
28 U.S.C. § 2680(a), the discretionary function exception to
the FTCA. The district court granted the government’s
motion and dismissed plaintiffs’ claims pursuant to Federal
Rule of Civil Procedure 12(b)(1). The court accepted the
argument that 28 U.S.C. § 2680(c) shields the IRS from
TTP’s and SAA’s claims. TTP and SAA timely appealed.
II. STANDARD OF REVIEW
We review de novo a district court’s decision to grant a
motion to dismiss for lack of subject matter jurisdiction.
Lacano Invs., LLC v. Balash, 765 F.3d 1068, 1071 (9th Cir.
2014). Because the government’s motion was filed pursuant
to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), we
accept as true all facts alleged in the complaint and construe
them in the light most favorable to plaintiffs, the non-moving
party. See Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir.
2014) (“The district court resolves a facial attack as it would
2 The Tucker Act grants exclusive jurisdiction to the Court of Federal
Claims for actions sounding in contract against the United States,
28 U.S.C. § 1491(a)(1), while the FTCA grants exclusive jurisdiction to
federal district courts to hear tort claims, 28 U.S.C. § 1346(b)(1).
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 9
a motion to dismiss under Rule 12(b)(6): Accepting the
plaintiff’s allegations as true and drawing all reasonable
inferences in the plaintiff’s favor, the court determines
whether the allegations are sufficient as a legal matter to
invoke the court’s jurisdiction.”). Under 28 U.S.C. § 1291,
we have jurisdiction to review the district court’s order.
III. DISCUSSION
A. TTP’s and SAA’s Claims Do Not Arise in Respect of
the Assessment or Collection of Any Tax.
The FTCA waives the United States’ sovereign immunity
for tort claims against the federal government in cases where
a private individual would have been liable under “the law of
the place where the act or omission occurred.” 28 U.S.C.
§ 1346(b)(1). Section 2680 provides for several exceptions
that “severely limit[]” the FTCA’s waiver of sovereign
immunity. Morris v. United States, 521 F.2d 872, 874 (9th
Cir. 1975). “If a plaintiff’s tort claim falls within one of the
exceptions, the district court lacks subject matter
jurisdiction.” Id. Among § 2680’s several exceptions is
§ 2680(c), which prevents lawsuits against the federal
government for “[a]ny claim arising in respect of the
assessment or collection of any tax.”
We have “broadly construed” § 2680(c) to encompass
actions taken during the scope of the IRS’s tax assessment
and collection efforts. Wright v. United States, 719 F.2d
1032, 1035 (9th Cir. 1983), abrogated on other grounds as
recognized by Gasho v. United States, 39 F.3d 1420 (9th Cir.
1994). For example, in Morris, we held that 2680(c) barred
not just claims based on literal collection activity, but also a
taxpayer’s claim that IRS agents wrongfully told his creditors
SNYDER & ASSOCS. AQUISITION 10 V. UNITED STATES
of his purported tax liability during an audit of his business.
521 F.2d at 874–75. Other circuits also have read § 2680(c)
expansively. See Aetna Cas. & Sur. Co. v. United States,
71 F.3d 475, 478 (2d Cir. 1995) (“We understand the
§ 2680(c) exception to cover claims arising out of the
operation of the government’s mechanism for assessing and
collecting taxes. The payment of refunds when due is an
integral part of that mechanism.”); Capozzoli v. Tracey,
663 F.2d 654 (5th Cir. 1981) (holding that § 2680(c) barred
a lawsuit by taxpayers who alleged that an IRS agent prowled
their property and took photos of their residence without
permission, during an investigation to determine the extent of
damage they claimed as casualty losses on their tax returns).
Section 2680(c) has been read to apply to both civil and
criminal investigations into potential tax liability, see Jones
v. United States, 16 F.3d 979 (8th Cir. 1994), as well as to
suits brought against the IRS by third parties who never had
any tax liability, see Perkins v. United States, 55 F.3d 910
(4th Cir. 1995) (barring a wrongful death claim arising from
the death of a miner hired by the IRS to retrieve mining
equipment to satisfy a federal tax debt); Interfirst Bank
Dallas, N.A. v. United States, 769 F.2d 299, 307 (5th Cir.
1985) (“[Section 2680(c)] gives no indication whatsoever that
the exemption is limited . . . to claims brought by taxpayers
as opposed to third parties.”); Broadway Open Air Theatre,
Inc. v. United States, 208 F.2d 257, 259 (4th Cir. 1953)
(rejecting the plaintiffs’ argument that § 2680(c) does not
apply when the lawsuit “is unrelated to any alleged tax
liability between the parties to the suit” (emphasis added)).
Despite § 2680(c)’s expansive reach, it does not grant the
IRS absolute immunity. We previously have rejected the
invitation to read the statute as encompassing any activities
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 11
that “might serve as a deterrent that will facilitate the
‘assessment or collection’ of taxes generally.” See Wright,
719 F.2d at 1035. Even courts that have applied § 2680(c) to
claims that, at first blush, seem attenuated from assessment
and collection activities have taken pains to emphasize that
they “do not intend to suggest that the government is
insulated from tort liability for any and all transgressions
committed by IRS employees.” Capozzoli, 663 F.2d at 658;
see also Perkins, 55 F.3d at 914 (“[T]he breadth of section
2680(c)’s operation is not unlimited.”).
The government argues that its conduct in this case
involved the assessment or collection of taxes because it was
trying to determine whether taxpayers were claiming bona
fide refunds. This argument overlooks our obligation to
accept as true the allegations in plaintiffs’ complaint. See
Leatherman v. Tarrant Cty. Narcotics Intelligence &
Coordination Unit, 507 U.S. 163, 164 (1993) (“We review
here a decision granting a motion to dismiss, and therefore
must accept as true all the factual allegations in the
complaint.”). TTP and SAA allege that the IRS already
suspected that the individuals under investigation were scam
artists who were not entitled to any bona fide refunds. The
allegation that the IRS’s efforts were aimed at snaring tax
cheats cleanly distinguishes this case from the case on which
the government relies, Aetna Casualty & Surety Co., 71 F.3d
475. There, Aetna Casualty argued that it was entitled to part
of a tax refund that the IRS had paid to a different taxpayer.
Aetna sued the government for tortious conversion, id. at 477,
and the Second Circuit held, unremarkably, that § 2680(c)’s
bar of claims concerning tax assessment and collection efforts
also bars claims based on “payment of refunds when due,”
id. at 478. Here, the payment of refunds when due is not at
issue. Construing the alleged facts in plaintiffs’ favor, the
SNYDER & ASSOCS. AQUISITION 12 V. UNITED STATES
complaint includes fraudsters who filed fake returns, so no
refunds were due. Plaintiffs allege that the IRS was not
assessing the amount of taxes the filers owed, nor was it
attempting to collect taxes from them. Instead, it was
conducting a sting operation aimed at snaring tax cheaters
intent on stealing funds from the United States treasury.
At oral argument, the government identified Perkins,
55 F.3d 910, as the case that “comes closest” to the facts of
this case. But Perkins lends no support to the government’s
argument. It is readily distinguishable because it involved a
miner hired by the IRS to retrieve a piece of mining
equipment in an attempt to satisfy a federal tax debt. See id.
at 912. The wrongful death claim in Perkins easily qualified
as a claim arising from the government’s tax collection
efforts. See id. at 912–13.
The government perfunctorily concedes that the IRS is
not entitled to absolute immunity, but goes on to argue that
§ 2680(c) is intended to bar all lawsuits that “hamper the . . .
ability of the IRS to conduct its business,” and stretches the
definition of § 2680(c) so far that we can discern no limit to
its interpretation of the immunity that § 2680(c) affords. In
particular, at oral argument the government refused to
recognize any distinction between the facts of this case and a
hypothetical scenario in which an IRS agent driving a
government car runs a stop sign and hits someone. Under the
government’s reading of § 2680(c), its exposure to liability
for the on-duty auto accident would fall within § 2680(c)’s
exception to the waiver of sovereign immunity. By offering
no real limit to the scope of § 2680(c), the government
essentially seeks absolute immunity for the IRS’s actions.
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 13
The facts alleged in this case describe an elaborate
criminal sting operation little different from law enforcement
and investigative efforts to catch identity thieves who are
stealing bank account information, or cons who are
committing health care fraud. Arguably, when Agent Daniels
asked Snyder to front the money for the IRS’s sting and
cautioned that failing to cooperate would interfere with a
criminal investigation, he was not attempting to assess or
collect taxes, nor issuing duly owed refunds. Nor were the
targets of the sting operation trying to enjoy tax-free income
by fudging on reporting requirements or ginning up fake
deductions. Instead, they were trying to use false
identification to claim “refunds” wholly unconnected to
payment of taxes. The IRS convinced Snyder to use SAA’s
funds as bait to catch the scam artists and, in exchange for his
trouble, Snyder lost both of his businesses.
The IRS revoked TTP’s e-filing privileges despite
knowing that Snyder did the responsible thing by stopping
payment on checks SAA advanced to Hilton’s clients and that
TTP’s e-filing identification number was used in connection
with fraudulent returns at the request of the IRS. The
government’s briefing does not attempt to tie the cancellation
of TTP’s e-filing privileges to any efforts to assess or collect
taxes. The only possible links we can see between tax
assessment and collection and the suspension of the e-filing
privileges is that the e-filing system is part of the IRS’s
general mechanism for collecting taxes, and that the
revocation of TTP’s e-filing privileges was part of a general
effort to deter tax fraud. Neither fact suffices to save the
government’s immunity theory. We have previously rejected
an interpretation of § 2680(c) so expansive that it would
negate 28 U.S.C. § 2680(h), which expressly allows claims
for intentional torts such as malicious prosecution by federal
SNYDER & ASSOCS. AQUISITION 14 V. UNITED STATES
investigative or law enforcement officers. See Wright,
719 F.2d at 1035–36.
We are aware of no reported appellate decision that has
addressed facts similar to those here, and the government
offers no persuasive reason why we should be the first circuit
to grant such expansive immunity to the IRS. Granting
immunity in this case would allow the FTCA’s waiver of
sovereign immunity vis-a-vis the IRS to be wholly subsumed
in the § 2680(c) exception. We “read[] no exemptions into
the FTCA beyond those provided.” Id. at 1036. Section
2680(c)’s exception to the waiver of sovereign immunity is
broad, but it is not unlimited, and the government’s allencompassing
view of it cannot be squared with the statutory
text. By its terms, the exception shields only actions taken in
connection with efforts to assess or to collect taxes, which
were not involved in this case.
B. The Government’s Alternative Arguments Do Not
Provide Grounds for Affirming the District Court’s
Order.
The government also urges us to affirm the district court’s
judgment on four alternative grounds that the district court
did not reach. Although “we can affirm the district court on
any grounds supported by the record,” Weiser v. United
States, 959 F.2d 146, 147 (9th Cir. 1992), none of the
government’s arguments merits dismissal at this early stage
of litigation.
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 15
1. Section 2680(h) Does Not Bar the Claims Because
They Do Not Rest on Alleged Misrepresentations.
The government argues that 28 U.S.C. § 2680(h) bars
TTP’s and SAA’s claims for negligence, conversion, and
failure to restore things wrongfully acquired because they
are premised on misrepresentations by the government.
Section 2680(h) establishes an exception to the waiver of
sovereign immunity for claims that “aris[e] out of . . .
misrepresentation.” This exception includes
misrepresentations made willfully and misrepresentations
made negligently. See United States v. Neustadt, 366 U.S.
696, 702 (1961).
Section 2680(h) bars claims that focus on the
government’s failure to use due care in communicating
information, not actions focused on breach of a different duty.
Block v. Neal, 460 U.S. 289, 297 (1983). The plaintiff in
Block received federal assistance for a house construction
loan, and a federal agency undertook to supervise the
construction. Id. at 291–92. The agency reported to plaintiff
that the construction was satisfactory but, after moving in, she
discovered numerous defects. Id. at 292. She sued for
negligent supervision under the FTCA. The government
argued that § 2680(h) barred her negligence claim. Id. at
293–94. According to the government, plaintiff’s claims
were based on misrepresentations about the condition of the
house. Id. at 294. The Supreme Court held that § 2680(h)
did not except the government’s waiver of sovereign
immunity. Id. at 296–97. It reasoned that the claim for
negligent supervision did not “aris[e] out of
misrepresentation” within the meaning of § 2680(h) because
the plaintiff did not seek to recover on the basis of
misstatements made by the government officials. The duty to
SNYDER & ASSOCS. AQUISITION 16 V. UNITED STATES
use due care supervising construction was separate from any
duty the government had to accurately communicate
information to the plaintiff. Id. at 297. “Neither the language
nor history of the [FTCA] suggest[s] that when one aspect of
the [g]overnment’s conduct is not actionable under the
‘misrepresentation’ exception, a claimant is barred from
pursuing a distinct claim arising out of other aspects of the
[g]overnment’s conduct.” Id. at 298. “Any other
interpretation would encourage the [g]overnment to shield
itself completely from tort liability by adding
misrepresentations to whatever otherwise actionable torts it
commits.” Id.
Here, § 2680(h) does not shield the government because
TTP and SAA do not allege that the IRS obtained their
money through deceit. TTP and SAA allege that the IRS
wrongfully obtained use of their money during the sting
operation and failed to return it. As in Block, any alleged
misstatements by the IRS “are not essential to” plaintiffs’
claims, id. at 297, which primarily rely on the government’s
allegedly negligent failure to “take due care to see that
Plaintiff[s] were reimbursed and indemnified for any monies
which they advanced to persons involved in the sting, or
allowed Defendant to use at their request, or which they
otherwise lost.” Any “partial overlap” between plaintiffs’
claims and a potential misrepresentation claim does not bring
the former within the scope of § 2680(h)’s exception. See id.
at 298.
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 17
2. TTP and SAA Have Stated Claims Under
California Law for Failure to Restore Things
Wrongfully Acquired and for Conversion.
The government argues that TTP and SAA failed to state
claims for failure to restore things wrongfully acquired and
for conversion. This defense rests on the government’s
theory that it never had control over property that belonged to
TTP or SAA. But TTP and SAA assert that the IRS coerced
Snyder into reissuing checks to the targets of the IRS’s
investigation. At this early stage, we cannot determine
whether the facts will be as TTP and SAA allege, but if
plaintiffs are able to support their allegations, a fact finder
might be able to decide that the government exerted sufficient
control over their property to support these claims. See Cal.
Civ. Code §§ 654, 1712.
California case law is sparse in these areas, but California
defines “ownership of a thing” as “the right of one or more
persons to possess and use it to the exclusion of others.” Id.
§ 654. Even if consent is initially given, a plaintiff can state
a claim for failure to restore things wrongfully acquired under
§ 1712 if the plaintiff later withdraws consent. Similarly,
conversion is “the unwarranted interference by defendant
with the dominion over the property of the plaintiff from
which injury to the latter results.” Welco Elecs., Inc. v. Mora,
166 Cal. Rptr. 3d 877, 882 (Ct. App. 2014) (internal
quotation marks omitted). “Money may be the subject of
conversion if the claim involves a specific, identifiable sum
. . . .” Id. Here, the complaint alleges specific sums of
money that TTP and SAA allowed the IRS to direct.
Although the IRS directed that the money should be allowed
to pass into the hands of individuals under investigation
rather than to the IRS itself, the allegation is that the IRS
SNYDER & ASSOCS. AQUISITION 18 V. UNITED STATES
directed the disposition of plaintiffs’ funds. TTP and SAA
did not consent to the IRS’s permanent use of these sums, and
the IRS never reimbursed them. The complaint’s allegations
suffice to state a claim for failure to restore things wrongfully
acquired and conversion.
3. TTP and SAA Have Stated a Claim for Abuse of
Process Under California Law.
The government also argues that TTP and SAA failed to
state a claim for abuse of process. “To establish a cause of
action for abuse of process, a plaintiff must plead two
essential elements: that the defendant (1) entertained an
ulterior motive in using the process and (2) committed a
wilful act in a wrongful manner.” Coleman v. Gulf Ins. Grp.,
718 P.2d 77, 81 (Cal. 1986). The government argues that
plaintiffs cannot satisfy the second prong because they cannot
show that the IRS committed a willful act in a wrongful
manner.
“[G]enerally, an action [for abuse of process] lies only
where the process is used to obtain an unjustifiable collateral
advantage. For this reason, mere vexation or harassment are
not recognized as objectives sufficient to give rise to the tort.”
Younger v. Solomon, 113 Cal. Rptr. 113, 118 (Ct. App. 1974).
TTP and SAA allege that the IRS issued subpoenas and
revoked TTP’s e-filing privileges to intimidate them and
cause them to drop claims for a return of their funds. If TTP
and SAA had dropped their claims, the IRS would have
obtained a collateral advantage—unchallenged conversion of
TTP’s and SAA’s money. These allegations easily amount to
more than “mere vexation or harassment” and survive the
government’s motion to dismiss.
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 19
4. We Do Not Reach the Government’s Argument
That § 2680(a)’s Discretionary Function Exception
Bars the Claims.
The government further argues that, because the alleged
conduct involved the exercise of a discretionary function,
28 U.S.C. § 2680(a) bars TTP’s and SAA’s claims. Section
2680(a) excepts from the FTCA “[a]ny claim . . . based upon
the exercise or performance or the failure to exercise or
perform a discretionary function or duty on the part of a
federal agency or an employee of the [g]overnment, whether
or not the discretion involved be abused.” The discretionary
function exception involves a two-part test. Alfrey v. United
States, 276 F.3d 557, 561 (9th Cir. 2002). First, we ask
“whether the challenged conduct is discretionary, that is,
whether it ‘involv[es] an element of judgment or choice.’”
Id. (alteration in original) (quoting Fang v. United States,
140 F.3d 1238, 1241 (9th Cir. 1998)). This prong “is not met
‘when a federal statute, regulation or policy specifically
prescribes a course of action for an employee to follow.’” Id.
(quoting Fang, 140 F.3d at 1241)). Second, we ask “whether
that judgment is of the kind that the discretionary function
exception was designed to shield.” Id. (quoting Berkovitz v.
United States, 486 U.S. 531, 536 (1988)).
TTP and SAA argue that the Federal Rules of Civil
Procedure require that they have a chance to conduct
discovery on what statutes, regulations, or policies govern an
IRS agent’s use of private property in the course of a tax
fraud investigation. We agree. The government’s
unsupported assertion that it had unfettered discretion to
commandeer TTP’s and SAA’s funds is not sufficient.
Depending on what discovery yields, the government may be
unable to satisfy the first prong of the test for the
SNYDER & ASSOCS. AQUISITION 20 V. UNITED STATES
discretionary function exception. At the very least, some
discovery on this issue is warranted. See Fed. R. Civ. P.
56(d).
IV. CONCLUSION
We reverse the district court’s order granting the motion
to dismiss and remand for further proceedings in accordance
with this opinion.
Appellee shall bear costs on appeal.
REVERSED and REMANDED.
BYBEE, Circuit Judge, concurring in the judgment:
I am sympathetic to the majority’s resolution of this case
and ultimately agree that, on the record before us, we should
reverse the district court’s dismissal and remand for further
proceedings. I write separately to address my concern with
the majority’s blanket conclusion that the Internal Revenue
Service (IRS) was not engaged in “the assessment or
collection of any tax,” 28 U.S.C. § 2680(c), simply because
“no refunds were due” to the subjects of the IRS investigation
in this case, Maj. Op. at 11–12. In my opinion, that is an
unduly narrow construction of § 2680(c). But I agree that
Plaintiffs should have an opportunity to show why they can
maintain their tort suit against the IRS.
The Federal Torts Claims Act (FTCA) waives the United
States’ sovereign immunity for tort claims alleging “money
damages . . . for injury or loss of property . . . caused by the
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 21
negligent or wrongful act or omission of any employee of the
Government while acting within the scope of his office or
employment.” Id. § 1346(b)(1). This waiver, however, is
“severely limited” by exceptions listed in § 2680. Morris v.
United States, 521 F.2d 872, 874 (9th Cir. 1975). Relevant
here is the exception in § 2680(c) for “[a]ny claim arising in
respect of the assessment or collection of any tax.”
The FTCA does not define tax “assessment” or
“collection.” But the Internal Revenue Code defines the
scope of the IRS’s assessment and collection authority.
Section 6201, entitled “Assessment authority,” explains that
the IRS “is authorized and required to make the inquiries,
determinations, and assessments of all taxes (including
interest, additional amounts, additions to the tax, and
assessable penalties) imposed by this title.” 26 U.S.C.
§ 6201(a). An assessment is “made by recording the liability
of the taxpayer in the office of the Secretary in accordance
with rules or regulations prescribed by the Secretary.”
26 U.S.C. § 6203. Section 6301, entitled “Collection
authority,” simply provides that “[t]he Secretary shall collect
the taxes imposed by the internal revenue laws.” Thus, in a
literal sense, a tax “assessment” is a recorded determination
of tax liability. And a tax “collection” is an effort to obtain
a tax liability. As explained below, however, we have not
limited the scope of § 2680(c) to literal assessment or
collection.
We have addressed the scope of § 2680(c) on only two
occasions. In Morris, we interpreted the phrase “the
assessment or collection of any tax” to encompass tax
investigations and audits. 521 F.2d at 874. There, the IRS
harassed and intimidated Morris and his wife during the
investigation and, on several occasions, unlawfully seized
SNYDER & ASSOCS. AQUISITION 22 V. UNITED STATES
their property. Id. The IRS also told Morris’s creditors that
Morris had a large tax liability and would be insolvent as a
result. Id. At the conclusion of its investigation, the IRS
determined that Morris had no outstanding tax liability and
returned over $6000 in overpaid taxes. Id. Morris and his
wife brought an action under the FTCA. We concluded:
Even assuming arguendo that the Internal
Revenue agents’ collection activity was
beyond the normal scope of authority and
amounted to tortious conduct, we find that the
claim falls squarely within the exempted
group of tort claims arising out of tax
collection efforts.
The alleged conduct of the IRS agents, if
true, would be deplorable; nevertheless, the
district court lacked subject matter jurisdiction
over the claims against them.
Id. at 874 (citations omitted). The takeaway from Morris is
that § 2680(c) covers more than literal tax assessment or
collection; it also covers the IRS’s efforts to investigate
potential tax liability. This holding is in harmony with the
IRS’s assessment authority under 26 U.S.C. § 6201(a), which
includes the authority not only to assess taxes in a literal
sense (i.e. record a tax liability) but also the authority to make
“inquiries” and “determinations” regarding any taxes imposed
in the Internal Revenue Code.
Eight years after Morris, we decided Wright v. United
States, 719 F.2d 1032 (9th Cir. 1983). Wright had been
indicted for failure to file tax returns and for making false
statements in his returns. Id. at 1033. The government
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 23
eventually dismissed the indictments, and Wright filed an
FTCA action alleging that the indictments constituted
malicious prosecution. Id. The government argued that the
indictments were part of “the assessment or collection” of
taxes and were thus barred by § 2680(c). Id. at 1035. We
noted that the indictments were not collection efforts “[i]n the
literal sense” because the prosecution “was an attempt to
impose criminal penalties on Wright, not to collect taxes from
him.” Id. But we also acknowledged that § 2680(c) “has
been broadly construed” and that it would “not strain
precedent to hold that . . . prosecuting Wright fell within the
exception because the prosecution might serve as a deterrent
that will facilitate the ‘assessment or collection’ of taxes
generally.” Id. Ultimately, however, we rejected that broad
construction in light of § 2680(h), which expressly permits
claims for malicious prosecution by federal law enforcement
officers.1 There was no dispute that the IRS agent in question
1 28 U.S.C. § 2680(h) excepts from the United States’ waiver of
sovereign immunity
[a]ny claim arising out of assault, battery, false
imprisonment, false arrest, malicious prosecution,
abuse of process, libel, slander, misrepresentation,
deceit, or interference with contract rights: Provided,
That, with regard to acts or omissions of investigative
or law enforcement officers of the United States
Government, the provisions of this chapter and section
1346(b) of this title shall apply to any claim arising, on
or after the date of the enactment of this proviso, out of
assault, battery, false imprisonment, false arrest, abuse
of process, or malicious prosecution. For the purpose
of this subsection, “investigative or law enforcement
officer” means any officer of the United States who is
empowered by law to execute searches, to seize
evidence, or to make arrests for violations of Federal
law.
SNYDER & ASSOCS. AQUISITION 24 V. UNITED STATES
was a federal law enforcement officer, id. at 1034, and we
saw nothing in § 2680(h) suggesting “that malicious tax
prosecutions are to be treated differently from other malicious
prosecutions,” id. at 1036. To avoid encroaching on
§ 2680(h), we interpreted § 2680(c) “not to apply to [the IRS
agent’s] actions in carrying out the criminal prosecution
against plaintiff, insofar as those acts are alleged to constitute
malicious prosecution.” Id. Construing § 2680(c) in this
manner left both § 2680(c) and § 2680(h) “with a great deal
of room to operate.” Id.
Since deciding Wright, we have not had occasion to
further opine on what constitutes “the assessment or
collection of any tax.”2 Other circuits, however, have held
that a wide array of IRS conduct falls within § 2680(c)’s
purview. To say that the statute has been given a broad
construction is an understatement. See, e.g., Perkins v.
2 In Smith v. Brady, 972 F.2d 1095 (9th Cir. 1992), we compared
§ 2680(c) to 26 U.S.C. § 7430. Section 2680(c) was not at issue in that
case, but we observed that cases interpreting § 2680(c) “show that a broad
range of activity by the IRS arises in connection with the determination of
tax liability.” Id. at 1100. In Gasho v. United States, 39 F.3d 1420 (9th
Cir. 1994), we addressed § 2680(c)’s exemption for liability from “any
claim arising in respect of . . . the detention of any goods or merchandise
by any officer of customs.” Relying on Wright, the plaintiffs in Gasho
argued that § 2680(h), which permits claims for various intentional torts
committed by federal law enforcement officers, amended the § 2680(c)
bar. We rejected the notion that § 2680(h) in any way amended § 2680(c)
so as to waive immunity that would otherwise apply. We held that Wright
simply requires “the United States to first demonstrate that the Customs
or IRS agent’s tortious conduct falls within the scope of activities
exempted in § 2680(c). If such a showing is made, the claim is barred.”
Id. at 1433. Because we construed the malicious prosecution in Wright
not to constitute an assessment or a collection of a tax “within the strict
meaning of those words,” the government had failed to demonstrate that
its conduct fell within the scope of § 2680(c). Id.
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 25
United States, 55 F.3d 910, 913 (4th Cir. 1995) (“The
opinions interpreting section 2680(c) clarify that the
exemption applies not only to actions by persons against
whom the tax collection efforts are directed, but also to
actions by third parties injured by tax collection efforts.”);
Interfirst Bank Dallas, N.A. v. United States, 769 F.2d 299,
307 (5th Cir. 1985) (“[Section 2680(c)] gives no indication
whatsoever that the exemption is limited to claims . . .
brought by taxpayers as opposed to third parties. Instead, it
specifically applies to all tax-related claims.”); Capozzoli v.
Tracey, 663 F.2d 654, 658 (5th Cir. 1981) (“This language is
broad enough to encompass any activities of an IRS agent
even remotely related to his or her official duties.”);
Broadway Open Air Theatre v. United States, 208 F.2d 257,
259 (4th Cir. 1953) (rejecting an argument that § 2680(c)
does not apply to conduct “unrelated to any alleged tax
liability between the parties to the suit”). As relevant to this
appeal, the Eighth Circuit held in Jones v. United States that
§ 2680(c) encompasses both civil and criminal tax
investigations. See 16 F.3d 979, 980–81 (8th Cir. 1994). In
Jones, the court dismissed an FTCA claim arising out of an
investigation “that at all relevant times . . . was in a criminal
status, as opposed to being an administrative or civil matter.”
Id. at 980. It did so in spite of the fact that the investigation
did not result in “any attempted assessment or collection of
taxes or penalties.” Id. According to the court, whether an
investigation is civil or criminal in nature “makes no
difference” to § 2680(c)’s bar. Id.; see also Perkins, 55 F.3d
at 916 (summarily rejecting an argument that § 2680(c) does
not apply when the IRS is “conducting a criminal
investigation rather than collecting taxes” as having “no basis
in law”).
SNYDER & ASSOCS. AQUISITION 26 V. UNITED STATES
The majority does not dispute Jones’s conclusion that
§ 2680(c) applies to criminal tax investigations as well as
civil tax investigations and, I think, properly so. See Maj. Op.
at 10. In a different context, the Supreme Court has
commented on “the interrelated criminal/civil nature of a tax
fraud inquiry.” United States v. LaSalle Nat’l Bank, 437 U.S.
298, 314 (1978); see also id. at 314 n.15. In LaSalle, the
Court addressed the scope of the IRS’s summons authority
under 26 U.S.C. § 7602. Id. at 305. That provision has since
been modified, but at the time it only permitted the IRS to
issue summonses in connection with civil, not criminal,
investigations. See id. at 301 n.3. The question before the
Court was whether the statute authorized a summons issued
solely for the purpose of building a criminal case. Id. at
307–08. The Court reasoned that “[f]or a fraud investigation
to be solely criminal in nature would require an extraordinary
departure from the normally inseparable goals of examining
whether the basis exists for criminal charges and for the
assessment of civil penalties.” Id. at 314. Committing tax
fraud may subject perpetrators to both criminal and civil
penalties. Id. at 308; see also 26 U.S.C. § 7206 (subjecting
fraudulent taxpayers to criminal penalties of imprisonment,
fines up to $100,000 ($500,000 for corporations), or both,
plus costs of prosecution); id. § 6663(a) (adding seventy-five
percent of any underpayment to a taxpayers’s tax liability
when the underpayment is due to fraud). Those civil
penalties are, by statute, considered part of the taxpayer’s tax
liability. See 26 U.S.C. § 6201 (“The Secretary is authorized
and required to make the inquiries, determinations, and
assessments of all taxes (including interest, additional
amounts, additions to the tax, and assessable penalties)
imposed by this title . . . .” (emphasis added)). It is thus
typically the case that the IRS, when trying to determine
criminal liability, is also trying to determine whether any civil
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 27
penalties should be added to the taxpayer’s liability. Not only
does the IRS have an interest in assessing civil penalties
against fraudulent taxpayers, it also has an interest in
collecting the unpaid taxes. And “[t]he institutional
responsibility of the [IRS] to calculate and to collect civil
fraud penalties and fraudulently reported or unreported taxes
is not necessarily overturned by a single agent who attempts
to build a criminal case.” LaSalle, 437 U.S. at 314. It is
rarely the case that the IRS “abandon[s] . . . the pursuit of
civil tax determination or collection” simply because it also
chooses to investigate potential tax crimes. See id. at 314,
318.
LaSalle lends support to our conclusion in Wright that a
purely criminal prosecution does not constitute tax
assessment or collection, although LaSalle also suggests that
a purely criminal tax investigation will be rare.3 “Only [upon
the recommendation of prosecution] do the criminal and civil
aspects of a tax fraud case begin to diverge.” Id. at 311.
3 There is a good reason for this. Criminal tax evasion is a specific
intent crime. In such cases, the government bears a very high burden
because it must show that the defendant “willfully attempt[ed] in any
manner to evade or defeat any tax.” 26 U.S.C. § 7201. In this context,
“willfullness” means the government must “prove that the law imposed a
duty on the defendant, that the defendant knew of this duty, and the he
voluntarily and intentionally violated that duty.” Cheek v. United States,
498 U.S. 192, 201 (1991). The Court has long “interpreted the statutory
term ‘willfully’ as used in the federal criminal tax statutes as carving out
an exception to the traditional rule [that every person is presumed to know
the law]. This special treatment of criminal tax offenses is largely due to
the complexity of the tax laws.” Id. at 200. The burden of proof in tax
prosecutions is thus greater than it is for other crimes, even where the
government must show the defendant acted “willfully.” See Bryan v.
United States, 524 U.S. 184, 193–95 (1998). Because of the high burden
of proof, most tax investigations will have only civil consequences.
SNYDER & ASSOCS. AQUISITION 28 V. UNITED STATES
Although the IRS “does not sacrifice its interest in unpaid
taxes just because a criminal prosecution begins,” id. at
311–12, the imposition of criminal penalties does nothing to
further the IRS’s interest in collecting or assessing taxes aside
from the deterrent effect on the taxpayer and others, see
Wright, 719 F.2d at 1035. The investigation preceding
prosecution, however, generally has both civil and criminal
motives even when the investigation is “in a criminal status”
“at all relevant times.” See Jones, 16 F.3d at 980. But the
Court recognized in LaSalle that there is at least the
possibility that the IRS could carry out an investigation
strictly for the purpose of pressing criminal charges.
437 U.S. at 318. If it turns out that the IRS has “abandon[ed]
in an institutional sense . . . the pursuit of civil tax
determination or collection,” id., then it is no longer carrying
out its tax assessment or collection functions and falls outside
the scope of § 2680(c).
Here, the Government argues that its investigation had a
civil component because it was trying to determine whether
to pay the taxpayers’ claimed refunds. Plaintiffs counter that
the sole purpose of the sting operation was to catch criminals
that the IRS already suspected were committing tax fraud. In
all likelihood, the investigation had both civil and criminal
components. See id. at 314. Specifically, the IRS
investigation was likely an effort to prevent the payment of
fraudulent returns and impose civil and criminal penalties,
with the civil penalties making up part of the taxpayer’s tax
liability. See 26 U.S.C. § 6201. It also seems likely that the
IRS would go after any unpaid taxes the subjects of the
investigation may owe. But the complaint is ambiguous as to
the nature of the investigation. It alleges that the
investigation was designed “to identify instances of
fraudulent tax returns,” which lends support to the IRS’s
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 29
contention that it was trying to determine whether it had to
pay the refunds. The complaint also alleges that the
investigation was an effort to “catch criminals attempting to
defraud the IRS.” This allegation highlights the criminal
nature of the IRS’s investigation, and, construed narrowly in
Plaintiffs’ favor, lends support to the majority’s conclusion
that the IRS’s efforts were solely “aimed at snaring tax
cheats.” Maj. Op. at 11. Although I think the complaint
fairly suggests both civil and criminal motives, I see no harm
in permitting discovery for the purpose of clarifying the
nature of the IRS investigation.
The majority reasons that “the targets of the sting
operation [were not] trying to enjoy tax-free income by
fudging on reporting requirements or ginning up fake
deductions” but “were trying to use false identification to
claim ‘refunds’ wholly unconnected to payment of taxes.” Id.
at 13. I have two responses. First, the real crux of my
disagreement with the majority is its apparent conclusion that
IRS efforts to prevent the payment of fraudulently filed
refunds do not fall within the broad array of the IRS’s
assessment and collection activities. See id. at 12 (“Plaintiffs
allege that the IRS was not assessing the amount of taxes the
filers owed, nor was it attempting to collect taxes from them.
Instead, it was conducting a sting operation aimed at snaring
tax cheaters intent on stealing funds from the United States
treasury. ”). The majority distinguishes this case from Aetna
Casualty & Surety Co. v. United States, 71 F.3d 475 (2d Cir.
1995), which reasoned that “[t]he payment of refunds when
due is an integral part of” the “mechanism for assessing and
collecting taxes” and thus within § 2680(c)’s purview. Id. at
478. The majority concludes that “the payment of refunds
when due is not at issue” because “the complaint includes
fraudsters who filed fake returns, so no refunds were due.”
SNYDER & ASSOCS. AQUISITION 30 V. UNITED STATES
Maj. Op. at 11–12. I do not read Aetna as drawing a line
between payment and nonpayment of refunds. Rather, the
Second Circuit in Aetna was trying to avoid a narrow
construction of § 2680(c) that excluded refunds from
assessment and collection efforts. Id. at 478–79. To
conclude, as the proposed majority does, that paying duly
owed refunds falls under § 2680(c) while denying refunds
does not strikes me as unduly narrow. It puts the cart before
the horse. If discovery reveals that the IRS was, as it asserts,
attempting to determine whether the refund claims at issue
were bona fide, then it cannot be the case that the IRS is
assessing taxes when it turns out the claims were bona fide
but is not when it turns out the claims were bogus. The
“[a]ssessment authority” given to the IRS in 26 U.S.C. § 6201
includes the ability to make “inquiries, determinations, and
assessments of all taxes.” An inquiry into the validity of a
taxpayers’ Form 1040 falls squarely within that authority.
Second, even assuming we can distinguish between
cheating on the taxes we pay and cheating on the refunds we
claim, the majority’s conclusion that the IRS “was not
attempting to assess or collect taxes” is, at best, premature.
Maj. Op. at 13. The complaint simply alleges that the IRS
was attempting to detect instances of fraudulent tax returns.
There are various ways a taxpayer could commit fraud on a
tax return, including fudging numbers or claiming fake
deductions. The complaint gives an example of one of the
investigated taxpayers using a fake ID, but it is far from clear
what kind of fraud the other subjects of the investigation
might have committed. If discovery reveals that some of the
investigated taxpayers were fudging numbers, then, based on
the majority’s own reasoning, the majority would agree that
the investigation constituted tax assessment. But, in any
event, I’m not sure why it matters whether the fraud involved
SNYDER & ASSOCS. AQUISITION V. UNITED STATES 31
fake IDs or fudged numbers. The IRS’s interest in not paying
a fraudulently claimed return is the same regardless of the
type of fraud at issue. And a taxpayer who has borrowed an
ID from someone else or who has claimed false deductions is
still liable for any unpaid taxes.
In short, the majority’s conclusion that the IRS was not
engaged in tax assessment or collection rests on an unduly
narrow construction of what constitutes tax assessment and
collection. I nonetheless agree that we should reverse the
district court on the record before us. Plaintiffs should at
least get the chance to show that the IRS investigation had no
other purpose than to impose criminal penalties.4
* * *
If the subjects of the IRS investigation in question were
to bring tort claims against the IRS for conduct related to the
investigation into the validity of their claimed returns, I
wonder whether any of us would have given pause to the
district court’s conclusion that § 2680(c) bars such claims.
What makes this case different from all of the other cases
applying § 2680(c) to bar claims is not so much the nature of
the IRS investigation, but the fact that Plaintiffs are not the
taxpayers at issue and are innocent third parties. We cannot,
however, distinguish this case on that ground without doing
damage to the statute’s text, see § 2680(c) (“The provisions
of this chapter and section 1346(b) of this title shall not apply
to . . . (c) Any claim arising in respect of the assessment or
collection of any tax . . . .” (emphasis added)), or creating an
overt circuit split, see, e.g., Interfirst Bank Dallas, N.A.,
4 Based on the record before us, I would not reach the Government’s
alternative arguments for affirming the dismissal of Plaintiffs’ claims.
SNYDER & ASSOCS. AQUISITION 32 V. UNITED STATES
769 F.2d at 307 (“[Section 2680(c)] gives no indication
whatsoever that the exemption is limited to claims . . .
brought by taxpayers as opposed to third parties.”). That
said, I think that our case law fairly gives Plaintiffs a chance
to show that the IRS investigation was purely criminal. But
I can’t agree with the majority’s conclusion that IRS
investigations into the validity of a claimed refund fall
outside the scope of § 2680(c).
Finally, it is worth emphasizing what Plaintiffs are not
alleging in this lawsuit. They are not alleging that the IRS
breached an express or implied contract to make Plaintiffs
whole. Nor are they alleging that the failure to repay
Plaintiffs constituted a government taking. These claims
would fall under the Tucker Act, which specifically waives
immunity for breach of contract and takings claims.
28 U.S.C. § 1491(a)(1). Plaintiffs have raised these claims
before the Court of Federal Claims. Without passing on the
merits of that lawsuit, breach of contract and takings would
seem to be the more natural way of styling Plaintiffs’ claims.
Here, however, Plaintiffs’ tort claims arose during the course
of an IRS investigation. Further discovery may confirm the
Government’s argument that Plaintiffs’ claims arose “in
respect of the assessment or collection of any tax” and are
thus barred by § 2680(c), but the Plaintiffs should get the
opportunity to show otherwise. I don’t think we can conclude
that the Government is wrong on this record.
I concur in the judgment only.

Outcome: Reversed

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