Court Dismisses Suit Challenging Collection of Communications Excise Taxes

In 1997, the IRS took the position that MTC was improperly withholding the excise tax because, in some instances, MTC charged the tax to its customers but then did not pay the tax to its carriers. The IRS conducted an audit of MTC and in 1999 assessed approximately $960,000 in excise taxes. In 2001, the IRS assessed trust fund recovery penalties against plaintiff under 26 U.S.C. 6672 because the IRS believed that plaintiff was a responsible officer of MTC. Plaintiff paid a portion of the trust fund penalties and filed a claim for refund and request for abatement with the IRS. The claim was denied.

Plaintiff then filed a complaint with the United States Court of Federal Claims for abatement of the penalties assessed against him. The government asserted a counterclaim for recovery of the penalties. While this lawsuit was pending, the Department of the Treasury and the IRS issued Notice 2006-50, which stated that "telephonic communication for which there is a toll charge that varies with elapsed transmission time and not distance (time-only service) is not a taxable toll telephone service. . . ." The notice also stated that the government would cease to pursue litigation to recover the excise tax. Plaintiff moved for summary judgment based on the argument that MTC provided a time-only service and therefore plaintiff was not liable for the trust fund recovery penalties because MTC was not subject to the excise tax under 26 U.S.C. 4251. The motion was denied. The Court of Federal Claims held that plaintiff was potentially liable under 26 U.S.C. 6672 regardless of whether MTC was subject to the tax because plaintiff collected and withheld the excise tax under the color of law. A three-day bench trial ensued. At the conclusion of trial, the Court of Federal Claims denied plaintiff's claims and granted judgment in favor of the government in the amount of the trust fund recovery penalties. The judgment created a lien on plaintiff's real property. Plaintiff appealed to the Federal Circuit, which affirmed the lower court without an opinion. Plaintiff then filed this complaint.

Plaintiff contends that the government used the tax code and its agency authority to illegally collect and retain plaintiff's money. Plaintiff argues that the government cannot enforce a judgment for the collection of taxes under 26 U.S.C. 4251 when, pursuant to Notice 2006-50, telecommunications excise tax is not and was not applicable to MTC. Plaintiff further contends that Notice 2006-50 was issued after the bench trial and that the effect of the notice was not considered by the Court of Federal Claims. Plaintiff seeks declaratory relief, quiet title and an injunction. Plaintiff further claims that the government violated his right to due process and his Fourth Amendment rights. The government now moves to dismiss all five claims.

"It is well settled that the United States is a sovereign and, as such, is immune from suit unless it has expressly waived such immunity and consented to be sued." Gilbert v. DaGrossa, 756 F.2d 1455, 1458 (9th Cir. 1985). A court should dismiss a plaintiff's claim where there is no subject-matter jurisdiction, including cases where the federal government is a defendant and there is no explicit waiver of sovereign immunity. F.D.I.C. v. Meyer, 510 U.S. 471, 475 (1994). Taxpayers have the burden of showing that the United States has unequivocally waived its sovereign immunity. Baker v. United States, 817 F.2d 560, 562 (9th Cir. 1987).

Here, plaintiff is expressly barred by statute from seeking either declaratory or injunctive relief. First, the Declaratory Judgment Act states "[i]n a case of actual controversy within its jurisdiction, except with respect to Federal taxes . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought . . ." (emphasis added). The only exception to this jurisdictional bar -- the status and classification of Section 501(c)(3) organizations -- is not applicable here. Accordingly, plaintiff is barred from seeking declaratory relief.

Second, the Anti-Injunction Act provides that "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." Based on the express language of the Act, plaintiff is barred from seeking an injunction to prevent collection of taxes assessed against him.

Plaintiff contends that judicial exception to the Act applies. The judicial exception requires a taxpayer to demonstrate that (1) under no circumstances can the government ultimately prevail on the merits and (2) the taxpayer will suffer irreparable injury without injunctive relief. Elias v. Connett, 908 F.2d 521, 525 (9th Cir. 1990). As to the first prong, plaintiff has not and cannot meet this burden because the government has clearly established that it is able to prevail on the merits. Plaintiff's claims are based on his contention that Notice 2006-50 precludes the government from collecting the excise tax assessed against him. The Court of Federal Claims, however, has already considered the effect of Notice 2006-50 and determined that, regardless of the applicability of 26 U.S.C. 4251, plaintiff acted as a collection agent and had a duty to remit the excise tax to the government. Brinskele, 73 Fed. Cl. 227, 235-36 (2006). This decision was affirmed by the Federal Circuit.

Third, contrary to plaintiff's assertions, the Administrative Procedure Act does not waive the government's sovereign immunity in all actions for non-monetary relief. The APA provides a waiver of sovereign immunity in suits seeking judicial review of "agency action." Gallo Cattle Co. v. United States Dep't of Agric, 159 F.3d 1194, 1198 (9th Cir. 1998). Here, plaintiff is challenging the Court of Federal Claims judgment against him. This does not constitute an "agency action" within the meaning of the APA.

Based on the above, this Court lacks jurisdiction to grant either declaratory or injunctive relief. Accordingly, plaintiff's claims are DISMISSED.

Under 28 U.S.C. 2410, the United States may be joined as a party to a quiet title action affecting property upon which it claims a lien. A taxpayer, however, may only contest the procedural validity of a tax lien and cannot attack the merits of an assessment. Elias, 908 F.2d at 527. Plaintiff's argument, however, contests the validity of the judgment that is the basis of the lien and not the procedural validity in filing the lien. Plaintiff's quiet title claim therefore fails. Accordingly, plaintiff's claim to quiet title is DISMISSED.

IT IS SO ORDERED.

DATED: December 12, 2012.