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Individual Appeals Dismissal of Canada-U.S. Tax Treaty Challenge

JUN. 25, 2018

Donald Dewees v. United States

DATED JUN. 25, 2018
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Donald Dewees v. United States

[Editor's Note:

The addendum can be viewed in the PDF version of the document.

]

DONALD DEWEES,
Plaintiff-Appellant,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.

NOT YET SCHEDULED FOR ORAL ARGUMENT

UNITES STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Appeal from the United States District Court for the District of Columbia in
No. 1:16-cv-01579-CRC, Christopher Reid Cooper, U.S. District Judge

BRIEF FOR PLAINTIFF-APPELLANT

MARK FEIGENBAUM
1137 Centre Street, Suite 201
Thornhill, ON L4J 3M6
Canada
(905) 695-1269
mark@feigenbaumlaw.com

Counsel for Plaintiff-Appellant

CERTIFICATE AS TO PARTIES,
RULINGS, AND RELATED CASES

Undersigned counsel certifies the following:

A. Parties

Plaintiff-Appellant is Donald Dewees. The Defendant-Respondent is the United States of America.

B. Ruling Under Review

This appeal challenges the August 8, 2017 order of the District Court which granted the Government's motion to dismiss for lack of jurisdiction and failure to state a claim. (A124). United States District Judge Christopher R. Cooper issued the decision.

C. Related Cases

There are no other related pending cases pending in this matter.

CORPORATE DISCLOSURE STATEMENT

There are no corporate parties in this matter.


TABLE OF CONTENTS

CERTIFICATE AS TO PARTIES RULINGS AND RELATED CASES

CORPORATE DISCLOSURE STATEMENT

TABLE OF AUTHORITIES

I. JURISDICTIONAL STATEMENT

II. STATEMENT IN SUPPORT OF ORAL ARGUMENTS

III. STATEMENT OF ISSUES

IV. STATEMENT OF THE CASE

V. STATEMENT OF FACTS

VI. SUMMARY OF ARGUMENTS

VII. STANDARD OF REVIEW

VIII. ARGUMENTS

I. The District Court erroneously dismissed Mr. Dewees' due process claim because he set forth sufficient facts to state a plausible claim

II. The District Court erroneously dismissed Mr. Dewees' equal protection claim because he set forth facts showing an actual injury

IX. CONCLUSION

TABLE OF AUTHORITIES

Cases:

Barr v. Clinton, 370 F.3d 1196 (D.C. Cir. 2004)

Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)

Conley v. Gibson, 355 U.S. 41 (1957)

El Paso Natural Gas Co. v. United States, 750 F.3d 863 (D.C. Cir. 2014)

Herbert v. National Academy of Sciences, 974 F.2d 192 (D.C. Cir. 1992)

Joint Stock Soc'y v. UDV N. Am., Inc., 266 F.3d 164 (3d Cir. 2001)

Kelson v. Springfield, 767 F.2d 651 (9th Cir. 1985)

Los Angeles v. Lyons, 461 U.S. 95 (1983)

Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992)

Mathews v. Eldridge, 424 U.S. 319 (1976)

Morrissey v. Brewer, 408 U.S. 471 (1972)

Musson Theatrical v. Federal Express Corp., 89 F.3d 1244 (6th Cir. 1996)

Osborn v. Visa, Inc., 797 F.3d 1057 (D.C. Cir. 2015)

Tyson v. Brennan, 277 F. Supp. 3d 28 (D.C. Cir. 2017)

Statutes & Other Authorities:

U.S. Const. amend. V

28 U.S.C. § 1291

28 U.S.C. § 1346(a)(1)

28 U.S.C. § 1631

Fed. R. Civ. P. R. 12(b)

Fed. R. Civ. P. R. 12(b)(1)

Fed. R. Civ. P. R. 12(b)(6)

GLOSSARY

A

Joint Appendix

SFCP

Streamlined Filing Compliance Procedures Program


I. JURISDICTIONAL STATEMENT

The United States District Court for the District of Columbia had jurisdiction in this case pursuant to 28 U.S.C. § 1346(a)(1) as it is a case against the United States seeking the return of a penalty claimed to have been collected without authority and a sum alleged to have been excessive and wrongfully collected under the internal-revenue laws. (A3).

Plaintiff, Donald Dewees, timely filed a Notice of Appeal on September 6, 2017. (A115). Dewees initially filed this appeal in the United States Court of Appeals for the Federal Circuit; the appeal was transferred to this Court pursuant to 28 U.S.C. § 1631. (A134-136). This Court has appellate jurisdiction pursuant to 28 U.S.C. §§ 1291 on an appeal from the District Court's Order of August 8, 2017, which is a final order granting Defendant United States (the Government)'s motion to dismiss Mr. Dewees' complaint. (A124).

II. STATEMENT IN SUPPORT OF ORAL ARGUMENTS

Counsel for Mr. Dewees respectfully informs this Court that oral arguments may be helpful to the resolution of this appeal.

III. STATEMENT OF ISSUES

1. Whether the District Court erred in granting the Government's motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure Rule 12(b)(1) and 12(b)(6). (A125-133).

2.Whether the complaint states a plausible claim for the violation of Dewees' due process rights. (A12-14).

3.Whether the District Court erroneously found that it lacked subject matter jurisdiction over the equal protection claim based on a lack of standing. (A11-12).

IV. STATEMENT OF THE CASE

On August 3, 2016, Mr. Dewees filed a complaint against the Government seeking a refund of Federal penalties he paid to the United States that were improperly assessed for the late filing of Form 5471 for tax years 1997 through 2008. (A4-14).

On October 28, 2016, the Government filed a motion to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) for lack of subject matter jurisdiction and failure to state a claim upon which relief can be granted. (A21-22). Mr. Dewees filed an opposition to the Government's motion on December 9, 2016, and the Government filed a reply in support of their motion to dismiss on December 19, 2016. (A99-104; A107-112).

On August 8, 2017, the Government's motion to dismiss was granted by the District Court. (A124). Mr. Dewees filed a notice of appeal on September 6, 2017. (A122). The Government made a motion to transfer the appeal to the United States Court of Appeals for the District of Columbia Circuit on September 18, 2017, which Mr. Dewees consented to. (A134-135). An order transferring the appeal to the United States Court of Appeals for the District of Columbia Circuit was issued on November 3, 2017. (A136).

V. STATEMENT OF FACTS

Mr. Dewees is a United States citizen, born in Los Angeles, California. (A4, ¶ 3). He moved to Canada in 1971 for work, and he has remained in Toronto, Ontario, Canada with his family since that time. (A5, ¶ 7). Mr. Dewees dutifully engaged a Canadian tax professional in order to fulfill his filing requirements in accordance with Canadian tax laws. (A5, ¶ 11). When Mr. Dewees became aware of potential penalties in relation to not filing U.S. tax returns, he immediately sought the assistance of a U.S. tax specialist, who advised Mr. Dewees to join the then current 2009 Offshore Voluntary Disclosure Program (OVDP). (A6, ¶¶ 13-14). Mr. Dewees intended to follow all necessary steps in order to join the OVDP. Unfortunately, on October 3, 2009, Mr. Dewees' eldest son unexpectedly took his life. As a result, Mr. Dewees' focus was on his family during this emotionally trying time, and his attention was diverted away from joining the OVDP. Despite this tragedy and impact on his personal life, Mr. Dewees' OVDP submission was completed and sent to the Internal Revenue Service (IRS) on October 14, 2009. (A6, ¶¶ 15-16). At the same time, Mr. Dewees sent his U.S. Forms 1040, 90-22.1 and 5471 to the IRS for the tax years 2003 through 2008. (A6, ¶ 16).

On November 23, 2009, the IRS notified Mr. Dewees that he had been preliminarily accepted into the OVDP. (A6, ¶ 17). On November 24, 2009, Mr. Dewees then received notification from the IRS that additional information was required in order to process his OVDP submission; however, the requested information had already been included in the Forms 1040, 90-22.1 and 5471 which had previously been sent to the IRS on October 14, 2009. (A6, ¶ 18). On May 20, 2010, a representative of Mr. Dewees sent the requested information to the IRS again, which was already included in the October 2009 OVDP submission. (A7, ¶ 21). Despite complying with the requests of the IRS, Mr. Dewees received a letter dated May 19, 2010, stating that he was terminated from the OVDP for failure to furnish the requested 1040s and related FBAR forms for the tax years 2003 through 2008. (A7, ¶ 20). The requested documentation was re-sent again in June 2010. (A7, ¶ 23).

On October 28, 2010 penalties in the amount of $252,480 were assessed against Mr. Dewees, all of which relate to FBAR non-compliance, none relate to Form 5471 non-compliance. (A7, ¶ 24). The assessed penalties were reduced to $185,862, as some accounts had been double counted by the IRS. (A7, ¶ 25).

On January 13, 2011, Mr. Dewees received notification that he was at risk of being terminated from the OVDP for failure to pay the assessed penalty, and on June 9, 2011 the IRS requested confirmation of Mr. Dewees' intent to no longer participate in the OVDP. (A7, ¶¶ 26-27). Mr. Dewees confirmed his withdrawal from the OVDP on June 16, 2011 because of excessive amounts of penalties owing, at which time the penalties were removed from his account. (A8, ¶ 28).

After Mr. Dewees' withdrawal from OVDP, new penalties in the amount of $120,000 were imposed for the late filing of Form 5471. (A8, ¶ 29). However, it was indicated to Mr. Dewees that reasonable cause for failure to file would be considered. Mr. Dewees responded to the request for reasonable cause on September 27, 2011. (A8, ¶ 29). On top of the already excessive $120,000 penalty, an additional $10,000 penalty was assessed; $5,000 per year for 2007 and 2008. (A8, ¶ 31). Mr. Dewees immediately paid this additional $10,000 in hopes that it would help his appeal of the $120,000 penalty imposed. (A8, ¶ 32). Mr. Dewees' request for abatement of civil penalties was disallowed on February 25, 2014, and his file was forwarded to Appeals. (A8, ¶ 35). Six months later, the Appeals Officer indicated that Mr. Dewees failed to show that he had reasonable cause for his failure to file Form 5471 for the years in question. (A8, ¶ 36). The Government did not issue a notice of deficiency for the penalty assessment; as such, the U.S. Tax Court had no jurisdiction to hear any appeal of the penalty assessment by Mr. Dewees. (A12, ¶ 59). After his appeal was rejected by the Appeal's office, Mr. Dewees had no avenue to appeal the assessed penalty. (A12, ¶ 57).

This led to Mr. Dewees having his Canadian tax refund held in abeyance pursuant to Article XXVI A of the Canada-U.S. Tax Convention (1980), which provides that the IRS may request the Canada Revenue Agency (CRA) to assist in collecting outstanding amounts due. (A9, ¶ 37). On August 18, 2015, Mr. Dewees paid the outstanding debt to the IRS by sending a check to the CRA made out to the United States Treasury in the amount of $134,116.46. (A9, ¶ 38). Mr. Dewees had no opportunity to appeal the seizure of his funds by the CRA. (A13, ¶¶ 63-65). Thus, Mr. Dewees paid the amount due and filed this action seeking a return of the amounts seized by the IRS. (A14, ¶ 69).

Mr. Dewees' filed this complaint seeking both a refund of the amount he paid as well as a declaration that the relevant provision of the Canada-U.S. Tax Convention is unconstitutional. (A14). In granting the Government's motion, the District Court held that Mr. Dewees failed to state a plausible claim for relief on his claims regarding excessive fines and due process. (A125-126). With respect to the equal protection claim, the District Court made a threshold ruling that it lacked subject matter jurisdiction because Mr. Dewees did not establish standing through an allegation that he had been injured. According to the District Court, the only injury Mr. Dewees could plausibly allege for this claim would be that “he sought entrance into the SFCP or that his application was denied.” (A129-133). Although the Government also argued in its motion that Mr. Dewees' equal protection claim should be dismissed on the additional ground of failure to state a claim, the District Court did not reach that issue basing its decision only upon a lack of subject matter jurisdiction. (A133).

VI. SUMMARY OF ARGUMENTS

The District Court's decision to dismiss Mr. Dewees' complaint should be reversed for the following reasons. First, the District Court erred in granting the Government's motion because Mr. Dewees' stated a plausible claim for relief and therefore met the burden required to defeat a defendant's Rule 12(b) motion to dismiss. As set forth in his complaint, Mr. Dewees had his property seized by the IRS — through seizure of his property by the CRA — without a meaningful opportunity to be heard. Specifically, Mr. Dewees' allegations support the theory that he was constitutionally entitled to contest the penalty assessment through an appeal both after the penalty was assessed and before his property was seized by the IRS/CRA. The fact that he was unable to so appeal constitutes a violation of his due process rights.

Second, the District Court erred by holding that Mr. Dewees' had no standing to bring his equal protection claim because he did not allege an actual injury. As set forth in his complaint, Mr. Dewees was injured by his inability to participate in the SFCP program. Although Mr. Dewees did not ever apply to the program, he was effectively denied the opportunity to participate in the SFCP by virtue of its known procedures, which do not allow a member of the OVDP program to later participate in the SFCP. Thus, Mr. Dewees' was injured by not being permitted to avail himself of the benefits of the SFCP program. The fact that he was not permitted to do so was a violation of Mr. Dewees' right to equal protection of the laws.

Therefore, the order granting the Government's motion to dismiss should be reversed entirely and the case should be returned to the District Court for further proceedings.

VII. STANDARD OF REVIEW

A Circuit Court reviews de novo the District Court's grant of a Rule 12(b) motion to dismiss. Kelson v. Springfield, 767 F.2d 651, 653 (9th Cir. 1985); see also Herbert v. National Academy of Sciences, 974 F.2d 192, 197 (D.C. Cir. 1992) (the Circuit Court “will conduct an independent, de novo review on all questions of law”). The same standard of review applies to a dismissal for failure to state a claim under Rule 12(b)(6) and for want of subject matter jurisdiction under Rule 12(b)(1). El Paso Natural Gas Co. v. United States, 750 F.3d 863, 874 (D.C. Cir. 2014).

A motion to dismiss should be denied unless it appears “beyond doubt” that the plaintiff could “prove no set of facts in support of “the claim that would entitle relief to the plaintiff.” Conley v. Gibson, 355 U.S. 41, 46 (1957). The plaintiff must put forth enough facts “to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). This Court must construe Mr. Dewees' complaint liberally, granting his “the benefit of all inferences that can be derived from the facts alleged.” Barr v. Clinton, 370 F.3d 1196, 1199 (D.C. Cir. 2004).

VIII. ARGUMENTS

I. The District Court erroneously dismissed Mr. Dewees' due process claim because he set forth sufficient facts to state a plausible claim.

In his complaint, Mr. Dewees' stated a claim against the Government for the violation of his due process rights. The Fifth Amendment provides that “No person shall . . . be deprived of life, liberty, or property without due process of law.” U.S. Const. amend. V. It has long been settled that courts judge procedural due process challenges to property deprivations by weighing (1) the private interest that will be affected by the official action; (2) the risk of erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute safeguards; and (3) the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail. Mathews v. Eldridge, 424 U.S. 319, 335 (1976). Due process is “flexible and calls for such procedural protections as the particular situation demands.” Morrissey v. Brewer, 408 U.S. 471, 481 (1972).

Analyzing Mr. Dewees' situation under the three factors promulgated in Mathews v. Eldridge and — keeping in mind the flexibility mandated by Morrissey v. Brewer — it is clear that the balance of the factors weighs in Mr. Dewees' favor. With respect to the first factor, clearly an important private interest is at stake: Mr. Dewees' opportunity to be heard regarding the loss of his property in connection with the IRS' penalty determination against him. The second factor poses a high risk that Mr. Dewees would be mistakenly deprived of his interest due to the poor administrative procedures — including the lack of any appeal recourse — in place at the time regarding the OVDP and SFCP. In any due process analysis by this or the District Court, both of these factors must be weighed against the Government's stated interest in not providing an appeal process or a method by which a taxpayer like Mr. Dewees could seek an abatement of the imposed penalties.

As the Supreme Court has held, federal pleading requirements (pursuant to Rule 8) only require “a short and plain statement of the claim showing that the pleader is entitled to relief.” Twombly, supra, 550 U.S. at 555. Mr. Dewees' complaint set forth the facts that show he is entitled to relief based on a breach of his due process rights. Specifically, Mr. Dewees' alleged that he has no avenue to appeal the decision regarding the penalty the IRS imposed on him and he was unable to appeal the CRA's seizure of his property. (A12-13).

Upon filing a Rule 12(b) motion to dismiss for failure to state a claim, the Government had the burden of persuasion to show that Mr. Dewees' complaint was legally insufficient. See Tyson v. Brennan, 277 F. Supp. 3d 28, 34 (D.C. Cir. 2017) (noting “Rule 12(b)(6) 'places the burden on the moving party'”). The Government's burden could only be met by pointing to the four corners of the complaint. Contrary to what the District Court held, the Government failed to meet its burden because Mr. Dewees' set forth the particular facts required to put the Government on notice of his claim for a violation of his due process rights.

The District Court held that “the absence of Dewees' requested avenue of relief does not mean his due process rights have been violated.” (A132). This holding was in direct agreement with the Government's argument in their motion that “Dewees' ability to challenge the validity of the penalties in the District Court is sufficient to protect his due process rights.” (A49). But both the District Court's holding and the Government's argument rely on circular logic because Dewees' complaint is seeking a return of the amounts assessed against him which he would have sought in an appeal if he had been given the opportunity. The fact that Mr. Dewees' was denied any ability to appeal the penalty assessment — both after the Appeals office denied his administrative appeal and at the time he was informed that the CRA had seized his property on behalf of the IRS — is the very basis of his complaint demanding relief, in the form of the return of the paid penalties, based on a violation of his due process rights. The District Court's dismissal of his complaint proves the point that Mr. Dewees' has been deprived of his property without due process — which is a violation of his Fifth Amendment constitutional right.

Accordingly, the District Court erred when it held Mr. Dewees' did not state a claim for violation of his due process rights and dismissed his complaint.

II. The District Court erroneously dismissed Mr. Dewees' equal protection claim because he set forth facts showing an actual injury.

Mr. Dewees' complaint alleges that he was injured by the IRS' refusal to allow him to participate in the SFCP program. And because the Government permits other taxpayers who are similarly situated with Mr. Dewees' with the opportunity to participate in the SFCP program, Mr. Dewees' right to equal protection of law. (A11-12). The District Court wrongly dismissed Mr. Dewees' claim based on a finding that he did not have standing.

Three things are required for a plaintiff to have standing. First, a plaintiff must establish an injury in fact. Joint Stock Socy v. UDV N. Am., Inc., 266 F.3d 164, 174-175 (3d Cir. 2001). A sufficient injury in fact is concrete and particularized, and it must be actual or imminent. Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992). The allegations in Mr. Dewees' complaint indicate that he has clearly suffered an actual injury. To be particularized, the injury “must affect the plaintiff in a personal and individualized way.” Id. at 560. This injury must be particular and actual, “not 'conjectural' or 'hypothetical'”. Id. at 560 (quoting Los Angeles v. Lyons, 461 U.S. 95, 102 (1983)). In addition, there must be a causal connection between the injury and the conduct complained of. Joint Stock Soc'y v. UDV N. Am., Inc., 266 F.3d 164, 174-175 (3d Cir. 2001). Third and finally, it must be likely that a favorable decision from the court would redress the injury. Id.

Mr. Dewees' allegations indicate an actual injury in this case because all of the above requirements are met. First, the conduct complained of — the actions of the IRS with respect to the SFCP denial — was a direct cause of his injury. Mr. Dewees was barred from applying to the SFCP based on the fact that he had previously applied to OVDP. At the time Mr. Dewees applied to OVDP, SFCP had not been initiated so this is not a circumstance in which Mr. Dewees' selected one program over the other. Once the SFCP program came into existence it was too late for Mr. Dewees to apply. In any case, SFCP would not have provided any relief to Mr. Dewees as the program stated that prior penalties would not be abated. Therefore, the penalties imposed on Mr. Dewees would have remained outstanding even if he had been able to apply for SFCP.

In any event, according to the frequently asked questions on the IRS website regarding the programs, SFCP would have been futile to Mr. Dewees since it was stated on the website that previously assessed penalties would not be abated. The rules of SFCP are published by the IRS as guidance only, and have no force of law. However, this information lead Mr. Dewees to not apply to the program, leaving him with no other means to rectify the situation other than instituting this lawsuit, which has been erroneously dismissed. Even so, the administrative rules published for the program stated that taxpayers who had previously participated in OVDP were prohibited from applying, which effectively served as a denial of participation in the SFCP. This denial led to the loss of Mr. Dewees' property, which is the actual injury alleged in this case.

Next, Mr. Dewees' injury is not at all hypothetical: the IRS' seizure of his property through the CRA actually happened when he was effectively denied the ability to participate in the SFCP. Finally, this Court ruling in favor of Mr. Dewees would completely redress the injury he has suffered. Accordingly, Mr. Dewees has plead the type of actual injury that is required under the law and it is sufficient to afford the District Court subject matter jurisdiction over his equal protection claim.

The District Court's holding that Mr. Dewees cannot establish that he suffered an actual injury because he did not plead “that he sought entrance into the SFCP or that his application was denied” places an impermissibly onerous burden on Mr. Dewees as a plaintiff. As the Sixth Circuit once explained, when a defendant seeks dismissal pursuant to Rule 12(b)(1) based on the facts alleged in the complaint, the plaintiffs burden to prove subject matter jurisdiction is not onerous. Musson Theatrical v. Federal Express Corp., 89 F.3d 1244, 1248 (6th Cir. 1996) (holding the “plaintiff can survive the motion by showing any arguable basis in law for the claim made”). The Musson court also noted that “the law is hardly static — and a federal court has jurisdiction to hear claims on the margins of reasonable possibility.” Id. With similar reasoning in mind, this Court has previously found that a plaintiff has sufficiently alleged standing by setting forth facts indicating he was harmed based upon a theory of injury that was not yet proven. See Osborn v. Visa, Inc., 797 F.3d 1057, 1063-1064 (D.C. Cir. 2015) (finding plaintiff alleged standing through a theory of economic harm that was disputed by the defendant).

In this case, Mr. Dewees alleges that he has been harmed based on the theory that the IRS denied him an opportunity to participate in SFCP by virtue of its provisions, thus it would have been futile for him to apply. It was this denial that led directly to the actual injury suffered by Mr. Dewees, i.e., his loss of property. Thus, the fact that Mr. Dewees did not allege specifically that he applied to the SFCP and was denied is not dispositive to his allegation of an actual injury. And the District Court's reliance on the absence of this singular fact to find that Mr. Dewees cannot establish standing was error.

IX. CONCLUSION

The District Court erred in granting the Government's motion to dismiss Dewees' complaint. This Court should reverse the District Court's order granting the motion and dismissing the case, and return the case for further proceedings, including a trial by a jury.

Respectfully submitted,

Mark A. Feigenbaum

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