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Corporation Argues Court Erred in Dismissing Damages Suit for Disclosure of Information Under Tax Treaty

JUN. 9, 2011

Aloe Vera of America Inc. et al. v. United States

DATED JUN. 9, 2011
DOCUMENT ATTRIBUTES
  • Case Name
    ALOE VERA OF AMERICA, INC., A TEXAS CORPORATION; REX G. MAUGHAN, HUSBAND; RUTH G. MAUGHAN, WIFE; MAUGHAN HOLDINGS, INC., AN ARIZONA CORPORATION; GENE YAMAGATA, AN INDIVIDUAL; AND YAMAGATA HOLDINGS, INC., A NEVADA CORPORATION, Plaintiffs - Appellants, vs. UNITED STATES OF AMERICA, Defendant - Appellee.
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 10-17136
  • Authors
    Tarter, Tim A.
    Ryan, James A.
    Grant, Merwin D.
    Vaughn, Kenneth B.
  • Institutional Authors
    Woolston & Tarter PC
    Quarles & Brady PLLC
    Grant & Vaughn PC
  • Cross-Reference
    For the district court opinion in Aloe Vera of America Inc. v.

    United States, No. 2:99-cv-01794 (D. Ariz. Aug. 3, 2010), see

    Doc 2010-18655 or 2010 TNT 163-12 2010 TNT 163-12: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2011-20755
  • Tax Analysts Electronic Citation
    2011 TNT 191-15

Aloe Vera of America Inc. et al. v. United States

 

NO. 10-17136

 

 

IN THE UNITED STATES COURT OF APPEALS

 

FOR THE NINTH CIRCUIT

 

 

ON APPEAL FROM A FINAL JUDGMENT OF THE UNITED STATES DISTRICT

 

COURT FOR THE DISTRICT OF ARIZONA

 

 

REPLY BRIEF OF APPELLANTS

 

 

Tim A. Tarter, Esq.

 

WOOLSTON & TARTER, P.C.

 

Suite 1430

 

2400 East Arizona Biltmore Circle

 

Phoenix, Arizona 85016-2114

 

(602) 532-9197 Telephone

 

(602) 532-9193 Facsimile

 

 

James A. Ryan, Esq.

 

QUARLES & BRADY, L.L.P.

 

One Renaissance Square

 

Two North Central Avenue

 

Phoenix, Arizona 85004-2391

 

(602) 229-5200 Telephone

 

(602) 420-5082 Facsimile

 

 

Attorneys for Appellants Aloe Vera of America, Inc., Rex G. Maughan,

 

Ruth G. Maughan, and Maughan Holdings, Inc.

 

 

Merwin D. Grant, Esq.

 

Kenneth B. Vaughn, Esq.

 

GRANT & VAUGHN, P.C.

 

6225 North 24th Street, Suite 125

 

Phoenix, Arizona 85016

 

(602) 393-4322 Telephone

 

(602) 393-4327 Facsimile

 

 

Attorneys for Appellants Gene Yamagata and Yamagata Holdings, Inc.

 

 

                       TABLE OF CONTENTS

 

 

 INTRODUCTION

 

 

 STANDARDS FOR DECISION AND OF REVIEW

 

 

 ARGUMENT

 

 

      A. District Court Erred in Requiring Listing by Aloe Vera of Return

 

         Information

 

 

      B. Aloe Vera Presented Undisputed Evidence Which Proved Timely Filing

 

 

           1. Count I findings necessarily establish Count II jurisdiction

 

 

           2. Aloe Vera proved subject matter jurisdiction over Count II

 

 

      C. Single Statute of Limitations Date is Reversible Error

 

 

      D. A "Should Have Known" Standard for Discovery is Inapplicable

 

 

      E. Miscellaneous Arguments by Defendant

 

 

 CONCLUSION

 

 

 CERTIFICATE OF COMPLIANCE

 

 

 CERTIFICATE OF SERVICE

 

 

 TABLE OF AUTHORITIES

 

CASES

 

 

Alaska v. Babbitt, 38 F.3d 1068 (9th Cir. 1994)

Aloe Vera of America, Inc. v. United States, 580 F.3d 867 (9th Cir. 2009)

Aloe Vera of America, Inc. v. United States, 128 F. Supp. 2d 1235 (D. Ariz. 2000)

Amcor Capital Corp. v. United States, 1995 WL 515690 (C.D. Cal. June 13, 1995),

aff'd on other grounds, 106 F.3d 406 (Table), 1997 WL 22248 (9th Cir. Jan. 15, 1997)

American Title Ins. Co. v. Lacelaw Co., 861 F.2d 224 (9th Cir. 1988)

Augustine v. United States, 704 F.2d 1074 (9th Cir. 1983)

Bentson v. United States, 947 F.2d 1353 (9th Cir. 1991)

Gandy v. United States, 234 F.3d 281 (5th Cir. 2000)

Gandy v. United States, 1999 WL 112527, *2 (E.D.Tex. Jan. 15, 1999)

Jencks v. Modern Woodmen of America, 479 F.3d 1261 (10th Cir. 2007)

Mallas v. United States, 993 F.2d 1111 (4th Cir. 1993)

McQueen v. United States, 264 F. Supp. 2d 502 (S.D. Tex. 2003., aff'd by unpublished op., 100 Fed. Appx. 964 (5th Cir. 2004)

Milgard Tempering, Inc. v. Selas Corp. of Am., 902 F.2d 703 (9th Cir. 1990)

Mortensen v. First Federal Savings & Loan Ass'n, 549 F.2d 884 (3rd Cir. 1977)

Perez-Mejia v. Holder, ---F.3d---, 2011 WL 1496990 (9th Cir. Apr. 21, 2011)

Richmond v. Biggans, 821 F.2d 959 (3rd Cir. 1987)

Roberts v. Corrothers, 812 F.2d 1173 (9th Cir. 1987)

Safe Air for Everyone v. Meyer, 373 F.3d 1035 (9th Cir. 2004)

Snider v. United States, 468 F.3d 500 (8th Cir. 2006)

Thornhill Publ'g Co., Inc. v. Gen. Tel. & Elec. Corp., 594 F.2d 730 (9th Cir. 1979)

Trentacosta v. Frontier Pac. Aircraft Indus., Inc., 813 F.2d 1553 (9th Cir. 1987)

United States v. Yacoubian, 24 F.3d 1 (9th Cir. 1994)

Wood v. Commonwealth of Va., 155 F.3d 564 (Table), 1998 WL 414019 (4th Cir. July 23, 1998)

STATUTES AND RULES

26 U.S.C. § 6103

26 U.S.C. § 7431

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

Fed. R. Civ. P. 56

Ariz. LRCiv. 56.1

 

INTRODUCTION

 

 

As explained in Aloe Vera's opening brief, on October 6, 1999, Plaintiffs filed a complaint against Defendant United States of America in the United States District Court for the District of Arizona.1 In Count I, Plaintiffs allege that the IRS disclosed false return information to the Japanese National Tax Administration ("NTA") in violation of the disclosure provisions in 26 U.S.C. § 6103. In Count II, Plaintiffs allege that the IRS violated section 6103 by disclosing return information to the NTA when the IRS knew or should have known that the NTA would not treat the information in accordance with the secrecy provisions of the Treaty.

The district court granted Defendant's motion for summary judgment on February 2, 2007. This Court vacated the district court's judgment and remanded the case back to the district court to determine whether there is sufficient evidence to establish subject matter jurisdiction under 26 U.S.C. § 7431(d). Aloe Vera of America, Inc. v. United States, 580 F.3d 867, 872-73 (9th Cir. 2009).

After briefing by the parties, the district court filed its Order on August 3, 2010 (the "August Order") (Doc. 584, ER 1-22), finding that the district court has subject matter jurisdiction over all Plaintiffs' Count I claim that the IRS made a false statement to the NTA regarding unreported income and, with respect to the Maughan Plaintiffs, but not the Yamagata Plaintiffs, over the Count I claim that the IRS made a false statement to the NTA regarding commission vs. price. (August Order at 8-9, Doc. 584, ER 8-9.) However, the district court concluded that it did not have subject matter jurisdiction over any claim of unauthorized disclosure under Count II of Plaintiffs' complaint. (August Order at 16, 20, Doc. 584, ER 16, 20.)

The district court erred by failing to follow the law of the case, including both its own prior rulings and the Circuit Court's mandate. The district court also erred by ignoring substantial and undisputed record evidence to support Count II subject matter jurisdiction as well as subject matter jurisdiction over the Yamagata Plaintiffs' Count I claim for the commission vs. price disclosure.

 

STANDARDS FOR DECISION AND OF REVIEW

 

 

Defendant argues that the district court's factual findings on jurisdictional issues must be accepted unless clearly erroneous (citing Alaska v. Babbitt, 38 F.3d 1068, 1072 (9th Cir. 1994)). For the reasons discussed below, that standard of review does not apply in this instance.

As set forth in the August Order, a motion to dismiss under Rule 12(b)(1) may be resolved using evidence extrinsic to the complaint without converting the motion to dismiss into a motion for summary judgment under Rule 56.2 (August Order at 3, Doc. 584, ER 3 (citing Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004).) But the standards generally applicable to a factual attack motion under Rule 12(b)(1) raising a factual challenge to jurisdiction differ greatly from those applicable to a motion for summary judgment. Thornhill Publ'g Co., Inc. v. Gen. Tel. & Elec. Corp., 594 F.2d 730, 733 (9th Cir. 1979). "[A] court may proceed as it never could under . . . Fed. R. Civ. P. 56 . . . [T]he existence of disputed material facts will not preclude the trial court from evaluating for itself the merits of the jurisdictional claims." Id. (quoting Mortensen v. First Federal Savings & Loan Ass'n, 549 F.2d 884, 891 (3rd Cir. 1977)).

The Safe Air court cautioned (and the August Order noted at 3, Doc. 584, ER 3), that a jurisdictional finding on a genuinely disputed fact is inappropriate when the jurisdictional issue and the substantive issue are so intertwined that the jurisdictional question depends on the resolution of factual issues going to the merits of the action. 373 F.3d at 1039-40.

"The relatively expansive standards of a 12(b)(1) motion are not appropriate for determining jurisdiction in a case like this, where issues of jurisdiction and substance are intertwined. A court may not resolve genuinely disputed facts where 'the question of jurisdiction is dependent on the resolution of factual issues going to the merits.'" Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987) (quoting Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 1983)).

Where the jurisdictional and substantive issues are inextricably intertwined, a district court should treat and resolve a fact based Rule 12(b)(1) motion as it would a motion for summary judgment. Safe Air, 373 F.3d at 1040; see, e.g., Jencks v. Modern Woodmen of America, 479 F.3d 1261, 1263, n.2 (10th Cir. 2007) ("When subject matter jurisdiction is dependent on the same statute which provides the substantive claim in the case, the jurisdictional claim and the merits are considered to be intertwined. . . .") (internal quotation marks and citation omitted). Subject matter jurisdiction over Aloe Vera's section 7431 claims depends on the same statute that creates the substantive claim. The court below used the wrong standard.

The August Order's jurisdictional findings of fact and rulings of law go to the merits of Aloe Vera's claims. The ruling that the 1996 IRS-NTA meetings did not involve disclosure of Aloe Vera's return information (August Order at 17-18, Doc. 584, ER 17-18), and that the court could not determine what specific items of return information are contained in the Simultaneous Examination Proposal ("SEP") that the IRS sent to the NTA (August Order at 19, Doc. 584, ER 19), both go to the underlying merits of the action. See 26 U.S.C. § 7431(a). Safe Air prohibits rulings that are not premised on the application of summary judgment standards when jurisdiction and the merits are so intertwined. Safe Air, 373 F.3d at 1040. The "should have known" discovery ruling (August Order at 13-16, Doc. 584, ER 13-16), would also independently require the application of summary judgment review standards. See Augustine, 704 F.2d at 1078-79.

The August Order failed to apply summary judgment standards to the rulings on Defendant's fact-based Rule 12(b)(1) motion. The court did not view the evidence in the light most favorable to Aloe Vera as nonmoving party and fails to construe all reasonable inferences in favor of Aloe Vera as nonmoving party herein. (See Aloe Vera Brief at 18-19.) These are legal questions/standards, the application of which are subject to de novo review by this Court. See United States v. Yacoubian, 24 F.3d 1, 3 (9th Cir. 1994). As such, the August Order's findings of fact are subject to de novo review, because of the intertwined jurisdiction and merits issues, and because the court employed the wrong legal standard to arrive at its findings.

 

ARGUMENT

 

 

A. District Court Erred in Requiring Listing by Aloe Vera of Return Information

The District Court erred in holding that Aloe Vera was required to, but failed to, list each specific item of return information disclosed by the IRS to the NTA. (August Order at 16-21, Doc. 584, ER 16-21.) Defendant is mistaken when it argues in support of this error. (Defendant's Brief at 52-57, 61-62.)

The district court previously held that, because the information disclosed by the IRS to the NTA was received by, recorded by, prepared by, furnished to or collected by the IRS regarding the possible existence of Aloe Vera's tax liability, all such information constituted return information within the definition of the statute.3 (Aloe Vera's Brief at 35-36.) The IRS employees' notes, which are in the record, and the SEP, also in the record, each constitute itemized lists of return information disclosed by the IRS to the NTA. (Aloe Vera's Brief at 43-49 and 51-52 (enumerating specific examples of disclosed return information).)

B. Aloe Vera Presented Undisputed Evidence Which Proved Timely Filing

 

1. Count I findings necessarily establish Count II jurisdiction

 

First and foremost, the August Order's findings of fact with respect to the return information at issue in Count I conclusively establish subject matter jurisdiction over the same return information under Count II. The district court found that the "commission vs. price" disclosure of return information was not discovered by Plaintiffs AVA and Maughan until August 1998. (August Order at 8, Doc. 584, ER 8.) The "unreported income" disclosure of return information was first discovered by all Plaintiffs in September 2001. (August Order at 9, Doc. 584, ER 9.) Count II alleges that disclosures by the IRS to the NTA, which the IRS knew or should have known was an insecure recipient, were unauthorized. Aloe Vera of America, Inc. v. United States, 128 F. Supp. 2d 1235, 1249 (D. Ariz. 2000).

Discovery of these two discrete disclosures of return information within the two years of filing is proven. The application of the insecure recipient alternative legal theory (Count II) has been validated. Accordingly, the district court's finding of subject matter jurisdiction regarding the disclosures at issue under Count I necessarily established subject matter jurisdiction over Count II with respect to these same disclosures.4

 

2. Aloe Vera proved subject matter jurisdiction over Count II5

 

Aloe Vera met its burden, independently of the district court's findings described above, of proving subject matter jurisdiction over Count II. The district court ignored undisputed and uncontroverted evidence in the record. Defendant has scrupulously avoided any discussion of this evidence in its brief.6

Aloe Vera does not rely on any controverted, challenged allegations from the pleadings. Aloe Vera properly relies on both pleading allegations and statements of fact that Defendant judicially admitted.7 Aloe Vera also relies on documents prepared and produced by the IRS, affidavits, and depositions. (Aloe Vera's Brief at 43-49.) Aloe Vera relies on such evidence to meet the preponderance of the evidence burden.

Defendant is bound by its admissions of fact (discussed infra). E.g., American Title Ins. Co. v. Lacelaw Co., 861 F.2d 224, 226 (9th Cir. 1988). These facts, once admitted, are withdrawn from any further need for evidence or proof. Perez-Mejia v. Holder, ---F.3d---, 2011 WL 1496990 (9th Cir. Apr. 21, 2011); American Title Ins. Co., 861 F.2d at 226. "There is no rule of law requiring a party to a lawsuit to produce evidence of facts which are established by an opposing party's formal admission." Richmond v. Biggans, 821 F.2d 959, 962 (3rd Cir. 1987).

Contrary to the August Order's conclusion, such admissions obviate any and all need for further action by Aloe Vera regarding proof of these facts. Id. (August Order at 16-21, Doc. 584, ER 16-21.) Such admitted facts are binding, not only on Defendant, but also on the district court. Bentson v. United States, 947 F.2d 1353, 1356 (9th Cir. 1991); American Title Ins., 861 F.2d at 226. Irrespective of the standard of proof employed, the August Order commits reversible error by failing to find Count II subject matter jurisdiction based on the uncontroverted, undisputed factual admissions.8 Even if this Court adopts a narrow and restrictive view of the facts and evidence judicially admitted by the Defendant, such a streamlined review reveals an uncontested basis for a finding of jurisdiction over Count II.9

August 1996 Meeting Disclosures

The IRS disclosed return information of all Plaintiffs to the NTA in the August 1996 simultaneous examination meeting.10 IRS Manager Sturgis' notes of the August 1996 meeting reflected outbound IRS communications to the NTA which constituted return information of AVA, Maughan, and Yamagata.11 Plaintiffs AVA and Maughan first became aware of the August 1996 IRS-NTA meetings when Sturgis' notes were received in August 1998.12 Plaintiffs did not learn that the IRS had met with the NTA in August 1996 and did not learn what disclosures were made in the meeting until August 1998 or thereafter.13

The record shows that counsel for Plaintiffs AVA and Maughan gave the IRS notes to Plaintiffs Yamagata's counsel after August 1998, and Defendant did not dispute this fact.14 Regardless of the August Order's speculation that Plaintiffs Yamagata might, in some unstated manner, have learned of the commission vs. price false statement (which is contained only in the referenced IRS notes), (1) nothing in the record suggests that Plaintiffs Yamagata actually learned of the 1996 IRS-NTA meetings before August 1998; and (2) the record demonstrates that Defendant withheld the crucial documents leading to the FOIA litigation with Plaintiffs Maughan, eliminating any reasonable inference that Plaintiffs Yamagata had learned of the commission vs. price disclosure contained only in the IRS notes before August 1998.15 The district court's finding of a "possibility" of Plaintiffs Yamagata's earlier discovery of this discrete disclosure (August Order at 8, n.2, Doc. 584, ER 8.), to find it lacked jurisdiction over Plaintiffs Yamagata's commission vs. price false statement disclosure, is belied and wholly unsupported by the record and, consequently, is clearly erroneous.

There is simply no need to adduce further evidence into the record in support of these factual issues. Defendant is bound by its judicial admissions (as is the district court on these factual matters within the knowledge of the Defendant). Bentson, 947 F.2d at 1356; American Title Ins. Co., 861 F.2d at 226. It was legal error for the August Order to fail to recognize the foregoing undisputed, uncontroverted evidence. For the August Order to find facts in contravention of the above undisputed factual admissions is reversible error, whether this Court reviews de novo or for clear error.

Simultaneous Examination Proposal ("SEP") Disclosures

Turning to the SEP, the document is in the evidentiary record and was cited in Aloe Vera's 2010 motion for summary judgment.16 The SEP contains disclosures of return information of Plaintiffs AVA, Maughan and Yamagata by the IRS to the NTA and Defendant admitted that was so.17 The district court read the SEP before issuing the August Order.18 The district court professed an inability to discern what return information is in the SEP.19 as a matter of both fact and law, each and every statement in the SEP was made from information contained in the IRS files and was automatically, by definition, return information.20 The SEP was not received by Plaintiffs or their counsel until September 2001 and Defendant admitted that was so.21 The IRS did not expressly advise Aloe Vera that it had disclosed return or return information as part of the simultaneous examination, except to the extent that it did provide Plaintiffs AVA and Maughan with notice in August 1996 of the simultaneous examination.22 The IRS failed to disclose to Plaintiffs AVA and Maughan, as of March 1998, any records constituting IRS communications to the NTA.23

Although the ultimate fact (that Plaintiffs first discovered that the IRS had disclosed their return information contained in the SEP in September 2001) is "disputed" by Defendant, the contentions of Defendant are actually collateral factual arguments.24 (DSOF at 4, ¶ 28, Doc. 571, ER 108). None of these collateral factual arguments were relied upon in the August Order.

In failing to apply summary judgment standards, and instead proceeding as if ruling on a motion to dismiss under Rule 12(b)(1), the district court failed to view the evidence and construe inferences in favor of Plaintiffs. Had the district court applied the summary judgment standards and viewed the evidence in the light most favorable to Plaintiffs and construed the inferences in favor of Plaintiffs, it would necessarily have found that Plaintiffs succeeded in proving jurisdiction by a preponderance of the evidence.

C. Single Statute of Limitations Date is Reversible Error

In support of the August Order, Defendant encapsulates its single statute of limitations argument as follows: "If . . . the NTA was known to be an insecure recipient, the entire simultaneous examination, viewed as a unitary act, violated section 6103, and the disclosure of every item of return information during the examination is subsumed by that same claim." (Defendant's Brief at 48.) In other words, "the act of unauthorized disclosure comprises all disclosures made in the simultaneous examination . . . [T]he statute of limitations for Count II began to run on the date that Plaintiffs learned that the IRS had entered into an agreement with the NTA to conduct a simultaneous examination." Id. Defendant's citation to McQueen v. United States, 264 F. Supp. 2d 502, 510 (S.D. Tex. 2003), aff'd by unpublished op., 100 Fed. Appx. 964 (5th Cir. 2004),25 fails to provide any support for its argument that a single limitation period applies to all IRS disclosures at issues in Count II, no matter how many disclosures were made on different dates.

As discussed in Aloe Vera's Brief at 28-34 and 41-42, the August Order relies upon McQueen for the proposition that, even though multiple acts of disclosure occurred at different times (each representing the disclosure of a discrete piece of return information), because all disclosures were made to one recipient, there is just one limitation period applicable to all disclosures. (August Order at 12-13, Doc. 584, ER 12-13.)

Defendant's arguments that the McQueen, Wood26 and Amcor Capital27 cases support the August Order on this point require little further response. Aloe Vera's Brief discusses and distinguishes all three cases, demonstrating why they fail to provide support for the legal positions elucidated in the August Order. (Aloe Vera Brief at 31-33.)

Defendant attempts to draw an analogy between the instant case and Defendant's mistaken characterization of the Fifth Circuit decision in Gandy v. United States, 234 F.3d 281 (5th Cir. 2000).28 Defendant argues that both Gandy and the instant case involve situations in which the plaintiff argued that the statute of limitations did not begin to run until written documentation was received. (Defendant's Brief at 45, 53-54.) But the Gandy case does not state that Mr. Gandy ever received a copy of the IRS circular letter at issue. 234 F.3d at 283-284. Rather, the Fifth Circuit held that district court properly found that Gandy actually knew of the contents of the circular letter (based on conversations with clients to whom the IRS had sent the letter) outside the two-year statute of limitations. Id.

Aloe Vera has never argued that the statute of limitations did not run until Aloe Vera received written documentation of IRS disclosures of which Aloe Vera was previously aware. Unlike Mr. Gandy, Aloe Vera did not know the contents of the written disclosures the IRS had made to the NTA in the SEP, and therefore did not discover the disclosure of any particular return information contained therein, until Aloe Vera finally received a copy of the SEP in 2001.

Significantly, the Gandy case discerns between separate acts of disclosure of return information that create separate causes of action controlled by distinct limitation periods. Gandy, 234 F.3d 281; accord Snider v. United States, 468 F.3d 500 (8th Cir. 2006); Mallas v. United States, 993 F.2d 1111 (4th Cir. 1993).29 The Gandy court first determined that an act of written disclosure (revealing the criminal nature of the IRS investigation in the body of a circular letter) was time-barred because Mr. Gandy actually knew of the contents of the written disclosure more than two years before filing the complaint. Gandy, 234 F.3d at 283-84. The case also involved separate acts of oral disclosure of the criminal nature of the IRS investigation, which occurred during the same time frame as the circular letter, and those claims were not time-barred; instead the court proceeded to address the merits of those claims. Id. Thus Mr. Gandy's actual knowledge of the contents of one, written disclosure did not trigger a single limitation period for other separate disclosures. Instead, separate disclosures of the same information (i.e., that Mr. Gandy was under criminal investigation), some made in writing and some orally, gave rise to separate claims and limitation periods triggered by Mr. Gandy's actual discovery of each such disclosure. Id.30

The Fifth Circuit in Gandy contradicts the all disclosures subsumed into one cause of action argument made by Defendant. (See Defendant's Brief at 48.) The Gandy opinion also undercuts the single limitation period rationale in the August Order's interpretation of the district court's opinion in McQueen.31

D. A "Should Have Known" Standard for Discovery is Inapplicable

Defendant contends that District Court Judge Silver did not reject the "should have known" standard earlier in this proceeding and therefore the law of the case does not prevent its application. (Defendant's Brief at 38.) Defendant is mistaken. Aloe Vera of America, Inc., 128 F. Supp. 2d at 1241, n.7 (the "Discovery Order"). The August Order itself recognized that Judge Silver had previously rejected the "should have known" standard. (August Order at 14-15, n.5, Doc. 584, ER 14-15.)

Defendant took the opposite position in prior pleadings in this case, referring to the Discovery Order as refusing to adopt the "should have known" standard, stating that the Discovery Order was erroneous, and asking Judge Teilborg to adopt inquiry notice as the correct standard. (See United States' Motion to Dismiss Amended Complaint at 8, Doc. 40, SER 68.)32

The August Order concludes that "[t]his Court has interpreted 'discovered' to . . . include inquiry notice." (August Order at 15, n.5, Doc. 584, ER 15.) The remand order from this Circuit did not address the "should have known" or "inquiry notice" issues. Therefore, the August Order should have set forth some clear error in the Discovery Order which is the law of the case (or should have identified one of the other requisite conditions for reversal of the law of the case) before changing the court's prior ruling on this all important issue without prior notice to Aloe Vera. E.g., Milgard Tempering, Inc. v. Selas Corp. of Am., 902 F.2d 703, 715 (9th Cir. 1990). (See Aloe Vera Brief at 26.) But the August Order makes no attempt to identify any "clear error" in the Discovery Order -- and none appears. (August Order at 14-15, Doc. 584, ER 14-15.) The August Order thus constitutes an abuse of discretion, is clearly erroneous, and should be rejected by this Court.33

Aside from the fact that the August Order runs afoul of the law of the case doctrine, the Discovery Order's rationale was, and remains, valid. Section 7431(d) provides that the statute of limitations runs from the date of discovery. As set forth in Aloe Vera's Brief at 31-33, the McQueen, Wood and Amcor cases relied upon in the August Order (as well as by Defendant) involve fact patterns reflecting actual discovery of the core facts of the disclosures outside the applicable limitation period. The "should have known" references in these cases were unnecessary and unsupported by the facts. Id. Although the three cases were affirmed, they were affirmed in unpublished opinions. The inquiry notice standard for "discovery" under section 7431(d) has not been, and should not be, established as the law in any circuit.34

E. Miscellaneous Arguments by Defendant

Defendant makes a number of ancillary arguments which can be dealt with summarily, as follows:35

1. Defendant argues (Defendant's Brief at 7-8, 36-36), under the guise of giving an overall perspective of the evidentiary record, that the allegations in the amended complaint (upon which the court relied in denying Defendant's second motion to dismiss on statute of limitations grounds) were subsequently deleted as inaccurate by the Third Amended Complaint, which added paragraph 24, admitting that Plaintiffs were aware in late 1996 that certain return information had been disclosed by the IRS to the NTA.

The allegations recited by Defendant are but a small slice of the pertinent portion of the pleading, the allegations relating to the IRS and NTA exchanges in the simultaneous examination are extensive. (TAC at ¶¶ 42-63, Doc. 405, ER 277-281). Further, the evidentiary record is not limited to, or properly constrained by, the pleadings at this stage of the proceeding. Indeed, the district court recognized this reality when it did not allow Plaintiffs to add the "unreported income" false statement to the Third Amended Complaint, but did properly allow the same false statement to be presented and argued in Plaintiffs' 2006 motion for summary judgment. (See Doc. 526, ER 25.)

2. Defendant contends that Plaintiffs' arguments regarding the interplay between the simultaneous examination notices, the return information implicit therein and the SEP return information, (Defendant's Brief at 26-27; Aloe Vera's Brief at 50-52), are barred from consideration on appeal as they were not presented to the district court below.

The August Order refused to recognize the return information disclosed in the SEP while contradicting the law of the case on the breadth and depth of what constitutes "return information" under section 6103; the reversal of the district court's prior ruling on the scope of "return information" was made sua sponte in the August Order -- after briefing and oral argument ended. As a result, Aloe Vera was denied the opportunity to brief and argue these issues for consideration before the court ruled. If Aloe Vera is denied the opportunity to present issues on appeal which were not properly at issue before the district court, which were pivotal to the district court's ruling, and which reversed the law of the case, all without prior notice , Aloe Vera certainly is denied due process. (Aloe Vera Brief at 55-56.)36

3. Defendant argues that Aloe Vera's own characterization of Count II is that, at the time of "the disclosure" (singular) the IRS should have known that the NTA was an insecure recipient. (Defendant's Brief at 34 (citing TAC at ¶ 83, Doc. 405, ER 284-285).) Then, Defendant argues that "the disclosure" complained of in Count II is in fact the simultaneous examination, which the AVA and Maughan Plaintiffs, but not the Yamagata Plaintiffs, knew of in August 1996, outside the statute of limitations. (Id. at 34-36.)

Defendant mischaracterizes and misinterprets the substance of Count II. Count II incorporates by reference all preceding paragraphs, including Third Amended Complaint paragraph 51, that the IRS, at the time of the disclosure of information and documents to the NTA as part of the simultaneous examination, should have known that the NTA was an insecure recipient. (Doc. 405, ER 279, 284.) Thus, Aloe Vera incorporates into Count II the multiple, yet distinct, disclosures of return information by the IRS to the NTA, occurring throughout the ongoing simultaneous examination.

 

CONCLUSION

 

 

Based on the foregoing, Plaintiffs respectfully request this Court to enter an order (1) finding subject matter jurisdiction over all of Plaintiffs' claims, and (2) reversing the August Order to the extent that the district court's order (a) finds no subject matter jurisdiction over Plaintiffs Yamagata and Yamagata Holdings' Count I claim for the "Commission vs. Price" disclosure, and (b) finds no subject matter jurisdiction over all Plaintiffs' Count II claims. Plaintiffs further request that this Court proceed to determine the merits of the pending consolidated appeals, Nos. 07-15577 and 07-15579, and/or order such additional briefing, oral argument or other matters as this Court determines appropriate.

RESPECTFULLY SUBMITTED this 9th day of May, 2011.

WOOLSTON & TARTER, P.C.

 

Suite 1430

 

2400 East Arizona Biltmore Circle

 

Phoenix, Arizona 85016-2114

 

 

And

 

 

QUARLES & BRADY, L.L.P.

 

One Renaissance Square

 

Two North Central Avenue

 

Phoenix, Arizona 85004-2391

 

 

Tim A. Tarter

 

 

Tim A. Tarter

 

James A. Ryan

 

 

Attorneys for Appellants Aloe Vera

 

of America, Inc., Rex G. Maughan,

 

Ruth G. Maughan, and Maughan

 

Holdings, Inc.

 

 

GRANT & VAUGHN, P.C.

 

6225 North 24th Street,

 

Suite 125

 

Phoenix, Arizona 85016

 

 

Merwin D. Grant

 

 

Merwin D. Grant

 

Kenneth B. Vaughn

 

Attorneys for Appellants

 

Gene Yamagata and

 

Yamagata Holdings, Inc.

 

FOOTNOTES

 

 

1 Unless otherwise stated, Plaintiffs-Appellants are sometimes collectively referred to as "Aloe Vera." "AVA," when utilized, stands for the entity Aloe Vera of America, Inc.

2 Rule references are to the Federal Rules of Civil Procedure.

3 26 U.S.C. § 6103(b) (defining return information expansively); Aloe Vera of America, Inc. v. United States, 128 F. Supp. 2d 1235, 1246 (D. Ariz. 2000) ("Because information allegedly disclosed by the IRS to the NTA was 'prepared by . . . the Secretary' allegedly 'with respect to the determination of the existence, or possible existence, of [tax] liability (or the amount thereof) of [Plaintiffs],' see 26 U.S.C. § 6103(b)(2)(A), such information constitutes 'return information' within the definition provided by the statute.") (alterations in original) (adopting the Fourth Circuit's "broad characterization of what qualifies as 'return information'").

4 To reach a contrary (and erroneous) result, Defendant urges, and the August Order finds, that a single statute of limitations applies to all disclosures at issue in Count II, no matter when they occurred or were discovered, merely because there was only one recipient, the NTA. (August Order at 11-16, Doc. 584, ER 11-16.) As discussed infra, the only Circuit Court law on point requires the opposite conclusion. See section C, pgs. 16-20.

5 This section is primarily responsive to the court's alternative holding. (August Order at 16-21, Doc. 584, ER 16-21; see also Defendant's Brief at 15-16, 26-28.)

6 Once challenged, Plaintiffs must establish jurisdiction by a preponderance of evidence, other than controverted allegations in the pleadings, such as affidavits, depositions or other evidence. See Trentacosta v. Frontier Pac. Aircraft Indus., Inc., 813 F.2d 1553, 1559 (9th Cir. 1987). That is, Aloe Vera cannot rely on mere allegations in a complaint, which, once challenged are thereafter not entitled to a presumption of correctness. See Thornhill Publ'g Co., Inc. v. Gen. Tel. & Elec. Corp., 594 F.2d 730, 733-35 (9th Cir. 1979).

7 Such facts include those specific admissions by Defendant under LRCiv 56.1(b) in response to both Aloe Vera's 2006 and 2010 motions for summary judgment.

8 Defendant's Brief at 26 argues, without any citation to specific examples, that Aloe Vera indiscriminately relied on evidentiary materials submitted to the court but not identified by Aloe Vera, allegedly forcing the court to search a decade-long record. Defendant's argument is made in disregard of the record in this case. Aloe Vera's Brief at 42-44 relies on evidence presented to the district court in its statement of facts supporting the 2010 motion for summary judgment. To the extent that, in the August Order, the district court sua sponte considered whether the 1996 IRS-NTA meetings involved disclosures of return information by the IRS, Aloe Vera counters this error by citation to notes by IRS employees, Manager Sturgis and Analyst Warner, attached to the Aloe Vera 2006 motion for summary judgment. (Aloe Vera's Brief at 10 & Doc. 482, Defendant's Supplemental Excerpt of Record ("SER") 192.) Those notes were referred to in Aloe Vera's 2010 motion for summary judgment. Although the district court's sua sponte treatment of the issue would justify an expanded perspective regarding the evidentiary record, the district court did not have to perform a search for the evidence; the August Order quotes extensively from the 2007 summary judgment order regarding these very same notes. (August Order at 7, Doc. 584, ER 7; 2007 Summary Judgment Order at 7-8, Doc. 526, ER 29-30.)

9 All factual admissions referenced below, unless otherwise noted, were cited to the district court in Aloe Vera's 2010 motion for summary judgment regarding subject matter jurisdiction.

10 2010 Plaintiffs' Statement of Facts ("PSOF") at 5, ¶¶ 29-30, Doc. 568 at 5, ER 136; Defendant's Statement of Facts ("DSOF") at 4-5, ¶¶ 29-30, Doc. 571 at 4, ER 108-109; Third Amended Complaint ("TAC") at 4-5, ¶¶ 18-19, Doc. 405 at 4-5, ER 272-73; Answer to TAC at 4-5, ¶¶ 18-19, Doc. 409, ER 257-58.

11 PSOF at 2-3, ¶¶ 3-4, 7-9, Doc. 568, ER 133-134; DSOF at 1-3, ¶¶ 3-4, 7-9, Doc. 571, ER 105, 107.

12 PSOF at 2, ¶ 4, Doc. 568, ER 133; DSOF at 1, ¶ 4, Doc. 571, ER 105.

13 PSOF at 5-6, ¶¶ 31-38, Doc. 568, ER 136-137; DSOF at 5, ¶ 31, Doc. 571, ER 109.

14 PSOF at 3, ¶ 10, Doc. 568, ER 134; DSOF at 3, ¶ 10, Doc. 571, ER 107 ("Not disputed for purposes of plaintiffs' motion.").

15See e.g., PSOF at 2, ¶¶ 3-5, Doc. 568, ER 133; Id. at 3, ¶¶ 9-10, Doc. 568, ER 134. Defendant did not dispute these facts. DSOF at 1, ¶¶ 3-5, Doc. 571, ER 105-106; Id. at 3, ¶¶ 9-10, Doc. 571, ER 107.

16E.g., PSOF at 5, ¶ 27, Doc. 568, ER 136; DSOF at 4, ¶ 27, Doc. 571, ER 108.

17Id.

18 August Order at 19, Doc. 584, ER 19.

19Id.

20Aloe Vera of America, Inc., 128 F. Supp. 2d at 1246-47. (See Aloe Vera's Brief at 35-36, 46-47, n.39.)

21 PSOF at 5, ¶ 24, Doc. 568, ER 136; DSOF at 4, ¶ 24, Doc. 571, ER 108.

22 Supp. PSOF at 3-4, ¶¶ 33-34, Doc. 528, ER 61-62; First Amended Complaint ¶ 56, Doc. 27, ER 313-314; Answer to First Amended Complaint ¶ 56, Doc. 72, ER 300.

23 PSOF at 2-3, ¶¶ 7-8, Doc. 568, ER 133-134; DSOF at 3, ¶¶ 7-8, Doc. 571, ER 107.

24 Defendant's collateral factual arguments, (1) that an August 1997 FOIA letter reveals that Plaintiffs AVA and Maughan were aware of IRS disclosures of return information to the NTA and (2) that the January 1997 NTA Correction Notices made Aloe Vera aware that the IRS has disclosed return information to the NTA, do not directly dispute the fact that Aloe Vera first discovered that the IRS had disclosed their return information in the SEP in September 2001. Aloe Vera's Brief at 48-49.

25 The August Order erroneously cites to 400 Fed. Appx. 964 as the affirming disposition.

26Wood v. Commonwealth of Va., 155 F.3d 564 (Table), 1998 WL 414019 (4th Cir. July 23, 1998).

27Amcor Capital Corp. v. United States, 1995 WL 515690 (C.D. Cal. June 13, 1995), aff'd on other grounds, 106 F.3d 406 (Table), 1997 WL 22248 (9th Cir. Jan. 15, 1997).

28 As set forth infra, although Defendant's attempt at an analogy misses the mark, the Gandy decision does provide definitive guidance on the issue of a single limitation period for multiple disclosures on different dates versus separate limitation periods for separate acts of disclosure on separate dates, the latter of which is a correct statement of the law.

29 In Snider and Mallas, the Circuit Courts found that each act of unauthorized disclosure creates a separate cause of action for damages purposes.

30 In fact, the district court in Gandy further parsed three categories of disclosure -- (1) verbal statements made in telephone conversations, (2) summonses, and (3) in-person interviews with third-party witnesses. Gandy v. United States, 1999 WL 112527, *2 (E.D.Tex. Jan. 15, 1999). The district court determined that the disclosures in certain interviews, made in the presence of taxpayer's attorney, were thereby discovered by Gandy outside the statute of limitations. Id. at *2. But the other disclosures, including those made in 45 other interviews, proceeded to a trial on the merits. Id.

31McQueen was appealed to the Fifth Circuit and was affirmed by unpublished disposition. That resolution of the case forecloses any argument that McQueen alters the Fifth Circuit's analysis of the statute of limitations issues in Gandy.

32 The court properly declined, at that time, the invitation to change the law of the case. (Order (J. Teilborg) of June 20, 2001 at 3, Doc.65, ER 307.)

33 This Court reviews such a legal determination de novo. Yacoubian, 24 F.3d at 3.

34 Indeed, the Fifth Circuit's rationale in Gandy, as set forth supra, undercuts the August Order's construction of McQueen as supporting a single limitation period for different disclosures occurring at different times.

35 Any arguments made by Defendant in its brief that have not been addressed herein are deemed meritless.

36 The above analysis is applies equally to the "constructive" discovery argument advanced by Defendant. (See Defendant's Brief at 31.)

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Case Name
    ALOE VERA OF AMERICA, INC., A TEXAS CORPORATION; REX G. MAUGHAN, HUSBAND; RUTH G. MAUGHAN, WIFE; MAUGHAN HOLDINGS, INC., AN ARIZONA CORPORATION; GENE YAMAGATA, AN INDIVIDUAL; AND YAMAGATA HOLDINGS, INC., A NEVADA CORPORATION, Plaintiffs - Appellants, vs. UNITED STATES OF AMERICA, Defendant - Appellee.
  • Court
    United States Court of Appeals for the Ninth Circuit
  • Docket
    No. 10-17136
  • Authors
    Tarter, Tim A.
    Ryan, James A.
    Grant, Merwin D.
    Vaughn, Kenneth B.
  • Institutional Authors
    Woolston & Tarter PC
    Quarles & Brady PLLC
    Grant & Vaughn PC
  • Cross-Reference
    For the district court opinion in Aloe Vera of America Inc. v.

    United States, No. 2:99-cv-01794 (D. Ariz. Aug. 3, 2010), see

    Doc 2010-18655 or 2010 TNT 163-12 2010 TNT 163-12: Court Opinions.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2011-20755
  • Tax Analysts Electronic Citation
    2011 TNT 191-15
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