Dismissal, Severance of Disclosure Claim Denied in Penalty Case

CELIA R. CLARK,
Plaintiff,
v.
UNITED STATES OF AMERICA and INTERNAL REVENUE SERVICE,
Defendants.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
WEST PALM BEACH DIVISION

ORDER DENYING MOTION TO DISMISS COUNT II [ECF No. 6] AND DENYING MOTION TO SEVER/BIFURCATE AND STAY DISCOVERY ON COUNT II [ECF NO. 25]

THIS CAUSE comes before the Court upon Defendant United States' Motion to Dismiss Count II of Plaintiff's Complaint (the “Motion”) [ECF No. 6]. The Court has reviewed the Motion, Plaintiff's Response in Opposition [ECF No. 11], Defendant's Reply [ECF No. 13], and the full record. For the reasons discussed below, the Court DENIES Defendant's Motion to Dismiss [ECF No. 6] and Defendant's Motion to Sever, or in the Alternative Bifurcate Claims and Stay Discovery on Count II [ECF No. 25].

FACTUAL AND PROCEDURAL BACKGROUND¹

This action involves a tax dispute arising out of the Internal Revenue Service's (“IRS”) investigation and assessment of penalties against Plaintiff for tax years 2008 and 2016. Plaintiff Celia Clark is a tax attorney whose legal practice during those years included helping small businesses establish small “microcaptive” insurance companies [ECF No. 1 ¶¶ 12, 14]. Beginning in August 2012, the IRS began investigating Clark's captive insurance practices to determine whether Plaintiff was promoting any abusive tax shelter [ECF 1 ¶ 27]. Following that investigation, the IRS assessed $11,636,929 in penalties against Clark [ECF 1 ¶ 65]. According to the Complaint, the IRS's investigation was abusive because the IRS allowed the investigation to drag on for years without providing clarity or taking a firm position on the proper tax treatment of captive insurance companies [ECF No. 1 ¶¶ 48-49].

Plaintiff further alleges that, during the course of the IRS's investigation, multiple IRS employees disclosed her tax return information to her clients, clients' representatives, and other individuals, in an attempt “to destroy Clark's business through leaks of her protected return information” [ECF 1 ¶¶ 60, 63]. During that time, Plaintiff was represented by the law firm of Caplin & Drysdale [ECF 1 ¶¶ 58, 63h]. Plaintiff's attorneys complained to the IRS and the Treasury Inspector General for Tax Administration (TIGTA) regarding the IRS's alleged disclosure of Plaintiff's return information [ECF No. 1 ¶¶ 58, 63h].

Based on these allegations, on November 11, 2022, Plaintiff filed the Complaint [ECF No. 1], asserting two causes of action: (1) Tax Refund (Count I) and (2) Disclosure of Tax Information in Violation of 26 U.S.C. § 7431 (Count II) [ECF No. 1 ¶¶ 70-80]. During that time, Plaintiff was represented by the law firm of Caplin & Drysdale [ECF 1 ¶¶ 58, 63h].

On February 23, 2022, Defendants filed the instant Motion to Dismiss, seeking to dismiss Plaintiff's disclosure of tax return information claim in Count II as barred by the two-year statute of limitations under 26 U.S.C. § 7431(d) [ECF No. 6].² Plaintiff responded in opposition [ECF No. 11] and the Defendant replied [ECF No. 13]. The Motion is ripe for adjudication.

LEGAL STANDARDS

A. Federal Rule of Civil Procedure 12(b)(1)

A Rule 12(b)(1) motion challenges the district court's subject matter jurisdiction and takes one of two forms: a “facial attack” or a “factual attack.” Lawrence v. Dunbar, 919 F.2d 1525, 1529 (11th Cir. 1990). A facial attack on the complaint requires the court merely look to see if the plaintiff has sufficiently alleged a basis of subject matter jurisdiction, taking as true the allegations in the plaintiff's complaint. Id. “By contrast, a factual attack on a complaint challenges the existence of subject matter jurisdiction using material extrinsic from the pleadings, such as affidavits or testimony.” Stalley ex rel. U.S. v. Orlando Reg'l Healthcare Sys., Inc., 524 F.3d 1229, 1233 (11th Cir. 2008). Regardless of whether a challenge is facial or factual, “[t]he burden for establishing federal subject matter jurisdiction rests with the party bringing the claim.” Williams v. Poarch Band of Creek Indians, 839 F.3d 1312, 1314 (11th Cir. 2016) (quoting Sweet Pea Marine, Ltd. v. APJ Marine, Inc., 411 F.3d 1242, 1247 (11th Cir. 2005)). If a district court determines that it lacks subject matter jurisdiction to hear the case, the court must dismiss the action. See Fed. R. Civ. P. 12(h)(3).

B. Federal Rule of Civil Procedure 12(b)(6)

Rule 8(a)(2) requires complaints to provide “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). To avoid dismissal under Rule 12(b)(6), a complaint must allege facts that, if accepted as true, “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see Fed. R. Civ. P. 12(b)(6). A claim for relief is plausible if the complaint contains factual allegations that allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly, 550 U.S. at 545). Conclusory allegations, unwarranted deductions of facts or legal conclusions masquerading as facts will not prevent dismissal. Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182, 1188 (11th Cir. 2002).

DISCUSSION

The Government seeks to dismiss Count II of Plaintiff's Complaint on timeliness grounds for failing to bring the claim within the two-year statute of limitations set forth in under 26 U.S.C. §7431(d) [ECF No. 6]. In support, the Government attaches to its Motion five letters sent in 2014 from Plaintiff's attorneys at the law firm of Caplin & Drysdale to the IRS and TIGTA complaining about various communications between IRS agents and Plaintiff's clients [ECF No. 6-1]. The Government argues that the letters establish that Plaintiff discovered the alleged disclosures no later than 2014 [ECF No. 6 pp. 3-4]. The Government argues that the court may consider these letters at the motion to dismiss stage for two reasons [ECF No. 6 pp. 4-8].

First, the Government contends that the statute of limitations under 26 U.S.C. § 7431(d) is jurisdictional, thereby allowing the Court to evaluate the Motion as a factual attack on subject matter jurisdiction under Rule 12(b)(1) and therefore to consider matters outside the pleadings [ECF No. 6 pp. 4-6]. Plaintiff responds that § 7431(d) is not jurisdictional, citing Bancroft Global Dev. v. U.S., 330 F. Supp. 3d 82 (D.D.C. 2018), which analyzed whether § 7431(d) was jurisdictional in light of intervening Supreme Court authority and concluded that it was not [ECF No. 11 pp. 10-13]. The Government did not respond or further address this point in Reply [ECF No. 13]. The Court has reviewed the authorities cited by the parties and does not consider the limitations provision in § 7431(d) to be jurisdictional. See Bancroft, 330 F. Supp. 3d at 95 (concluding “that § 7431's statute of limitations is a nonjurisdictional affirmative defense and that the Court must analyze Plaintiffs' pleadings as to timing under the Rule 12(b)(6) standard, as opposed to the Rule 12(b)(1) standard”). Accordingly, the Court declines to consider the letters under Rule 12(b)(1) and instead analyzes the Motion under Rule 12(b)(6).

Second, the Government argues that, even evaluating the Motion under Rule 12(b)(6), the Court may consider the letters without converting the motion to a motion for summary judgment because the letters are undisputedly authentic and discuss facts central to Plaintiff's claim [ECF No. 6 pp. 6-8 (referencing incorporation by reference doctrine)]. Plaintiff disputes the centrality of the letters to her disclosure claim and argues that, even if were the Court to consider them, they concern only a subset of the alleged disclosures in the complaint and thus do not establish that Plaintiff discovered all of the disclosures more than two years before bringing her claim [ECF No. 11 pp. 8-10, 13-14].

Generally, a court “must convert a motion to dismiss into a motion for summary judgment if it considers materials outside the complaint.” Day v. Taylor, 400 F.3d 1272, 1275-76 (11th Cir. 2005) (citing Fed. R. Civ. P. 12(b)). Nevertheless, a court “may consider a document attached to a motion to dismiss without converting the motion into one for summary judgment if the attached document is (1) central to the plaintiff's claim and (2) undisputed.” Day, 400 F.3d at 1276. “In this context, 'undisputed' means that the authenticity of the document is not challenged.” Id.

In this case, the Court declines to consider the letters at this stage of the proceedings. It is true that Plaintiff does not challenge the authenticity of the letters [see generally ECF No. 11]. It is also true that (1) the letters generally tend to suggest that Plaintiff was aware of a variety of communications between IRS agents and Plaintiff's clients regarding the IRS's scrutiny of Plaintiff's captive insurance practices [ECF No. 6-1]; and (2) the Complaint makes general reference to “complaints” made by Plaintiff's counsel to TIGTA and the IRS “describing many of the [disclosure] incidents” that Plaintiff alleges [ECF No. 1 ¶ 63h]. Nevertheless, there remains significant dispute about the centrality of these letters to Plaintiff's disclosure of tax information claim under 26 U.S.C. § 7431, as well as whether the letters concern the full scope of disclosures alleged in the Complaint [see ECF No. 11 pp. 8-10, 13-14]. In light of those disputes, the Court considers the letters to be more appropriate for consideration on a more fulsome summary judgment record.

CONCLUSION

Accordingly, it is hereby ORDERED AND ADJUDGED as follows:

DONE AND ORDERED in Chambers at Fort Pierce, Florida, this 18th day of July 2022.

AILEEN M. CANNON
UNITED STATES DISTRICT JUDGE

cc:
counsel of record