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McNamee v. United States

United States District Court, D. Connecticut

December 28, 2017

SEAN P. MCNAMEE, Plaintiff,
v.
THE UNITED STATES, Defendant.

          RULING ON DEFENDANT'S MOTION TO DISMISS

          VICTOR A. BOLDEN, UNITED STATES DISTRICT JUDGE.

         Sean McNamee (“Mr. McNamee” or “Plaintiff”), a certified public accountant, has sued the United States Department of Treasury Internal Revenue Service (“United States”), claiming an unconstitutional denial of his right to appeal a proposed penalty assessed against him. Compl. at 2, ECF No. 1. Mr. McNamee does not seek damages-only “his constitutional right to an appellant hearing.” Am. Compl. at 1, ECF No. 11.

         The United States moves to dismiss the Complaint because the United States did not waive its sovereign immunity in 28 U.S.C. § 6320 or § 6330, and argues that the Court therefore lacks jurisdiction over this case. Mot. Dismiss at 1, ECF No. 8. The Court agrees.

         This Court does not have jurisdiction over this matter. 28 U.S.C. § 6330(d)(1) grants jurisdiction to the Tax Court, and there is no explicit waiver under any of the provisions that Mr. McNamee cited for the government to be sued in the District Court. As a result, for the reasons discussed more fully below, Defendant's motion to dismiss is GRANTED and this case is dismissed.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         Mr. McNamee, a certified public accountant, has helped clients prepare their tax forms for many years. See, e.g., Compl. at 1, 13. This lawsuit involves tax preparer penalties issued against Mr. McNamee, and his attempts to appeal those penalties within the Internal Revenue Service (“IRS”).

         Issues arose from tax filings that Mr. McNamee helped his clients prepare from 2007 until at least 2013. In a letter to the Internal Revenue Service (IRS), Mr. McNamee explains that, in late 2012, two representatives from the IRS and an individual from the U.S. Attorney's Office interviewed him, while assessing penalties based on sixteen audits of his clients. Opp. Mot. Dismiss Ex. 9 at 1, ECF No. 12-9.

         Evidently, the IRS's investigation focused on whether Mr. McNamee had understated the salaries and overstated the expenses of several clients. See Compl. at 7. For example, Mr. McNamee apparently advised at least one client that the client could qualify as a “traveling or city salesman” under I.R.C. § 3121(d)(3)(D). Id. As a “traveling salesman” or independent contractor, Mr. McNamee advised, the client could claim certain business expenses as exempt from income tax. Id. The client reported his wage income on Form 1040 as $178, 000 for 2009 and $165, 000 for 2010. Id. at 19. The client reported “no gross receipts for both years” but listed “expenses of $9, 600 and $10, 310 for 2009 and 2010, respectively.” Id.

         The IRS determined, however, that the client was not an independent contractor but rather a wage earner and “one of the owners of the corporation in which he received wages.” Compl. at 19. The IRS explained that Mr. McNamee had “treated the taxpayer as a statutory employee and created false expenses.” Id. The IRS stated that Mr. McNamee had estimated his client's expenses based on Mr. McNamee's theory that “a real estate developer has to incur expenses, like travel and meals and entertainment to conduct his business, ” and therefore “anyone who works on a commission based earning[] should be entitled to match the expenses they incur to carry [out] their employment responsibilities, dollar for dollar, and not subject to limitations . . . .” Id. But, the IRS noted, Mr. McNamee had failed to include “supporting documentation . . . to substantiate the expenses on [the client's] schedule C.” Id. The IRS found that Mr. McNamee knew that the expenses listed in the client's schedule C had not been reimbursed by the corporation, and explained that “actual unreimbursed expenses do not belong on schedule C.” Id. at 20. The IRS concluded that Mr. McNamee “willfully disregarded rules and regulations in preparation of the return.” Id. at 24.

         On March 5, 2013, Mr. McNamee “received approximately 30 penalty notices” of proposed penalties against him for tax years 2007 through 2010, all contained a claim that Mr. McNamee had violated I.R.C. § 6694(b)(1). Opp. to Mot. Dismiss Ex. 9 at 1; Compl. at 11; Am. Compl. at 2. That statute provides:

Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph 2 [i.e., willful or reckless conduct] shall pay a penalty with respect to each such return or claim in an amount equal to the greater of-(A) $5, 000, or (B) 75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

I.R.C. § 6694(b)(1). The notice also allegedly stated that Mr. McNamee had thirty days to appeal the proposed penalties, and explained that if Mr. McNamee disagreed with the findings, he could request a meeting or a telephone call with a representative from the IRS, and if he disagreed again, he could request a conference with the Appeals Office within the IRS. Compl. at 11. The IRS enclosed a document titled “Your Appeal Rights and How to Prepare a Protest If You Don't Agree, ” and explained the procedures to protest the assessment. Id. Finally, the letter stated that if Mr. McNamee did not respond by April 4, 2013, the IRS would “assess the penalty and begin enforced collection actions.” Id.

         On March 19, 2013, Mr. McNamee received statutory notices that penalties had been assessed against him. Compl. at 2.

         On May 31, 2013, the IRS informed Mr. McNamee that a complaint had been filed against him alleging “a lack of due diligence” and “disreputable conduct” as a result of treating commission-based taxpayers “as statutory employees as opposed to common law employees.” Id. at 25. Mr. McNamee responded on June 4, 2013, and the IRS replied that he “thoroughly researched and documented the basis for the position [he] took, ” but “failed to advise [his] clients of the potential penalties that were reasonably likely to apply to the client.” Id.

         Mr. McNamee's case was also sent to the Office of Professional Responsibility (OPR) in the Department of Treasury. See Compl. at 25. On March 5, 2014, OPR sent Mr. McNamee a reprimand letter based on “information that called into question [his] fitness to practice before the Internal Revenue Service . . . .” Id. The letter concluded that Mr. McNamee had erroneously treated taxpayers as statutory employees, rather than common law employees, despite audits that should have corrected the error. Id. OPR found that Mr. McNamee had “thoroughly researched and documented the basis for the position [he] took” but “failed to advise [his] clients of the potential penalties that were reasonably likely to apply to the client.” Id. OPR concluded that Mr. McNamee's conduct fell “below that of the standards of a competent practitioner” but declined to “initiate a proceeding for [Mr. McNamee's] censure, suspension, or disbarment from practice before the Internal Revenue Service at this time” and instead reprimanded Mr. McNamee for the conduct. Id.

         Mr. McNamee alleges that he and his original counsel wrote protest letters, and attaches one to the Complaint that explains that Mr. McNamee “conducted substantial research into the legislative history and interpretation of” the applicable tax provisions, and “acted out of a good faith belief” that his reading of the tax code was correct. Compl. at 7. Mr. McNamee claims that, as of the filing of the Amended Complaint in July 2017, despite his repeated requests for one, no appellate hearing had taken place. Ex. 2-1 to 2-6. Mr. McNamee did attach to his Complaint a letter from an Appeals Officer at the IRS, who indicated that he received Mr. McNamee's file, including his objections to the proposed assessment of his penalties, on August 1, 2016, and Mr. McNamee could expect a review of the matter in about six months of that date. Id. at 27-28. In addition, the United States indicated in its motion to dismiss that, at some point, the tax return preparer penalties proposed or assessed against Mr. McNamee for 2012 and 2013 were reversed by the IRS Office of Appeals. Mot. Dismiss at 5; Mot. Dismiss Ex. A, ECF No. 8-2.

         In the initial Complaint, Mr. McNamee sought to remove any and all liens against him until those liens are appealed or cancelled. Compl. at 3. He asked the Court to “direct the Internal Revenue Service [to] immediately restore [his] PTIN and . . . immediately process and approve an electronical filing code number so that [his] clients may properly file the taxes they are required to file by law.” Id. In addition, he asked the Court to “immediately suspend any and all audits or appeals being conducted in the State of Connecticut and moved to an independent jurisdiction so that [his] clients may get fair representation in an audit” and “direct the Internal Revenue Service to cease their continued harassment of [Mr. McNamee and his] clients.” Id. In the Amended Complaint, he reduces his “original claim to the sole position of the Treasury denying [him] his constitutional right to an appellant hearing.” Am. Compl. at 1. He does not seek damages. Am. Compl. at 3.

         In the first Complaint, ECF No. 1, Mr. McNamee named the “Department of the Treasury Internal Revenue Service Appeals Office CT-RI Appeals Office 333 East River Drive, Suite 200, East Hartford CT 06108” as the defendant. The Amended Complaint, ECF No. 11, replaces that defendant with the “United States.”

         II. STANDARD OF REVIEW

         The United States moves to dismiss Mr. McNamee's Amended Complaint based on a lack of subject-matter jurisdiction. “A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it.” Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000); Fed.R.Civ.P. 12(b)(1). The plaintiff bears the burden ...


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