CCA 200033001: damages claim over IRS collection conduct

Plain-English summary

Investors claimed damages under section 7433 after the IRS collected late filing penalties and transferred payments between partnership accounts. The visible memorandum explains that a claimant must prove a violation of tax collection law, the required degree of disregard, direct economic damage, and a causal link between the conduct and that damage. It notes that the collection activity occurred before a 1998 amendment added negligence as a basis for liability, so reckless or intentional disregard governed these claims. The memorandum begins to discuss the investors' allegations, but its later pages are blacked out in the IRS release. The visible text does not reveal how Counsel assessed those allegations or the final outcome.

Ruling snapshot

• Question: What standards govern the investors' section 7433 damages claim arising from IRS collection activity?
• Outcome: Advice given in the visible portion; the case specific assessment is redacted.
• Key authorities: IRC §§ 7433, 7214, 6304, 6331(d), and 6301; Treas. Reg. § 301.7433-1.

Full text (IRS public release)

                         DEPARTMENT OF THE TREASURY
                             I N T E R N AL R E V E N U E S E R V I C E
                                  WASHINGTON, D.C. 20224


                                                       March 17, 2000

Number: 200033001                                               GL-119716-99
Release Date: 8/18/2000                                         CC:EL:GL:

                                                                 UIL: 20.02.03-00
                                                                      9999.98-00


MEMORANDUM FOR DISTRICT COUNSEL, PACIFIC NORTHWEST

FROM:                  Lawrence H. Schattner
                       Chief, Branch 3 (General Litigation)



SUBJECT:               I.R.C. § 7433 Claim


This responds to your memorandum to the Office of Assistant Chief Counsel (Field
Service) requesting advice with respect to your proposed response to issues raised
in the administrative claim filed pursuant to I.R.C. § 7433 by some investors in A.
The claim for damages allege that the Service recklessly or intentionally violated
the provisions of I.R.C. §§ 7214, 6304, 6331(d), and 6301 when it collected late
filing penalties from investors in A who did not settle their A-related tax liabilities
with the Service, and by transferring payments made on behalf of one partnership
to the account of another partnership.




Legend

A
B

C
Amount A
Date A
Date B
Date C
Date D
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Statutory Background of I.R.C. § 7433

I.R.C. § 7433 provides in part as follows:

(a) IN GENERAL. - If, in connection with any collection of Federal tax with respect
to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or
intentionally, or by reason of negligence, disregards any provision of this title, or
any regulation promulgated under this title, such taxpayer may bring a civil action
for damages against the United States in a district court of the United States.

(b) DAMAGES. - In any action brought under subsection (a) or petition filed under
subsection (e), upon a finding of liability on the part of the defendant, the defendant
shall be liable to the plaintiff in an amount equal to the lesser of $1,000,000
($100,000 in the case of negligence), or the sum of -

      (1) actual, direct economic damages sustained by the plaintiff as a
proximate result of the reckless or intentional or negligent actions of the officer or
employee, and

      (2) the costs of the action.

(d)(3) PERIOD FOR BRINGING ACTION. - Notwithstanding any other provision of
law, an action to enforce liability created under this section may be brought without
regard to the amount in controversy and may be brought only within 2 years after
the date the right of action accrues.

Treas. Reg. § 301.7433-1(g)(2) provides that a cause of action under section
7433(a) accrues when the claimant has had a reasonable opportunity to discover all
essential elements of a possible cause of action.

Section 7433 is a waiver of the United States’ sovereign immunity and, although
placed in the Internal Revenue Code, Congress could have placed such waiver in
the Federal Tort Claims Act, 28 U.S.C. § 2401, which currently allows the United
States to be sued for tort but excepts tax matters from its scope. Indeed, tort terms
are used in section 7433. Also, its legislative history, which describes when a
cause of action accrues under section 7433, is the same as the rule under the
Federal Tort Claims Act. See H.R. Rep. 100-1104, at 29. The essential elements
of a cause of action for tort that must be established by a plaintiff are: (1) that there
is a duty on the part of the defendant; (2) that there has been a breach of duty by
the defendant; (3) that the defendant’s negligent or intentional action caused
damages to the plaintiff; and (4) that the plaintiff suffered damages in a specific
amount. See William Prosser, The Law of Torts, § 30, p. 143 (4th Ed. 1971). Under
section 7433, the essential elements are: (1) that the Internal Revenue Code and
regulations prescribe what conduct Service personnel are required to follow in
connection with collection activities; (2) that there was a breach of that duty by the
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Service; (3) that the breach was the result of “reckless, intentional, or negligent
disregard” of the Code or the regulations issued thereunder; and (4) that the
claimant suffered damages in a specific amount. The claimant has the burden of
proof with regard to each of these elements.

Before discussing whether the allegations in the A-related administrative claim
satisfies each element under section 7433, we make some general observations
concerning the definitions of “reckless and intentional disregard” and “causation.”

Neither section 7433 nor the regulations thereunder define the tort terms “reckless,”
“intentional,” or “negligent.” However, these terms have generally accepted
common law definitions. One who is guilty of intentional disregard or misconduct
intends the harm caused by his acts or omissions. In order for disregard or
misconduct to be reckless, the actor must have intentionally acted or failed to act
either knowing, or knowing facts that would lead a reasonable person to realize,
that it is highly probable that harm will result. See 57 Am. Jur. 2d., Negligence
§§ 290-304 (1989). Reckless misconduct differs from negligence. Negligence
consists of mere inadvertence or failure to take precautions while reckless
misconduct involves a conscious choice of a course of action or inaction. Conduct
cannot be in reckless disregard unless the conduct itself is intended. See 57A Am.
Jur.2d, Negligence §§ 300, 302 (1989). Whether conduct or failure to act
constitutes reckless, intentional, or negligent disregard of the law will depend on the
facts and circumstances of each case.

The claimant must establish that the Service’s actions were the proximate cause of
the claimant’s damages. Economic damages are the proximate result of an
employee’s reckless or intentional conduct if the damages are caused in fact by
and are a foreseeable result of such actions. Economic damages that are not
attributable directly to an employee’s reckless or intentional conduct, but that result
substantially from an unforeseeable intervening cause, are not compensable under
section 7433, even if such damages would not have been sustained but for the
employee’s actions. See Information Resources, Inc. v. United States, 996 F.2d
780 (5th Cir. 1993) (the Service recklessly or intentionally disregarded its regulations
when it failed to release liens against a computer software company. However, the
company was not entitled to recover damages allegedly lost due to the action
because no direct causal relationship was shown between the liens and the
corporations’s loss of business).

The claimant must incur actual, pecuniary damages. Injuries such as
inconvenience, emotional distress and loss of reputation are compensable only to
the extent that they result in actual pecuniary damages. Treas. Reg. § 301.7433-
1(b)(1); Amoco Prod. Co. v. Aspen Group, 1999 U.S. Dist. LEXIS 12713 (D. Colo.
1999).
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                                     The A Cases 1

In order to recover under section 7433, the claimants must first be able to prove
that the Service violated some provision of the internal revenue laws or regulations
during the process of collecting the late filing penalties. The claimants allege that
the Service’s collection of the penalties was an attempt to coerce non-settling
partners to accept the substantive tax settlement in violation of section 7214, and to
harass, oppress and abuse the non-settling partners in violation of section 6304.
The claimants also allege that the Service’s method of applying some of the levied
funds violated section 6331(d) and section 6301.

                                   Litigation Hazards




      1
          RRA 98 amended section 7433 to add a cause of action for negligent
disregard of the internal revenue laws. The amendment is effective for actions of
officers or employees of the Service after July 22, 1998. The collection activity in these
cases took place prior to July 22, 1998. Therefore, the reckless or intentional standard
applies to these cases.
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