Monday, January 26, 2004
Ninth Circuit Rejects Agent Liability in IRS Tax Enforcement Actions
From Staff and Wire Service Reports
Case law under which citizens can sue federal officials for violating their constitutional rights does not permit a challenge to partnership tax assessment and collection activities by agents of the Internal Revenue Service, the Ninth U.S. Circuit Court of Appeals has ruled.
Relief under Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388 (1971), is not available against IRS agents, since the Internal Revenue Code establishes a comprehensive program which includes meaningful statutory remedies for any wrongs committed in administering it, a three-judge panel said Thursday.
The case involved an Oregon cattle-ranching scam that cost investors in 41 states more than $100 million. Dozens of victims of the so-called “phantom cattle” scam by former Oregon rancher Walter J. Hoyt III, nicknamed the “Paper Cowboy” for herds of cattle that existed only on paper, sought Bivens damages from the IRS agents who investigated it.
The plaintiffs blamed the IRS for failing to stop the Hoyt operation despite continuous audits of Hoyt for 24 years.
Between 1971 and 1996, Hoyt organized partnerships that were partly designed to offer investors a tax deduction in addition to any profits on livestock sales. But the partnerships eventually became what some investigators called the biggest agricultural scam in U.S. history.
The investors had sued the IRS after the agency disallowed tax deductions based on the phony livestock operation and ordered payment of penalties and interest. Some of the investors claimed bankruptcy and other financial hardships as a result.
Judge Ronald M. Gould, in his opinion for the appellate panel, noted that Hoyt was convicted of bankruptcy fraud, mail fraud and money laundering, but was never indicted for tax crimes investigated by the IRS.
The tax agency began a criminal investigation in 1984 that ended without charges in 1987. A second investigation that began in 1989 also ended without prosecution.
The investors said that until 1995, the IRS allowed Hoyt to claim the tax refunds, which he used to encourage more investors to become partners.
But Gould wrote that the investors “have no right to...relief for any allegedly unconstitutional actions of IRS officials engaged in tax assessment and collection.”
Citing Schweiker v. Chilicky, 487 U.S. 412 (1988), the judge explained:
“The Supreme Court has instructed us that a Bivens action does not lie where a comprehensive federal program, with extensive statutory remedies for any federal wrongs, shows that Congress considered the types of wrongs that could be committed in the program’s administration and provided meaningful statutory remedies.”
Seven other federal circuits have rejected similar claims, Gould said, holding that the nation’s tax assessment and collection system meets the Schweiker test.
Senior Third U.S. Circuit Court of Appeals Judge Ruggero J. Aldisert, sitting by designation, and Judge Susan P. Graber joined in Gould’s opinion.
An IRS spokesman in Washington, D.C., said the agency does not comment on lawsuits still in court.
The attorney for the scam victims, Wendy Pearson, said she was disappointed by the ruling.
“If ever there was a case that warranted a bit of relief, this is it,” Pearson said. She said the 99 investors she represents will discuss the possibility of an appeal to the Supreme Court.
Hoyt is serving a 19-year sentence at a minimum-security federal prison in Arizona. At its peak in 1987, his business sprawled across more than 500,000 acres of ranches and leased federal land in the high desert of eastern Oregon.
Copyright 2004, Metropolitan News Company