The opinion of the court was delivered by: MARILYN HALL PATEL
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER
This matter arises out of an international withholding tax audit conducted by the Internal Revenue Service ("IRS") under 26 U.S.C. § 1441 against Albert Miller as withholding agent for A-Alphatronics, Inc.. The IRS recommended withholding tax liability in excess of $ 10,000,000 and additional penalties in excess of $ 6,000,000.
This case presents issues involving sections 7432 and 7433 of the Internal Revenue Code, which were enacted as part of the so-called "Taxpayer Bill of Rights" in the Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, Secs. 6240-6241. Sections 7432 and 7433 allow taxpayers to bring civil actions in the United States district courts to recover damages from the government when an IRS officer or employee knowingly or negligently fails to release a lien (section 7432) or recklessly or intentionally disregards any provision of the Internal Revenue Code or any regulation promulgated thereunder (section 7433).
Section 7432, entitled "Civil Damages for Failure to Release Lien," provides in pertinent part:
(a) In General. --If any officer or employee of the Internal Revenue Service knowingly, or by reason of negligence, fails to release a lien under section 6325 on property of the taxpayer, 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), 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 sum of--
(1) actual, direct economic damages sustained by the plaintiff which, but for the actions of the defendant, would not have been sustained, plus
(2) the costs of the action.
Section 7433, entitled "Civil Damages for Certain Unauthorized Collection Actions," provides in pertinent part:
(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 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. Except as provided in section 7432, such civil action shall be the exclusive remedy for recovering damages resulting from such actions.
(b) Damages. -- In any action brought under subsection (a), 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 $ 100,000 or the sum of --
(1) actual, direct economic damages sustained by the plaintiff as a proximate result of the reckless or intentional actions of the officer or employee, and
(2) the costs of the action.
The government concedes that the assessment made on September 4, 1989 against plaintiff was erroneous. It should not have been made on that date because a notice of deficiency (90-day letter) had not been sent to the plaintiff before the assessment was made. The notices of tax lien that had been filed on May 1 and 17, 1990 were released on July 27, 1990 and the assessments were abated on August 30, 1990.
Plaintiff contends that the government is liable for damages under sections 7432 and 7433. The government claims it is not liable for damages because no officer or employee of the IRS knowingly, or by reason of negligence, failed to release a lien under 26 U.S.C. § 6325 or recklessly or intentionally disregarded any provision of the Internal Revenue Code in connection with the collection of the taxes assessed against plaintiff.
This matter was tried before the court on March 23-25, 1992. The trial related solely to the issue of whether the United States is liable to the plaintiff for damages under the provisions of 26 U.S.C. §§ 7432 and 7433. The court hereby enters its findings of fact and conclusions of law as to plaintiff's claims. To the extent that any findings of fact are included under conclusions of law they shall be deemed findings of fact, and to the extent that any conclusions of law are included under findings of fact they shall be deemed conclusions of law.
2. Tamaki is a specialist employed by the IRS to investigate transactions involving foreign entities. Cases are referred to international examiners by domestic revenue agents if issues involve foreign entities. As soon as an international examiner completes his investigation, the case is referred back to the domestic revenue agent group which had referred the case to the international examination group. The international examiner or his group has no responsibility or authority to close out or process a case once he completes his audit. Only a domestic revenue agent has that responsibility.
3. Tamaki's audit was initiated in 1982. Both Edward Mevi and Lawrence Brookes filed Powers of Attorney concerning this matter. In a letter dated November 6, 1986, Brookes contacted Tamaki inquiring whether Tamaki needed any additional materials to complete the audit. Ex. A-10. In a telephone conversation in early December, 1986, Brookes requested a closing conference if a tax were to be assessed against plaintiff. Tamaki never contacted Brookes thereafter.
4. Tamaki completed his report on June 30, 1987 and recommended that withholding taxes under section 1442 be assessed against plaintiff at 30% of the research and development contract amounts for each of the years 1976 through 1980. Ex. B-16. Tamaki based this recommendation, among other reasons, on the fact that "the taxpayer has not and will not provide the proper books and records or information to support his position." Ex. B-16 at 56. The report concluded that "the entire series of transactions with all the entities created by A.J. Miller are considered sham. . . . None . . . are considered arm's length." Ex. B-16 at 56. Tamaki then prepared various IRS internal processing forms for purposes of closing the case out of his international examination group for transfer back to the domestic revenue agent group.
5. Tamaki was aware that plaintiff's tax counsel, Lawrence Brookes, did not agree with the imposition of the withholding taxes under section 1442 against his client and that Brookes intended to appeal the matter to the IRS appeals division. Tamaki included that fact in the transmittal form he prepared when he transferred his report to his group manager. Ex. A-30; Form 4665. It was Tamaki's understanding that the domestic revenue agent group which had referred the case to him would issue a 30-day letter and that the taxpayer would file a protest and the matter would be transferred to the appeals division for further review and an attempt to settle the case.
6. Tamaki's report was reviewed by a reviewer on July 9, 1987 for purposes of technical accuracy. The reviewer proposed certain adjustments and Tamaki made those adjustments to his report on August 27, 1987. The reviewer also stated in his report that he expected the appeals division to review the case. Ex. A-30; Form 3990.
7. No copies of this report were sent to either Miller or his attorneys. No one from the IRS made any effort to contact Miller or his attorneys to set up a closing conference.
9. Tamaki had no further involvement in the matter from August 27, 1987 until June or July of 1989, when the group manager of the international examination group in the San Jose District, Donald Kihara, showed Tamaki a box containing Tamaki's original report and workpapers which had been sent to Kihara by the group manager of the international examination group in San Francisco. Tamaki told Kihara to send it to a domestic revenue agent group for processing. The original domestic revenue agent group that had originally referred the case to Tamaki in 1982 no longer existed, so the case had to be assigned to a new group for it to be processed.
10. Tamaki did not keep track of the case after he completed his report because he had a large caseload that included multinational corporations, of which many involved potential assessments of tax much larger than the Miller audit, although the Miller audit was the largest potential assessment of personal tax that he had handled. Tamaki had no knowledge of what happened to his report between August 27, 1987 and June or July of 1989 when Kihara spoke to him. After completing a report, there is nothing for Tamaki has nothing to do with a case unless he is asked by an appeals officer or government attorney to respond to something the taxpayer filed or did.
11. Kihara is the group manager of the international examination group in the San Jose IRS District. Prior to June, 1989 there was no international examination group in San Jose, so all referrals regarding international tax issues were sent to the San Francisco District.
12. In June of 1989 Kihara received a phone call from the international examination group manager in the San Francisco District, Dough Kuntz. He told Kihara that he had located the Miller file in San Francisco and that it needed to be closed. They decided the case should be closed in the San Jose District because Miller resided and worked within that district.
13. Since the international group is only a specialty group within the Examination Division, they have no control over tax returns. The processing of cases can only be initiated by a domestic revenue agent group who would cause 30 and 90-day letters to be sent out. The international examination group manager or agent who wrote the report does not review either the 30 or 90-day letters either before or after they are sent out by the processing or support units responsible for sending out such letters.
14. Kihara then asked Jean Janich, a group manager of a revenue agent group, if she would process the Miller case. She agreed. Kihara made no suggestion as to how Janich should process the case. Kihara had no involvement in the case again until May, 1990 when Brookes called him seeking a copy of the notice of deficiency on the assessment that had been made on September 4, 1989. When he spoke with Brookes in May, 1990, Kihara had no reason to believe that 30 and 90-day letters had not been sent to Miller before the assessment was made. Although he had not seen the 90-day letter, he assumed it had been sent out and told Brookes he would attempt to locate a copy of the notice.
15. Janich is a group manager of a domestic revenue agent group in the San Jose IRS District. She had twelve revenue agents under her supervision in 1989. Each domestic revenue agent group has a support function which prepares all 30 and 90-day letters. Janich had no authority to prepare or send out such letters. Only the processing unit can perform those functions.
16. In June or July of 1989, Janich took control of the Miller case for purposes of closing it out. She intended that it be sent to the appropriate examination support and processing group to send out the 30 and 90-day letters. She assigned the matter to a revenue agent in her group, Ann Reuter, in order to research the procedures that needed to be performed to close the case since it involved the filing of 1042 tax returns. Neither Janich, Reuter, nor any other domestic revenue agent in the San Jose District had ever before processed a case involving a 1042 tax return.
17. Both Janich and Reuter discussed the matter with the manager of the processing group in the San Jose District who told both of them that all 1042 tax returns must be sent to the Philadelphia Service Center for processing. Janich also personally looked at the IRS Manual which directed that all 1042 tax returns be sent to the Philadelphia Service Center for processing. Ex. A-29. The administrative file was sent by Janich to the Philadelphia Service Center on July 26, 1989 and received by the service center on August 16, 1989. Ex. A-12.
18. Janich believed that the Philadelphia Service Center would process the 1042 tax returns in the proper manner which included sending 30 and 90-day letters to the taxpayer before any assessment was made. Janich made the decision to send the 1042 tax returns to the Philadelphia Service Center for processing based upon her review of the Internal Revenue Manual, the research conducted by Reuter, and conversations she and Reuter had with the manager of the processing function.
19. Reuter then filed all the appropriate internal processing forms and gave them to the secretary along with the administrative file to be sent to the Philadelphia Service Center. Reuter assumed that the Philadelphia Service Center would properly process the case by first issuing both 30 and 90-days letters. She did not prepare the internal processing forms that went along with the administrative file to the Philadelphia Service Center any differently than if the case was being closed out by the San Jose ...