Opposition Brief — Western Reserve Oil & Gas Co. v. New

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Soseett eset! OL, JR

In the Supreme Court of the Unites States

OCTOBER TERM, 1985

WESTERN RESERVE OIL AND

Gas Co., LTD., ET AL., PETITIONERS

Vv.

H. STEVEN NEw, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

MEMORANDUM FOR THE RESPONDENTS

IN OPPOSITION

CHARLES FRIED

Solicitor General

Department of Justice

Washington, D.C. 20530

(202) 633-2217

TABLE OF AUTHORITIES

Cases:

ee ee ee Rs wa onc duee sated

Eoard of Regents v. Roth,

IEE cetGentideeVesseacacesscanss

Bob Jones University *. Simon,

DO SA SORE bene Fo Meenas bos eee eansevaes

Butz v. Economou, 438 U.S. 478 ............

Cleveland Trust Co. v. United States,

421 F.2d 475, cert. denied, 400 U.S.

UW Kb eee hs kc cave ebce bu 60046 Ceeass

Davis v. Scherer, No. 83-490

CPD Be Oe soak Hack cwcdecn ns asenses.

Duke Power Co. .v. Carolina Environmental

Study Group, Inc., 438 U.S. 59 ............

Harlow v. Fitzgerald, 457 U.S. 800 ...........

Investment Annuity, Inc. v. Blumenthal,

609 F.2d 1, cert. denied, 446 U.S.

GOn <6 AH Ott, Gate ey 2 Shee ee 3

Kosak vy. United States, No. 82-618

St SE cai Wh ou Cate Kcapetens ices

Luhring v. Glotzbach, 304 F.2d 560 ..........

Mid-South Music Corp. v. Kolak,

FE ai knead s Uk peewee o0ke 0 v0 ese

Mid-South Music Corp. v. United States

Dep't of the Treasury, 579 F. Supp.

481, aff'd sub nom. Mid-South Music

Corp. v. Kilak, 756 F.2d 23 ...........045-

(1)

, 5, 6

II

Page

Cases—-Continued:

Paul v. Davis, 424 U.S. 693 .........ccececcees 6

Phillips v. Commissioner, 283 U.S. 589 ....... 4,6

Rosenberg v. Commissioner, 450 F.2d 529 .... 6,7

Rutledge v. Arizona Board of Regents,

660 F.2d 1345, aff'd sub nom. Kush v.

Rutledge, 460.U.S. 719 ....... cc cece eee nee 6

Sanderson v. Village of Greenhills,

CH EO Kaa 6 ee ER adie nk ees tea cevaee 3

United States v. Euge, 444 U.S. 707 ............ 5

United States v. Lovasco, 431 U.S. 783 ......... 4

Constitution and statutes:

U.S. Const. :

SE Nib Kew ink canndacsdan oenseuawest 4

Amend. V (Due Process Clause) ..... ie © &

Internal Revenue Code of 1954 (26 U.S.C.):

UE 055 cakes cdvsbackd cetiestecainens 4,6

EE ad bc bob ee ctsben bes caeeeaea bens 4,6

Arr rere Cor prt 4

LED o'sh vd acnencaCann kRasS Rea eee 4

NE Nas dh. bho svsideaen Kaendekanatnewass 4

y RR 5 ole Cs er ee 4+

Miscellaneous:

Rev. Proc. 83-78, 1983-2 C.B. 595 ...........4. 2,4

In the Supreme Court of the Rite’. States

OCTOBER TERM, 1985

No. 83-681

WESTERN RESERVE OIL AND

Gas Co., LTD., ET AL., PETITIONERS

Vv.

H. STEVEN NEW, ET AL.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

MEMORANDUM FOR THE RESPONDENTS

IN OPPOSITION

Petitioners brought this action for damages against

Internal Revenue Service (IRS) personnel, alleging that

their rights of due process under the Fifth Amendment to

the United States Constitution had been violated by the

IRS’s issuance of “pre-filing notification letters” to inves-

tors in the petitioners’ limited partnerships.

1. At the time pertinent to this action, petitioner Trevor

Phillips was the sole general partner of two California

limited partnerships, Western Reserve Oil and Gas Com-

pany (Western Reserve) and 1983 Western Reserve Oil and

Gas Company (1983 Western Reserve), which were in the

business of producing and developing oil and gas during

calendar year 1983 (Pet. App. A4-A6). Various other indi-

viduals had purchased interests in the limited partnerships

(id. at AS).

(1)

2

The Internal Revenue Service informed Phillips, in a

standard “pre-filing notification letter,” that it believed that

there was “a basis for concluding that the partners of [West-

ern Reserve and 1983 Western Reserve] will not be in com-

pliance with the Federal income tax laws if they claim the

tax benefits represented by the general partners and pro-

moters to be available” (Pet. App. A22-A23 n.2). The letter

offered Phillips an opportunity, which he accepted, to meet

with representatives of the IRS and present facts and legal

arguments showing that the claimed tax benefits complied

with federal income tax laws (ibid.; id. at A6). See Rev.

Proc. 83-78, 1983-2 C. B. 595. Following the meeting, how-

ever, the IRS sent each of Western Reserve’s partners a

pre-filing notification letter advising them that it believed

deductions or credits purportedly accruing to Western

Reserve were not allowable, and that it planned to examine

returns claiming such deductions or credits and to disallow

them (Pet. App. A6; id. at A24 n.3).

2. Petitioners then instituted this action for damages in

district court (Pet. App. A4). In their complaint, as

amended, they alleged that the issuance of the pre-iiling

notification letters deprived. them of liberty and property

without due process of law in violation of the Fifth

Amendment, in that the mailing of the letters had (1) the

“ ‘irreversible consequence of destroying the means by

which Phillips secure{d] his livelihood,’ ” (2) “a ‘chilling

effect’ because investors would withdraw,” and (3) “the?—~

_>—ettershad the same damaging effect on his lifelihood [sic]

as a ‘jeopardy assessment’ ” (id. at A7, quoting complaint).

The complaint stated that the respondents acted “ ‘under

color of authority’ ” in issuing the pre-filing notification

letters, but that the action was motivated by a personal

animosity toward a business partner of Phillips whom the

IRS personnel hoped to “ ‘injure, embarrass and destroy’ ”

(id. at A7-A8, quoting complaint). The complaint also

3

alleged that the meeting with the IRS did not satisfy the

requirements of due process because Phillips was not given

sufficient notice and explanation of the IRS’s position (id.

at A&).

The district court granted respondents’ motion to dismiss

the action (Pet. App. B14), holding that the complaint

failed to state a cognizable claim (id. at B4-B9), and that, in

any event, respondents were immune from suit (id. at B9-

B14). Petitioners appealed and the court of appeals

affirmed (id. at A21; the court of appeals’ decision is

reported at 765 F.2d 1428).

The court of appeals held that petitioners had failed to

allege the deprivation of a property or liberty interest cog-

nizable under the Fifth Amendment (Pet. App. A9-A16).

The property claim was rejected (id. at A10-A13) since

Phillips had no legitimate claim of entitlement to operate a

business in violation of the tax laws (id. at A12); the court of

appeals cited as support Mid-South Music Corp. v. Kolak,

756 F.2d 23 (6th Cir. 1984), and Investment Annuity, Inc. v.

Blumenthal, 609 F.2d 1 (D.C. Cir. 1979), cert. denied, 446

U.S. 981 (1980). The liberty interest claim was also rejected

(Pet. App. Al3-A1I5) and Sanderson v. Village of Green-

hills, 726 F.2d 284 (6th Cir. 1984), distinguished, since “the

regulatory basis for the actions of the federal agents is

clearly set forth in the complaint” (Pet. App. Ai5). With

regard to the claim that Internal Revenue Service personnel

acted with malice, the court found that such conduct here

would not constitute the denial of a liberty or property

interest either (Pet. App. A15-A16).

The court of appeals also held that no violation of pro-

cedural due process had occurred (Pet. App. A16-A18). It

reasoned that a hearing is not constitutionally required

prior to the assessment or collection of taxes, so long as the

4

aggrieved party has an opportunity for later judicial deter-

mination of liability, citing, inter alia, Phillips v. Commis-

sioner, 283 U.S. 589, 595 (1931) (Pet. App. A17-A18). In

this case, it pointed out, Congress has provided for suits

regarding adjustment or readjustment of disputed partner-

ship items (765 F.2d at 1434; the supporting citation by the

court of appeals to 26 U.S.C. 6226 and 6228 is omitted at

Pet. App. A18, and 28 U.S.C. 1346(a)(1) is miscited as “26

U.S.C. 1346(a)(1)” ).

3. The decision below in this fact-bound action is cor-

rect, and is in accord with decisions of other circuits. No

further review is warranted.’

The Secretary of the Treasury may, under 26 U.S.C.

6302(b), use such “reasonable devices or methods as may be

necessary or helpful in securing a complete and proper

collection” of taxes. This Court has stated that the Internal

'The court of appeals also found (Pet. App. A18-A20) the respond-

ents to have acted within their statutory authority. It is relevant to an

immunity inquiry, of course, whether an official has violated any

“clearly established statutory or constitutional rights,” Harlow v. Fitz-

gerald, 457 U.S. 800, 818 (1982) (emphasis added), but the court had

earlier said it would not reach the immunity question (Pet. App. A22

n.1). There was no need to do so, since the court had already concluded

that there was no due process violation.

?Petitioners have raised a number of issues in their petition for the

first time in this case. For example, they urge that various sections of the

Internal Revenue Code are unconstitutional (Pet. 1, 11-12, 14-15, 46,

54, 56), that they suffered crue! and unusual punishment at the hands of

respondents (Pet. 7), that respondents abridged their First Amendment

freedom of association (Pet. 8-9,10), that Rev. Proc. 83-78, supra, is

void for vagueness (Pet. 13), that excessive bail was set (Pet. 30), and

that the notice provisions of 26 U.S.C. 6331(d){(2) and 6703 were some-

how violated (Pet. 13-14). These contentions and other allegations of

misconduct were neither asserted in petitioners’ complaint nor raised in

any other manner below. Accordingl: , they are not properly before this

Court. See, e.g., Kosak v. United States, No. 82-618 (Mar. 21, 1984),

slip op. 2 n.3; United States v. Lovasco, 431 U.S. 783, 788-789 n.7

(1977).

5

Revenue Code “imposes on the Secretary * * * a broad

duty to enforce the tax laws,” United States v. Euge, 444

U.S. 707, 716 (1980), and that Congress intended “to pro-

vide the Secretary with broad latitude to adopt enforcement

techniques helpful in the performance of his tax collection

and assessment responsibilities” (id. at 716 n.9). The pre-

filing notification letters here were such a reasonable device.

See Mid-South Music Corp. v. United States Dep't of the

Treasury, 579 F. Supp. 481, 483-484 (M.D. Tenn. 1983),

aff'd sub nom. Mid-South Music Corp. v. Kolak, 756 F.2d

23 (6th Cir. 1984).

a. The mere allegation of a constitutional cause of action

is not sufficient to survive a motion to dismiss if the constitu-

tional claims are “frivolous,” “insubstantial,” “patently

without merit,” or “immaterial and made solely for the

purpose of obtaining jurisdiction.” See Butz v. Economou,

438 U.S. 478, 507-508 (1978); Duke Power Co. v. Carolina

Environmental Study Group, Inc., 438 U.S. 59, 70 (1978);

Bell v. Hood, 327 U.S. 678, 682-683 (1946). Petitioners’

Fifth Amendment claim is patently frivolous, and the dis-

missal of petitioners’ action was properly affirmed by the

court of appeals.

As the Sixth Circuit concluded in Mid-South Music

Corp. v. Kolak, 756 F.2d 23, 25 (1984), the claimant's

interest in doing business free of the IRS's conveying infor-

mation it believes to be accurate to taxpayers, and the

relationship between the pre-filing notification letters and

the alleged injury (a loss of patronage from the recipients of

such letters), are too attenuated to implicate the Due Pro-

cess Clause. See also Bob Jones University v. Simon, 416

U.S. 725, 746-748 (1974); Investment Annuity, Inc. v.

Blumenthal, 609 F.2d at 7. One must have a “legitimate

claim of entitlement” to a benefit in order to claim a prop-

erty interest in it. Board of Regents v. Roth, 408 U.S. 564,

6

577 (1972). Petitioners here have only a unilateral expecta-

tion of continued patronage from investors and their asso-

ciates, and that is not a constitutionally protected property

interest. bid; Investment Annuity, Inc. v. Blumenthal, 609

F.2d at 7-8. Nor have the petitioners been deprived of a

“liberty interest.” Their claim that the designation of West-

ern Reserve as an abusive tax shelter in the pre-filing notifi-

cation letters has impaired their business opportunities

amounts to nothing more than a purported defamation.

The imposition of a defamatory stigma upon a citizen by an

official acting under color of law does not constitute a

deprivation of liberty within the meaning of the Fifth

Amendment; it is, at most, acommon-law tort. See Paul v.

Davis, 424 U.S. 693 (1976); Rutledge v. Arizona Board of

Regents, 660 F.2d 1345, 1353 (9th Cir. 1981), aff'd sub nom.

Kush v. Rutledge, 460 U.S. 719 (1983). There is also no

plausible suggestion that the IRS has “foreclosed [petition-

ers’] freedom to take advantage of other [business] oppor-

tunities.” Soard of Regents v. Roth, 408 U.S. at 573.

In any event, petitioners’ due process claim is meritless

since, as the court of appeals explained (Pet. App. Al7-

A18), they have adequate post-enforcement opportunities

for judicial review. Congress has provided for later judicial

determinations of liability in this area, which is all that due

process requires. Bob Jones University v. Simon, 416 U.S.

at 746-748; Phillips v. Commissioner, 283 U.S. 589, 595-

601 (1931); Rosenberg v. Commissioner, 450 F.2d 529,

531-533 (10th Cir. 1971). Phillips, on behalf of all the

partners, may litigate the propriety of any disputed tax

benefits deriving from Western Reserve in the Tax Court,

the district courts, or the Claims Court. See 26 U.S.C. 6226

and 6228.3

3Even where a hearing is provided for under Internal Revenue Service

procedural rules, the failure to provide it does not violate a taxpayer's

due process rights, because such rules are merely “directory rather than

7

b. Finally, it is apparent that respondents are entitled to

the defense of official immunity. They did not violate any

clearly established statutory or constitutional rights;

indeed, the issuance of pre-filing notification letters had

been approved by the only court to have addressed the

question. See Mid-South Music Corp. v. United States

Dep't of the Treasury, supra. Regardless of petitioners’

allegations of malicious intent, then, respondents would

enjoy qualified immunity from suit, if not absolute immun-

ity. Harlow v. Fitzgerald, 457 U.S. 800, 817-818 (1982); see

also Davis v. Scherer, No. 83-490 (June 28, 1984).

It is therefore respectfully submitted that the petition for

a writ of certiorari should be denied. -

Respectfully submitted.

CHARLES FRIED

Solicitor General

DECEMBER 1985

mandatory.” Rosenberg v. Commissioner, 450 F.2d at 533; Cleveland

Trust Co. v. United States, 421 F.2d 475, 481-482 (6th Cir.), cert.

denied, 400 U.S. 819 (1970); Luhring v. Glotzbach, 304 F.2d 560, 565

(4th Cir. 1962).

DOJ-1985-12