United States District Court, S.D. New York
MODEST NEEDS FOUNDATION and KEITH P. TAYLOR, Plaintiffs,
MARIA BIANCO, JOAN M. CASALI, CESAR SABANDO, ANTHONY S. WETMORE and KATHLEEN BARKER, Defendants.
OPINION AND ORDER
PITMAN United States Magistrate Judge.
Modest Needs Foundation ("MNF") and Keith P. Taylor
commenced this action against defendants Maria Bianco, Joan
M. Casali, Cesar Sabando, Anthony S. Wetmore and Kathleen
Barker pursuant to Bivens v. Six Unknown
Named Agents of Federal Bureau of Narcotics,
supra, 403 U.S. 388, and the Declaratory Judgment
Act, 28 U.S.C. §§ 2201-02, alleging violations of
their right to Due Process and Equal Protection under the Fifth
and Fourteenth Amendments of the United States Constitution.
Plaintiffs' claims arise out of a series of examinations
of MNF by the Internal Revenue Service (the "IRS")
over a period of more than five years. Plaintiffs seek
compensatory and punitive damages, as well as declaratory
relief. By notice of motion dated October 28, 2016 (D.I. 31),
defendants move to dismiss plaintiffs' claims pursuant to
Federal Rule of Civil Procedure 12(b) (6) .
parties have consented to my exercising plenary jurisdiction
over this matter pursuant to 28 U.S.C. § 636(c). For the
reasons set forth below, defendants' motion to dismiss is
complaint alleges the following facts which I assume to be
true for the purposes of resolving this motion. Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009).
March 2002, Taylor formed MNF, a non-profit, tax-exempt
organization, the stated mission of which is to assist
"hard-working, low-income individuals and families
struggling to overcome the burden of short-term, emergency
expenses" (Complaint, dated Apr. 25, 2016 (D.I. 1)
("Compl.") ¶¶ 21, 26). After garnering
national media attention, MNF's revenue exceeded $500,
000 for the first time in fiscal year ("FY") 2005;
as a result, MNF was required to undergo an external audit
(Compl. ¶¶ 23-28, 35). MNF hired Iris Rosken to
perform this audit, as well as the audits in FY 2006 and FY
2007 (Compl. ¶¶ 35-37, 39, 43). Beginning in FY
2008, MNF hired Eisner LLP ("Eisner"), an
accounting firm that Rosken supervised, to conduct annual
audits (Compl. ¶ 49). From FY 2005 to FY 2008, the
audits found no irregularities with MNF's bookkeeping,
accounting practices, corporate policies or its leadership
(Compl. ¶¶ 37, 39, 43, 49).
2009, Eisner performed an audit of MNF and once again found
no irregularities with respect to MNF's accounting
policies and practices, management or recordkeeping (Compl.
¶ 60). However, the audit noted an outstanding
"loan" to Taylor; it accounted for more than fifty
percent of the organization's business expenses incurred
in FY 2009 that Taylor had elected to reimburse pursuant to a
longstanding agreement' with MNF's Board of Directors
(Compl. ¶ 61). In a meeting, Eisner explained that
because Taylor failed to deliver the reimbursement prior to
the close of business on December 31, 2009, Eisner had no
choice but to carry over the balance into FY 2010 and to show
the outstanding amount as a loan to Taylor in FY 2009 (Compl.
¶ 61). Despite Taylor's insistence that he had
delivered the reimbursement before the end of 2009, MNF's
Board of Directors voted to accept the audit report (Compl.
¶ 62) .
the meeting, Taylor asked Rosken why the audit report would
show an outstanding loan to Taylor even though Taylor had
delivered the funds prior to the close of business on
December 31, 2009 (Compl. ¶ 62). Rosken explained that
Eisner noted that Taylor's reimbursement was not
deposited until mid-January 2010; under those circumstances,
Eisner determined that the payment was properly classified as
having been received in FY 2010, not FY 2009 (Compl.
¶¶ 62-63) .
the ensuing months, Rosken became increasingly hostile and
had had several disagreements with Taylor (Compl.
¶¶ 64-68). In October 2010, Taylor discovered that
Rosken had systematically allocated hundreds of MNF's
expenses to an account which tracked the business expenses
that Taylor would likely choose to re-pay at the conclusion
of the fiscal year (Compl. ¶ 69). These adjustments
suggested that Taylor owed MNF a great deal of money (Compl.
decided to review all of MNF's FY 2009 and FY 2010 books
and records, particularly all records pertaining to the
transaction that had resulted in the booking of the
"outstanding loan" in FY 2009 (Compl. ¶ 70).
In conducting this review, Taylor discovered that Rosken had
accessed MNF's books and records in January 2010 and
administratively changed the "date received" entry
for Taylor's reimbursement check from a date in 2009 to
one in 2010 (Compl. ¶ 70). Taylor met with Eisner to
discuss this issue and presented documentation regarding the
transaction in question (Compl. ¶ 72). Upon reviewing
Taylor's evidence, Eisner told him that the repayment
should have been classified as occurring in FY 2009 and that
no outstanding loan should have been booked (Compl. ¶
73). Eisner also produced work papers to Taylor which showed
that Rosken had adjusted the "date received" field
prior to Eisner's audit (Compl. ¶ 73). Eisner went
on to explain that no provision of generally accepted
accounting principles could have justified Rosken's
adjustment and that Rosken knew, or reasonably ought to have
known, that the adjustment would raise very significant
issues with state and federal regulatory agencies and
dramatically increase the probability that MNF would be
selected for an audit by the IRS (Compl. ¶ 73). After
learning this information from Eisner, Taylor fired Rosken
(Compl. ¶¶ 76-78).
after her termination, Rosken sent a letter to MNF's
Board of Directors accusing Taylor of having founded MNF
primarily to benefit himself and his family and of treating
MNF as his "'personal piggy bank'" (Compl.
¶ 79). Rosken insisted that the Board of Directors was
obligated to hire a forensic accountant to determine the
extent of Taylor's alleged malfeasance, to terminate
Taylor's employment as President and Executive Director
of MNF and to hire her into Taylor's position; Rosken
also demanded that the Board make and inform her of its
decision regarding Taylor's employment within 14 days
(Compl. ¶ 79). Rosken's letter went on to state that
if the Board of Directors did not take the foregoing actions
and report back to her within 14 days, she would take
"'whatever actions were necessary'" to
ensure that MNF and Taylor were held accountable for
Taylor's alleged abuse of his position (Compl. ¶
79). The Board of Directors determined that Rosken's
allegations were baseless and sent a note to Rosken
indicating that their investigation had been completed and
that they had "'taken the action they deemed
appropriate'" (Compl. ¶ 83).
Examination of MNF's FY 2008 by Barker and
two weeks after the Board of Directors informed Rosken that
their investigation was complete, Kathleen Barker, a Revenue
Agent working in the IRS's tax-exempt/government entities
group, sent MNF a "certified letter" indicating
that the organization's FY 2008 Form 990 had been
selected for an audit (Compl. ¶ 84). When Taylor and
Barker met on or about January 3, 2011, Barker explained that
the audit was the result of a "'referral' (e.g.,
a 'complaint' of some kind)" (Compl. ¶ 85).
She also explained that the purpose of the audit was to
determine whether MNF qualified for tax exempt status (Compl.
¶ 85). Finally, Barker explained that the audit would
take "years" to complete, even though she had not
even begun to review any books or records (Compl. ¶ 86).
Taylor gave Barker access to all of MNF's books and
records (Compl. ¶ 87).
March or early April 2011, Taylor received an Information
Document Request ("IDR"), signed by Barker and
authorized by Cesar Sabando, Barker's direct supervisor,
which requested a minimum of one thousand pages of
documentation regarding MNF's FY 2008 financial
transactions (Compl. ¶ 91). This request sought
documents for virtually every expense incurred by MNF in that
year (Compl. ¶ 91). Plaintiffs claim that the IDR
requested far more documentation from MNF than was reasonably
necessary to account for the "business purpose" of
MNF's FY 2008 expenditures and/or to determine whether
MNF served a bona fide charitable purpose (Compl.
received a second IDR from Barker on or about August 16, 2011
(Compl. ¶ 97). This IDR focused almost exclusively on
travel and meeting expenses incurred by MNF in FY 2008
(Compl. ¶ 98). In light of Barker's ongoing
examination, the second IDR seemed to suggest that Barker was
seeking evidence to support the allegations of self-dealing
that Rosken had leveled against Taylor (Compl. ¶ 98).
Specifically, it appeared that Barker and Sabando were
attempting to establish that Taylor founded MNF for his
personal benefit, treated the organization as his
"'personal piggy bank'" and was not fit to
serve as MNF's President and Executive Director (Compl.
¶¶ 102, 104). As a result of their belief that they
were being targeted, MNF and Taylor retained counsel in
November 2011 (Compl. ¶¶ 105-06).
January 3, 2012, Barker demanded that either Taylor or his
counsel agree to extend by one year the statutory deadline
for the assessment of taxes or penalties (Compl. ¶ 111).
On January 11, 2012, Barker stated that she needed an
additional year to examine MNF's books and records and
that if Taylor did not agree to extend the deadline, Barker
would close the audit, issue a Notice of Deficiency (an
"NOD") against Taylor and commence an examination
of MNF's books and records for additional years (Compl.
¶ 113). Barker explained that these actions would
be easy for her to justify because, notwithstanding her need
for an additional year to complete the examination, she had
already determined that flights Taylor had
taken were a fringe benefit, whether or not they
were for business purposes, and the "Conference and
Meeting" expenses incurred were inappropriate (Compl.
¶ 113). Taylor agreed to a three-month extension of the
deadline (Compl. ¶ 115).
Examination of MNF's FY 2008 by Bianco and
Bianco replaced Barker in February 2012 and was assigned to
complete the examination of MNF's FY 2008 books and
records (Compl. ¶ 117). In April 2012, Bianco informed
Taylor and his counsel that she identified only one issue
with respect to MNF's books and records, which was that
MNF had issued both a Form W-2 and a Form 1099 to three
employees, one of whom was Taylor (Compl. ¶¶ 122,
124). On a telephone call, plaintiffs'
counsel informed Bianco that MNF would remit payment to
correct the delinquency (Compl. ¶ 125). However, Sabando
joined the call and informed counsel that he still would not
issue a "closing letter" with respect to the FY
2008 examination, even though no other deficiencies were
identified, because the audit was "ongoing" (Compl.
¶ 126). Sabando explained that the examination would be
ongoing because he personally did not like Taylor (Compl.
¶ 126). Sabando also expressed his belief that Taylor
used MNF as his "personal 'bank account'"
and that if MNF's Board of Directors cared about MNF,
they would fire Taylor (Compl. ¶ 126). Finally, Sabando
opined that if Taylor cared about MNF, he would resign
because Sabando intended to keep MNF under audit until either
Taylor was removed or resigned from his position or the cost
of responding to the audits forced MNF out of business
(Compl. ¶ 126). Upon learning of these statements,
Taylor informed his counsel that the statements closely
resembled the accusations Rosken had made against MNF and
Taylor at the time of her termination (Compl. ¶ 126).
2012, Taylor received assessments for the deficiency Bianco
identified, and MNF remitted payment in the interest of
closing the FY 2008 audit (Compl. ¶ 127).
Expansion of Examination by Bianco and Sabando
same day that MNF remitted payment in an effort to close the
FY 2008 audit, Taylor received a new IDR from Bianco (Compl.
¶ 128). This IDR indicated that, despite having found no
additional issues with respect to MNF's FY 2008 books and
records, the audit was being expanded at Sabando's
discretion to include MNF's Form 990 for FY 2009 and FY
2010 (Compl. ¶ 128). The IDR also allegedly sought
documents that did not exist (Compl. ¶ 129). For
example, although the IDR requested board minutes regarding a
list of expenses that were incurred by Taylor and that the
Board of Directors determined were "'unnecessary and
unreasonable, '" Barker, Bianco and Sabando knew
that no such expenses existed (Compl. ¶
129). When plaintiffs' counsel called
Sabando to ask why the examination was expanded when the FY
2008 examination had not revealed any wrongdoing beyond the
manner in which the wages of three employees were reported to
the IRS, Sabando explained that the audit was being expanded
because MNF was unwilling to extend the statutory deadline to
assess taxes or penalties for FY 2008 for the full year, so
Sabando's office could not "'complete their
audit of that year'" (Compl. ¶¶ 130-31)
The Freedom of Information Act Request
10, 2012, plaintiffs' counsel drafted a Freedom of
Information Act request to the IRS, requesting a copy of the
audit file concerning MNF (Compl. ¶ 135). On
approximately December 21, 2012, counsel received a redacted
copy of the file (Compl. ¶ 137). It revealed that prior
to Barker's initial meeting with Taylor in January 2011,
Barker and Sabando had already determined that Taylor used
MNF's resources for his personal benefit and that he
should be removed as MNF's President (Compl. ¶ 137).
Moreover, the file revealed that Bianco and Sabando intended
to continue their examination of MNF for as long as was
necessary to force Taylor's resignation or termination,
or until such time as the cost of responding to the
examination forced MNF into insolvency (Compl. ¶ 137).
Attempts to Extend the Statutory Deadline
March 21, 2013, Taylor and his counsel received summonses
demanding that they deliver the documentation requested in
the 2012 IDR by April 1, 2013 (Compl. ¶ 138). When
counsel asked for an extension of the deadline to comply with
the summons, Sabando stated that he would consider extending
the deadline only if MNF agreed to extend the statutory
deadline for the assessment of taxes and penalties for FY
2009 for a minimum of six months (Compl. ¶ 140). When
counsel explained that such an extension was unnecessary,
Sabando ended the conversation and subsequently failed to
return counsel's telephone calls (Compl. ¶¶
3, 2013, Sabando informed counsel that if MNF did not agree
to extend the deadline for a full six months, he would
immediately move for revocation of MNF's tax-exempt
status (Compl. ¶ 144). On May 6, counsel informed
Sabando that MNF and Taylor would agree to a three-month
extension, but Sabando refused the offer (Compl. ¶ 146).
On May 8, Sabando informed counsel that because Taylor was
unwilling to extend the statutory deadline as Sabando had
demanded, Bianco and Sabando would be issuing a Jeopardy
Assessment not against MNF, but against Taylor personally
(Compl. ¶ 149). Alternatively, Sabando stated that if
Taylor or his counsel agreed to extend the deadline by six
months, Taylor could avoid the assessment or appeal it
(Compl. ¶ 150). Counsel reiterated the offer to extend
the deadline by three months, at which point Sabando ended
the conversation (Compl. ¶ 150).
Jeopardy Assessment and NOD for FY 2009
15, 2013, Taylor received a Jeopardy Assessment and NOD, even
though he was never personally under audit and never had the
opportunity to provide documentation with respect to the
accuracy of his own Form 1040 for FY 2009 (Compl.
¶ 151). The NOD did not contain an itemized list of all
expenses that had been disallowed or an explanation of the
disallowances, as was required; rather, the NOD consisted of
a list of disallowed lump-sum payments that were broadly
categorized (Compl. ¶¶ 153-54).
receiving the NOD, Taylor and his counsel pursued several
remedies. They filed a motion challenging the NOD in the
United States Tax Court (the "Tax Court") (Compl.
¶ 159). They also successfully petitioned Senator
Kirsten Gillibrand to commence an investigation of the
ongoing examination (Compl. ¶¶ 162-63). As a result
of Senator Gillibrand's investigation, Sabando was
disciplined, placed on administrative leave and temporarily
relieved of his managerial duties (Compl. ¶ 163).
Additionally, the examination of MNF was transferred to a
different group, headed by IRS Revenue Manager Joseph
Colletti (Compl. ¶ 163) .
FY 2009 "Re-Audit"
September 16, 2013, Colletti informed plaintiffs' counsel
that MNF's FY 2009 books and records would be re-audited
and that the re-audit would be headed by Bianco (Compl.
November 5, 2013, an IRS Appeals Officer called
plaintiffs' counsel to discuss the possibility of
MNF's FY 2009 books and records being reviewed by the IRS
Appeals Office ("Appeals"), an option which
plaintiffs claim should have been available to them (Compl.
¶ 167). The next day, plaintiffs' counsel spoke by
telephone with Joan M. Casali, the IRS Counsel who had been
assigned to defend the NOD (Compl. ¶¶ 167-68).
Casali was adamant that no one in Appeals would be allowed to
review either the NOD or the documentation MNF compiled in
response to the IDR for MNF's FY 2009 books and records
(Compl. ¶ 168). Rather, Casali informed counsel, she
would accept the re-audit as if it had been completed by
Appeals (Compl. ¶ 168) .
re-audit of MNF's FY 2009 books and records was scheduled
to begin on February 10, 2014, with Bianco, Casali and
plaintiffs' counsel present (Compl. ¶ 175). At the
commencement of the gathering, Casali announced that she was
attending the re-audit not in her capacity as IRS Counsel,
but rather on behalf of Appeals, and that she had been
empowered by Appeals to perform the functions of an Appeals
Officer (Compl. ¶ 175). However, after
calling Appeals, Taylor's counsel learned that
Casali's statements were false (Compl. ¶ 175).
Casali then prevented the re-audit from proceeding and stated
that she had already determined that Taylor used MNF as his
"personal 'expense account'" and demanded
that plaintiffs' counsel justify certain decisions by the
Board of Directors (Compl. ¶ 176). She also insisted
that the re-audit focus solely on the expenses that had been
charged to Taylor by Bianco and Sabando in the FY 2009 NOD
(Compl. ¶ 177). Finally, Casali stated that the next
decision in the case would be hers, not Appeals', and no
re-audit occurred at that time (Compl. ¶¶ 177-78).
February 20, 2014, Bianco sent plaintiffs' counsel an
itemized list of expenses that had been disallowed on the NOD
previously issued to Taylor (Compl. ¶ 179). Bianco and
Sabando had construed virtually all of the business expenses
incurred by MNF in FY 2009 as if they had been salary paid to
Taylor by MNF in FY 2009 (Compl. ¶¶ 179-80). The
list also included amounts that Bianco knew, or reasonably
should have known, had been reimbursed by Taylor (Compl.
second re-audit was scheduled to take place on February 26,
2014 (Compl. ¶ 181). Casali attended the re-audit and
used the meeting to review documentation which, under normal
circumstances, should not have been available to her and to
ask questions that were apparently aimed at defending the
IRS's position in the matter (Compl. ¶ 181).
Plaintiffs claim that these actions were an impermissible
form of pre-trial discovery in the Tax Court proceeding that
Taylor had commenced (Compl. ¶ 182). She also reiterated