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Modest Needs Foundation v. Bianco

United States District Court, S.D. New York

July 21, 2017



          HENRY PITMAN United States Magistrate Judge.

         I. Introduction

         Plaintiffs 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[1] 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[2] 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) .

         The 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 granted.

         II. Facts

         A. Background

         The 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).[3]

         In 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).

         In FY 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'[4] 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) .

         After 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) .

         Over 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. ¶ 70).

         Taylor 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).

         Immediately 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).

         B. Examination of MNF's FY 2008 by Barker and Sabando

         Approximately 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).[5] 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).

         In late 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. ¶ 94).

         Taylor 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).

         On 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).[6] 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[7] 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).

         C. Examination of MNF's FY 2008 by Bianco and Sabando

         Maria 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).[8] 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).

         In May 2012, Taylor received assessments for the deficiency Bianco identified, and MNF remitted payment in the interest of closing the FY 2008 audit (Compl. ¶ 127).

         D. Expansion of Examination by Bianco and Sabando

         On the 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).[9] 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) .[10]

         1. The Freedom of Information Act Request

         On June 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).

         2. Attempts to Extend the Statutory Deadline

         On 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. ¶¶ 140, 143).

         On May 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).

         3. Jeopardy Assessment and NOD for FY 2009

         On May 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[11] (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).

         After 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) .[12]

         E. FY 2009 "Re-Audit"

         On 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. ¶ 165).

         On 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) .[13]

         The 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[14] (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).

         On 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. ¶ 179).

         A 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 that ...

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