Carol Gray v. USA

Filing

Filed opinion of the court by Judge Hamilton. AFFIRMED. Joel M. Flaum, Circuit Judge; Diane P. Wood, Circuit Judge and David F. Hamilton, Circuit Judge. [6502267-1] [6502267] [12-3523]

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In the

United States Court of Appeals
For the Seventh Circuit
No. 12-3523
C AROL D IANE G RAY,
Plaintiff-Appellant,
v.
U NITED S TATES OF A MERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 11 C 3269—Sharon Johnson Coleman, Judge.

A RGUED A PRIL 30, 2013—D ECIDED JULY 23, 2013

Before F LAUM, W OOD , and H AMILTON, Circuit Judges.
H AMILTON, Circuit Judge. Since she failed to file
federal income tax returns and failed to pay taxes for
several years, plaintiff-appellant Carol Gray has been
involved in a long siege with the Internal Revenue Service. In this case, Gray alleges that IRS employees
engaged in wide-ranging wrongdoing in connection
with disputes over her delinquent taxes and returns.
Initially, she did not file an administrative claim for

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damages with the IRS. Instead, she brought suit in the
Northern District of Illinois claiming she was entitled to
relief under 26 U.S.C. § 7433, which allows taxpayers
to recover damages for unauthorized tax collection.
More than six months later, after the government moved
to dismiss for failure to exhaust administrative remedies,
she finally filed an administrative claim. The applicable
IRS regulation requires exhaustion of administrative
remedies before suit. Eventually, the district court dismissed Gray’s suit, in part for failure to state a claim,
in part as untimely, and in part for lack of subjectmatter jurisdiction based on Gray’s failure to exhaust
administrative remedies.
On appeal, Gray argues that the regulation requiring
exhaustion before suit contradicts the statutory text,
which she says allows her to go to court first and
exhaust administrative remedies later. The IRS counters
that Gray’s failure to exhaust before suit not only
doomed her claims but also deprived the court of jurisdiction. We view the case slightly differently. In our view,
§ 7433’s exhaustion requirement is not actually jurisdictional, but it is still mandatory. The IRS is entitled to
insist that a plaintiff comply with its exhaustion procedures. In creating these procedures, the IRS permissibly
interpreted the statute to require exhaustion of administrative remedies before suit was filed. Because Gray
did not exhaust administrative remedies, we affirm the
dismissal of her suit under § 7433.

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I. Factual and Procedural Background
This case focuses on two periods of several years during
which Gray did not file income tax returns or pay taxes
and on the later disputes over these unpaid taxes and
unfiled returns. The first period ran from 1992 to 1995,
for which Gray did not file her tax returns until
October 1996 and did not begin payment until the following year. She blames her now ex-husband for the
failure to file these returns and pay these taxes on time.
Gray also did not timely report and pay her taxes
during a second period, from 2001 to 2004. Again
blaming her by-then ex-husband, she asserts that she
did not file tax returns for this second period because of
a lengthy legal dispute with him about who would
pay their son’s college tuition and who could list their
son as a dependent. Gray claims that she believed she
could not file her tax returns or even pay her taxes
until she resolved this dispute with her ex-husband.
(Without deciding the merits, we must note our doubt
that tax law should be interpreted to excuse filing
and payment when ex-spouses reach such stalemates in
divorce cases.)
Gray sued the IRS pro se in May 2011, alleging that IRS
agents engaged in widespread misconduct during the
decade that it has sought to collect Gray’s arrearages.
Among other things, she says, IRS employees: refused
to honor a written IRS commitment that, she believes,
establishes that she owed no taxes for the first period;
orally abused her about her overall tax debt; threatened
her with a perjury prosecution for contesting her debt;

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conducted an “unauthorized” audit in May 2009 when
she attempted to revise her tax returns for the first
period of tax debt; and incorrectly told her that she
could not sue the IRS.
More than six months into this lawsuit, after the government had moved to dismiss for failure to exhaust,
Gray submitted an administrative claim to the IRS.
Raising allegations that overlap with but do not
perfectly match her lawsuit’s charges, she accused IRS
agents of collecting taxes “illegally” in four ways: (1) they
conducted an “illegal” audit in May 2009 for the 1992-95
tax years; (2) they demanded payment for amounts incorrectly reflected in the audit; (3) they inaccurately asserted in a Tax Court case that Gray owed arrearages;
and (4) they refused to bind the IRS to a supposed earlier
determination that she owed no money for the years
in question. A month after she filed her administrative claim, the district court dismissed Gray’s complaint without prejudice on grounds including failure
to exhaust administrative remedies, and gave her one
month to amend the complaint.
With the assistance of counsel, Gray then filed a
second amended complaint seeking relief under three
statutes: 26 U.S.C. § 7422 (providing for refunds), § 7432
(authorizing damages for unreleased tax liens), and
§ 7433 (authorizing damages for unauthorized tax collections). Gray makes no discernible argument on appeal
under the first two statutes, so she has abandoned
those claims. See Fed R. App. P. 28(a)(9); Cole v. Comm’r,
637 F.3d 767, 772-73 (7th Cir. 2011). The following

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month, the IRS rejected Gray’s administrative claim.
The government then moved to dismiss Gray’s counselassisted complaint on grounds that once again
included failure to exhaust administrative remedies.
Gray opposed the motion to dismiss but did not contest
that the administrative claim attached to the motion
to dismiss was the claim that she had filed.
The district court granted the government’s motion to
dismiss. With respect to the § 7433 claims at issue in this
appeal, the court concluded that none of them stated
a claim for relief because they principally challenged
the assessment rather than the collection of taxes. The
court also concluded that other claims in the complaint
should be dismissed either as unexhausted or, in the
case of the claim relating to a May 2009 audit, as untimely.

II. Discussion
Gray presents a handful of arguments on appeal, but in
our view, the decisive issue in this case is whether she
exhausted administrative remedies. Gray argues that
she did enough to exhaust because § 7433 permitted her
to file her administrative claim after she filed her lawsuit. The government responds that exhaustion is a jurisdictional prerequisite to suit, that Gray filed suit before
exhausting administrative remedies, and that the district
court thus lacked jurisdiction. In our view, neither party is
entirely correct, but we affirm the dismissal of Gray’s
claims.
Exhaustion of administrative remedies is a condition
of the federal government’s waiver of sovereign

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immunity for suits for damages under § 7433 for unauthorized tax collection. Congress has permitted suits for
damages alleging that, “in connection with any collection of Federal tax,” an IRS employee negligently,
recklessly, or intentionally “disregard[ed] any provision
of this title, or any regulation promulgated under this
title.” 26 U.S.C. § 7433(a). Congress has specified that a
“judgment for damages shall not be awarded . . . unless
the court determines that the plaintiff has exhausted
the administrative remedies available to such plaintiff
within the Internal Revenue Service.” § 7433(d)(1).
Although a plaintiff must exhaust administrative remedies to recover damages under § 7433, exhaustion is not
a jurisdictional requirement. After struggling with the
issue in many contexts for many years, the Supreme
Court articulated a bright-line rule to determine whether
a statutory limitation is truly jurisdictional: “when Congress does not rank a statutory limitation on coverage
as jurisdictional, courts should treat the restriction as
nonjurisdictional in character.” Arbaugh v. Y & H Corp.,
546 U.S. 500, 516 (2006); see also Rabe v. United Air Lines,
Inc., 636 F.3d 866, 869 (7th Cir. 2011). Section 7433 contains
no language suggesting that Congress intended to
strip federal courts of jurisdiction when plaintiffs do
not exhaust administrative remedies. Thus, in the wake
of Arbaugh, our colleagues in the Sixth Circuit overruled
circuit precedent and concluded that the exhaustion
requirement in § 7433 is not jurisdictional. Hoogerheide
v. IRS, 637 F.3d 634, 636-39 (6th Cir. 2011); see also Kim v.
United States, 632 F.3d 713, 718-20 (D.C. Cir. 2011) (concluding that, under § 7433, a plaintiff need not plead

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exhaustion to survive a motion to dismiss). This conclusion is consistent with our view that, because sovereign
immunity can be waived, the defense is not jurisdictional.
See Collins v. United States, 564 F.3d 833, 837-38 (7th
Cir. 2009); Parrott v. United States, 536 F.3d 629, 634 (7th
Cir. 2008).
While exhaustion of administrative remedies is not a
jurisdictional prerequisite to suit, which would mean
the requirement could not be waived and the courts
would be required to raise the issue on their own
initiative, exhaustion is still a statutory requirement for
recovery, § 7433(d)(1), and a condition of the government’s waiver of sovereign immunity. The government
is entitled to insist on exhaustion. By demanding compliance, the government may insist that Gray exhaust
administrative remedies as specified in its regulations,
“using all steps that the agency holds out, and doing
so properly.” Pozo v. McCaughtry, 286 F.3d 1022, 1024
(7th Cir. 2002) (emphasis in original); see also Woodford v.
Ngo, 548 U.S. 81, 90 (2006); LaBonte v. United States, 233
F.3d 1049, 1051-53 (7th Cir. 2000); Amwest Surety Ins. Co.
v. United States, 28 F.3d 690, 697-98 (7th Cir. 1994). It is
undisputed that Gray filed a formal claim with the
IRS only after filing her lawsuit. We agree with the government that this belated attempt did not comply with
IRS procedures and therefore bars Gray from maintaining this suit.1

1

Because exhaustion is a (non-jurisdictional) affirmative
defense, in a typical case it would be inappropriate on a
(continued...)

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Congress explicitly conditioned a plaintiff’s ability to
collect damages under § 7433 on the plaintiff’s exhaustion of “the administrative remedies available to such
plaintiff within the Internal Revenue Service.” 26 U.S.C.
§ 7433(d)(1). In accord with the statute, the IRS created
an administrative framework for pursuing damages
claims under § 7433. See 26 C.F.R. § 301.7433-1. In addition to setting forth procedures for pursuing an administrative claim, this regulation specifies that a taxpayer
must file an administrative claim before filing a lawsuit
for damages:
(d) No civil action in federal district court prior to
filing an administrative claim--(1) Except as provided in paragraph (d)(2) of this section, no action
under paragraph (a) of this section shall be maintained in any federal district court before the earlier
of the following dates:

1

(...continued)
motion to dismiss to consider materials outside the complaint,
including the administrative claim itself. See Edgenet, Inc. v.
Home Depot U.S.A., Inc., 658 F.3d 662, 664-65 (7th Cir. 2011); Kim
v. United States, 632 F.3d 713, 718-20 (D.C. Cir. 2011). Nonetheless, Gray has had ample opportunity to present evidence
and relevant allegations supporting her claim of exhaustion.
She does not dispute that she filed a formal administrative
claim only after she sued or that the claim attached to the
government’s motion is her claim. See Edgenet, 658 F.3d at 665;
Loeb Indus. Inc. v. Sumitomo Corp., 306 F.3d 469, 479-80 (7th
Cir. 2002); Massey v. Helman, 259 F.3d 641, 646 n.8 (7th Cir.
2001). Accordingly, we may consider the administrative claim
in resolving this purely legal issue.

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(i) The date the decision is rendered on a claim
filed in accordance with paragraph (e) of this
section; or
(ii) The date six months after the date an administrative claim is filed in accordance with paragraph
(e) of this section.
(2) If an administrative claim is filed in accordance
with paragraph (e) of this section during the last six
months of the period of limitations described in
paragraph (g) of this section, the taxpayer may file
an action in federal district court any time after the
administrative claim is filed and before the expiration of the period of limitations.
§ 301.7433-1(d).
Gray argues that this regulation runs afoul of the statutory text because it requires a taxpayer to exhaust administrative remedies before filing suit against the government.2 The statute states that “a judgment for
damages shall not be awarded . . . unless the court determines that the plaintiff has exhausted the administrative

2

Gray also argues that the regulation was improperly promulgated, but this argument is meritless. The regulation was
subject to notice and comment procedures, and nothing
appears unusual about its promulgation. See Civil Cause of
Action for Unauthorized Collection Actions, “Final Regulations,” 57 Fed. Reg. 3535-01, codified at 26 C.F.R. § 301.7433-1
(Jan. 30, 1992); Civil Cause of Action for Unauthorized Collection Actions, “Notice of Proposed Rulemaking,” 56 Fed.
Reg. 28842-01 (proposed June 25, 1991).

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remedies available to such plaintiff within the Internal
Revenue Service.” 26 U.S.C. § 7433(d)(1). Gray reads this
language as unambiguously allowing a taxpayer to
pursue administrative remedies after filing suit, at any
time before the award of judgment in court. Because, in
Gray’s view, the exhaustion regulation contradicts an
explicit statutory command, she argues that we should
ignore the regulation’s requirement that administrative
remedies be exhausted before filing suit.
Congress envisioned that the IRS would make administrative remedies available to taxpayers seeking damages
under § 7433. Congress required taxpayers to exhaust
such remedies but did not set forth the details
for a remedial scheme. See 26 U.S.C. § 7433(d)(1). Because
Congress left a statutory gap for the IRS to fill in with
details, we apply the two-step procedure in Chevron,
U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837 (1984), to determine whether the regulation is a
permissible construction of the statute. Nat’l Cable &
Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 980
(2005).
First, using the “traditional tools of statutory construction,” we consider whether “Congress has directly
spoken to the precise question at issue.” Chevron, 467 U.S.
at 842-43 & n.9. The precise question here is whether a
taxpayer is permitted to file suit under § 7433 before
exhausting administrative remedies. Gray insists that
Congress has answered yes, but we conclude that the
statute leaves the matter to the IRS. By establishing that a
“judgment for damages shall not be awarded” unless a

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plaintiff exhausts the administrative remedies “available
to such plaintiff within” the IRS, § 7433(d)(1) sets a floor,
not a ceiling. It restricts the plaintiff’s right to recover
by setting forth the bare minimum that a plaintiff must
do to recover damages. The provision thus does not
purport to limit the agency’s discretion to impose additional exhaustion requirements, nor does it entitle a
taxpayer to exhaust after filing suit. Section 7433’s reference to remedies “within the Internal Revenue Service”
envisioned that the IRS would fill in the details of the
administrative claim scheme and specify the mechanics
of exhaustion.
Because the statute does not unambiguously allow
taxpayers to exhaust administrative remedies after
filing suit, we proceed to step two of the Chevron
analysis, asking whether the requirement that a taxpayer
exhaust administrative remedies before filing suit is a
“permissible construction” of § 7433. Chevron, 467 U.S. at
843. It is. Cases interpreting a variety of similar federal
statutes have likewise required exhaustion of administrative remedies before suit. E.g., Hallstrom v. Tillamook Cnty.,
493 U.S. 20, 25-26 (1989) (RCRA); Jamie S. v. Milwaukee
Public Schools, 668 F.3d 481, 494 (7th Cir. 2012) (IDEA);
Edwards v. Briggs & Stratton Ret. Plan, 639 F.3d 355, 360 (7th
Cir. 2011) (ERISA); Warrum v. United States, 427 F.3d 1048,
1050 (7th Cir. 2005) (FTCA); Ford v. Johnson, 362 F.3d 395,
398 (7th Cir. 2004) (PLRA); Bartley v. United States, 123 F.3d
466, 467-68 (7th Cir. 1997) (26 U.S.C. § 7422); Hidalgo v.
F.B.I., 344 F.3d 1256, 1258-59 (D.C. Cir. 2003) (FOIA).
That these kinds of interpretations abound is not surprising. The most basic purposes of administrative ex-

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haustion would be undermined if plaintiffs were
permitted to sue before exhausting available administrative remedies. Pre-suit exhaustion exhibits respect for a
coordinate branch of the federal government by giving the
agency “an opportunity to correct its own mistakes . . .
before it is haled into federal court.” Woodford v. Ngo,
548 U.S. 81, 89 (2006) (internal quotation omitted). Exhaustion before suit also gives the agency and the would-be
plaintiff the opportunity to work out their differences
without litigation, thus conserving the resources of
the judiciary and the parties. See Porter v. Nussle, 534
U.S. 516, 525 (2002); Ford, 362 F.3d at 398. And even if
litigation ensues, pre-suit exhaustion may narrow
the issues before the court or at least encourage the development of a clean factual record. See Porter, 534 U.S. at
525; Edwards, 639 F.3d at 361. It is permissible for the
IRS to interpret section 7433 in light of these advantages
and to conclude that they “outweigh a plaintiff’s relatively minor inconvenience of having to pursue her
claims administratively before rushing to federal court.”
Lindemann v. Mobil Oil Corp., 79 F.3d 647, 650 (7th
Cir. 1996).
It is true that some of the other statutes in the cases we
cited above have language that is more specific about
requiring exhaustion before filing suit. For example,
RCRA provides that “No action may be commenced”
under the citizen-suit provision until the plaintiff gives
prior notice to federal and state agencies and the alleged
violator. Hallstrom, 493 U.S. at 25-26, quoting 42 U.S.C.
§ 6972(b)(1). The Federal Tort Claims Act provides
“An action shall not be instituted . . . unless the claimant

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shall have first presented the claim” to the agency.
Warrum, 427 F.3d at 1050, quoting 28 U.S.C. § 2675(a). The
statute for a tax refund case provides that “No suit or
proceeding shall be maintained . . . until a claim for
refund or credit has been duly filed . . . .” Bartley, 123
F.3d at 468, quoting 26 U.S.C. § 7422(a).
Gray makes a respectable argument that the different
language in § 7433(d)(1) (“A judgment for damages
shall not be awarded under subsection (b) unless the
court determines that the plaintiff has exhausted the
administrative remedies available to such plaintiff
within the Internal Revenue Service.”) means that she did
not have to exhaust administrative remedies until it
came time to enter a judgment in her favor, at the end
of the district court lawsuit.
That is a reasonable reading of the statute, but we do
not think it is the only reasonable way to read it. The
policy reasons for requiring exhaustion of administrative remedies are served only if exhaustion is required
before suit is filed. Moreover, the practice of requiring
prior exhaustion is so widespread and entrenched in
federal law that it would take clearer statutory language
than we find in § 7433(d)(1) to convince us that
Congress meant to prohibit the IRS from requiring exhaustion before suit is filed.
In determining whether the agency’s interpretation is
reasonable at Chevron step two, we may also consider
legislative history. See Emergency Services Billing Corp. v.
Allstate Insurance Co., 668 F.3d 459, 465-66 (7th Cir. 2012);
see generally Chevron, 467 U.S. at 845 (recognizing that

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legislative history is relevant at step two); Fidelity
Federal Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 153-54
(1982) (if agency’s regulation represents reasonable accommodation of conflicting policies “committed to the
agency’s care by statute, we should not disturb it unless
it appears from the statute or its legislative history that
the accommodation is not one that Congress would
have sanctioned”), quoting United States v. Shimer, 367 U.S.
374, 383 (1961). The legislative history of § 7433(d)(1)
likewise suggests that Congress did not intend to
prohibit the IRS’s requirement for exhaustion of administrative remedies before suit. Both the House and Senate
committee reports explained that a taxpayer may not
“seek” damages under § 7433 without first exhausting
administrative remedies. H. R. Rep. No. 105-364, pt. 1, at 59
(1997) (“No person is entitled to seek civil damages for
negligent, reckless, or intentional disregard of the Code or
regulations in a court of law unless he first exhausts his
administrative remedies.”) (emphases added); S. Rep. No.
105-174, at 49 (1998) (“No person is entitled to seek civil
damages in a court of law without first exhausting administrative remedies.”) (emphases added). The taxpayer
“seeks” damages when suit is filed. These committee
reports thus support the view that the IRS regulation is
a permissible interpretation of § 7433(d)(1) and not an
arbitrary or capricious action by the agency.
For these reasons, we conclude that 26 U.S.C. § 7433(d)(1)
can reasonably be interpreted to require exhaustion of
administrative remedies before suit. Gray did not comply
with the straightforward IRS regulation that adopted
this view. See 26 C.F.R. § 301.7433-1(d). Instead, she

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went directly to federal court and waited nearly six
more months before presenting some of her claims for
damages to the IRS. This was too late. Because Gray sued
before presenting her claims to the IRS, she cannot maintain this lawsuit.
And even apart from the exhaustion issue, Gray’s
claims fail for an independent reason that we cannot
ignore: she has not alleged in her suit or administrative
claim that the IRS violated any statutes or regulations
in connection with the collection of her taxes, and even
on appeal has not identified any statutes or regulations
that were violated. 26 U.S.C. § 7433(a). In the complaint,
Gray alleges that IRS agents ‘disregarded’ an IRS letter
supposedly stating that she owed no taxes, but she does
not point to the statute or regulation that the agents
violated by overlooking the letter. Similarly Gray asserts
that IRS agents conducted an “unauthorized audit” and
“provided or failed to provide accurate information”
concerning Gray’s appeal rights, but she does not specify
how these actions ran afoul of the law. We asked Gray’s
counsel at oral argument which statutes or regulations,
in Gray’s view, the IRS had violated, and he did not
identify any (besides § 7433 itself). A plaintiff may not
pursue a § 7433 action for violation of anything but
statutes or regulations. See Shwarz v. United States, 234
F.3d 428, 433-34 (9th Cir. 2000); Gonsalves v. IRS, 975
F.2d 13, 16 (1st Cir. 1992). We do not hold that the the
statutes and/or regulations allegedly violated must be
identified in the district court complaint, but at some
point the plaintiff needs to be prepared to identify the
statutes and/or regulations that IRS employees allegedly

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disregarded. Because Gray still has not identified any
laws or regulations the IRS violated, she cannot prevail
on her § 7433 claim.
The judgment of the district court is A FFIRMED.

7-23-13