Kraus v. USA
ORDER granting 43 Plaintiff's Motion to Amend his Answer to Defendant's counterclaim, given Defendant's consent to the amendment; denying 47 Plaintiff's Motion to Amend his Complaint, for the reasons set forth in the attached Order. Signed by Judge Sarala V. Nagala on 8/1/2022. (Rennie, Carolyn)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
LEE O. KRAUS,
Plaintiff and Counterclaim
UNITED STATES OF AMERICA,
Defendant and Counterclaim
August 1, 2022
RULING AND ORDER ON KRAUS’ MOTION TO AMEND THE COMPLAINT AND
MOTION TO AMEND THE ANSWER
Sarala V. Nagala, United States District Judge.
Plaintiff and counterclaim Defendant Lee O. Kraus has brought a one-count pro se civil
action against Defendant and counterclaim Plaintiff, the United States of America (“the United
States”), pursuant to 26 U.S.C. § 7422(a). Kraus claimed that certain taxes were erroneously or
illegally assessed or collected, and sought a refund and abatement. The United States responded
with a one-count counterclaim contending that Kraus’ tax liability, penalty, and interest remain
Kraus has now filed two motions to amend the pleadings. First, Kraus moves to amend his
answer to the United States’ counterclaim to add certain affirmative defenses. ECF No. 43.
Because the United States consents to the amendment, the Court GRANTS Kraus’ motion to
amend his answer, in accordance with Fed. R. Civ. P. 15(a)(2).
Second, Kraus moves to amend his complaint to add new claims against the United States,
which the United States opposes. ECF No. 47. Specifically, Kraus moves to raise three claims
that officers of the Internal Revenue Service recklessly, intentionally, and negligently disregarded
the Internal Revenue Code and associated regulations in connection with the collection of his taxes
pursuant to 26 U.S.C. § 7433(a). Kraus also seeks three declarations pursuant to the Declaratory
Judgment Act, 28 U.S.C. § 2201, regarding certain facts underlying his tax liability. The United
States contends that all six claims are barred by the doctrine of sovereign immunity. For the
foregoing reasons, the Court agrees with the United States and denies the motion to amend, as set
FACTUAL BACKGROUND & PROCEDURAL HISTORY
A. Kraus’ Association with DPCC
Kraus’ original complaint, ECF No. 1, alleges the following facts, which are substantially
repeated in the proposed first amended complaint (“FAC”), ECF No. 38. In 2006, Kraus formed
a wholly-owned limited liability company, Composite Capital Advisors LLC (“Composite
Capital”), registered in Delaware. Compl. ¶ 18. Composite Capital was a consulting company for
clients on matters pertaining to engineering and business. Id. In 2010, Composite Capital was
initially retained by Jose Di Mase, a resident of Italy, to consult on the corporate acquisition of
Duraseal Pipe Coatings Company, LLC (“DPCC”). Id. ¶ 19.
DPCC was a limited liability company organized under the law of Missouri, and it applied
corrosion and abrasion-resistant coatings to tubing used in oil wells. Id. ¶ 13. Following the
acquisition, Di Mase became the sole managing member and chairman of DPCC. Id. ¶ 15. DPCC
became wholly owned by DuraSeal Holdings, SRL (“SRL”), an Italian company of which Di Mase
was the chairman and president. Id. ¶¶ 14–15. In turn, SRL shares were controlled by another
company based out of Luxembourg, Holding Development Investment, SA (“HDI”). Id. ¶ 16.
HDI was owned by a trust, the beneficiary of which was Di Mase and his family. Id. In sum,
Kraus alleges that DPCC was ultimately owned and controlled by Di Mase. See id. ¶ 28.
Di Mase retained Kraus, through Composite Capital, to advise on SRL’s acquisition of
DPCC and another supplier. Id. ¶ 19. As part of the acquisition, Kraus joined SRL’s Board of
Directors in 2011, though he was one of only two directors on the board not part of the Di Mase
family. Id. ¶ 20. Around 2012 and 2013, DPCC was experiencing low revenue, and Di Mase,
through HDI, retained Kraus “to provide advisory services” regarding DPCC’s products and the
Id. ¶¶ 23–24, 26.
Disagreements over Kraus’ compensation persisted
throughout this period. Id. ¶ 27. As part of these unspecified disagreements, Di Mase appointed
Kraus to be the chief executive officer (“CEO”) of DPCC, allegedly as a way for DPCC to pay
Kraus’ consulting fees directly. Id. ¶¶ 32–33, 35.
Kraus alleges, however, that the CEO title conveyed no authority under DPCC’s
organizational documents, as Di Mase effectively retained control over financial policy and
employment decisions. Id. ¶¶ 35–36, 41–42. For example, Kraus alleges that there was one
instance when DPCC applied for a loan with Cornerstone Bank, and Kraus executed the loan
documents on DPCC’s behalf. Id. ¶ 85. But Kraus allegedly executed those documents pursuant
only to a one-time, limited authorization agreement between him and Di Mase relating to the
particular transaction. Id.
The administrative functions of DPCC, including payroll and cash flow, were maintained
by Christine Brandow, initially employed as the office manager and later promoted to treasurer.
Id. ¶ 42–43. Kraus alleges that, in April of 2015, Brandow deferred payment of DPCC’s payroll
taxes. Id. ¶ 44. After Brandow informed Di Mase and Kraus of this deferral, Kraus allegedly
advised Di Mase against it, but Di Mase “ignored” this advice. Id. ¶ 46. Brandow continued
deferring DPCC’s payroll taxes throughout the remainder of 2015. Id. ¶ 48. Kraus’ engagement
with DPCC ended in December of 2015, and DPCC ceased all operations in 2016. Id. ¶¶ 49–50.
B. IRS’ Investigation and Tax Penalty
In 2017, Kraus was interviewed pursuant to Form 4180 by an Internal Revenue Service
(“IRS”) revenue officer, Janice L. Shain, to investigate liability for DPCC’s unpaid payroll taxes.
Id. ¶ 51. Shain asked Kraus his job title, and he explained that he was the CEO but that the title
conveyed no authority under DPCC’s operating agreement and that he was actually a consultant.
Id. ¶ 52. Shain documented Kraus’ response as “CEO.” Id. ¶ 52. Shain also asked Kraus “if he
determined financial policy for” DPCC, to which Kraus responded that he did not. Id. ¶ 53.
However, Shain documented Kraus’ response as “yes” on the form. Id. Similarly, Shain asked
Kraus if he had authority to pay bills, to which Kraus responded that he did not, but she
documented his response as “yes” on the form. Id. ¶ 54. In addition, Shain asked whether Kraus
had knowledge that the payroll taxes were not paid, to which Kraus answered “yes” because
Brandow had informed him of such. Id. ¶ 55. When Shain asked if other individuals had the
authority to determine DPCC’s financial policy, Kraus named Brandow and Di Mase, however
Shain recorded only Brandow’s name and not Di Mase’s name. Id. ¶ 57.
Following this interview, the IRS determined that Kraus was responsible for the withheld
taxes—according to Kraus, largely due to his title as CEO. Id. ¶¶ 60, 82. The summary of the
determination recites Kraus’ response that he was “responsible for determining the financial policy
of” DPCC, evidenced by Kraus’ signature on DPCC’s behalf on the loan documents. Id. ¶ 82.
The IRS noted that there was no evidence of Kraus’ signature on any checks on behalf of DPCC,
but concluded that his “position as CEO gave him the status, duty and authority to ensure” that the
relevant taxes were paid. Id. See also Countercl., ECF No. 24 ¶ 82 (admitting that the complaint
contains the correct quotation of the IRS’ recommendation for the penalty assessment).
Accordingly, the IRS made trust fund recovery liability assessments under 26 U.S.C. § 6672
against Kraus for the final three tax periods in 2015. Compl. ¶ 2; see also Countercl. ¶ 21.
Since that date, Kraus has maintained that the assessment of the trust fund recovery penalty
(the “penalty”) was improper for various reasons. For example, he represents that Shain falsely
recorded Kraus’ answers during the initial interview. Compl. ¶ 58. In addition, Kraus insists that
his signature of the loan documents was pursuant to the one-time, limited scope authorization
granted to him by Di Mase. Id. ¶ 85.
In the course of settlement discussions during 2019, the IRS provided to Kraus DPCC’s
tax return dated February 12, 2016. Id. ¶ 61. The document purported to bear Kraus’ signature,
but Kraus alleges that his association with DPCC had ended by that date. Id. ¶¶ 61–62. Kraus
hired a forensic evidence specialist who determined that his signature on the tax return was forged.
Id. ¶ 65. Moreover, Kraus alleged that he never handled payroll matters for DPCC, as that fell
within Brandow’s obligations. Id. ¶ 62. Nevertheless, the IRS continued to pursue Kraus for the
penalty. Id. ¶ 68. Kraus attempted to obtain DPCC’s tax return forms for 2015, but the IRS refused
to provide those documents. Id. ¶ 77.
Kraus also learned, in the IRS’ responses to his 2017 requests under the Freedom of
Information Act (“FOIA”), that neither Brandow nor Di Mase were contacted by the IRS in the
course of the investigation into the withheld taxes. Id. ¶¶ 70–72. Kraus subsequently learned that
the penalty was assessed against him alone, not against Brandow or Di Mase. FAC ¶ 138.
Finally, Kraus maintains that the DPCC operating agreement conferred no authority
associated with the CEO title, and that Missouri law confers no statutory or common law authority
on the CEO of a limited liability company beyond the scope of the company’s operating agreement.
Compl. ¶¶ 89–90, 93.
Moreover, Kraus’ agreements with Di Mase’s various companies
established that he was DPCC’s consultant, not an employee of Di Mase or DPCC. Id. ¶ 113. To
that end, Missouri had assessed a similar penalty under state law, but the penalty was set aside in
2017 after Kraus provided the state agency with the same information he provided to the IRS. Id.
Kraus made partial payments on the penalty in 2019 and 2020, including through
withholding of an income tax refund owed to him. Id. ¶ 2; Countercl. ¶ 6. In November of 2020,
Kraus filed for bankruptcy as a consequence of the assessment of the penalty and other liabilities
arising from his activities at DPCC. Id. ¶ 136.
C. The Present Action
In April of 2021, Kraus filed the original one-count pro se complaint against the United
States, seeking refund and abatement of the penalty pursuant to 26 U.S.C. § 7422(a). Following a
brief stay while Kraus’ bankruptcy proceeding remained pending, see ECF Nos. 15, 17, the United
States filed its answer to the complaint in November of 2021. The United States also filed a onecount counterclaim pursuant to 26 U.S.C. § 6672, seeking payment of the balance of Kraus’
penalty, totaling almost $200,000, as well as statutory interest accruing since September of 2021.
Countercl., ECF No. 44 ¶ 8.
The case proceeded to discovery, which remains pending. See ECF No. 34. The Court’s
Scheduling Order set a deadline of February 25, 2022, for either party to amend the pleadings. Id.
at 1. On that date, Plaintiff filed the FAC, ECF No. 38. After the United States objected to the
filing of the FAC, see ECF No. 40, the Court directed Plaintiff to file a motion to amend the
complaint pursuant to Federal Rule of Civil Procedure 15(a)(2), see ECF No. 41, which Plaintiff
has now done. ECF No. 47. The United States filed a memorandum of law opposing the motion
to amend. ECF No. 48.
The proposed FAC raises seven counts against the United States. Count One claims civil
conspiracy arising from the IRS officers’ alleged collaboration with Brandow to ensure that Kraus
bore the penalty, for which Kraus claims damages pursuant to 26 U.S.C. § 7433(a). FAC ¶¶ 130,
132, 135, 139. Count Two claims reckless and intentional disregard of the Internal Revenue Code
and associated regulations by IRS officers, for which Kraus claims damages pursuant to § 7433(a).
Id. ¶ 145. Count Three claims negligent violation of the Code and associated regulations by IRS
officers, for which Kraus claims damages pursuant to § 7433(a). Id. ¶ 148. Count Four seeks a
declaration that, pursuant to the DPCC operating agreement, Kraus had no authority to sign bank
loan documents on behalf of DPCC. Id. ¶¶ 154–55. Count Five seeks a declaration that, pursuant
to Missouri law, Kraus’ CEO title alone conferred on him no statutory authority or duty to ensure
that DPCC’s taxes were paid. Id. ¶ 162. Count Six seeks a declaration that the IRS did not have
a sufficient evidentiary basis on which to time him responsible for DPCC’s failure to pay the
payroll taxes. Id. ¶ 169. Count Seven seeks refund and abatement of the penalty pursuant to §
7422(a), repeating the sole count of the original complaint. Id. ¶ 176.
The United States opposes the six new counts proposed in the FAC, arguing that each is
futile because they are barred by the doctrine of sovereign immunity. With respect to Counts One
through Three, the United States contends that § 7433 does not operate to waive the United States’
sovereign immunity in this context for three reasons. First, § 7433 and its associated regulations
impose a limitations period which has elapsed. Second, § 7433 and its associated regulations
require a plaintiff to first exhaust administrative remedies, which Kraus has not done. Third, §
7433 provides for a civil action arising from the allegedly improper collection of taxes, but not
Kraus’ claim for allegedly improper determination of tax liability. With respect to Counts Four
through Six, the United States contends that the Declaratory Judgment Act, 28 U.S.C. § 2201,
provides no waiver of sovereign immunity to permit a plaintiff to obtain a declaratory judgment
regarding his federal tax rights or obligations. For the reasons explained below, the Court agrees
with the United States.
A. Fed. R. Civ. P. 15(a)(2)
The propriety of the present motion to amend the complaint, filed within the time period
set by the Court’s Scheduling Order, is governed by Federal Rule of Civil Procedure 15(a)(2).
That rule provides that a party may amend its pleading with the opposing party’s consent or the
court’s leave, and further provides that the court “should freely give leave when justice so
requires.” Id. Rule 15(a)(2) “is a liberal and permissive standard, and the only grounds on which
denial of leave to amend has long been held proper are upon a showing of undue delay, bad faith,
dilatory motive, [or] futility.” Sacerdote v. N.Y. Univ., 9 F.4th 95, 115 (2d Cir. 2021) (alteration
in original; citation and internal quotation marks omitted), cert. denied, 142 S. Ct. 1112 (2022).
Relevant here, a proposed amendment is considered futile if it “fails to state a claim or
would be subject to a successful motion to dismiss on some other basis.” Nwachukwu v. Liberty
Bank, No. 3:16-CV-704 (CSH), 2016 WL 3647837, at *2 (D. Conn. July 1, 2016) (citing, among
others, Lucente v. Int’l Bus. Machs. Corp., 310 F.3d 243, 258 (2d Cir. 2002)). See also Mortimer
Off Shore Servs., Ltd. v. Fed. Republic of Germany, 615 F.3d 97, 99 (2d Cir. 2010) (affirming
district court’s denial of leave of amend complaint as futile because the proposed amended
complaint did not cure the original complaint’s subject matter jurisdictional defects); Blanchard
v. Doe, No. 17-CV-6893 (PKC) (JO), 2019 WL 2211079, at *3–4 (E.D.N.Y. May 22, 2019)
(denying leave to amend complaint because proposed amended claims would fail due to the
defendants’ official immunities and reasoning that “an amendment is futile if it would fail to state
a plausible claim for relief or if an affirmative defense, e.g., the defendant’s immunity, is
Thus, a proposed amended complaint is futile “if the proposed claim could not withstand a
motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).” Lucente, 310 F.3d at 258. “Put differently,
a proposed claim is futile if, accepting the facts alleged by the party seeking amendment as true
and construing them in the light most favorable to that party, it does not ‘plausibly give rise to an
entitlement to relief.’” Brach Fam. Found., Inc. v. AXA Equitable Life Ins. Co., No. 16-CV-740
(JMF), 2018 WL 1274238, at *1 (S.D.N.Y. Mar. 9, 2018) (quoting Ashcroft v. Iqbal, 556 U.S. 662,
679 (2009)). Similarly, a proposed amended complaint is futile if the claims would be properly
dismissed under Fed. R. Civ. P. 12(b)(1) as barred by sovereign immunity. See Makarova v.
United States, 201 F.3d 110, 113 (2d Cir. 2000) (affirming the district court’s conclusion that
dismissal pursuant to Fed. R. Civ. P. 12(b)(1) was warranted because the claims were barred by
“The party opposing a motion to amend,” in this case, the United States, “bears the burden
of establishing that amendment would be futile.” Aboah v. Fairfield Healthcare Servs., Inc., No.
3:20-CV-763 (SVN), 2022 WL 443253, at *4 (D. Conn. Feb. 14, 2022) (citation and internal
quotation marks omitted). Moreover, “[i]n reviewing a pro se complaint, the Court takes into
consideration the plaintiff’s lack of legal training and holds the complaint to ‘less stringent
standards than formal pleadings drafted by lawyers.’” Roberts v. Internal Revenue Servs., 468 F.
Supp. 2d 644, 649 (S.D.N.Y. 2006) (quoting Boddie v. Schnieder, 105 F.3d 857, 860 (2d Cir.
1997)). See also Tracy v. Freshwater, 623 F.3d 90, 101 (2d Cir. 2010) (noting that the “special
solicitude” typically afforded to pro se litigants often involves “liberal construction of pleadings,
motion papers, and
. . . briefs”).
B. Sovereign Immunity
“It is axiomatic that the United States may not be sued without its consent and that the
existence of consent is a prerequisite for jurisdiction.” United States v. Mitchell, 463 U.S. 206,
212 (1983). “The sovereign immunity of the United States may only be waived by [a] federal
statute[.]” Presidential Gardens Assocs. v. United States, 175 F.3d 132, 139 (2d Cir. 1999)
(citation omitted). Specifically, “[a] waiver of the Federal Government’s sovereign immunity
must be unequivocally expressed in statutory text . . . and will not be implied. . . . Moreover, a
waiver of the Government’s sovereign immunity will be strictly construed, in terms of its scope,
in favor of the sovereign.” Lane v. Pena, 518 U.S. 187, 192 (1996) (citations omitted). If there is
an explicit waiver, the substantive claim must fall within the scope of the waiver for the waiver to
apply. See United States v. White Mountain Apache Tribe, 537 U.S. 465, 472 (2003). Because
the doctrine of sovereign immunity is jurisdictional in nature, “the plaintiff bears the burden of
establishing,” by a preponderance of the evidence, “that her claims fall within an applicable
waiver.” Makarova, 201 F.3d at 113.
COUNTS ONE, TWO, AND THREE
A. 26 U.S.C. § 7433
Counts One, Two, and Three of the proposed FAC raise claims pursuant to 26 U.S.C. §
7433(a). That statute provides: “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,
or by reason of negligence, 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.” 26 U.S.C. § 7433(a). This provision constitutes a waiver of
sovereign immunity, subject to certain requirements which must be satisfied. Gavigan v. Comm’r,
No. 3:06-CV-942 (PCD), 2007 WL 1238651, at *8 (D. Conn. Apr. 27, 2007) (explaining that
“[t]he United States consents to be sued by a taxpayer in district court in actions relating to the
collection of federal taxes” pursuant to § 7433(a), but noting the exhaustion of remedies
requirement); Kuhl v. United States, 467 F.3d 145, 148 (2d Cir. 2006) (explaining that “taxpayers
must comply with the letter of the government’s narrow waiver of sovereign immunity in order to
get [a § 7433(a) claim] to federal court”).
1. Exhaustion and Timeliness
Two overlapping requirements, which must be satisfied for the waiver of sovereign
immunity contained in § 7433 to apply, are exhaustion of administrative remedies and timeliness.
Id.; Roberts, 468 F. Supp. 2d at 650. With respect to exhaustion, the statute provides that a plaintiff
cannot bring a § 7433(a) claim “unless the court determines that the plaintiff has exhausted the
administrative remedies available to such plaintiff within the Internal Revenue Service.” 26 U.S.C.
§ 7433(d)(1). With respect to timeliness, a § 7433 claim must be brought in federal court no later
than two years after the “the date the right of action accrues,” which is when the taxpayer “has had
a reasonable opportunity to discover all essential elements of a possible cause of action.” 26 U.S.C.
§ 7433(d)(3); 26 C.F.R. § 301.7433-1(g)(2). See also Keohane v. United States, 669 F.3d 325,
329 (D.C. Cir. 2012) (noting that § 301.7433-1(g)(2) “sets a relatively low bar”). However, the
administrative process does not toll the two-year limitations period. 26 U.S.C. § 7433(d)(3); 26
C.F.R. § 301.7433-1(g)(1).
Recognizing the overlapping nature of these obligations, a § 7433 cause of action is timely
and properly exhausted if filed within one of three possible time frames. See Tenpenny v. United
States, 490 F. Supp. 2d 852, 858 (N.D. Ohio 2007) (explaining the overlapping timeliness and
administrative exhaustion requirements). First, a federal cause of action is proper if filed after the
IRS has issued a decision on the administrative claim, assuming that the two-year limitation period
has not elapsed.
26 C.F.R. § 301.7433-1(d)(1)(i).
Here, Kraus alleges that he filed an
administrative claim regarding Counts One, Two, and Three on February 24, 2022. FAC ¶ 3. The
IRS has not yet issued a decision on that claim; therefore the first possible time frame for his
federal cause of action does not apply.
Second, a federal cause of action is proper if the administrative claim has been pending
with no decision for six months and the two-year limitation period has not elapsed. 26 C.F.R. §
301.7433-1(d)(1)(ii). Kraus does not dispute that less than six months have passed since he filed
his administrative claim; therefore, this time frame does not apply.
Finally, a federal cause of action is proper if the administrative claim was filed with less
than six months remaining on the two-year limitation period and the federal cause of action was
filed anytime thereafter but before the expiration of the two-year limitation period. 26 C.F.R. §
301.7433-1(d)(2). The United States contends that Kraus cannot satisfy this third time frame
because it applies only when some amount of time remains on the two-year limitation period, but
here the two-year limitation period elapsed long ago. For his part, Kraus contends that he did not
discover the final essential element of his claims—namely, that the IRS did not assess a penalty
against Brandow or Di Mase, thus evidencing the conspiracy—until February of 2022, in the
course of discovery for this litigation. Accordingly, Kraus contends, the two-year limitation period
began to run in February of 2022, and has not yet expired. Accepting Kraus’ reasoning, however,
Kraus’ claims appear unexhausted. Assuming without deciding that Kraus is correct about the
importance of his discovery that the IRS assessed a penalty against him alone, § 301.7433-1(d)(2)
cannot render his federal claims properly exhausted because more than six months would remain
in the two-year limitation period.
Thus, none of the three avenues to exhaust a § 7433 claim apply here, meaning that Kraus
has not exhausted the claims raised in Counts One, Two, and Three of the proposed FAC.
Anticipating this result, Kraus has asked the Court to excuse the administrative exhaustion
requirement on the ground that the administrative process would be futile. See United States v.
Khan, 540 F. Supp. 2d 344, 350 (E.D.N.Y. 2007) (noting that exhaustion of administrative
remedies, required for a habeas corpus claim challenging the conditions of the petitioner’s
confinement, is excused where the petitioner demonstrates that the administrative process would
be futile); M.G. v. N.Y.C. Dep’t of Educ., 15 F. Supp. 3d 296, 303 (S.D.N.Y. 2014) (noting that
exhaustion of administrative remedies under the Individuals with Disabilities in Education Act is
excused where the plaintiff demonstrates that exhaustion would be futile under the circumstances).
Kraus claims that IRS can no longer decide the administrative claim because the filing of the
counterclaim in this action by the United States “transferred control of all matters regarding this
tax away from the IRS to the DOJ.” ECF No. 49 at 4. He also contends that, even if IRS retains
authority over the administrative claim, it has “demonstrated a pattern of bias” and failure to
respond on past administrative matters, id., so any efforts to pursue the administrative claim would
However, Kraus identifies no case, nor has this Court found one, in which an unexhausted
§ 7433 claim was nevertheless permitted due to futility of the administrative process. Given that
a waiver of sovereign immunity must be “strictly construed,” the Court cannot conclude, by a
preponderance of the evidence, that Kraus’ failure to exhaust administrative remedies may be
excused because it would be futile. Lane, 518 U.S. at 192 (citations omitted); Makarova, 201 F.3d
2. Collection Practices
More importantly, the Court concludes that, even if Kraus’ § 7433 claims were timely and
properly exhausted, Counts One, Two, and Three do not fall within the scope of the limited waiver
of sovereign immunity provided by the statute to challenge improper collection practices. As
noted, § 7433 provides a cause of action and waiver of sovereign immunity for taxpayers whose
federal taxes were collected negligently, recklessly, or intentionally in violation of the Internal
Revenue Code. At least two courts in this district have explained that § 7433 “does not create a
cause of action for reckless or intentional conduct by an IRS employee in the determination of a
federal tax, but only for reckless or intentional conduct by an IRS employee in the collection of a
federal tax.” Ludtke v. United States, 84 F. Supp. 2d 294, 301 (D. Conn. 1999) (emphasis added)
(citing Shaw v. United States, 20 F.3d 182 (5th Cir.), cert. denied, 513 U.S. 1041 (1994)). Cf.
Schadl v. Kupinse, No. 3:99CV844 (AWT), 2001 WL 471891, at *4 (D. Conn. Jan. 21, 2011)
(citing Shaw, 20 F.3d at 184, for the proposition that § 7433 related only “to the collection, and
not to the assessment of taxes”).
The Fifth Circuit case on which Ludtke and Schadl rely, Shaw, provides instructive
reasoning. In Shaw, the Fifth Circuit explained that a § 7422 claim for improper assessment and
refund requires the taxpayer to “demonstrate why no taxes are owed,” whereas a § 7433 claim for
improper collection practices requires the taxpayer to “demonstrate that the IRS did not follow the
prescribed methods of acquiring assets.” Shaw, 20 F.3d at 184. See also Hohman v. Eadie, 894
F.3d 776, 782 (6th Cir. 2018) (explaining that the assessment of a tax “involves the decision to
impose tax liability while the collection deals with the IRS attempting to collect the taxes owed”).
The court in Shaw found further support for this distinction in the legislative history of § 7433,
which had originally permitted a taxpayer to sue for damages in connection with “the
determination or collection of” any federal tax, but was subsequently narrowed to limit the scope
to collection practices alone. Shaw, 20 F.3d at 184. Accordingly, even though it was undisputed
that the IRS’ assessment of a tax against Shaw was improper, the court held that the IRS “did not
engage in improper collection procedures” and dismissed the plaintiff’s § 7433 claim. Id.
Although the Second Circuit has not directly considered the scope of § 7433, many other
circuits have followed the reasoning of the Fifth Circuit and concluded that the IRS’ determination
of tax liability cannot constitute a basis for a § 7433 claim. The Tenth Circuit dismissed a § 7433
claim in which the plaintiff claimed “that she did not owe the taxes the IRS sought to collect”
because the plaintiff did not “allege specific facts suggesting that the IRS failed to follow the
prescribed procedures for collecting from her.” Myers v. United States, 593 F. App’x 814, 817
(10th Cir. 2014). The Seventh Circuit dismissed a § 7433 claim by reasoning that, “[a]t its heart,
[the] plaintiffs’ complaint seeks to undo their tax liability because they claim the IRS illegally
imposed those taxes,” but such a claim was properly raised under § 7422 for a refund, not § 7433.
Goldberg v. United States, 881 F.3d 529, 535 (7th Cir.), cert. denied, 138 S. Ct. 1564 (2018).
Accord Gonsalves v. Internal Revenue Servs., 975 F.2d 13, 16 (1st Cir. 1992) (dismissing § 7433
claim because “[t]he essence of [the plaintiff’s] claim is that the [IRS] violated the tax laws by
refusing to give him a refund because he was exempt from paying taxes during the years in
question,” however a taxpayer wishing “to challenge the IRS’ calculation of their tax liability”
must file a refund action pursuant to § 7422). At least three other circuit courts have similarly held
that § 7433 “is limited to actions taken in connection with the collection of taxes. A taxpayer
cannot seek damages under § 7433 for improper assessment of taxes.” Bjerke v. Freemyer, 25 F.
App’x 577, 578 (9th Cir. 2001). See also Robertson v. United States, 147 F. App’x 308, 310 (3rd
Cir. 2005); Kim v. United States, 632 F.3d 713, 716–17 (D.C. Cir. 2011).
Here, Counts One, Two, and Three of the FAC clearly pertain to the IRS’ assessment of
Kraus’ tax liability. As noted above, Count One claims civil conspiracy arising from the IRS
officers’ alleged collaboration with Brandow, the DPCC employee responsible for the withheld
taxes, to ensure that Kraus bore the penalty. FAC ¶¶ 130, 132, 135, 139. This conspiracy allegedly
motivated the IRS’ determination of Kraus’ tax liability; therefore, it pertains to assessment, not
collection, of tax. Similarly, Counts Two and Three claim reckless, intentional, and negligent
disregard of the Internal Revenue code by IRS officers. Id. ¶ 145, 148. Although Kraus alleges
that such conduct pertained to “the collection of taxes in this matter,” the substance of his § 7433
claims centers on the IRS’ improper reliance on his allegedly forged signature when determining
his tax liability. See Goldberg, 881 F.3d at 534 (“The problem for [the] plaintiffs here is that they
do not allege any misconduct related to the tax collection process. Instead, they claim the IRS
violated the tax code when assessing their tax liability.”). Kraus does not allege facts suggesting
that the IRS violated the Internal Revenue Code when acquiring his assets; rather, he contends that
its decision to impose the penalty in the first place violated the Code. See Myers, 593 F. App’x at
817. However, the plain text of § 7433 and the legislative history clearly indicate that “Congress
intended to limit the relief available to taxpayers” with respect to the assessment of taxes. Schadl,
2001 WL 471891, at *4.
Accordingly, it is clear that Counts One, Two, and Three of the proposed FAC do not fall
within the scope of the limited waiver of sovereign immunity provided by § 7433, therefore
sovereign immunity bars those claims. White Mountain Apache Tribe, 537 U.S. at 472 (explaining
that “[j]urisdiction over any suit against the [United States] requires a clear statement from the
United States waiving sovereign immunity . . . together with a claim falling within the terms of the
waiver”). Because Counts One, Two, and Three would be futile, the Court must deny Kraus’
motion to amend with respect to those claims.
COUNTS FOUR, FIVE, AND SIX
Counts Four, Five, and Six of the proposed FAC seek declarations that Kraus had no
authority to sign bank loan documents on behalf of DPCC under its operating agreement; that
Kraus’ CEO title conferred no authority under Missouri law; and that the IRS did not have a
sufficient evidentiary basis on which to hold him responsible for DPCC’s failure to pay the payroll
taxes. FAC ¶¶ 154–55, 162, 169. Although the FAC does not explicitly reference the Declaratory
Judgment Act, such statute is the only relevant basis for these claims.
The Declaratory Judgment Act, 28 U.S.C. § 2201(a) (the “DJA”), provides that “any court
of the United States, upon the filing of an appropriate pleading, may declare the rights and other
legal relations of any interested party seeking such declaration,” and that such declaration “shall
have the force and effect of a final judgment or decree[.]” However, the DJA does not waive the
sovereign immunity of the United States. Sec. & Exch. Comm’n v. Credit Bancorp., Ltd., 297 F.3d
127, 137 (2d Cir. 2002). On the contrary, the DJA specifically excepts from its scope any
declaration “with respect to Federal taxes[.]”1 28 U.S.C. § 2201(a). “Thus, whether or not [the
DJA] waives the sovereign immunity of the United States with respect to other types of actions, it
explicitly excludes from any such waiver the power to declare rights or obligations with respect to
federal taxes.” Credit Bancorp., Ltd., 297 F.3d at 137.
Consequently, “courts routinely dismiss requests for judgments declaring federal tax
obligations, even in the face of ‘lengthy recital[s] of assumed violations of constitutional rights.’”
This exception contains further exclusions not relevant to the present action.
Clavizzao v. United States, 706 F. Supp. 2d 342, 347 (S.D.N.Y. 2009) (quoting Jolles Found. v.
Moysey, 250 F.2d 166, 170 (2d Cir 1957)). Indeed, one district court in this circuit dismissed a
DJA claim in circumstances analogous to the present case, in which a pro se plaintiff sought refund
of a penalty arising from unpaid employment withholding taxes and a declaration that the plaintiff
was not the “responsible party” against whom such penalty may be assessed. Mangione v. Internal
Revenue Servs., No. 97 Civ. 9439 (JGK), 1998 WL 401538, at *1 (S.D.N.Y. July 17, 1998). The
court reasoned that the DJA could not serve to waive sovereign immunity or otherwise provide a
basis for subject matter jurisdiction because the statute “expressly precludes” granting declaratory
relief with respect to federal taxes. Id. at *3. Likewise, Kraus cannot find a waiver of the United
States’ sovereign immunity in the DJA to support his DJA claims.
Kraus contends that Counts Four and Five seek declarations interpreting the DPCC
operating agreement and Missouri law respectively. The Court is not convinced, however. These
declarations are plainly meant to inform the propriety of the penalty assessed against him. By
Kraus’ own theory of the case, the DPCC operating agreement and relevant Missouri law inform
the question of whether the IRS had a sufficient evidentiary basis to conclude that he was the
person responsible for withholding the payroll taxes. As such, the DJA’s exclusion of federal tax
claims, and the absence of any waiver of sovereign immunity in the DJA, render Counts Four,
Five, and Six of the proposed FAC futile. Therefore, the Court must deny Kraus’ motion to amend
the complaint with respect to these three counts. However, the Court notes that denial of the
motion to amend with respect to these three counts will not foreclose Kraus from reiterating the
substantive arguments raised therein at later stages of the case to support of his claim for refund
For the reasons described above, Kraus’ motion to amend his complaint, ECF No. 47, is
DENIED. In addition, as noted above, Kraus’ motion to amend his answer to the United States’
counterclaim, ECF No. 43, is GRANTED.
SO ORDERED at Hartford, Connecticut, this 1st day of August, 2022.
/s/ Sarala V. Nagala
SARALA V. NAGALA
UNITED STATES DISTRICT JUDGE
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