Harvey v. American Funds Service Company
ORDER & REASONS granting 9 Motion to Dismiss for Failure to State a Claim & denying 10 Motion to Remand to State Court. Signed by Judge Martin L.C. Feldman on 11/27/2013. (caa, )
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
CYRIL J. HARVEY., JR.
AMERICAN FUNDS SERVICE CO.
ORDER AND REASONS
defendant's motion to dismiss under Rule 12(b)(6). For the reasons
that follow, the motion to remand is DENIED and the motion to
dismiss is GRANTED.
This action involves the allegedly unlawful backup withholding
of dividend payments from plaintiff's investment account.
On October 8, 2006, plaintiff and his wife opened a joint
deposited $80,000 into the account and invested in several mutual
On September 30, 2008, American Funds received a letter
from the Internal Revenue Service, entitled "Backup Withholding
Notification" (the "C-Notice"), directing American Funds to begin
backup withholding, at a rate of twenty-eight percent on the
dividend, interest and capital gains made to plaintiff.
instructed American Funds to begin withholding within thirty days,
and to continue the withholding until the IRS officially notified
American Funds in writing to stop.
The IRS also informed American
Funds that its failure to withhold as directed could result in
civil and criminal penalties under the Internal Revenue Code.
plaintiff in a letter that it would begin backup withholding as
directed. American Funds advised plaintiff that he could challenge
the withholding by seeking a determination from the IRS.
withholding, and on March 19, 2012, American Funds responded by
again explaining that plaintiff should seek a determination from
the IRS in order to resolve any dispute regarding his taxpayer
status and to stop the withholding.
On December 20, 2012, plaintiff sent American Funds a letter
entitled "Statement & Certification of Citizenship," in which he
asserted that he is a United States Citizen and therefore not
subject to backup withholding under 26 U.S.C. § 7701. In response,
American Funds again explained that it could not stop the backup
withholding without direction from the IRS.
On April 24, 2013, plaintiff filed a "Complaint for Unlawful
Conversion of Property and Violations of Constitutional Rights" in
Louisiana state court.
On October 4, 2013, American Funds removed
the suit to this Court.
Plaintiff now moves to remand, and
defendant moves to dismiss for failure to state a claim under Rule
Although the plaintiff challenges removal in this case, the
removing defendant carries the burden of showing the propriety of
this Court's removal jurisdiction.
See Jernigan v. Ashland Oil,
Inc., 989 F.2d 812, 815 (5th Cir. 1993); Willy v. Coastal Corp.,
855 F.2d 1160, 1164 (5th Cir. 1988).
“Because removal raises
significant federalism concerns, the removal statute is strictly
construed.” Gutierrez v. Flores, 543 F.3d 248, 251 (5th Cir. 2008).
Further, “any doubt as to the propriety of removal should be
resolved in favor of remand.”
Under 28 U.S.C. § 1331, “district courts shall have original
jurisdiction of all civil actions arising under the Constitution,
jurisdiction exists when a well-pleaded complaint establishes
either that federal law creates the cause of action or that the
plaintiff’s right to relief necessarily depends on resolution of a
substantial question of federal law.
See Borden v. Allstate Ins.
Co., 589 F.3d 168, 172 (5th Cir. 2009).
Even where a state-law
claim is at issue, "federal question jurisdiction exists where: (1)
resolving a federal issue is necessary to resolution of the statelaw claim; (2) the federal issue is actually disputed; (3) the
federal issue is substantial; and (4) federal jurisdiction will not
responsibilities." Singh v. Duane Morris, LLP, 538 F.3d 334, 338
(5th Cir. 2008).
Federal question jurisdiction plainly exists.
complaint is entitled "Complaint for Unlawful Conversion of Private
Property and Violations of Constitutional Rights."
In the first
paragraph of his complaint, plaintiff states claims:
for the unlawful seizure and wrongful conversion of the
Plaintiff's property in the name of tax only, and for
violations by the Defendant of the Plaintiff's
constitutional Rights as secured and guaranteed under
both the Constitution of the State of Louisiana and the
Constitution of the United States of America.
Plaintiff invokes the Fourth and Fifth Amendments of the U.S.
Constitution as authority for his complaint.
alleges defendant "conspired outside the controlling federal law to
attempt to compel the Plaintiff to service unsubstantiated debt
allegations, in the name of tax."
Plaintiff essentially claims
that defendant improperly withheld dividend payments under 26
U.S.C. § 3406.
Plaintiff's complaint clearly establishes that federal law
See Borden, 589 F.3d at 172.
Even plaintiff's state-
law claims implicate disputed and substantial federal tax law
issues regarding defendant's authority to withhold plaintiff's
Singh, 538 F.3d at 338; see also Hughes v.
2012)(affirming denial of remand where plaintiff "tried to frame
his claims as sounding in state law" but the only contested issue
was "whether or not the IRS properly issued an administrative
levy"); Garble & Sons Metal Prods., Inc. v. Darue Eng'g & Mfg., 545
U.S. 308, 315 (2005)("The meaning of a federal tax provision is an
important federal law issue that belongs in federal court.").1
Court has removal jurisdiction over plaintiff's claims.
Rule 12(b)(6) of the Federal Rules of Civil Procedure allows
a party to move for dismissal of a complaint for failure to state
a claim upon which relief can be granted.
Such a motion is rarely
granted because it is viewed with disfavor.
See Lowrey v. Tex. A
& M Univ. Sys., 117 F.3d 242, 247 (5th Cir. 1997) (quoting Kaiser
Aluminum & Chem. Sales, Inc. v. Avondale Shipyards, Inc., 677 F.2d
1045, 1050 (5th Cir. 1982)).
In considering a Rule 12(b)(6)
motion, the Court “accepts ‘all well-pleaded facts as true, viewing
them in the light most favorable to the plaintiff.’” See Martin K.
Eby Constr. Co. v. Dall. Area Rapid Transit, 369 F.3d 464 (5th Cir.
2004) (quoting Jones v. Greninger, 188 F.3d 322, 324 (5th Cir.
Even if plaintiff's state-law claims did not necessarily
depend on resolution of substantial federal questions, the Court
would still have supplemental jurisdiction over those claims, which
are so intertwined to the federal claims that they form the "same
case or controversy." 28 U.S.C. § 1367(a). All of plaintiff's
claims arise out of the same set of operative facts–-namely, that
defendant allegedly lacked the authority to withhold federal taxes
from plaintiff's account. Halmekangas v. State Farm Fire & Cas.
Co., 603 F.3d 290, 293 (5th Cir. 2010).
1999)). But, in deciding whether dismissal is warranted, the Court
will not accept conclusory allegations in the complaint as true.
Kaiser, 677 F.2d at 1050.
Indeed, the Court must first identify
allegations that are conclusory and, thus, not entitled to the
assumption of truth.
Ashcroft v. Iqbal, 556 U.S. 662, 678-79
A corollary: legal conclusions “must be supported by
factual allegations.” Id. at 678.
Assuming the veracity of the
well-pleaded factual allegations, the Court must then determine
“whether they plausibly give rise to an entitlement to relief.”
Id. at 679.
“‘To survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.’” Gonzalez v. Kay, 577 F.3d
600, 603 (5th Cir. 2009)(quoting Iqbal, 556 U.S. at 678)(internal
quotation marks omitted).
“Factual allegations must be enough to
raise a right to relief above the speculative level, on the
assumption that all the allegations in the complaint are true (even
if doubtful in fact).”
Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555 (2007) (citations and footnote omitted). “A claim has facial
plausibility when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is
liable for the misconduct alleged.”
Iqbal, 556 U.S. at 678 (“The
plausibility standard is not akin to a ‘probability requirement,’
but it asks for more than a sheer possibility that a defendant has
requires the reviewing court to draw on its judicial experience and
Id. at 679.
“Where a complaint pleads facts that
are merely consistent with a defendant’s liability, it stops short
of the line between possibility and plausibility of entitlement to
relief.” Id. at 678 (internal quotations omitted) (citing Twombly,
550 U.S. at 557).
“[A] plaintiff’s obligation to provide the
‘grounds’ of his ‘entitle[ment] to relief’”, thus, “requires more
than labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do.”
Twombly, 550 U.S. at
555 (alteration in original) (citation omitted).
In deciding a motion to dismiss, the Court may consider
documents that are essentially “part of the pleadings.”
any documents attached to or incorporated in the plaintiff’s
complaint that are central to the plaintiff’s claim for relief.
Causey v. Sewell Cadillac-Chevrolet, Inc., 394 F.3d 285, 288 (5th
Cir. 2004) (citing Collins v. Morgan Stanley Dean Witter, 224 F.3d
496, 498-99 (5th Cir. 2000)).
Also, the Court is permitted to
consider matters of public record and other matters subject to
judicial notice without converting a motion to dismiss into one for
See United States ex rel. Willard v. Humana
Health Plan of Tex. Inc., 336 F.3d 375, 379 (5th Cir. 2003).
constitutional rights, plaintiff essentially challenges defendant's
authority to begin backup withholding on plaintiff's investment
account. Section 3406 of the Internal Revenue Code governs "backup
26 U.S.C. § 3406.
Section 3406(a)(1) requires
payors of "reportable interest or dividend payments" to deduct and
withhold a designated amount as a tax from payments to payees under
certain circumstances, including when the payor received a notice
of payee underreporting with respect to interest and dividends. 26
U.S.C. § 3406(c).
This notice is commonly referred to as a "C-
determines that there has been payee underreporting, mails at least
four notices to the payee, and assesses any tax deficiencies.
U.S.C. § 3406(c)(1).
Once the IRS issues a C-Notice to the payor,
the withholding can only be stopped after the IRS makes a favorable
determination to the payee and then: (1) provides the payee with a
written certification that withholding is to stop and (2) directly
Section 3406 also provides:
For purposes of section 31, this chapter (other than
section 3402(n)), and so much of subtitle F (other than
section 7205) as relates to this chapter, payments which
are subject to withholding under this section shall be
treated as if they were wages paid by an employer to an
26 U.S.C. § 3406(h)(10).
That is, payments that are subject to
withholding under § 3406 should be treated as if they were wages
paid by an employer to an employee (even though there is no actual
employment relationship), except under § 3402(n). Under § 3402(n),
an employer is not required to withhold any tax if the employee
furnishes to the employer a withholding exemption certificate
verifying that the employee: (1) incurred no income tax liability
for the preceding year, and (2) anticipates that he will incur no
income tax liability for the current year.
Under § 3403, however,
"the employer shall be liable for the payment of the tax required
to be deducted and withheld under this chapter, and shall not be
liable to any person for the amount of such payment." Accordingly,
consistent with § 3406(h)(10), the payor becomes liable to the IRS
for the payment of the backup withholding, but is by law insulated
from liability to any other person, including the payee.
U.S.C. §§ 3403, 3406(h)(10).
dismissed because defendant was authorized and required to withhold
receiving the C-Notice. Defendant argues successfully that because
plaintiff's claims are statutorily barred by § 3403.
plaintiff's dividend payment.
And, to underscore, under § 3403
defendant "shall not be liable to any person for the amount of such
See 26 U.S.C. § 3406(h)(10).
therefore fail as a matter of law.
Plaintiff contends that because he furnished to defendant a
statutorily exempt from backup withholding under § 3406(h)(10).
Plaintiff is plainly mistaken.
The statutory exemption contained
in § 3406(h)(10) provides that a payee (as distinguished from an
withholding exemption certificate under § 3402(n).
Even if §
3402(n) were applicable, plaintiff has not furnished a valid
withholding exemption certificate.
Plaintiff merely produced a
self-styled "Statement of Certification of Citizenship," asserting
that he is a U.S. citizen, but nowhere verifying that he has
incurred no tax liability for the preceding year and that he
anticipates he will incur no income tax liability for the current
See 26 U.S.C. § 3402(n)(1),(2).
Plaintiff alleges that the backup withholding violated his
right to due process, amounted to an illegal search and seizure,
and constituted a taking of his private property for public use
without just compensation.
The Court has already held that
defendant was both authorized and required to withhold taxes from
constitutionality of the federal tax withholding statute, his
claims must fail.
The Sixteenth Amendment to the United States
Constitution gives Congress the constitutional authority to direct
withholding under § 3406.
See U.S. Const. amend. XVI ("Congress
shall have power to lay and collect taxes on incomes, from whatever
source derived"); Beatty v. C.I.R., 667 F.2d 501, 502 (5th Cir.
1982)("Congress has the power to require withholding on wages").
By his own allegations, plaintiff received adequate notice of
the withholding and the opportunity to receive a determination from
the IRS as to the propriety of the withholding.
26 U.S.C. §
withholding), (3)(D)(payee can seek a determination from the IRS to
The Fifth Circuit U.S. Court of Appeals has
observed that "so long as there is an adequate opportunity for
postseizure determination of rights, the summary tax collection
procedures of the Internal Revenue Code meet the requirements of
1981)(analyzing 26 U.S.C. § 6331)(citations omitted).
provides no grounds for entitlement to relief on his constitutional
Twombly, 550 U.S. at 555.
Plaintiff maintains that he has stated a state-law claim for
"Conversion is a wrongful act of dominion
over the possessory rights of another, depriving that person of
possession of property permanently or for an indefinite time."
Ginn v. Folger Coffee Co., No. 08-3856, 2008 WL 4909319, at *2-*3
(E.D. La. Nov. 12, 2008)(citing Quealy v. Paine, Webber, Jackson &
Curtis, Inc., 475 So. 756, 760 (La. 1985)).
Because defendant had
both legal authority and a duty to begin backup withholding upon
receipt of the C-Notice from the IRS, plaintiff cannot claim any
"wrongful act," and, therefore cannot in law state a claim of
If plaintiff believes that the withholding is in
error, his proper remedy is to seek a determination from the IRS.
26 U.S.C. § 3406(c)(3).
Accordingly, IT IS ORDERED that plaintiff's motion to remand
is DENIED, and defendant's motion to dismiss under Rule 12(b)(6) is
The plaintiff's claims are DISMISSED with prejudice.
New Orleans, Louisiana, November 27, 2013
MARTIN L. C. FELDMAN
UNITED STATES DISTRICT JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?