Taxpayer Can't Recoup Damages for Coin Collection Seized During Search of Her Home

(Parker Tax Publishing April 2021)

The Eighth Circuit reversed a district court decision in which the lower court had awarded monetary damages to an individual because the IRS deposited collectible coins, which were seized during a search of her house, at face value. The court held that the Federal Tort Claims Act's discretionary-function exception applied and thus the government had not waived its sovereign immunity to being sued. Willis v. U.S., 2021 PTC 104 (8th Cir. 2021).

Background

Between 2007 and 2011, Carrie Willis and her husband, Bobby, purchased $1 Presidential coins in 364 $1,000 bricks. In 2012, the Willis's divorced and, as part of the divorce, Mr. Willis gave up any ownership interest in the $1 Presidential coins. Also, in 2012, state and federal authorities in New Mexico were actively investigating claims of financial fraud, including embezzlement and misappropriation of escrow money, involving a title company and escrow business previously operated by the couple. In May of 2012, Mr. Willis voluntarily and unilaterally came into the Springfield, Missouri IRS office to advise agents of his connection to a foreign drug cartel and to tell the agents he was under investigation in New Mexico for embezzlement. IRS authorities obtained a search warrant and, during a search of Carrie Willis's home, seized the $1 Presidential coins and passed them along to IRS Agent Scott Wells. The Presidential coins were outside the scope of the authorities' search warrant. Agent Wells contacted his supervisor and was eventually told that he could seize the Presidential coins. The IRS did not apply for a seizure warrant or fill out any affidavit explaining the need to seize the $1 Presidential coins and Agent Wells did not document the reason for seizing the $1 Presidential coins, either before or after the seizure occurred.

Agent Wells subsequently deposited the coins at their face value into an IRS account and later remitted the amount to Ms. Willis. She maintained that the coins were collectors' items and, as a result, the agent was mistaken when he essentially swapped them for ordinary currency, greatly discounting their value. Ms. Willis sued the government under the Federal Tort Claims Act (FTCA) for conversion. In Willis v. U.S., 2020 PTC 399 (W.D. Mo. 2020), a district court agreed and awarded Ms. Willis $94,880. The government appealed to the Eighth Circuit, arguing that the district court erred when it concluded that FTCA had waived the government's sovereign immunity in the current circumstances. Ms. Willis argued that the agent violated IRS manual provisions by failing to investigate whether the coins had a special value to collectors.

Governmental Immunity

Generally, a person who sues the federal government must show that the government has unequivocally waived its sovereign immunity from a lawsuit. Under 28 U.S.C. Section 1346(b)(1), FTCA waives sovereign immunity in suits seeking money damages against the federal government "for injury or loss of property . . . caused by the negligent or wrongful act or omission of any employee of the Government while acting within the scope of his office or employment, under circumstances where the United States, if a private person, would be liable to the claimant." But FTCA contains a number of exceptions to this general waiver of immunity. In U.S. v. Gaubert, 499 U.S. 315 (1991), the Supreme Court identified a so-called "discretionary-function exception" which applies when government agents make decisions that are discretionary in nature (i.e., ones that involve an element of judgment or choice). More specifically, under 28 U.S.C. Section 2680(a), the exception applies to any claim that is based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the government, whether or not the discretion involved is abused.

Analysis

The Eighth Circuit reversed the district court's decision and held that FTCA's discretionary-function exception applied and thus the government had not waived its sovereign immunity. The court began by noting that the upshot of the Supreme Court decisions dealing with FTCA and governmental immunity meant that it had to answer two questions to determine if the "discretionary-function exception" applied in the instant case. First, the court asked whether the challenged conduct or omission is "truly discretionary" in that it involves an element of judgment or choice instead of being controlled by mandatory statutes or regulations. If the challenged conduct or omission is truly discretionary, the court said, it needed to consider whether the employee's judgment or choice could be based on considerations of social, economic, and political policy because, if it could, the exception would apply, and sovereign immunity would bar the suit.

The court agreed with the government that the agent's decision was a discretionary one and observed that Internal Revenue Manual Sections 9.7.4.6.1(2) and 9.7.6.14.1(1) provided "that domestic and foreign currency seized for forfeiture, except where it is . . . held as a 'collectible asset,' must be expeditiously counted, processed, and deposited . . . within 5 days of seizure." Neither that manual nor any other mandatory rule, the court noted, instructed an agent on how to determine whether seized currency is a "collectible asset." That determination is left to the agent's discretion.

Willis's argument that Agent Wells violated the IRM provisions by failing to investigate whether the coins had a special value to collectors missed the mark, the court said. According to the court, Agent Wells satisfied his mandatory obligation - he did not fail to decide whether the seized currency was ordinary currency or a collectible asset. He quite clearly decided that the coins were ordinary currency, the court said, and so had them quickly processed. The court rejected Willis's argument that the IRS manual required Agent Wells to do more, and that his failure to follow the manual was not discretionary. Even if the decision was carelessly made or was uninformed, the court concluded, Agent Wells' negligence in making it was irrelevant. The decision was still discretionary.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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