Aloe Vera of America, Inc. v. United States

FILED
NOT FOR PUBLICATION
APR 05 2017
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

FOR THE NINTH CIRCUIT

ALOE VERA OF AMERICA, INC., a No. 15-15672
Texas corporation; et al.,
D.C. No. 2:99-cv-01794-JAT
Plaintiffs-Appellants,

v. MEMORANDUM*

UNITED STATES OF AMERICA,

Defendant-Appellee.

Appeal from the United States District Court
for the District of Arizona
James A. Teilborg, District Judge, Presiding

Argued and Submitted March 15, 2017
San Francisco, California

Before: McKEOWN and BYBEE, Circuit Judges, and MOLLWAY,** District
Judge.

This appeal (the third in this case) follows a bench trial after which the

district court found that the Internal Revenue Service had provided Japan’s taxing

*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
The Honorable Susan Oki Mollway, United States District Judge for
the District of Hawaii, sitting by designation.
authority with information the IRS knew to be false about Plaintiffs. Plaintiffs

sought millions of dollars in damages that they said resulted when Japan’s taxing

authority followed its alleged custom of leaking information to the Japanese press.

The district court, finding that the United States had improperly disclosed tax

return information in violation of 26 U.S.C. § 6103, determined that the United

States was liable for damages under 26 U.S.C. § 7431. Because Plaintiffs failed to

meet their burden of proving actual damages, the district court awarded only

statutory damages of $1000 to Aloe Vera of America, Inc., $1000 to Gene

Yamagata, and $1000 to Rex and Ruth Maughan jointly. This appeal followed.

At oral argument, Plaintiffs abandoned their argument that the burden

with respect to causation of damages should be shifted to the United States, instead

conceding that Plaintiffs had the burden of proving causation by a preponderance

of the evidence. Plaintiffs also conceded that no damages should be awarded to the

holding companies, Maughan Holdings, Inc., and Yamagata Holdings, Inc., and

that punitive damages were not recoverable in the absence of an award of actual

damages. Given these concessions, the only issue on this appeal concerns the

damage rulings relating to Aloe Vera of America, Gene Yamagata, and Rex and

Ruth Maughan.

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 We review a district court’s findings of fact after a bench trial for

clear error. Fed. R. Civ. P. 52(a)(6) (“Findings of fact, whether based on oral or

other evidence, must not be set aside unless clearly erroneous, and the reviewing

court must give due regard to the trial court’s opportunity to judge the witnesses’

credibility.”); see F.T.C. v. BurnLounge, Inc., 753 F.3d 878, 883 (9th Cir. 2014).

We review the district court’s conclusions of law de novo. Id. We have

jurisdiction under 28 U.S.C. § 1291, and we affirm the district court’s decision to

award only statutory damages. However, as agreed by the United States, with

respect to Rex Maughan and Ruth Maughan, we reverse and remand with

instructions to the district court to award separate statutory damages of $1000 to

each of them, rather than $1000 to them jointly.

Under 26 U.S.C. § 7431(a)(1), a taxpayer whose tax return or return

information has been disclosed in violation of § 6103 may sue for damages.

Monetary damages are the greater of statutory damages of $1000 or actual

damages plus punitive damages in appropriate cases. See 26 U.S.C. § 7431(c).

There is no dispute that the IRS sent the National Tax Administration of Japan

(“NTA”) a Simultaneous Examination Proposal containing a false statement

(“Unreported Income Statement”) listing approximately $32 million that Plaintiffs

allegedly should have reported as income on their returns. Nor is there any dispute

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that this false statement violated § 6103. What is disputed is whether Plaintiffs

proved that this false statement caused the NTA to participate with the United

States in a simultaneous examination that allegedly led to millions of dollars in

damages.

The district court did not clearly err in determining that Plaintiffs

failed to meet their burden of proving by a preponderance of the evidence, whether

direct or circumstantial, that the IRS had caused actual damages. The Unreported

Income Statement went to the scope of what the IRS alleged was a scheme to

evade taxes. While this scope was certainly considered by the NTA, Plaintiffs

failed to prove by a preponderance of the evidence that the false statement was

determinative of the NTA’s decision to participate in the simultaneous

examination. The NTA had an interest in stopping tax evasion in general, not just

evasion involving large amounts of money. Had the Unreported Income Statement

not been included in the Simultaneous Examination Proposal, the proposal would

still have contained sufficient detail about Plaintiffs’ business structure, income

sources, and tax liabilities to support the examination. It would, for example, still

have included what the district court called “provocative allegations that Maughan

and Yamagata were hiding income from the United States and possibly Japan as

well as hiding dividends as ‘commissions’ in the cost of goods sold to avoid

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Japanese withholding tax.” See Findings of Fact and Conclusions of Law at 28

(Feb. 11, 2015), ER at 30, 2015 WL 567003, at *17. On their own, “[t]hese

allegations were a sufficient basis for Japan to enter into the simultaneous

examination.” Id.

To prove causation, Plaintiffs relied heavily at trial on a letter dated

January 11, 1995, see ER at 652-59, from which they said causation could be

inferred because the NTA took no action after receiving that letter even though it

contained the information included in the 1996 Simultaneous Examination

Proposal, except for the false Unreported Income Statement. We see no clear error

in the district court’s determination that the January 1995 letter did not establish

the necessary causation by a preponderance of the evidence, as the letter and the

proposal had differing purposes. The former sought the NTA’s assistance with an

IRS investigation while the latter proposed a simultaneous examination. A lack of

response to the letter is insufficient to prove that the Unreported Income Statement

caused actual damages.

Although we affirm the district court’s award and judgment in

significant part, we reverse and remand this matter in one narrow respect. As

agreed by the United States, Rex Maughan and Ruth Maughan should have each

been awarded $1000. See Final Pretrial Order at 97 (July 10, 2014), ER at 296;

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Brief for the Appellee at 4 n.3. Accordingly, this matter is remanded with the

instruction that the district court amend its award of statutory damages to replace

the award of $1000 to Rex and Ruth Maughan jointly with an award of $1000 to

Rex Maughan and an award of $1000 to Ruth Maughan.

AFFIRMED IN PART, REVERSED AND REMANDED IN

PART.

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