Opinion
Civil Action No. 1:00-CV-768-ODE
March 27, 2002
ORDER
This civil tax case is presently before the court on cross motions for summary judgment. For the reasons set forth below, both motions for summary judgment are denied.
Raymond F. Schinazi, Ph.D., is employed by Emory University as a professor of pediatrics at the Emory School of Medicine, where he both teaches and performs research. He is also the director of Laboratory of Biochemical Pharmacology. Additionally, Dr. Schinazi works for the Department of Government Affairs, as a senior research career scientist. Dr. Schinazi received royalties from Emory University from patents of inventions related to antiviral agents for life threatening infections, including Aids and Hepatitis. [R. Schinazi Depo. at 50-1]
Dr. Schinazi and his wife, Carol Lynn Schinazi, (collectively "Plaintiffs") timely filed their 1993 federal income tax return on April 5, 1994. Plaintiffs' return showed an income tax liability of $16,309, which Plaintiffs paid when they filed their return. It is undisputed that plaintiffs failed to report $157,703.04 in royalties received by Dr. Schinazi from Emory University during 1993. Neither Defendant, the United States of America ("Government" or "Defendant"), nor Plaintiffs currently have a signed copy of the 1993 tax return at issue. However, there is no evidence in the record that the validity of that tax return was ever an issue over the course of the development of this case.
On October 3, 1994, the Internal Revenue Service ("I.R.S.") sent plaintiffs a letter notifying them that the royalty income from Emory University had been omitted from Plaintiffs' joint 1992 federal income tax return. [Pl. Exh. A]. In a letter, dated October 12, 1994, Dr. Schinazi responded to the I.R.S. indicating that the royalty income was omitted from his 1992 tax return because he thought it was tax-free income. [Pl. Exh. B]. In February 1995, the I.R.S. issued an examination report, proposing to increase Plaintiffs' taxable income on their 1992 joint federal income tax return by the amount of the royalties and assessed an accuracy-related penalty for a substantial understatement of income. [Pl. Exh. C]. During the year in which the 1992 audit took place, Plaintiffs did not amend their 1993 tax return to include the Emory royalties as income for that tax year.
On June 5, 1995, Defendant notified Plaintiffs that their 1993 federal income tax return had been selected for audit. [Pl. Exh. D]. In a letter dated October 13, 1995, the I.R.S. enclosed an examination changes report, proposing to increase the taxable income owed in tax year 1993 by the amount of the royalty income, resulting in additional tax liability in the amount of $63,422.00. [Def. Exh. B; Pl. Exh. E]. In addition, the examination report proposed the assessment of a civil fraud penalty in the amount of $44,111.00 and an accuracy-related penalty in the amount of $973.00 relating to the 1993 tax return. [Id.].
In a letter dated January 16, 1996, Plaintiffs appealed the assessment of the civil fraud penalty and requested a conference with the Regional Appeals Office. [Def. Exh. C]. On February 19, 1996, Plaintiffs paid $63,422.00, representing the additional federal income tax for the 1993 tax year for the unreported royalty income. [Def. Exh. D].
The I.R.S. issued a notice of deficiency dated April 10, 1997, for the civil fraud penalties associated with the 1993 tax year. [Def. Exh. F]. On September 5, 1997, the I.R.S. assessed the civil fraud penalty of $44,110.50 and an accuracy-related penalty of $921.60, for a total tax liability of $45,032.10 and associated interest in the amount of $18,627.48 against Dr. Schinazi. [Def. Exh. G; Pl. Exh. I]. Plaintiffs' counsel wrote the I.R.S. Appeals Office on September 18, 1997, requesting that the notice of deficiency be rescinded on the basis that it was issued prematurely. [Def. Exh. H].
Another accuracy related penalty was assessed against Carol Schinazi. This penalty is not a part of the instant litigation.
On October 21, 1997, Defendant issued a "Notice of Intent to Levy." [Def. Exh. I] Plaintiffs' attorney had a conference with the I.R.S. Appeals Officer on January 6, 1998, relating to the tax years 1993 and 1994. Thereafter, plaintiffs paid $63,659.58, representing the penalties and interest from their joint checking account on March 17, 1998. [Pl. Exh. J; Def. Exh. K].
The copy of Exh. I is illegible except for the title. In response thereto, Plaintiffs' counsel wrote Defendant to request a delay in collection activity pending resolution of issues related to the 1994 tax year that directly affected the 1993 tax year at issue herein. [Def. Exh. I].
Defendant submits that plaintiffs did not file a formal administrative claim for a refund prior to March 26, 1998. Plaintiffs dispute that fact, and assert that through a series of oral and written communications with the I.R.S., they filed a claim for refund requesting the abatement of the civil fraud penalty and interest thereon. Nonetheless, by letter dated March 26, 1998, the I.R.S. notified Plaintiffs that their claim for a refund was denied. [Pl. Exh. L]. Specifically, the letter stated: "Reason your claim was disallowed: You have failed to establish that the penalties previously assessed should be abated." [Id.]. It also instructed Plaintiffs that they had two years from the date of the notice to file suit for a refund. [Id.]
Just prior to filing suit, Plaintiffs' counsel completed and signed a Form 843, a claim for a refund of the civil fraud penalties, which was dated March 17, 2000. [Def. Exh. M]. Attached thereto was a Power of Attorney form, dated November, 1995, stating that Plaintiffs' counsel was permitted to represent them in matters relating to their 1040 tax forms for the years 1992, 1993 and 1994. [Id.]. The Form 843 was sent to the I.R.S. in an envelope bearing a private postage meter depicting full rate postage dated March 17, 2000. [Id.].
Defendant notes that the back of the envelope bears and "ID tag" bar code, which looks like a series of vertical lines. [Def. Exh. M]. Defendant maintains that the "ID tag" bar code shows that the envelope was received by the United States Postal Service on March 21, 2000, between 7:30 p.m. and 8:30 p.m. [Dec. Shah at ¶ 7, Def. Exh. N].
Plaintiffs dispute this fact and deny that the envelope was received by the United States Postal Service on March 21, 2000, noting that the postal representative declared that items of mail from an Atlanta address "should" be delivered to a destination in Atlanta within twenty-four hours of time they were "collected by the Postal Service." [Dec. Shah at ¶ 2, Def. Exh. N].
Plaintiffs filed their Complaint in the instant action on March 23, 2000, pursuant to 28 U.S.C. § 1346 (a)(1). By letter dated June 16, 2000, the I.R.S. returned the Form 843 to Plaintiffs through their counsel because it was not signed by the taxpayers nor accompanied by a valid power of attorney form that conferred the authority to sign tax returns. [Def. Exh. Q]. Plaintiffs submitted another Form 843 for the 1993 tax year dated July 1, 2000. [Def. Exh. R]. Plaintiffs contend that said form was an attempt to formalize and perfect the informal refund claim to which the I.R.S.'s claim disallowance letter dated March 26, 1998, related.
On April 4, 2001, Defendant filed a motion for summary judgment, arguing this court lacks subject matter jurisdiction over this matter. Plaintiffs responded to said motion and filed a cross motion for summary judgment on May 25, 2001, on the merits of their claim.
A motion for summary judgment should be granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). "[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, (1986); see also Morisky v. Broward County, 80 F.3d 445, 447 (11th Cir. 1996).
However, summary judgment is improper "if a reasonable fact finder evaluating the evidence could draw more than one inference from the facts, and if that inference introduces a genuine issue of material fact." Jeffery v. Sarasota White Sox, Inc., 64 F.3d 590, 594 (11th Cir. 1995). An issue of fact is "material" if it might affect the outcome of the case under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). It is "genuine" if the record taken as a whole could lead a rational trier of fact to find for the non-moving party. See id.; see also Matsushita Electric Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
Conclusory allegations based on subjective beliefs are insufficient to create a genuine issue of material fact. Leigh v. Warner Bros., Inc., 212 F.3d 1210, 1217 (11th Cir. 2000); Ramsey v. Leath, 706 F.2d 1166, 1170 (11th Cir. 1983). On the other hand, if the record taken as a whole could lead a rational trier of fact to find for the nonmoving party, then the issue of fact is genuine. Matsushita Elec. Indus. Co., 475 U.S. at 586. On a summary judgment motion, the record and all reasonable inferences that can be drawn from it must be viewed in the light most favorable to the non-moving party. Whatley v. CNA Ins. Cos., 189 F.3d 1310, 1313 (11th Cir. 1999)
Defendant's Motion for Summary Judgment
The Government's motion for summary judgment challenges the subject matter jurisdiction of this court. Defendant argues that Plaintiffs failed to file a proper and timely administrative claim for refund with the I.R.S. before filing this suit for refund. As such, Defendant maintains this court lacks subject matter jurisdiction.
It is well settled that the United States enjoys sovereign immunity from suit unless it consents to be sued. See e.g., Mutual Assur., Inc. v. United States, 56 F.3d 1353, 1355 (11th Cir. 1995). The United States has waived its sovereign immunity in order to allow taxpayers to file actions seeking tax refunds: "The district courts shall have original jurisdiction . . . of [a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected . . ." 28 U.S.C. § 1346 (a)(1). However, Congress has imposed certain terms on this waiver of sovereign immunity.
Section 7422 of the Internal Revenue Code provides that:
[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.26 U.S.C. § 7422 (a). Thus, a taxpayer's filing of an administrative refund claim with the I.R.S. is a jurisdictional prerequisite to the maintenance of a tax refund suit. Mutual Assur., 56 F.3d at 1356; Charter Co. v. United States, 971 F.2d 1576, 1579 (11th Cir. 1992)
Section 6511(a) states that a claim for credit or refund "shall be filed by the taxpayer within . . . two years from the time the tax was paid." 26 U.S.C. § 6511 (a). "[U]nless a claim for refund of a tax has been filed within the time limits imposed by § 6511(a), a suit for refund . . . may not be maintained in any court." United States v. Dalm, 494 U.S. 596, 602 (1990). The reason for requiring taxpayers to present a detailed claim to the I.R.S. prior to filing suit is that "courts should not make tax determinations before the agency most qualified to handle the matter tackles the issue." Santa Cruz Building Ass'n v. United States, 411 F. Supp. 871, 876 (E.D. Missouri 1976). Such decisions typically involve individual factual decisions, and the Regulations serve to economize administrative time by barring incomplete or confusing claims. Id.
In the instant matter, Plaintiffs paid the penalties and interest due with respect to the 1993 tax year on March 17, 1998. As such, the Government's position is that the jurisdictional deadline for filing a claim for refund pursuant to Section 6511(a) was on March 17, 2000. [Def. Br. at 5 (Summary Timeline), 15]. Additionally, Section 6532 provides that: no suit or proceeding under section 7422(a) for the recovery of any internal revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing the claim required under such section unless the Secretary renders a decision thereon within that time . . . 26 U.S.C. § 6532 (a)(1).
In their Complaint, Plaintiffs allege the court has subject matter jurisdiction based on the Notice of Disallowance and the Form 843, claim for refund, dated March 17, 2000. [Compl. ¶¶ 7-8]. The Government makes several arguments concerning alleged defects in Plaintiffs' administrative claim for a refund. First, the Government contends that the March 17, 2000, Form 843 refund claim is deficient to confer subject matter jurisdiction because it was untimely and not signed by the taxpayers. Additionally, the Government argues that because Plaintiffs filed suit on March 23, 2000, six days after filing their Form 843 claim for a refund, Plaintiffs failed to wait six months as required by Section 6532. Therefore, the Government asserts that this court lacks subject matter jurisdiction, requiring dismissal of this case.
In response, Plaintiffs explain that prior to their filing of the Form 843 in March, 2000, their oral and written communications with the I.R.S. regarding the fraud penalties amounted to an informal claim for refund, which under the case law can satisfy the jurisdictional prerequisite. Plaintiffs maintain that the filing of the Form 843 on March 17, 2000, was merely an attempt to perfect the informal claim prior to filing suit.
The United States Court of Appeals for the Eleventh Circuit has recognized that "a notice fairly advising the Commissioner of the nature of the taxpayer's claim, which the Commissioner could reject because too general or because it does not comply with formal requirements of the statute and regulations, will nevertheless be treated as a claim where formal defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period." Mills v. United States, 890 F.2d 1133, 1135 (11th Cir. 1989), citing United States v. Kales, 314 U.S. 186, 194 (1941). "There are no rigid guidelines except that an informal claim must have a written component and should `adequately apprise the Internal Revenue Service that a refund is sought for certain years.'" Id.
Generally, there are three components to an informal claim: (1) it must provide sufficient notice that the taxpayer is asserting a right to a refund; (2) the claim must describe the legal and factual basis for the refund; and (3) it must have some written component. New England Electric Sys. v. United States, 32 Fed. Cl. 636, 641 (Fed.Cl. 1995); see also Vintilla v. United States, 931 F.2d 1444, 1446 (11th Cir. 1991) (requiring a written component; Mills, 890 F.2d at 1135 (same). However, in considering an informal claim, courts must go beyond the written component and examine the facts and circumstances presented on a case by case basis. New England Electric, 32 Fed. Cl. at 641.
It is not enough that the Service have in its possession information from which it might deduce that the taxpayer is entitled to, or might desire, a refund; nor is it sufficient that a claim involving the same ground has been filed for another year or by a different taxpayer. On the other hand, the writing should not be given a crabbed or literal reading, ignoring all the surrounding circumstances which give it body and content. The focus is on the claim as a whole, not merely the written component. In addition to the writing and some form of request for a refund, the only essential is that there be made available sufficient information as to the tax and the year to enable the Internal Revenue Service to commence, if it wishes, an examination into the claim.Mills, 890 F.2d at 1135, citing American Radiator Standard San. Corp. v. United States, 318 F.2d 915, 920 (Cl.Ct. 1963). The written component alone need not bear the burden of satisfying the notice requirements but courts must consider the writing in light of all other existing facts and circumstances. BCS Financial Corp. v. United States, 930 F. Supp. 1273, 1278 (N.D. Ill. 1996)
In support of Plaintiffs' assertion that they made an informal claim, the court notes that the written component is satisfied by Plaintiffs' counsel's letter to the I.R.S. dated January 16, 1996, wherein Plaintiffs' sought to appeal the proposed assessment of the civil fraud penalty. [Def. Exh. C]. Therein, counsel set forth a detailed statement of facts relating to the 1993 royalties issue, a legal analysis, and conclusion. [Id.]. That document fully apprised the I.R.S. of the nature of Plaintiffs' objection to the proposed civil fraud penalties. See e.g., American Radiator, 318 F.2d at 920 (stating that the written component should include some form of request for a refund and sufficient information to enable the I.R.S. to start an investigation if it so wished); Broun v. United States, 1991 WL 115772 (M.D. Ga. 1991) (opining that the sufficiency of the notice to the I.R.S. is the most important requirement of the informal claim); see also BCS Financial, 930 F. Supp. at 1277 (stating that the purpose of the notice component of an informal claim is recognition of the fact the Government personnel are constantly changing and some continuity of notice must be provided).
The record also shows additional correspondence between Plaintiffs' counsel and the I.R.S. concerning the Notice of Deficiency and Notice of Intent to Levy. [Def. Exh. H, I]. Though the fraud penalties were not discussed therein, the contents of the letter indicate oral conversations had taken place between counsel and the I.R.S. [Id.]. Such evidence gives substance to Dr. and Mrs. Schinazi's conclusory averments that "through a series of oral and written communications with the Internal Revenue Service," Plaintiffs had filed a claim for refund requesting abatement of the civil fraud penalty and interest thereon. [R. Schinazi Aff. ¶ 7; C. Schinazi Aff. ¶ 7] Additionally, an IRS appeals officer held a conference with Plaintiffs' representative on January 6, 1998. Given the denial of Plaintiffs' claim issued three months later, the reasonable inference to be drawn is that the substance of Plaintiffs' refund claim was discussed therein.
The most persuasive evidence that an informal claim for a refund existed, however, is the communication from the I.R.S., Southeast Region Appeals Office, dated March 26, 1998, stating that Plaintiffs' claim for refund of the civil fraud penalties was disallowed ("Notice of Disallowance"). [Def. Exh. L]. The stated reason for disallowance was failure "to establish that the penalties previously assessed should be abated." Id. Additionally, the notice appeared to be a final decision of the merits of a refund claim, instructing Plaintiffs that they had two years from the date of the letter within which to file suit. Id.
Defendant counters that Plaintiffs had not filed a formal complaint prior to the issuance of the March 26, 1998, Notice of Disallowance. Moreover, the Government notes that claims for income tax refund are considered to be duly filed for purposes of district court jurisdiction under Section 7422 only after the entire tax has been paid; that is payment must be made before a refund can issue. Plaintiffs paid the penalties only ten days prior to the issuance of Notice of Disallowance.
The Government further argues that any correspondence between Plaintiffs' counsel and the I.R.S. prior to the issuance of the Notice of Disallowance did not amount to an informal claim for a refund. That is because the correspondence failed to specifically request a refund for a particular year. The Government asserts that the I.R.S. erred if it treated such correspondence as a claim for refund, as the letters failed to set forth the details of the grounds for a refund nor were they signed under penalty of perjury. See Treas. Reg. § 301.6402-2(b).
That regulation provides that a claim for a refund "must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commission of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that is made under penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit." Treas. Reg. § 301.6402-2(b)
There are few cases addressing whether the Government may be estopped from challenging the sufficiency of the underlying claim for a refund when it issues a Notice of Disallowance on an incomplete or inartful claim for a refund. However, those courts that have addressed the issue have answered the question in the affirmative.
In Turek v. United States, 1986 WL 1430 (N.D. Ill. 1986), the plaintiff taxpayer's refund claim was admittedly incomplete. However, the I.R.S. sent him a Notice of Disallowance, which noted both the deficiency in the claim in addition to disallowing the claim. The district court agreed that the Notice of Disallowance acted as a waiver of the technical requirements for a refund. The court explained:
[T]he language of the letter's opening paragraph states that the claim was disallowed and reasonably implies that the letter served as a notice of a final decision on the merits. It states, "this is your legal notice that your claim is disallowed." Therefore the letter is at best ambiguous, and plaintiff could reasonably have been confused and understood that a final decision had been made on the merits of his claim.Id. at * 4.
Similarly, in Santa Cruz Building Ass'n v. United States, 411 F. Supp. 871 (E.D. Missouri 1976), the district court found that the Government waived its right to demand a further detailed explanation of Plaintiff's refund claim, where it had sent the plaintiff a Notice of Disallowance, advising plaintiff that any further recourse would be to file suit. Thus, the Court held that the Government was estopped from denying jurisdiction based on the plaintiff's failure to follow the Regulations. Id. at 877; see also, Miller v. United States, 500 F.2d 1007, 1010 (2nd Cir. 1974) (holding the Government was estopped from asserting a statute of limitations defense where the I.R.S. inadvertently and erroneously sent the taxpayer a Notice of Disallowance two months after the taxpayer had signed a waiver of such and the taxpayer relied on language in the notice regarding the time within which he could file suit); Exchange and Savings Bank of Berlin v. United States, 226 F. Supp. 56 (D. Md. 1964) (same).
Defendant relies on Goulding v. United States, 726 F. Supp. 707, 712 (N.D. Ill. 1989) for its criticism of Santa Cruz. As noted by Plaintiffs, the United States Court of Appeals for the Seventh Circuit reversed the district court, specifically on the waiver issue, finding that the I.R.S.'s denial of the taxpayer's claim, despite the claim's lack of specificity, constituted a waiver of the defense. Goulding v. United States, 929 F.2d 329, 332-3 (7th Cir. 1991). The Court stated:
If the Commissioner chooses not to stand on his own formal or detailed requirements, it would be making an empty abstraction, and not a practical safeguard, or a regulation to allow the Commissioner to invoke technical objections after he has investigated the merits of the claim and taken action upon it. Even tax administration does not as a matter of principle preclude considerations of fairness.Id., quoting Angelus Mining Co. v. Commissioner, 325 U.S. 293, 297 (1945). The Court continued, "[t]o find the I.R.S. did not waive this defense [of the sufficiency of plaintiff's administrative claim] would be fundamentally unfair." Goulding, 929 F.2d at 333.
The Eleventh Circuit has held in the context of a taxpayer seeking to toll Section 6532's two-year statute of limitations for bringing suit that the statutory period for bringing suit begins to run from the date the IRS mails the Notice of Disallowance, whether or not the taxpayer receives such notice. Rosser v. United States, 9 F.3d 1519 (11th Cir. 1993). Given the importance of the Notice of Disallowance in framing commencement of the statutory period to file suit, this court finds that taxpayers are justified in relying on statements contained therein, even if, unbeknownst to the taxpayer, it was issued erroneously.
In the instant matter, the court must view the evidence in the light most favorable to Plaintiffs, as the non-moving party. Plaintiffs have articulated that the filing of the March 17, 2000, Form 843 was an attempt to perfect their earlier-filed informal claim prior to filing suit in district court. Plaintiffs explain that Section 6532's six-month waiting period before filing suit is inapplicable herein because the Government had already denied their informal claim for a refund, as stated in the March 26, 1998, Notice of Disallowance. The court agrees.
The court need not determine whether Plaintiffs' informal refund claim failed to meet the regulatory requirements because the court concludes that the Government is estopped from raising that argument. A review of the Notice of Disallowance shows that the I.R.S. considered Plaintiffs' claim for a refund on the merits, noted the amount of penalties, and determined that the claim was disallowed. [Def. Exh. L]. From the express terms of that letter, it would appear that the I.R.S. considered Plaintiffs' informal claim despite its deficiencies and issued a decision on the merits. As such, the Government waived the technical requirements prescribed by the Regulations, which it now seeks to enforce.
The Supreme Court discussed the applicability of the doctrine of estoppel against the Government in Heckler v. United States, 467 U.S. 51 (1984). Therein, the Court suggested that "the Government may not be estopped on the same terms as any other litigant" but concluded that there are certain situations that would justify the application of the doctrine. Id. at 60. At the least, the traditional elements of estoppel must be present, namely that "the party claiming the estoppel must have relied on its adversary's conduct in such a manner as to change his position for the worse." Id. at 59.
This is not a case where estoppel would compromise a Government interest in enforcing the law. Heckler, 467 U.S. at 60. The court finds that Plaintiffs relied on the Government's Notice of Disallowance to their detriment. Had Plaintiffs disregarded such notice and awaited a determination on the merits of its March 17, 2000, Form 843, the Government would likely have argued that the complaint was filed outside of the two-year statute of limitations prescribed in the March 26, 1998, Notice of Disallowance. Such a claim would have been insurmountable.
Whether or not the Notice of Disallowance issued inadvertently or erroneously, the court finds that Plaintiffs reasonably relied on its statement that their only recourse was to file suit in the district court within two years of the date of that letter. Moreover, had Plaintiffs waited six additional months from the date it filed the Form 843 to file suit, there is no evidence in the record, particularly in light of the position argued by the Government herein, that the I.R.S.'s determination would have been different from that in the March 26, 1998, Notice of Disallowance.
The Government makes much of the fact that the penalties were not paid prior to the filing of the informal claim. The court notes that the penalties were paid one week prior to the issuance of the Notice of Disallowance. Thus, that fact does not change the court's position on the Notice of Disallowance. In addition, the court has already found that by the issuance of the Notice of Disallowance, the Government waived its challenge to the validity of the informal claim.
Having found that Plaintiffs satisfied the technical prerequisites necessary to confer jurisdiction to this court through their informal claim, the court need not address the Government's argument that the March 17, 1998, Form 843 was untimely and treats the filing of the Form 843 as an amendment in attempt to perfect the informal claim. See Mutual Assurance v. United States, 56 F.3d 1353 (11th Cir. 1995) (holding that a timely filed claim for a refund may be amended after the statute of limitations); Grover v. United States, 1992 WL 247021 (S.D. Ga. 1992) (treating an untimely Form 843 as amending a timely filed informal claim for a refund). The fact that Plaintiffs ultimately amended the Form 843 outside of the statute of limitations through a subsequent filing on July 1, 2000, to include the proper signatures, is of no import to the jurisdictional analysis. See id.
Plaintiffs' counsel signed the document on her clients' behalf and attached a power of attorney. The Government contends that the power of attorney was deficient in that it failed to confer counsel with the power to sign tax returns on Plaintiffs' behalf. The Government returned the Form 843 to Plaintiffs on that basis by letter dated June 16, 2000. Accordingly, Plaintiffs re-filed the Form 843 on July 1, 2000, bearing their own signatures.
Therefore, the court finds that Plaintiffs have adequately complied with the procedural requirements necessary to confer subject matter jurisdiction to this court, and jurisdiction is proper pursuant to 28 U.S.C. § 1346. As such, Defendant's motion for summary judgment is DENIED in that regard.
In its motion for summary judgment, the Government also asserts that Carol Schinazi has no standing to bring any of the claims asserted in the complaint, and as a "matter of judicial housekeeping" seeks her dismissal from this action. [Def. Reply at 5, n. 7]. In essence, the Government maintains that although the Plaintiffs filed a joint federal income tax return for the 1993 tax year, the I.R.S. assessed the disputed penalties against Dr. Schinazi alone for the failure to report royalty income. Because Carol Schinazi was not assessed the civil fraud penalty at issue herein, the Government contends she can show no injury for this court to redress. As such, the Government contends that Carol Schinazi lacks standing to pursue this claim.
The court disagrees with the Government's position. This case involves Plaintiffs' efforts to recover penalties paid in conjunction the understatement of income on their 1993 tax return. Plaintiffs filed that return jointly, and, presumably, both signed the return. Plaintiffs paid the liability at issue herein from their joint checking account.
The law limits standing to sue under 28 U.S.C. § 1346 to persons against whom a tax has been assessed. See e.g., United States v. Williams, 514 U.S. 527 (1995). The court finds that Carol Schinazi was a party to the 1993 tax return and was jointly responsible for the additional liabilities concerning the royalty income following the audit. Therefore she has a personal stake in the outcome of the litigation sufficient to confer standing. Accordingly, Defendant's motion for summary judgment is DENIED.
Plaintiffs' Motion for Summary Judgment
On May 25, 2001, Plaintiffs moved for summary judgment on the merits of their claim for a refund, arguing that the Government cannot establish every element required to prove civil tax fraud. The parties agree that the civil fraud penalty was assessed pursuant to 26 U.S.C. § 6633 (a).
Section 6663 of the Tax Code provides: "If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud." 26 U.S.C. § 6663 (a). Thus, the Government must prove two elements: "(1) That petitioners have an underpayment of tax for that year, and (2) that some part of that underpayment is due to fraud." Balot v. Commissioner, 81 T.C.M (CCH) 1409 (2001); DiLeo v. Commissioner, 96 T.C. 858, 873 (1991), aff'd. 959 F.2d 16 (2d Cir. 1992)
It is well established that whether an underpayment of income is due to fraud is a question of fact. Plunkett v. Commissioner, 465 F.2d 299, 303 (7th Cir. 1972). To carry this burden, the Government must prove that the taxpayer intended to evade taxes that he knew or believed to be owing by conduct intended to taxes. Korecky v. Commissioner, 781 F.2d 1566, 1568 (11th Cir. conceal, mislead or otherwise prevent the collection of such 1986); Cefalu v. Commissioner, 276 F.2d 122, 128-29 (5th Cir. 1960). Fraud need not be established by direct evidence, but can be shown by surveying the taxpayer's entire course of conduct and drawing reasonable inferences therefrom. Korecky, 781 F.2d at 1568.
Such circumstantial evidence, referred to as the indicia or "badges" of fraud, may include such actions as: failure to file returns; failure to report income over an extended period of time; understatement of income; failure to furnish the government with access to records; failure to keep adequate books and records; the taxpayer's experience and knowledge, particularly knowledge of tax laws; and concealment of bank accounts from the government. See e.g. Solomon v. Commissioner, 732 F.2d 1459, 1461-62 (6th Cir. 1984); Korecky, 781 F.2d at 1568-69. "Consistent and substantial understatement of income is by itself strong evidence of fraud" particularly in situations where no satisfactory explanation for such understatement is forthcoming. Merritt v. Commissioner, 301 F.2d 484, 487 (5th Cir. 1962); Lessmann v. Commissioner, 327 F.2d 990 (8th Cir. 1964)
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Eleventh Circuit Court of Appeals adopted as binding precedent all decisions of the former Fifth Circuit handed down prior to October 1, 1981.
In support of their motion for summary judgment, Plaintiffs note that the Government has the burden of presenting admissible evidence on each and every element of its civil fraud claim. Plaintiffs argue that the Government cannot meet this burden as it failed to present evidence of every element material to the civil fraud claim against Plaintiffs. Specifically, Plaintiffs assert that Defendant cannot show that Plaintiffs' 1993 return was filed under penalty of perjury. That is because the Government cannot produce the 1993 tax return.
Contrary to Plaintiffs' assertion, the elements required to assess a civil fraud penalty under 26 U.S.C. § 6663, do not include proof that the return was filed under penalty of perjury. While that is an element of proof in a criminal fraud prosecution pursuant to 26 U.S.C. § 7206, the court was unable to find support in the case law for the proposition that the Government must prove that the return was filed under penalty of perjury to make out a prima facie case of civil tax fraud. Unlike its criminal counterpart, the language of Section 6663 makes no mention of the signature on the return or whether it was signed under penalty of perjury.
That statute provides, in relevant part, that an individual will be guilty of a felony if he:
Willfully makes and subscribes any return, statement or other document, which contains or is verified by a written declaration that it is made under the penalty of perjury, and which he does not believe to be true and correct as to every material matter . . .26 U.S.C. § 7206 (1); U.S. v. Morris, 20 F.3d 1111, 1114 n. 1 (11th Cir. 1994); see also U.S. v. Pirro, 212 F.3d 86, 89 (2d Cir. 2000) (stating that the elements of a section 7206 violation include, inter alia, that the defendant signed the return willfully and knowing it was false, and that the return contained a written declaration that it was made under penalty of perjury).
As support, Plaintiffs rely on McGee v. Commissioner, 80 T.C.M. (CCH) 438 (2000). Therein, the Tax Court found that the taxpayer had not signed his federal income tax returns for three years but they had been signed by his employee instead. As such, the Court found those returns to be invalid. The validity of Plaintiffs' 1993 tax return is not at issue herein and thus McGee is inapplicable. The court finds Plaintiffs' argument requiring the Government to prove the 1993 tax return was signed under penalty of perjury is without merit.
Plaintiffs have failed to raise any other specific issues in their motion for summary judgment. Plaintiffs did make the conclusory allegation that Defendant cannot "show that Plaintiffs had the specific intent to evade a tax which they knew was owing at the time they filed their 1993 federal income tax return . . ." [Pl. Mot. at 9]. Plaintiffs maintain that any understatement of income was due to honest mistakes concerning the taxability of royalty income.
In response, Defendant argues that facts exist precluding summary judgment on the civil fraud claim. Defendant points to several factors, which it contends are indicative of fraud, and create a genuine issue of material fact as to Dr. Schinazi's intent. The Eleventh Circuit has recognized that fraud may be proven by circumstantial evidence, including the substantial and consistent understatement of income, poor record-keeping practices, failure to cooperate with the I.R.S., and the taxpayers' sophistication in the business world. Korecky v, Commissioner, 781 F.2d 1566, 1568-9 (11th Cir. 1986)
The Government points to the following record evidence, which it contends raises a genuine issue of material fact as to the intent to defraud: Dr. Schinazi's high level of education and intelligence; his business sophistication as shown by his various financial investments and his reporting of income earned from consulting work on a Schedule C to his Form 1040 [R. Schinazi Depo. at 137-42]; the substantial amount of the underpayment — his royalty income in 1993 was $157,703, more than his gross income of $121,099 [Id. at 129-133]; the repeated understatement of income by failure to include the royalties over a period of four years [Def. Exh. A]; his inconsistent explanations of why he failed to include the royalties as income and his failure to keep copies of his tax returns and supporting information. Moreover, the Government points out that Plaintiffs failed to amend or even discuss with the I.R.S. examiner auditing the 1992 return, their failure to include the royalty income on the subsequent 1993 return, as Dr. Schinazi testified that he assumed that the I.R.S. would correct and notify him about this deficiency at a later date. [R. Schinazi Depo. at 165, 217]
By the term "inconsistent," Defendant is referring to Dr. Schinazi's position that he believed the royalties were "tax-free," as stated in a letter to the I.R.S. dated October 12, 1994. [Pl. Exh. B]. However, in his deposition, Dr. Schinazi testified that he believed the taxes were already taken out by Emory University, despite the fact that the 1099s for the royalty income indicated no federal taxes had been withheld. [Schinazi Depo. at 131-3].
In addition to the lack of substance and authority related to the issue of specific intent in Plaintiffs' motion, the court finds that Defendant has raised a genuine issue of material fact precluding summary judgment on the issue of whether Dr. Schinazi had the specific intent to defraud when he understated his income. As Defendant has pointed to circumstantial evidence indicative of fraud, namely Dr. Schinazi's sophistication and the repeated pattern of understatement, the court finds that the issue of Dr. Schinazi's intent should be reserved for a finder of fact, who may evaluate his credibility. Such credibility evaluations are inappropriate on a motion for summary judgment. Therefore, the court DENIES Plaintiffs' motion for summary judgment.
Accordingly, Defendant's motion for summary judgment [#25] is DENIED. Plaintiff's motion for summary judgment [#31] is DENIED.
SO ORDERED.