Opinion
No.CS-03-130-JLQ
September 4, 2003
ORDER GRANTING DEFENDANT'S MOTION TO DISMISS
BEFORE THE COURT is Defendant's Motion to Dismiss. (Ct. Rec. 4). Plaintiff's Bruno W. Schmidt and Charlene O. Schmidt are proceeding pro se. Defendant United States of America is represented by Youngna Lee.
BACKGROUND
Plaintiff's Bruno and Charlene Schmidt bring this action for a refund of the federal taxes that were withheld from their 1998 IRA distribution. A total of $21, 998.27 was withheld: $17, 174.25 federal income tax, and $6, 814.03 social security/RRTA. Plaintiff's seek monetary damages in the amount of $21, 998.27 plus interest, and whatever other relief justice so requires. (Ct. Rec. 1). The United States contends that, as of July 9, 2003, Plaintiff's owed $99, 439.12 in unpaid tax, interest, and penalties for the 1998 tax year. (Ct, Rec. 5). The IRS Certificate of Assessments, Payments and Other Specified Matters (Form 4340), however, shows a total due of $97, 494.11. (Ct. Rec. 12).
There is a lengthy history of the correspondence between the parties which is summarized only briefly here. On February 21, 2000, Defendant sent Plaintiff's "Letter CP-515, " demanding that Plaintiff's file a 1998 Tax Return. Plaintiff's responded by stating that they had no gross income to warrant a return, demanded due process, forms, publications, flowchart, and list of remedies and steps. During the next several months, Defendant issued several notices which threatened fines and other penalties if Plaintiff's did not submit the requested return. Most of the notices were form letters and did not specifically address Plaintiff's' protests. Plaintiff's continued to repeat their protests, but on August 15, 2000, filed an original 1998 tax return.
On October 3, 2000, Defendant deemed the return frivolous and threatened a penalty if not corrected within 30 days. At some point, Defendant appears to have lost the original return, so on April 15, 2001, Plaintiff's submitted a replacement return which was identical to the earlier return. After continued protests, Defendant denied without opinion Plaintiff's objections to the Notice of Proposed Assessment and Report of Examination Charges. On November 9, 2001, Defendant issued a Notice of Deficiency (Letter 3219 NOD) and advised Plaintiff's to pay the assessment or contest the NOD by petitioning to the Tax Court. It does not appear from the record, however, that Plaintiff's ever submitted this matter to the Tax Court.
The correspondence between the parties continued into the early part of 2003. On April 16, 2003, Plaintiff's filed the instant action. At all times relevant to the Complaint, Plaintiff's claim that they acted in good faith in responding to Defendant's correspondence. Plaintiff's further claim that they were denied due process when Defendant failed to examine their 1998 Tax Return or respond to Plaintiff's' timely protests and requests for assistance.
DISMISSAL STANDARD
Defendant moves to dismiss the Complaint on the basis that the court lacks subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). Rule 12(b)(1) permits a party to move for dismissal of a claim due to a court's lack of jurisdiction over the subject matter. Plaintiff carries the burden of establishing that subject matter jurisdiction exists. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994); Hexom v. Oregon Dept. of Transp., 177 F.3d 1134, 1135 (9th Cir. 1999). A Rule 12(b)(1) motion can attack the substance of a complaint's jurisdictional allegations despite their formal sufficiency, and in so doing rely on any evidence properly before the court. St. Clair v. City of Chico, 880 F.2d 199, 201 (9th Cir. 1989), cert. denied, 493 U.S. 993 (1989). The motion may be made as a `speaking motion' attacking the existence of subject matter jurisdiction without converting the motion into a motion for summary judgment. Trentacosta v. Frontier Pacific Aircraft Industries, 813 F.2d 1553, 1558 (9th Cir. 1987) (citations omitted).
Defendant's motion to dismiss for lack of subject matter jurisdiction was filed as a speaking motion because it was accompanied by several declarations and copies of documents from Plaintiff's' Internal Revenue Service file, including Form 4340, a self-authenticating document that serves as proof of the tax assessment. Where Defendant files a speaking motion, Plaintiff's must come forward with evidence outside the pleadings to support their jurisdictional allegations. Id. In ruling on such a motion, the court is ordinarily free to hear evidence regarding jurisdiction and to resolve factual disputes where necessary. Augustine v. United States, 704 F.2d 1074, 1077 (9th Cir. 1983). However, where jurisdictional and substantive issues are so intertwined that the question of jurisdiction is dependent on the resolution of factual issues going to the merits of a claim, the jurisdictional issue should await a determination of relevant facts either on a motion going to the merits or at trial. Id.
ANALYSIS
I. Federal District Court Subject Matter Jurisdiction Over Tax Refund SuitsThe United States, being a sovereign nation, cannot be sued without its consent. Elias v. Connett, 908 F.2d 521, 527 (9th Cir. 1990). The party bringing the action must show that sovereign immunity has been waived, otherwise, the court must dismiss any action to which the Government has not consented. Baker v. United States, 817 F.2d 560, 562 (9th Cir. 1987), cert. denied, 487 U.S. 1204 (1988).
Congress has established a detailed jurisdictional scheme to deal with judicial adjudication of federal tax disputes. When a taxpayer has been notified of a proposed tax deficiency, he has the option of either (1) filing a petition in the Tax Court challenging the deficiency pursuant to 26 U.S.C. § 6213, or (2) paying the tax, applying for a refund credit and, if the refund is not allowed, suing in a federal district court for recovery of the alleged overpayment. Boyton v. United States, 566 F.2d 50, 52-53 (9th Cir. 1977). In order to establish federal district court subject matter jurisdiction, Plaintiff must meet five conditions: 1) full payment of the tax; 2) file a valid credit claim with the IRS; 3) demonstrate action on the claim by the IRS; 4) file the suit for refund within two years of the IRS' denial; and 5) demonstrate that the suit for refund has the same basis as the claim originally filed with the IRS. See 28 U.S.C. § 1346(a)(1); 26 U.S.C. § 7422(a); King v. United States, 949 F. Supp. 787, 789 (E.D. Wash. 1996) (citing Jacob Mertens, Jr., Mertens Law of Federal Income Taxation § 58A.11 (1995)).
A. Full Payment of the Tax
The first requirement, full payment of the tax, originated from Flora v. United States, 362 U.S. 145 (1960), where the Court interpreted 28 U.S.C. § 1346(a)(1) as requiring a full payment of the tax before a refund suit could be maintained in a federal district court. "Reargument has but fortified our view that § 1346(a)(1), correctly construed, requires full payment of the assessment before an income tax refund suit can be maintained in a Federal District Court." Flora, 362 U.S. at 177. In dicta, the Flora Court stated that § 1346(a)(1) could be interpreted to permit suit for the tax, after its full payment, without payment of any part of the interest. Id. at 175 n. 37 (1960) (emphasis added); accord Shore v. United States, 9 F.3d 1524, 1527 (Fed. Cir. 1993) (concluding where taxpayers seek a refund of only the assessed tax, prepayment of interest and penalties is not required to establish subject matter jurisdiction).
B. Proof of the Assessment
To prove the validity of the assessment for jurisdictional purposes, the form on which a notice of assessment and demand for payment is made is irrelevant as long as it provides the taxpayer with all the information required under 26 U.S.C. § 6303(a). Elias v. Connett, 908 F.2d 521, 525 (9th Cir. 1990). In pertinent part, § 6303(a) requires "notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof." 26 U.S.C. § 6303(a).
In support of its argument that the total deficiency is $97, 494.11 (tax, interest, and penalties), Defendant submitted a certified copy of Form 4340 from the IRS administrative file. Form 4340 serves as an official document which establishes that assessments were made. Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1991). Introducing a presumptively correct assessment shifts the burden of proof to the taxpayer to show that the assessment is either "arbitrary or erroneous." United States v. Stonehill, 702 F.2d 1288, 1294 (9th Cir. 1983). Contrary to Defendant's argument, it was not necessary for Plaintiff's to prepay the entire $97, 494.11 in order to establish subject matter jurisdiction in this court. Plaintiff's filed this action on April 16, 2003. The figure of $97, 494.11 was calculated in June of 2003, two months after the Complaint was filed, and it included interest and penalty amounts. The amount attributable solely to the tax deficiency itself is $72, 720.00.
Plaintiff's object to Defendant's initial exhibits as insufficient proof of the assessment, however, they have not come forward with any specific evidence that the assessment is arbitrary or erroneous. Plaintiff's also do not claim to have paid any amount over the initial $17, 174.25 that was withheld from the IRA distribution. Where a jurisdictional dispute exists between the Government and the taxpayer as to the payment of the assessment, the Government's position controls. Hutchinson v. United States, 677 F.2d 1322, 1325-26 (9th Cir. 1982). In Hutchinson, the court determined that § 1346 requires full satisfaction of any reported liability, not merely the claim thereof. Id. (refusing to find that tax liability was satisfied when it depended upon the application of credit that was the subject of an unresolved dispute between the taxpayer and the Commissioner.).
For jurisdictional purposes, the Government has established a presumptively correct tax deficiency of $72, 720.00. It is unclear whether this amount includes the set-off for the $17, 147.25 withholding. Regardless, Plaintiff's are jurisdictionally deficient b at least $55, 572.75. Therefore, because Form 4340 operates as proof of Plaintiff's' outstanding tax deficiency, and there is no evidence that the assessment is either "arbitrary" or "erroneous, " Plaintiff's have not established federal district court subject matter jurisdiction for their tax refund suit.
II. 5 U.S.C. § 702 As an Independent Basis for Subject Matter Jurisdiction
In an attempt to evade the prepayment requirement, Plaintiff's cite to the Administrative Procedure Act, 5 U.S.C. § 702, as a separate vehicle for jurisdiction. Contrary to Plaintiff's' assertion, § 702 is not an independent source of jurisdiction. Califano v. Sanders, 430 U.S. 99, 107 (1977); Kennecott Copper Corp. v. Costle, 572 F.2d 1349, 1356 (9th Cir. 1978). Rather, § 702 waives the Governments' sovereign immunity, thereby permitting jurisdiction in actions seeking non-monetary relief with respect to agency action. Hughes v. United States, 953 F.2d 531, 537 (9th Cir. 1992). The Administrative Procedure Act provides in pertinent part:
Nothing herein (1) affects other limitations on judicial review or the power or duty of the court to dismiss any action or deny relief on any other appropriate legal or equitable ground; or (2) confers authority to grant relief if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought.5 U.S.C. § 702. In the case sub judice, 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422(a) constitute "other limitations on judicial review" which Plaintiff's cannot circumvent by citing to § 702 as their basis for subject matter jurisdiction.
CONCLUSION
To establish federal district court subject matter jurisdiction, Plaintiff's must either pay the full tax principal due or prove that the tax assessment is arbitrary or erroneous. Form 4340, provided by Defendant, establishes for jurisdictional purposes that Plaintiff's 1998 tax deficiency at the time this suit was commenced was at least $55, 572.75. Plaintiff's do not allege that they have paid this amount nor do they come forward with any evidence to suggest that the assessment is arbitrary or erroneous. Since the Plaintiff's have not paid the assessment in full, their only recourse was to petition the United States Tax Court. This court does not have jurisdiction.
IT IS HEREBY ORDERED that Defendant's Motion to Dismiss (Ct. Rec. 4) is GRANTED.
IT IS SO ORDERED. The Clerk is hereby directed to enter this Order, furnish copies to counsel and to Bruno and Charlene Schmidt, enter Judgment dismissing the Complaint and the claims therein without prejudice to the Plaintiff's' Tax Court claims, if any, and thereafter shall close this file.