Michelle Adams v. United States of America

NOTICE OF MOTION AND MOTION to Dismiss Case Pursuant to Fed. R. Civ. P. 12

C.D. Cal.July 18, 2016

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 EILEEN M. DECKER United States Attorney ROBERT F. CONTE Assistant United States Attorney Acting Chief, Tax Division VALERIE L. MAKAREWICZ (Cal. Bar No. 229637) Assistant United States Attorney Federal Building, Suite 7211 300 North Los Angeles Street Los Angeles, California 90012 Telephone: (213) 894-2729 Facsimile: (213) 894-0115 E-mail: valerie.makarewicz@usdoj.gov Attorneys for United States of America UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA WESTERN DIVISION MICHELLE L. ADAMS, Plaintiff, v. UNITED STATES OF AMERICA, Defendant. No. CV 2:15-cv-7184 GHK (PLA) NOTICE OF MOTION AND MOTION TO DISMISS CASE PURSUANT TO FED. R. CIV. P. 12(b)(1); EXHIBIT Hearing: Date: August 29, 2016 Time: 9:30 a.m. Courtroom: 650, Roybal U.S. Federal Building and Courthouse 255 E. Temple Street Los Angeles, CA 90012 Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 1 of 10 Page ID #:75 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PLEASE TAKE NOTICE that on the above captioned date and time, the United States of America will move for to dismiss the Complaint under Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of subject-matter jurisdiction. This motion is based upon this notice and the complete files and records of the action, the attached Memorandum of Points and Authorities, and attached Exhibit. This motion is made following the conference pursuant to L.R.7-3 which took place on June 29, 2016. Dated: 07/18/16 Respectfully submitted, EILEEN M. DECKER United States Attorney ROBERT F. CONTE Assistant United States Attorney Acting Chief, Tax Division /s/ VALERIE L. MAKAREWICZ Assistant United States Attorney Attorneys for UNITED STATES OF AMERICA Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 2 of 10 Page ID #:76 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 MEMORANDUM OF POINTS AND AUTHORITIES I. Introduction With respect to tax refund suits, 28 U.S.C. § 1346 provides a limited waiver of the United States’ immunity from suit. Section 1346 gives this Court original jurisdiction over actions against the United States for refund of tax alleged to have been erroneously or illegally assessed or collected. See 28 U.S.C. § 1346(a)(1). This waiver of immunity, however, depends on the claimant satisfying certain jurisdictional prerequisites. One such prerequisite is that the claimant fully pay the challenged tax assessment prior to filing suit. See Flora v. United States, 362 U.S. 145, 177 (1960) (holding that section 1346(a)(1) “requires full payment of the assessment before an income tax refund suit can be maintained in a Federal District Court”); see also Thomas v. United States, 755 F.2d 728, 729 (9th Cir.1985) (stating that “there is no jurisdiction in the district courts over suits for the refund of penalty amounts paid until the taxpayer has paid the full amount of the contested penalty assessment”) (citing Flora). However, with respect to civil penalties asserted against tax return preparers by the IRS under section 6694, Congress specifically delineated an abbreviated and less expensive 2-part process for challenging the assertion of said penalties, as determined in section 6694(c). First, within 30 days of notice and demand to pay the section 6694 penalties by the IRS, the tax return preparer must pay 15% of the total amount of penalties assessed against them and file a claim for refund with the IRS. Second, once this is completed, the tax return preparer can file a complaint for refund with the district court within the earlier of 30 days after denial of the claim by the IRS, or 6 months plus 30 days from the date the tax return preparer filed the claim for refund with the IRS. Only if a tax return preparer strictly follows the process as outlined does the United States waive sovereign immunity. In this action for a refund, plaintiff challenges penalties assessed against her by the Internal Revenue Service (IRS) under 26 U.S.C. § 6694(b) for the 2006 through 2010 tax Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 3 of 10 Page ID #:77 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 years. The Complaint alleges that the plaintiff took advantage of the jurisdictional exception under section 6694(c). However, plaintiff did not bring this action in accordance with the strict requirements in which the United States has waived sovereign immunity in order to be sued pursuant section 6694(c). Plaintiff paid 15% of the penalties assessed against her within 30 days of notice and demand from the IRS, but did not file a claim for refund with the IRS within that 30-day window. As such, this court does not have subject matter jurisdiction in which to adjudicate this case. The Court, therefore, should dismiss this action. II. Facts On November 10, 2014, the IRS assessed tax preparer penalties pursuant to 26 U.S.C.§ 6694(b) against plaintiff in the total amount of $125,000, for returns she prepared and filed on behalf of her clients for taxable years 2006, 2007, 2008, 2009, and 2010. Complaint, ¶¶ 6-10. On such date, the IRS sent plaintiff the required statutory notice and demand for payment of the section 6694 penalties assessed against plaintiff. Attached herein and marked Exhibit A are redacted Certificates of Official Records, Forms 4340, Certificates of Assessments, Payments, and Other Specified Matters for plaintiff for the section 6694 penalties assessed against her for years 2006 through 2010, inclusive.1 Exhibit A, pp. 2, 5, 8, 11, and 14. On December 5, 2014, plaintiff paid $18,750, which was 15% of the total amount assessed against plaintiff. Complaint, ¶12.2 On February 18, 2015, plaintiff filed claims for refund with the IRS with respect 1 The Certificates of Assessment set forth the date (November 10, 2014) of the IRS’s Statutory Notice of Balance Due (Notice and Demand for Payment). The Government’s supplementation of the record to clarify a fact does not serve to convert this motion to dismiss for lack of subject matter jurisdiction into one for summary judgment. Plaintiff has the burden to establish subject matter jurisdiction, and should have disclosed this date in her Complaint. 2 After paying a portion of the penalty assessments, the IRS likely sent plaintiff a second and adjusted Notice of Balance Due to plaintiff on December 15, 2014. Exhibit A. The second notice has no implication on the jurisdictional issues discussed herein, as the operative notice and demand letter was sent to plaintiff on November 10, 2014. Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 4 of 10 Page ID #:78 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 to the penalties imposed against her under section 6694(b), and requested the $18,750 be returned to her. Complaint, ¶ 13. Plaintiff filed the instant Complaint on September 11, 2015. See Docket No. 1 III. Argument a. Legal Standard on Rule 12(B)(1) Motions to Dismiss. A challenge to subject matter jurisdiction pursuant to Rule 12(b)(1) may be either facial or factual. See Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). A facial challenge relies solely on the complaint, asserting that its allegations are insufficient on their face to invoke federal jurisdiction. See id. In a facial challenge, the court accepts the complaint’s allegations as true. See Whisnant v. United States, 400 F.3d 1177, 1179 (9th Cir. 2005). In contrast, a factual challenge disputes the truth of the allegations that, in themselves, otherwise would invoke federal jurisdiction. See Meyer, 373 F.3d at 1039. In a factual challenge, the court need not accept the complaint’s allegations as true. Rather, the court may review evidence beyond the complaint without converting the motion to dismiss into a motion for summary judgment. See id. In this case, the United States makes a factual challenge to subject matter jurisdiction, disputing the plaintiff’s claim that she has met the jurisdictional prerequisites of 26 U.S.C. § 6694(c). b. Sovereign Immunity Generally. Federal courts are courts of limited jurisdiction, and may adjudicate only those cases authorized by the Constitution and by Congress. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377, 114 S. Ct. 1673 (1994); Attorneys Trust v. Videotape Computer Products, Inc., 93 F.3d 593, 594-95 (9th Cir. 1996). The presumption is that a federal court lacks jurisdiction in a particular case until it has been demonstrated that jurisdiction over the subject matter exists. Kokkonen, supra; 13 Charles A. Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure: Jurisdiction 2d § 3522 (1984). A plaintiff bears the burden of proving that the court has subject matter Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 5 of 10 Page ID #:79 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 jurisdiction to hear an action. See, e.g., Sopcak v. Northern Mountain Helicopter Service, 52 F.3d 817, 818 (9th Cir. 1995); Stock West, Inc. v. Confederated Tribes of the Colville Reservation, 873 F.2d 1221, 1225 (9th Cir. 1989); Scott v. Breeland, 792 F.2d 925 (9th Cir. 1986). Under the doctrine of sovereign immunity, the United States may not be sued without its consent. United States v. Mitchell, 445 U.S. 535, 538, 100 S. Ct. 1349 (1980). If the United States has not consented to be sued – i.e., waived its immunity – an action is barred, because the court has no subject matter jurisdiction to hear the case. United States v. Mitchell, 463 U.S. 206, 212, 103 S. Ct. 2961 (1983); Kaiser v. Blue Cross of California, 347 F.3d 1107, 1117 (9th Cir. 2003); Hodge v. Dalton, 107 F.3d 705, 707 (9th Cir. 1997). Where the United States has expressly consented to suit, a plaintiff must fully comply with the terms of the consent. See United States v. Sherwood, 312 U.S. 584, 590-91 (1941). Where the United States has not consented to suit, or where plaintiff has not fully complied with the terms of consent, the court must dismiss the action for lack of subject matter jurisdiction. See Elias v. Connett, 908 F.2d 521, 527 (9th Cir. 1990); United States v. Mitchell, 445 U.S. 535, 538 (1980). The burden of establishing that the United States has consented to suit rests on the party suing the United States. Cominotto v. United States, 802 F.2d 1127, 1129 (9th Cir. 1986). Where there has been no waiver of sovereign immunity, the Court must dismiss the action for lack of subject matter jurisdiction. Gilbert v. DaGrossa, 756 F.2d 1455, 1458 (9th Cir. 1985). A defendant challenging the court’s jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1) may do so either in the face of the pleadings or by presenting extrinsic evidence for the court’s consideration. White v. Lee, 277 F.3d 1214, 1242 (9th Cir. 2000). In ruling on a motion to dismiss under Fed.R.Civ.P. 12(b)(1), courts may consider affidavits and other evidence supporting or contradicting plaintiff’s jurisdictional allegations. See St Clair v. City of Chico, 880 F.3d 199, 201 (9th Cir. 1989). In deciding a Rule 12(b)(1) motion that relies upon extrinsic evidence, courts may weigh the Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 6 of 10 Page ID #:80 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 evidence presented, and determine the facts in order to evaluate whether they have power, within the court’s limited grant of jurisdiction, to hear the case. Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987); Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1141 n. 5 (9th Cir. 2003). Here, the United States asks the Court to consider evidence outside of plaintiff’s Complaint, i.e. the Certificates of Assessment at Exhibit A, solely to the extent that it relates to subject matter jurisdiction and the bar to this Court’s consideration of plaintiff’s refund suit. The Court should weigh the evidence presented and determine the facts relevant to assessing whether it has subject matter jurisdiction, specifically, whether plaintiff has failed with comply with statutory requirements for jurisdiction, contained within the limited waiver of sovereign immunity for refund suits under section 6694(c). c. Refund suits, section 6694 penalties, and this Court’s jurisdiction. With respect to tax refund suits, 28 U.S.C. § 1346 provides a limited waiver of the United States’ immunity from suit. Section 1346 gives this Court original jurisdiction over actions against the United States for refund of tax alleged to have been erroneously or illegally assessed or collected. See 28 U.S.C. § 1346(a)(1). This waiver of immunity depends on the claimant satisfying certain jurisdictional prerequisites. One such prerequisite is that the plaintiff fully pays the challenged tax assessment prior to filing suit. See Flora v. United States, 362 U.S. 145, 177 (1960) (holding that section 1346(a)(1) “requires full payment of the assessment before an income tax refund suit can be maintained in a Federal District Court”); see also Thomas v. United States, 755 F.2d 728, 729 (9th Cir.1985) (stating that “there is no jurisdiction in the district courts over suits for the refund of penalty amounts paid until the taxpayer has paid the full amount of the contested penalty assessment”) (citing Flora). Under § 6694, the IRS may assess a penalty against tax return preparers who have prepared returns for clients that understate the taxpayer’s liability due to the preparer’s willful attempt to do so or because of the preparer’s reckless or intentional disregard of rules or regulations. See 26 U.S.C. §§ 6694 (a) and (b). However, when Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 7 of 10 Page ID #:81 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 contesting these penalties, Congress allowed a jurisdictional exception to the Flora “full payment” rule, when it enacted 26 U.S.C. § 6694(c). Sections 6694(c)(1) and (2) allow a return preparer to bring a refund action in District Court after paying only 15% of the penalty imposed under section 6694(a) or (b) and filing a claim with the IRS, all within 30 days of notice and demand for payment from the IRS. If the tax preparer chooses not to do this scheme but still wants to contest the section 6694 penalties asserted against them, the preparer is not without remedy—the preparer must pay the entire amount assessed and file a claim for refund for the amount paid at any time not later than 3 years after the date of payment. 26 U.S.C. § 6694(c)(1); Treas. Reg. § 1.6694-4(a)(4). If the return preparer successfully completes the requirements under section 6694(c)(1), then, under § 6694(c)(2), the preparer must bring a challenge in District Court by the earlier of either (1) 30 days after six months from the date of filing his refund claim with the IRS or (2) 30 days from the date the IRS denies his refund claim. The net effect of this scheme under section 6694(c) is that if a return preparer timely pays 15% of the penalty and timely files a claim for refund within 30 days of notice and demand as required by § 6694(c)(1), then the preparer may challenge the penalty in District Court without having fully paid it, as generally required by section 1346 and Flora. In this case, the IRS assessed section 6694 penalties against plaintiff on November 10, 2014. Complaint, ¶ 6-10. Specifically, the IRS assessed penalties against plaintiff under § 6694(b) in the amount of $25,000 for the 2006 tax year; $25,000 for the 2007 tax year; $20,000 for the 2008 tax year; $30,000 for the 2009 year; and $25,000 for the 2010 tax year. Id. Also on such date, the IRS gave plaintiff the required statutory notice of the assessments and demanded payment of the balances due. Exhibit A, pp. 2, 5, 8, 11, and 14. On December 5, 2014, plaintiff paid an amount equal to 15% of the section 6694 penalties assessed against her by the IRS. Complaint, ¶ 12. Plaintiff paid the required 15% ($18,750) of the entire amount assessed against her ($125,000), within 30 days after Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 8 of 10 Page ID #:82 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 the date the IRS gave her notice of the assessment and demanded payment from her, which date is December 11, 2014. Id. On February 18, 2015, however, plaintiff filed claims for refund for the $18,750 she paid toward the assessed section 6694 penalties with the IRS. Complaint, ¶ 13. This date was more than 30 days after notice and demand for payment was sent to plaintiff. In other words, under the scheme delineated under section 6694(c)(1), plaintiff had until December 11, 2014 to pay 15% of the assessed penalties and file a claim for refund with the IRS. Plaintiff successfully paid the amount due, but did not file a claim for refund until February 18, 2015, more than 2 months after December 11, 2014, the date the claim for refund was due to be filed with the IRS under section 6694(c)(1). Here, since plaintiff did not meet the requirements of section 6694(c)(1) in filing a claim for refund with the IRS within 30 days after notice and demand was given to her, which in turn, provides the exception to the jurisdictional requirement of fully paying an assessment before bringing a refund suit, she has failed to meet the prerequisites for this Court’s jurisdiction under 28 U.S.C. § 1346. Plaintiff’s remedy is now under 28 U.S.C. § 1346, wherein she must fully pay the penalties at issue before bringing an action challenging those penalties, which she has failed to do to date. Given that plaintiff has not fully paid the contested tax assessments, this Court lacks subject matter jurisdiction over this action. See Flora v. United States, 362 U.S. 145, 176-77 (1960) (to establish the District Court’s jurisdiction to consider a tax refund claim, a taxpayer first must fully pay the contested tax assessment). /// /// /// Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 9 of 10 Page ID #:83 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IV. CONCLUSION Plaintiff has failed to follow the provisions of section 6694(c)(1), and as such, the 15% payment exception to the Flora full pay requirement does not apply, and section 6694(c)(2) cannot provide jurisdiction over the refund suit. Given that plaintiff has not fully paid the challenged assessments, this Court lacks subject matter jurisdiction over plaintiff’s action, and must dismiss it. Dated: 07/18/16 Respectfully submitted, EILEEN M. DECKER United States Attorney ROBERT F. CONTE Assistant United States Attorney Acting Chief, Tax Division /s/ VALERIE L. MAKAREWICZ Assistant United States Attorney Attorneys for UNITED STATES OF AMERICA Case 2:15-cv-07184-GHK-PLA Document 27 Filed 07/18/16 Page 10 of 10 Page ID #:84 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 1 of 15 Page ID #:85 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 2 of 15 Page ID #:86 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 3 of 15 Page ID #:87 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 4 of 15 Page ID #:88 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 5 of 15 Page ID #:89 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 6 of 15 Page ID #:90 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 7 of 15 Page ID #:91 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 8 of 15 Page ID #:92 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 9 of 15 Page ID #:93 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 10 of 15 Page ID #:94 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 11 of 15 Page ID #:95 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 12 of 15 Page ID #:96 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 13 of 15 Page ID #:97 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 14 of 15 Page ID #:98 Case 2:15-cv-07184-GHK-PLA Document 27-1 Filed 07/18/16 Page 15 of 15 Page ID #:99