Case No. CV 01-0191-N-LMB
February 13, 2002
Pending before the Court are Plaintiffs' Motion for Summary Judgment (Docket No. 11), Defendant's Motion to Dismiss (Docket No. 13), and Plaintiffs' Motion for Summary Judgment (Docket No. 18). All parties have consented to the jurisdiction of a United States Magistrate Judge to determine this matter.
The parties appeared before the Court on February 6, 2002 for oral argument on all pending motions. Having reviewed the record, considered the arguments of the parties, and otherwise being fully informed, the Court enters the following Order.
The facts in this action are undisputed for purposes of the pending motions. A formW-2 filed with the Internal Revenue Service (IRS) by Northwest Communications Consultants, Inc. ("Northwest") for its employee Roger N. Morris indicates that it paid him wages in the amount of $30,973.37, and withheld federal income tax for him in the amount of $4,810.00 in the year 1999. See Docket No. 15, Declaration of David Cheng, Exhibit G. A form W-2 filed with the IRS by Northwest for its employee Michelle G. Morris indicates that it paid her wages in the amount of $31,843.91, and withheld federal income tax for her in the amount of $3,763.00 in the year 1999. See Docket No. 15, Declaration of David Cheng, Exhibit H.
On or about March 8, 2000, Roger and Michelle Morris each filed a Form 1040 federal income tax return (filing status was "married filing separately"), whereon each indicated that he or she had earned no income in 1999. Each return claimed that the filer was entitled to a refund of the total amount of the income tax withholdings made by Northwest. See Docket No. 14, Exhibits E and F.
On or about November 3, 2000, Roger Morris filed an action against the United States in this federal court to obtain a refund of the $4,810.00. on that same day, Michelle Morris filed a separate suit in this Court to obtain a refund of the $3,763.00. On March 30, 2001, both actions were dismissed by the Honorable Edward J. Lodge for lack of prosecution under Local Rule 41.1. See CV00-645-N-EJL and CV00Z644-N-EJL. See Docket No. 15, Exhibits C and D.
Plaintiffs filed the instant action on May 1, 2001, seeking refund of the total amount withheld from both of their Northwest paychecks, $8,573.00. They contend that they are entitled to a refund because the IRS failed to "assess" a tax against them before they requested the refund, because their wages are not "income," and because they are entitled to a "tax credit."
II. PLAINTIFFS' FIRST MOTION FOR SUMMARY JUDGMENT
At the hearing, Plaintiffs acknowledged that their first Motion for Summary Judgment (Docket No. 11) is moot as a result of' the Court granting Defendant's Motion for an Extension of Time to Answer Complaint (see Order, Docket No. 10). As a result, Plaintiffs withdrew their first Motion for Summary Judgment. The Court allows withdrawal of that motion.
III. DEFENDANT'S MOTION TO DISMISS
A. Standard of Law
Defendant seeks dismissal of Plaintiffs' entire Complaint. A complaint should not be dismissed for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir, 1987) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102 (1957)). In reviewing a case for dismissal, the Court is required to treat all allegations of material fact as true and to construe them in a light most favorable to the non-moving party. Id. (quoting Western Reserve Oil Gas Co. v. New, 765 F.2d 1428, 1430 (9th Cir. 1985), cert. denied, 474 U.S. 1056, 106 S.Ct. 795 (1986)).
On a motion to dismiss, a court may consider documents "whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the pleadings." Branch v. Tunnell, 14 F.3d 449 453 (9th Cir.), cert. denied, 114 S.Ct. 2704 (1994) Considering such documents does not convert a motion to dismiss into a motion for summary judgment. Id.
In the United States, Congress has imposed a tax on individual income, to be computed according to established tax rate tables. 26 U.S.C. § 1. "Every individual having for the tax able year gross income which equals or exceeds the exemption amount" is required to file a tax return. except for certain categories of individuals who need not file returns. 26 U.S.C. § 6012.
Section 6012 has several exceptions, none of which appears applicable to the facts of this case. For example, § 6012(a)(1)(A)(iv) provides that a person is not required to file a tax return if he "is entitled to make a joint return and [if his] gross income, when combined with the gross income of his spouse, is, for the taxable year, Jess than the sum of twice the exemption amount plus the basic standard deduction applicable to a joint return. . . ."
The general rule is that each taxpayer who is required to filed a return is required to pay the income tax owed on or before the date the return is due, without assessment, notice or demand. 26 U.S.C. § 6151. An assessment does not create an income tax liability; rather, the income tax liability arose at a prior point in time when the tax was due. See Cohen v. Mayer, 199 F. Supp. 331, 332 (D.N.J. 1961), affirmed sub nom., Gohen v. Gross, 316 F.2d 521, 522 (3rd Cir. 1963). An assessment reflects the judgment of the IRS as to the amount of taxes owed, that is, whether there has been an overpayment or underpayment of taxes. Id. ("assessment is a prescribed procedure for officially recording the fact and the amount of a taxpayer's administratively determined tax liability, with consequences somewhat similar to the reduction of a claim of judgment"); Ott v. United States, 141 F.3d 1306, 1309 (9th Cir. 1998) (determining that income taxes were doomed "paid" upon remittance, not upon assessment and observing that "[m]ost taxes are collected voluntarily, without an assessment; an assessment serves as the basis on which the IRS takes action against those who do not voluntarily pay their taxes on time") (relying on Zeler v. United States, 80 F.3d 1360, 1364 (9th Cir. 1996) (determining that estate tax remittances constituted payments rather than deposits)).
Section 6151 has several exceptions, none of which appears applicable to the facts of this case. For example, § 6151(b)(1) provides; "If the taxpayer elects under section 6014 not to show the tax on the return, the amount determined by the Secretary as payable shall be paid within 30 days after the mailing by the Secretary to the taxpayer of a notice stating such amount and making demand therefor." This section references § 6014, which provides: "An individual who does not itemize his deductions and who is not described in section 6012(a)(1)(C)(i), whose gross income is less than $10,000 and includes no income other than remuneration for services performed by him as an employee, dividends or interest, and whose gross income other than wages, as defined in section 3401(a), does not exceed $100, shall at his election not be required to show on the return the tax imposed by section 1."
Assessment occurs after the taxpayer has submitted a tax return, or after (he date a return should have been filed if none was filed. See 26 U.S.C. § 6501 (generally, there is a three-year statute of limitations on the assessment of taxes, beginning on the date the tax return was filed); Cf. Baral v. United States, 528 U.S. 431, 438, 120 S.Ct. 1006, 1010 (2000) (In the context of determining whether remittances of estimated income tax and withholding tax are deemed "paid" on the due date of calendar year of taxpayer's income tax return or on a later date when the IRS assesses a tax liability, the Court acknowledged: "We observe, finally, that Baral's position-to the extent he submits that payment occurs only at the Service's assessment-would work to the detriment of taxpayers who timely file their returns and claim a refund or credit as compensation for an overpayment. The Service will not always assess the taxpayer's liability immediately upon receiving the return; the Service generally has three years in which to do so.").
1. Defendant's Res Judicata Argument
As a preliminary matter, Defendant argued that res judicata should be applied to bar Plaintiffs' current action. The Order dismissing Plaintiffs' prior action did not specify that the dismissal was with prejudice, or that it was pursuant to Federal Rule of Civil Procedure 41. Rather, the dismissal appears to have been based upon Local Rule 41.1, which does not specify that such a dismissal shall be with prejudice. For these reasons, res judicata does not bar the instant suit, as Defendant conceded at the hearing.
2. Plaintiffs' Assessment. Income, and Credit Arguments
Plaintiffs earned the wages set forth herein and the amount of federal income tax withheld from Plaintiffs' wages is not disputed. However, the application of the law to the facts is at issue here. Plaintiffs claim they are not required to pay income tax without a prior assessment and that their wages are not properly classified as income under the law.
Plaintiffs claim that they are entitled to a refund of their withheld taxes because the IRS failed to assess a tax against them prior to their filing a return seeking a refund. This assertion is without merit. Plaintiffs were required to file a tax return and pay taxes on the 1999 income they received from Northwest (and other income, if any). 26 U.S.C. § 1,6012. The return was due and the taxes were owed without the requirement of an assessment, notice or demand from the IRS. 26 U.S.C. § 6151; see Ott v. United States, 141 F.3d at 1309; Cf Zeler v. United States, 80 F.3d at 1364. Given this law, Plaintiffs' mere filing of a request for a refund prior to any assessment does not entitle them to a refund.
Plaintiffs also argue that § 6151 requires an assessment prior to the payment of any taxes because it provides for exceptions to the general rule that the tax is payable on the date the return is due. However, there are no facts in the record demonstrating that Plaintiffs lit within any of the exceptions, such as for example, that their gross income was less than $10,000.00. See Footnote 2.
Plaintiffs also argue that they had no income and owe no taxes because they did not sell or convey any capital assets in 1999, and because wages are not classifiable as income. Plaintiffs cite to Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189 (1920), in support of their position. In Eisner, the Court determined that Congress's attempt to tax stock dividends was unconstitutional, because no income was present, based on the definition of income as "the gain derived from capital, from labor, or from both combined. . . ." 252 U.S. at 207, 40 S.Ct. at 193. Plaintiffs argue that they owe no taxes because they had no capital gains; however, they ignore the fact that gain derived from labor is also income. See id. Whether Plaintiffs had capital gains in 1999 is not at issue in this matter; at issue is whether they are required to pay income tax without assessment on the approximately $60,000 in income derived from labor.
The determination of whether and how to tax capital gains on assets has since been changed by United States Supreme Court case law subsequent to Eisner. See, e.g., Helvering v. Bruun, 309 U.S. 461, 60 S.Ct. 631 (1940); commissioner v. Gienshaw Glass co., 348 U.S. 426, 431, 75 S.Ct. 473 (1955).
Plaintiffs also cite to § 61 to show that, by definition, they received no income. however, this section defines "gross income" as "all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items. . . ." This section does not provide support for Plaintiffs' position that their Northwest wages for their persona] services are not income.
Plaintiffs cite various other sections of Title 26 to support their position that an assessment of taxes must be made before taxes are owed, and it is their position that Plaintiffs' wages and earnings from Northwest are not income. These arguments are unavailing. Section 6001 provides that taxpayers must keep certain tax documents and that the Secretary may require taxpayers to provide such documents; it says nothing about income tax payment or assessment. Section 6011 provides that "any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary"; this section must he read in conjunction with those sections from which a tax liability arises, such as § 1.
Section 5703 governs tax liability of manufacturers or importers of tobacco products and cigarette papers and tubes, and refers to § 5701, which establishes tax rates for different types of tobacco products. There have been no allegations made that Plaintiffs derived their income From Northwest as a result of their status as manufacturers or importers of tobacco products arid cigarette papers and tubes. Nor is this section helpful by analogy. Section 5703 provides that such manufacturers and importers must pay the taxes by return; if they fail to file a return, the IRS has the power to assess a tax, together with appropriate penalties for failing to do so voluntarily. This section is in harmony with the general scheme of the IRS statutes which require taxpayers to voluntarily pay taxes according to established rates without prior assessment.
Plaintiffs also suggest that the languagc of § 1 is not in harmony with other sections requiring the payment of taxes. For example, § 2002 provides that "[t]he tax imposed by this chapter (estate and gill tax) shall be paid by the executor." Plaintiffs argue that § 1 does not contain similar wording, such as "income tax shall be paid by the individual taxpayer." Plaintiffs fail to acknowledge that an estate cannot pay taxes for itself as an individual taxpayer can, but that it is necessary to specify which individual is responsible to see that the taxes of an estate are paid. Plaintiffs also ignore § 2001, which provides that "[a] tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States," language which mirrors the liabiiity language of § 1.
Plaintiffs alternatively claim that they are entitled to a tax credit under
26 U.S.C. § 31(a)(1) or § 1462. Section 3l(a)(1) provides that "[t]he amount withheld as tax under chapter 24 [wage withholding] shall be allowed to the recipient of the income as a credit against the tax imposed by this subtitle." It is not disputed that the IRS has the legal duty to credit the amount withheld in 1999 against any tax due on the approximately $60,000.00 in wages Plaintiffs earned in 1999. No factual allegations are before the Court that the IRS has not or will not apply the withholding to the taxes due. Plaintiffs have simply failed to file an appropriate tax return showing whether they owe more or less than $8,573.00. As a resalt, this argument is premature and inapplicable here.
Plaintiffs' argument that § 1462 entitles them to a full refund of their withholding tax amounts is also premature and inapplicable. That section provides: "Income on which any tax is required to be withheld at the source under this chapter shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return." It is unknown what Plaintiffs owe because they have failed to file appropriate tax returns; when that occurs, the appropriate tax can be computed, and any refunds issued.
In their Memorandum supporting their Complaint, Plaintiffs also cite to § 32(a)(1) as authority for their argument that they are entitled to a tax credit. This section governs earned income credits for people living in poverty. Again, when Plaintiffs file an appropriate tax return, a determination can be made as to whether they qualify for such a credit. This argument is premature and inapplicable to the issues at hand.
Plaintiffs' arguments that they are entitled to receive a full refund of the taxes withheld from their 1999 wages because the IRS failed to assess them a tax or because their wages from Northwest arc not "income" are meritless. It appears beyond reasonable dispute that Plaintiffs can prove no set of facts in support of their claims which would entitle them to relief under the law. Durning v. First Boston corp., 815 F.2d at 1267. As a result, their Complaint must be dismissed for failure to state a claim upon which relief can be granted. Plainfiffs' case shall be dismissed with prejudice.
The Court also clarifies that any future attempts by Plaintiffs to obtain any refund lawfully due them after proper tax returns are filed, which are not grounded upon the meritless arguments asserted in this lawsuit, shall not he barred.
IV. PLAINTIFFS' SECOND MOTION FOR SUMMARY JUDGMENT
The Court has separately considered Plaintiffs' second Motion for Summary Judgment, which is based upon the assessment theory. Because the law does not support Plaintiffs' position, as explained in Section III of this Order, this Motion is subject to denial as a matter of law.
NOW THEREFORE IT IS HEREBY ORDERED:
1. Plaintiffs' Motion for Summary Judgment (Docket No. 11) is WITHDRAWN and is therefore deemed MOOT.
2. Defendant's Motion to Dismiss (Docket No. 13) is GRANTED. Plaintiffs' Complaint shall be dismissed with prejudice.
3. Plaintiffs' Motion for Summary Judgment (Docket No. 18) is DENIED.