Ardalan v. United States

• Decision Date: 23 March 1982
• Docket Number: Civ. A. No. 81-K-1951.
• Citation: 534 F. Supp. 721
• Parties: Shapoor and Harriet ARDALAN, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Colorado

534 F. Supp. 721

Shapoor and Harriet ARDALAN, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. A. No. 81-K-1951.

United States District Court, D. Colorado.

March 23, 1982.

Marshall I. Whitley, Tax Div., Dept. of Justice, Washington, D. C., for defendant.

George V. Fewson, Dawson L. Joyner, Boulder, Colo., for plaintiffs.

MEMORANDUM OPINION AND ORDER

KANE, District Judge.

This is a tax refund suit against the United States under 28 U.S.C. § 1346(a)(1).¹ Plaintiffs allege that throughout 1977 they were citizens and residents of Iran. They further allege that during 1977 neither of them had any income derived from within the United States.² They also allege that they filed a joint tax return and paid $215 in taxes for 1977 under the mistaken impression that the salary Mrs. Ardalan received as an employee of the U. S. Embassy in Iran was subject to taxation by the United States government. They now contend that, contrary to their belief at the time, Mrs. Ardalan's salary was not taxable because the Internal Revenue Code does not impose a tax on nonresident aliens simply because they are employed by the United States government in a foreign country. Plaintiffs also allege that after they filed their joint return they were assessed by the Internal Revenue Service for an additional tax liability amounting to $3,852.

Plaintiffs seek a refund of the $215 they claim to have mistakenly paid the United States government and an abatement of the alleged outstanding assessment. Plaintiffs state that they filed a timely refund claim as required by 26 U.S.C. § 7422(a) and that their claim has been disallowed. Plaintiffs also state that federal district court is the only forum in which they can bring either the refund claim or the request for an abatement because they signed a treasury department form (1902-E), at the suggestion of an IRS official, waiving their rights to have these issues determined in the United States Tax Court.

The government filed a motion to dismiss pursuant to F.R.Civ.P. 12(b)(1), arguing that jurisdiction does not arise under 28 U.S.C. § 1346(a)(1) if the claimant has not paid all assessments for the year in question before instituting suit in district court. The government contends that I must dismiss plaintiffs' refund claim because by requesting abatement of an outstanding deficiency, plaintiffs acknowledge that they have failed to satisfy the essential jurisdictional prerequisite for bringing a tax refund suit in district court. The government also argues that this court is without jurisdiction to abate any portion of the alleged assessment, because of the Anti-Injunction statute, 26 U.S.C. § 7421, which prohibits suits for the purpose of restraining assessment or collection of any tax, and under the Declaratory Judgment Act, 28 U.S.C. § 2201, which expressly denies district courts the authority, except in extraordinary circumstances not relevant here, to grant declaratory relief concerning federal taxes.

The government correctly asserts that the Anti-Injunction statute prohibits this court from considering plaintiffs' abatement request.³ Therefore, the only issue before me on this motion is whether plaintiffs' refund claim is barred by their failure to pay first the entire amount of the tax assessed against them for 1977. On this issue of first impression I conclude that this court has jurisdiction under 28 U.S.C. § 1346(a)(1) to hear plaintiffs' refund claim. I therefore deny the government's motion to dismiss the refund claim.

DISCUSSION

When considering a motion to dismiss for lack of subject-matter jurisdiction, I must construe the complaint's factual allegations in favor of the plaintiffs. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1973). Moreover, any uncontroverted allegations of jurisdiction must be accepted as true, even if they are not pleaded in the jurisdictional section of the complaint. C. Wright & A. Miller, Federal Practice and Procedure § 1350, at 551-52 (1975).

In arguing that this court lacks jurisdiction to hear plaintiffs' refund claim, the government relies solely on the U. S. Supreme Court's decision in Flora v. United States, 357 U.S. 63, 78 S.Ct. 1079, 2 L.Ed.2d 1165 (1958), aff'd on rehearing, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). The government contends that, in construing 28 U.S.C. § 1346(a)(1) to require prepayment before suit, the court intended to establish a rule which applies to all refund suits in district court without exception. The only question on this motion is whether Flora makes the prepayment requirement an absolute jurisdictional prerequisite to a tax refund suit in district court.

The Flora opinion addressed the issue:

whether a Federal District Court has jurisdiction under 28 U.S.C. § 1346(a)(1) of a suit by a taxpayer for the refund of income tax payments which did not discharge the entire amount of his assessment.

362 U.S. at 146, 80 S.Ct. at 631. The court held that:

Section 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.

362 U.S. at 177, 80 S.Ct. at 647.

The claimant in Flora was an American citizen and a partner in a United States based engineering company. The original litigation arose from a dispute between the plaintiff and the Internal Revenue Service over the proper characterization of economic losses sustained by the plaintiff. After the plaintiff filed his tax return, the IRS made a redetermination, which resulted in a substantial deficiency assessment against the plaintiff. After paying a portion of the assessment, the plaintiff filed a refund claim with the IRS. When his claim was disallowed by the IRS, he filed suit in district court to recover the portion of the assessment he had already paid.

The court based its Flora decision largely on policy considerations. One of the court's major concerns was that without the prepayment requirement, a taxpayer would be able to split his cause of action between the district court and the tax court. If prepayment were not required, after paying a portion of a deficiency assessment, a taxpayer could bring a refund suit in district court. Then when he subsequently sought a redetermination of the remaining assessment in tax court, the district court decision would be controlling on the validity of the outstanding assessment. See 362 U.S. at 164-65, 80 S.Ct. at 640-41.

A more general concern of the court in Flora was the need to protect the overall structure of the national income taxation system. In the court's view, refund suits under Section 1346(a)(1) without prepayment would have a detrimental effect on the efficiency of the tax system as a whole:

The government has a substantial interest in protecting the public purse, an interest which would be substantially impaired if a taxpayer could sue in district court without paying his tax in full.... A full-payment requirement will promote the smooth functioning of the system; a part-payment rule would work at cross purpose with it.

362 U.S. at 175-76, 80 S.Ct. at 645-46 (footnote omitted). In reaching its conclusion, the court also noted that the hardship imposed by the prepayment requirement would be mitigated by the right of the taxpayer to appeal a deficiency to the tax court without prepayment:

A word should also be said about the argument that requiring taxpayers to pay the full assessments before bringing suits will subject some of them to great hardship. This contention seems to ignore entirely the right of the taxpayer to appeal the deficiency to the Tax Court without paying a cent. If he permits his time for filing such an appeal to expire, he can hardly complain that he has been unjustly treated, for he is in precisely the same position as any other person who is barred by a statute of limitations.

362 U.S. at 175, 80 S.Ct. at 645 (footnote omitted).

In this case the plaintiffs argue that as nonresident aliens they had no United States tax liability in 1977 because Mrs. Ardalan's salary was not taxable under the Internal Revenue Code and because they had no other income derived from within the United States.

Section 871(a) of the Internal Revenue Code imposes on nonresident alien individuals "a tax of 30 percent of the amount received from sources within the United States." The question in this case is whether plaintiff's salary as an employee of the U. S. Embassy in Iran is construed under the Internal Revenue Code as derived from within the United States.

Code Section 7701(a)(9) states that "the term United States when used in a geographical sense includes only the States and the District of Columbia." Section 861(a)(3) provides that compensation "for labor or personal services...