Axtell v. US, 93-CV-0350-B.

CourtUnited States District Courts. 10th Circuit. District of Wyoming
Citation860 F. Supp. 795
Docket NumberNo. 93-CV-0350-B.,93-CV-0350-B.
PartiesDeborah AXTELL, individually and as Personal Representative of the Estate of Paul W. Axtell, Deceased, Plaintiff, v. UNITED STATES of America, Commissioner of Internal Revenue, Internal Revenue Service, Department of the Treasury, Defendant.
Decision Date25 April 1994

860 F. Supp. 795

Deborah AXTELL, individually and as Personal Representative of the Estate of Paul W. Axtell, Deceased, Plaintiff,
v.
UNITED STATES of America, Commissioner of Internal Revenue, Internal Revenue Service, Department of the Treasury, Defendant.

No. 93-CV-0350-B.

United States District Court, D. Wyoming.

April 25, 1994.


860 F. Supp. 796

W. Perry Dray, Brandin Hay, Dray, Madison & Thomson, Cheyenne, WY, for plaintiff.

Donald R. Wrobetz, Asst. U.S. Atty., Cheyenne, WY, Joel J. Roessner, Dept. of Justice, Tax Div., Washington, DC, for defendants.

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS FOR LACK OF SUBJECT MATTER JURISDICTION

BRIMMER, District Judge.

The above-entitled matter having come before the Court upon defendant's motion to dismiss and the plaintiff's opposition thereto, and the Court having reviewed the materials on file herein, having heard argument from the parties, and being fully advised in the premises, FINDS and ORDERS as follows:

Background

The plaintiff in this case is the representative and beneficiary of the estate of Paul W. Axtell. Paul Axtell died on March 19, 1979. His estate originally elected to defer payment of estate taxes pursuant to Internal Revenue Code ("IRC") § 6166. Section 6166 allows for a deferral of estate taxes when the estate consists largely of interest in a closely held business. See 26 U.S.C. § 6166 (1986).

In 1985, in order to avoid the high interest expense on the outstanding estate tax, the Axtell estate obtained a third party loan from the Wyoming Farm Loan Board to pay down the estate tax liability. As a result of the Internal Revenue Service's ("IRS") allowance of interest deductions as credits against the estate tax and interest still owing, the estate tax and interest was fully paid as of December 16, 1988. In the years 1986 through 1989, the estate made, and the IRS allowed, refund claims based on IRC § 2053 administrative expense deductions for loan interest paid during those years. When the Axtell estate made a refund claim based on the same interest payments in 1990, however, the IRS disallowed the claim as untimely under IRC § 6511.

In this action, the Axtell estate seeks to have the disallowance of the 1990 claim overruled, seeks judgment for a tax refund in the amount of $12,843.94, and seeks judgment for "future refunds" for continuing interest expense deductions. The case is currently before the Court on the IRS's motion to dismiss pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure.

860 F. Supp. 797

Standard of Review

A motion to dismiss under Rule 12(b)(1) raises the question of a court's subject matter jurisdiction over the action. A motion under Rule 12(b)(1) may be used to attack two different types of defects. The first defect is the pleader's failure to comply with Rule 8(a)(1) in that he failed to plead sufficient facts to demonstrate the federal court's jurisdiction over the subject matter of the case. See, e.g., Gibbs v. Buck, 307 U.S. 66, 59 S.Ct. 725, 83 L.Ed. 1111 (1939); Sierra Club v. Shell Oil Co., 817 F.2d 1169, 1172 (5th Cir.), cert. denied, 484 U.S. 985, 108 S.Ct. 501, 98 L.Ed.2d 500 (1987). The second defect that may be challenged under Rule 12(b)(1) is the court's actual lack of jurisdiction over the subject matter of the case. This defect may exist despite the formal sufficiency of the allegations in the complaint. See, e.g., KVOS, Inc. v. Associated Press, 299 U.S. 269, 57 S.Ct. 197, 81 L.Ed. 183 (1936).

There are, therefore, two different types of Rule 12(b)(1) challenges which correspond to these defects. The first is a facial challenge of the complaint which challenges the sufficiency of the pleading. The second, in which the court may consider matters outside the pleadings, challenges the truth of the factual averments upon which the court's jurisdiction depends.

In this case, the defendant has made a facial challenge to the sufficiency of the allegations of jurisdiction in the plaintiff's complaint. Regardless of the character of the Rule 12(b)(1) motion, the Court must construe the complaint broadly and liberally, in conformity with the principles underlying Rule 8(f). See 5A Charles Alan Wright and Arthur R. Miller, Federal Practice and Procedure: Civil 2d § 1350, at 218 (2d ed. 1990). "Whether the federal district court has jurisdiction over the action must be determined from the allegations of fact in the complaint, without regard to mere conclusory allegations of jurisdiction." Groundhog v. Keeler, 442 F.2d 674, 677 (10th Cir.1971). Finally, the burden of proof on a Rule 12(b)(1) motion is on the party asserting jurisdiction. Moir v. Greater Cleveland Regional Transit Authority, 895 F.2d 266 (6th Cir.1990); Professional Investors Life Ins. Co. v. Roussel, 445 F.Supp. 687, 691 (D.Kan. 1978).

Discussion

In order to understand the claims of the parties, it is necessary to review several legal principles concerning tax refund actions, in general, and estate taxes, in particular. Accordingly, the Court first addresses the legal doctrines which underlie the issue in this case. After an examination of the legal background, this Court will consider the facts in this case.

A. The Legal Background

1. Subject Matter Jurisdiction in a Tax Refund Action

A taxpayer may bring a refund action in district court for recovery of (1) a tax alleged to have been erroneously or illegally assessed or collected, (2) a penalty alleged to have been collected without authority, and/or (3) any sum alleged to be excessive or in any manner wrongfully collected. IRC § 7422(a).

A refund action, however, may not be maintained unless the taxpayer has first exhausted his administrative remedies by filing a claim for refund with the IRS. Under IRC § 6511(a), a claim for refund must "be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such period expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid." In addition, even when a claim for refund is filed in accordance with § 6511(a), any refund is limited to amounts paid within three years of the filing of the claim for refund. IRC § 6511(b)(2)(A); King v. United States, 495 F.Supp. 334, 336 (D.Neb.1980).

Where no claim for refund is made within the period of limitations set forth in section 6511, the district court must dismiss a § 7422 refund action for lack of subject matter jurisdiction. Dalm v. United States, 494 U.S. 596, 602, 110 S.Ct. 1361, 1365, 108 L.Ed.2d 548 (1990) (holding that "unless a

860 F. Supp. 798
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."). In other words, in order to maintain a refund action in court, a taxpayer must first have made a claim for refund to the IRS which was within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever period expired later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. In the absence of a timely claim for refund, the refund action is time barred and cannot be heard by any court

2. The Tax Deduction for Interest Paid on Deferred Payments of the Estate Tax

IRC § 2001 imposes a tax on the estates of decedents who were citizens or residents of the United States. The code defines the gross estate of a decedent broadly, to include the value of "all property, real or personal, tangible or intangible...." Id. § 2031. A number of deductions from the gross estate are allowed for the purposes of determining the taxable estate, that is, the value of the estate which is actually taxed. Id. § 2051. Under section 2053, certain expenses, indebtedness and taxes constitute one category of deductions allowed for the purpose of determining the taxable estate. Where the amount of a section 2053 deduction is not known, the deduction may nevertheless be taken if the amount is ascertainable with reasonable certainty and will be paid. Treas. Reg. § 20.2053-1(b)(3).

Section 6166 provides that where an estate consists largely of interest in a closely held business, the estate tax may be deferred. If the estate chooses to defer payments under that section, it must pay interest on the deferred payments. IRC §§ 6166(f) & 6601(j). Where an estate defers payment of the estate tax, paying the tax in installments, together with interest, the IRS is, in effect, in the position of a lender, while the estate is the borrower. Estate of Bahr v. Comm'r, 68 T.C. 74, 82-83, 1977 WL 3655 (1977). The interest paid on estate tax payments deferred under section 6166, however, may be deducted from the value of the taxable estate as an IRC § 2053(a)(2) administrative expense. Snyder v. United States, 582 F.Supp. 196, 200 (D.Md.1984); Estate of Bailly v. Comm'r, 81 T.C. 246, 249, 1983 WL 14862 (1983); Estate of Bahr v. Comm'r, 68 T.C. 74, 83, 1977 WL 3655 (1977). Because the interest paid on deferred estate tax payments may be deducted from the value of the taxable estate, thereby reducing the estate tax owed, the deferred payment of estate taxes creates a situation where, over time, the total tax liability imposed on the estate may be reduced due to the payment or interest in connection with the deferred payment of that liability.

The suggestion that an estate should be allowed a section 2053(a)(2) administrative expense deduction for estimated future interest that it may pay in connection with the deferred payment of its estate tax has been rejected by the IRS. This is because, until the interest is in fact paid, the possibility that the interest will not be paid exists. This runs afoul of the rule mentioned above that an estimated section 2053 deduction may be made only if the amount is (1) ascertainable with reasonable certainty and (2) will be paid. Treas.Reg. § 20.2053-1(b)(3). The IRS has adopted the position, therefore,...

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