Isler v. United States

• Decision Date: 31 October 2016
• Docket Number: No. 01-344 T,01-344 T
• Parties: ROBERT J. ISLER, et al., Plaintiffs, v. UNITED STATES, Defendant.
• Court: U.S. Claims Court

ROBERT J. ISLER, et al., Plaintiffs, v. UNITED STATES, Defendant.

No. 01-344 T

United States Court of Federal Claims

October 31, 2016

Civil Actions for Tax Refund, 26 U.S.C. § 7422;

Tax Equity and Fiscal Responsibility Act ("TEFRA"), 26 U.S.C. §§ 6221; 6231-34;

Rules of the United States Court of Federal Claims ("RCFC") 12(b)(1) (Jurisdiction).

Thomas E. Redding, Redding & Associates, P.C., Houston, Texas, Counsel for the Plaintiffs.

Bart Duncan Jeffress, United States Department of Justice, Tax Division, Washington, D.C., Counsel for the Government.

MEMORANDUM OPINION AND ORDER GRANTING THE GOVERNMENT'S MOTION TO DISMISS

BRADEN, Judge.

This tax refund case was pending in the United States Court of Federal Claims before four separate judges for nine years during final adjudication of jurisdictional issues raised in two related cases under the new Tax Equity and Fiscal Responsibility Act ("TEFRA"), codified in sections of the Internal Revenue Code, including 26 U.S.C. §§ 6221-34. See Keener v. United States, 76 Fed. Cl. 455 (2007), aff'd, 551 F.3d 1358 (Fed. Cir. 2009) (holding that the United States Court of Federal Claims did not have jurisdiction to adjudicate a taxpayer refund claim under TEFRA, because whether the Internal Revenue Service ("IRS") untimely assessed federal taxes is a "partnership item" and, under 26 U.S.C. § 7422(h) and United States Treasury Regulation § 301.6231(a)(3)-1(b), the court did not have jurisdiction to adjudicate partner-level refund claims, attributable to partnership items); see also Prati v. United States, 81 Fed. Cl. 422 (2008), aff'd, 603 F.3d 1301 (Fed. Cir. 2010) (holding that a taxpayer's refund claim, alleging that, the IRS untimely assessed tax and interest, was a "partnership item" that could not be raised in a partner-level refund action in the United States Court of Federal Claims under 26 U.S.C. § 7422(h)).

This case, however, inexplicably was allowed to languish for another six years, although the only remaining issue was whether the United States Court of Federal Claims could adjudicate whether the IRS timely assessed federal income taxes due and attributable to the adjustment of partnership items—the precise jurisdictional issue resolved by Keener in 2009.¹

I. RELEVANT FACTS.²

During the 1984 fiscal year, Mr. Robert J. Isler and Mrs. Susan L. Isler were partners in Oasis Date Associates ("ODA"), a California limited partnership. Compl. at ¶ 6. On their 1984 federal income tax return, Mr. and Mrs. Isler reported investment deductions related to an investment in ODA. Compl. Ex. A at 23.

On April 9, 1997, following an IRS examination of ODA's 1984 partnership return, Mr. and Mrs. Isler entered into a partner-specific Settlement Agreement with the IRS regarding four ODA partnership items: (1) ordinary income; (2) total positive income, minus qualified investment expense; (3) total positive income, minus qualified investment income; and (4) investment interest, minus investment income. Compl. Ex. A at 23. Under the April 9, 1997 Settlement Agreement, $4,756,385 of the deductions reported on ODA's 1984 partnership return were disallowed and Mr. and Mrs. Isler's tax liability for 1984 was adjusted accordingly. Compl. Ex. A at 22-23. Subsequently, Mr. and Mrs. Isler made an advance payment of $16,717 for any deficiency that may be due to the IRS. Compl. at ¶¶ 7, 9.

On September 29, 1997, the IRS assessed Mr. and Mrs. Isler $4,990 in federal income taxes for fiscal year 1984, plus $11,682 in interest. Compl. at ¶ 8. On March 30, 1999, Mr. and Mrs. Isler filed claims with the IRS, requesting a $4,990 refund for the 1984 fiscal year and the $11,682 interest assessment. Compl. at ¶ 10. On June 8, 1999 and May 12, 2000, the IRS disallowed Mr. and Mrs. Isler's March 30, 1999 claims. Compl. at ¶ 11.³

II. PROCEDURAL HISTORY.

On June 8, 2001, Mr. and Mrs. Isler ("Plaintiffs") filed a Complaint in the United States Court of Federal Claims seeking a federal tax refund of $22,039.06 for taxable year 1984, based on five claims:

• The IRS unlawfully assessed taxes after the relevant statutes of limitations, i.e., 26 U.S.C. § 6501(a)⁴, and 26 U.S.C. § 6229(a)⁵, expired. Compl. at ¶ 12a. Any amount assessed and collected, after the statute of limitations expired, is a refundable overpayment under 26 U.S.C. § 6401.⁶ Compl. at ¶ 12b. ("Untimely Tax Assessment Claim").

• Under the April 9, 1997 Settlement Agreement, Plaintiffs did not concede that any of the adjustments to ODA partnership items were tax motivated transactions, (Compl. at ¶ 12d), so, as a matter of law, the IRS improperly imposed interest at the penalty rate under 26 U.S.C. § 6621(c)⁷, (Compl. at ¶¶ 12c, 12e). ("Penalty Interest Claim").

• The IRS was required to abate interest under 26 U.S.C. § 6404(e).⁸ Compl. at ¶ 12f. ("Interest Abatement Claim").

• The IRS was required to apply a net interest rate of zero, under 26 U.S.C. § 6621(d)⁹, for the 1984 taxable period, because interest was payable to the IRS and allowable to Plaintiffs. Compl. at ¶ 12g. ("Interest Netting Claim").

• The IRS was required to apply an offset to Plaintiffs' 1984 deficiency, because of their overpayment of federal income tax in 1997. Compl. at ¶ 18a-18e. ("Offset Claim").

On December 5, 2003, the Government filed a Motion To Dismiss the Untimely Tax Assessment, Interest Abatement, Interest Netting, and Offset claims alleged in the June 8, 2001 Complaint, based on Rule 12(b)(1) of the United States Court of Federal Claims ("RCFC"). ECF No. 52 at 8-6.

On February 2, 2004, Plaintiffs filed a Motion For Summary Judgment regarding the June 8, 2001 Complaint's Penalty Interest Claim, (ECF No. 57), together with Proposed Findings Of Uncontroverted Fact, (ECF No. 58). On April 2, 2004, the Government filed a Response stating that, "[o]n April 9, 1997, [Plaintiffs] settled all of [their] 1984 ODA partnership items with theIRS," (ECF No. 73 at ¶ 27), although "[the April 9, 1997] settlement agreement did not address the limitations period on assessment," (ECF No. 73 at ¶ 28).

On December 12, 2005, the Government filed a second Motion to Dismiss arguing that the court does not have jurisdiction to adjudicate the June 8, 2001 Complaint's Penalty Interest Claim. ECF No. 102 at 1.

On May 21, 2007, the United States Supreme Court in Hinck v. United States, 550 U.S. 501 (2007), held that the United States Tax Court is the exclusive forum to conduct judicial review of an IRS decision not to abate interest under 26 U.S.C. § 6404(e). See id. at 506 ("[D]espite Congress's failure explicitly to define the [United States] Tax Court's jurisdiction as exclusive, we think it quite plain that the terms of § 6404(h) . . . control all requests for review of § 6404(e)(1) determinations. Those terms include the forum for adjudication.").

On October 4, 2007, the Government advised the court that, in light of Hinck, the parties agreed that the United States Court of Federal Claims does not have jurisdiction to adjudicate the June 8, 2001 Complaint's interest abatement claim. ECF No. 130 at 1; see also ECF No. 187 at 1 n.3 ("The parties previously agreed that[,] under Hinck v. United States[,] this court lacks jurisdiction of § 6404(e) interest abatement claims.").

On August 15, 2011, the parties filed a Joint Admission dismissing the June 8, 2001 Complaint's Interest Netting Claim and Offset Claim. ECF No. 169 at 1; see also ECF No. 187 at 1 n.3 ([Plaintiffs] stipulated to dismissal of [their] . . . offset grounds, which rendered moot [their] § 6221(d) interest netting grounds.").

* * *

On January 15, 2016, this case was reassigned to the undersigned judge. On February 10, 2016, the court convened a telephone status conference and set a schedule for any supplemental briefs the parties wanted to file, in light of the inordinate amount of time that passed since the Government filed a motion to dismiss in 2003. ECF No. 45.

On April 22, 2016, Plaintiffs filed a Supplemental Brief advising the court that "the only refund ground remaining [in the June 8, 2001 Complaint] is [section] 6501(a) limitations." ECF No. 187 at 1. On June 23, 2016, the Government filed a Response, again arguing that, under 26 U.S.C. § 7422(h), the court does not have jurisdiction to adjudicate whether the IRS untimely assessed federal income taxes, as alleged in the June 8, 2001 Complaint. ECF No. 190 at 1.

On July 8, 2016, Plaintiffs filed a Reply arguing that, 26 U.S.C. § 7422(h) does not apply to the June 8, 2001 Complaint's refund claim. ECF No. 194 at 1.

III. DISCUSSION.

A. Standard Of Review For A Motion To Dismiss Pursuant To RCFC 12(b)(1).

A challenge to the United States Court of Federal Claims' "general power to adjudicate in specific areas of substantive law . . . is properly raised by a [Rule] 12(b)(1) motion." Palmer v. United States, 168 F.3d 1310, 1313 (Fed. Cir. 1999); see also RCFC 12(b)(1) (allowingdefendant to assert, by motion, "lack of subject-matter jurisdiction"). When considering whether to dismiss an action for lack of subject-matter jurisdiction, the court is "obligated to assume all factual allegations [of the complaint] to be true and to draw all reasonable inferences in plaintiff's favor." Henke v. United States, 60 F.3d 795, 797 (Fed. Cir. 1995). Nonetheless, plaintiffs bear the burden of establishing jurisdiction by a preponderance of the evidence. See Reynolds v. Army & Air Force Exch. Serv., 846 F.2d 746, 748 (Fed. Cir. 1988) ("[O]nce the [trial] court's subject matter jurisdiction [is] put in question . . . [the plaintiff] bears the burden of establishing subject matter jurisdiction by a preponderance of the evidence.").

B. Jurisdiction.

The Tucker Act, 28 U.S.C. § 1491, authorizes the United States Court of Federal Claims to adjudicate tax refund claims, if the taxpayer has paid the full assessed federal tax liability and timely filed a refund claim with the IRS stating the grounds for the claim. See 28 U.S.C. § 1491(a); see also 26 U.S.C. § 6511(a)¹⁰; 26 U.S.C. § 7422(a)¹¹; Shore v. ...