Magnone v. US

• Decision Date: 19 October 1989
• Docket Number: No. 89 Civ. 1837 (MBM),89 Civ. 1838 (MBM).,89 Civ. 1837 (MBM)
• Citation: 733 F. Supp. 613
• Parties: Michael MAGNONE, Plaintiff, v. UNITED STATES of America, Defendant. Joseph V. MAGNONE and Rose Magnone, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

733 F. Supp. 613

Michael MAGNONE, Plaintiff, v. UNITED STATES of America, Defendant.

Joseph V. MAGNONE and Rose Magnone, Plaintiffs, v. UNITED STATES of America, Defendant.

Nos. 89 Civ. 1837 (MBM), 89 Civ. 1838 (MBM).

United States District Court, S.D. New York.

October 19, 1989.

H.J. Gartlan, Jr., Ellis & Gartlan, Hackensack, N.J., for plaintiffs.

Jed Rubenfeld, Asst. U.S. Atty., S.D. N.Y., New York City, for defendant.

AMENDED OPINION AND ORDER

MUKASEY, District Judge.

Plaintiffs Michael Magnone and Joseph and Rose Magnone sue under 26 U.S.C. § 7422 to recover sums paid to the Internal Revenue Service, which plaintiffs characterize as the amount of interest that accrued during 1979 on their 1974, 1975 and 1976 tax deficiencies. Although plaintiffs do not cite in their complaints the code section under which they seek relief, they state in their memorandum that they are suing under 26 U.S.C. § 6404(e) for abatement of interest attributable to errors and delays by the IRS.

Congress has provided taxpayers with an opportunity, under § 6404, to sue for an abatement of interest that has been assessed on certain deficiencies. This interest must be attributable solely to errors or delays by IRS employees while performing "ministerial acts." 26 U.S.C. § 6404(e)(1). Congress has permitted such suits, however, only for "interest accruing with respect to deficiencies or payments for taxable years beginning after December 31, 1978." Pub.L. 99-514, § 1563(b)(1), 100 Stat. 2085, 2762 (1986).

Furthermore, a taxpayer wishing to sue in district court for a refund must have paid the full assessment in question before bringing suit. Flora v. United States, 357 U.S. 63, 78 S.Ct. 1079, 2 L.Ed.2d 1165 (1958), aff'd on reh'g, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). The taxpayer also must have filed the same claim with the IRS, 26 U.S.C. § 7422(a), and may file a refund suit in district court only if the IRS has rejected the administrative claim or disregarded it for over six months. 26 U.S.C. § 6532(a)(1).

The taxpayers in this case argue that they should be allowed to sue in district court because they paid all the interest that accrued in 1979 for deficiencies in tax years 1974 through 1976. They assert that their payment of a sum equivalent to one year of interest allows them to sue for a refund under the Flora pre-payment rule and 26 U.S.C. § 7422. They assert also that this payment satisfies the § 6404 provision limiting refund suits for interest to deficiencies for taxable years beginning after December 31, 1978. Pub.L. 99-514, § 1563(b), 100 Stat. 2085, 2762 (1986).

The government moves to dismiss the complaints under Fed.R.Civ.P. 12(b)(1) and 12(b)(6), alleging that plaintiffs have failed to satisfy the jurisdictional requirements for bringing a tax refund claim in district court, and have failed also to state a claim under the tax code in that § 6404 does not permit this action.

Because plaintiffs have not satisfied the pre-payment rule, and because their claims in this court are completely different from their administrative claims, this court lacks jurisdiction over this case. Furthermore, because plaintiffs' claims also are barred by the time limitation Congress has placed on § 6404, plaintiffs fail to state a claim upon which relief can be granted. Accordingly, defendant's motion under Fed.R. Civ.P. 12(b)(1) and 12(b)(6) must be granted and the complaints dismissed.

I.

In 1978, the IRS informed plaintiffs that it would audit plaintiffs' tax returns for the tax years 1974, 1975 and 1976. In November, 1986, the IRS notified plaintiffs that their payments for the years in question were deficient.¹ Thereafter, plaintiffs paid the deficiencies assessed for those years, but not the interest which had accrued from 1974 through 1986. Instead, they filed a claim with the IRS in October, 1987 for abatement of the interest from 1974 to 1986, asserting without explanation that such interest was "suspended pursuant to § 6601(c)."²

In February, 1989, plaintiffs paid the IRS an amount they describe as "the interest allegedly due for tax year ended December 31, 1979." (Complaint, ¶ 14) In March, 1989, they filed an action in this court for a refund of the interest, alleging that the IRS's rejection of their claims was "illegal, improper, erroneous and an abuse of discretion," (Complaint, ¶ 15), and that the IRS's delay in the issuance of the deficiency notice was "grossly unfair." (Complaint, ¶ 17).

II.

Congress provided for district court jurisdiction over tax refund suits in 28 U.S.C. § 1346(a)(1), and set forth in 26 U.S.C. § 7422 the requirements for bringing such suits. These requirements have been further refined through regulations and case law. See 15 Mertens Law of Fed. Income Taxation § 58A.06 (1989). The two main jurisdictional limitations at issue in this case are the full payment rule, which hinges jurisdiction on plaintiffs' full payment of all amounts assessed against them, and the prior claim rule, which grants jurisdiction only when plaintiffs have filed a proper administrative claim with the IRS, and limits jurisdiction to those issues which were asserted in that administrative claim.

A) The Full Payment Rule

Under 28 U.S.C. § 1346(a)(1), district courts have original jurisdiction over any "civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws." The Supreme Court in Flora interpreted this provision to require full payment of all deficiencies in suit as a condition for district court jurisdiction over a refund claim. Flora, 362 U.S. at 177, 80 S.Ct. at 647. The Court recognized the hardship this requirement might impose on litigants, but asserted that litigants could avoid the prepayment rule by bringing their claims in Tax Court. Flora, 362 U.S. at 175, 80 S.Ct. at 645.

Since Flora, federal courts consistently have interpreted the pre-payment rule as necessitating complete payment, and thus have prevented partial payments from conferring jurisdiction on district courts.³ See Cataldo v. United States, 73-1 U.S.T.C. ¶ 9325 (S.D.N.Y.1971), aff'd, 456 F.2d 1335 (2d Cir.1972); Amundson v. United States, 279 F.Supp. 779 (S.D.N.Y.1967); Martinon v. Fitzgerald, 306 F.Supp. 922, 925 (S.D.N. Y.1968), aff'd per curiam, 418 F.2d 1336 (2d Cir.1969); Frise v. United States, 5 Cl.Ct. 488 (1984); Tracy v. United States, 226 F.Supp. 708 (S.D.Cal.1963). As Judge Mansfield wrote in Martinon, "a federal district court does not have jurisdiction to entertain a taxpayer's suit for refund of part payment made pursuant to an assessment for an alleged deficiency in his income tax. The taxpayer must first pay the full amount of the assessment before he may challenge it under 28 U.S.C. § 1346(a)." Martinon, 306 F.Supp. at 925.

Plaintiffs here contend that payment of an amount allegedly equivalent to the interest — calculated solely for the year 1979 — on their deficiencies from tax years 1974, 1975 and 1976 satisfies the full payment rule although this interest arises from deficiencies in previous tax years, and despite their failure to pay all the interest on such deficiencies.⁴ They argue that "as regards 1979, there are no outstanding taxes, penalties or interest for that particular calendar year ... which have not been paid ... It is for that 1979 year, and that year only, that plaintiffs seek relief by virtue of this action." (Pl. Mem. at 5-6) Plaintiffs further allege that because interest is assessable on an "annual" basis, and is computed at an "annual" rate, interest assessable for a single year may be the subject of a refund action even when the interest has been calculated based on deficiencies from previous years. (Pl. Mem. at 6) Plaintiffs argue that interest on the assessments for 1974, 1975 and 1976 that has been separated from these assessments and computed for one isolated year constitutes "full payment."

Indeed, a taxpayer who owes back taxes for several years may pay interest on and sue with respect to only one of them. See Green v. United States, 618 F.2d 122, 220 Ct.Cl. 712, 713 (1979), 79-2 U.S.T.C. ¶ 944⁵. However, the interest payment for a single tax year may constitute full payment only if it includes all interest relating to the year for which the deficiency has been assessed, but not if it is simply one year's worth of interest on a past deficiency. In other words, if plaintiffs wish to sue for a refund of interest for the year 1976, they could pay all interest that has accrued on their 1976 deficiency from 1976 until the time they paid the assessment, and then sue to recover this sum.

This is the only sensible interpretation of the full payment rule, because the same issues that arise in this suit for a refund of interest that accrued during 1979 would arise in a claim encompassing interest that accrued during all other years since the deficiencies. All claims therefore should be brought at the same time, after full payment has been made, as "Congress intended that all tax questions for any one taxable year should be included in one litigation." Tracy, 226 F.Supp. at 709. Nor should a taxpayer be allowed to litigate what looks like a small claim and then, if successful, gain collateral estoppel advantage as to a much larger claim.

This interpretation accords also with the policy underlying the Flora decision; in fact, plaintiffs' argument here is quite similar to petitioner's argument in Flora, which the Supreme Court specifically rejected. In Flora, the IRS levied a deficiency assessment of $28,908.60, including interest, against petitioner. Petitioner paid $5,058.54, filed a claim for that amount with the IRS, and when that claim was rejected, sued for a refund in district court. Flora, 362 U.S. at 147, ...