Potts v. United States
Decision Date | 24 July 2020 |
Docket Number | No. CV-19-04965-PHX-SPL,CV-19-04965-PHX-SPL |
Parties | Craig K. Potts, et al., Plaintiffs, v. United States of America, Defendant. |
Court | U.S. District Court — District of Arizona |
Currently before the Court is a Motion to Dismiss for Lack of Jurisdiction (the "Motion") filed by the United States of America ("Defendant"). (Doc. 20) For the following reasons, the Court will grant the Motion.
Craig K. Potts and Kristen H. Potts ("Plaintiffs") are husband and wife and reside in Scottsdale, Arizona. (Doc. 19 at 4) In August of 2019, Plaintiffs brought this action pursuant to 28 U.S.C. § 1346 seeking a tax refund for the taxable years of 2005, 2008, 2009, 2010, 2011, 2012 and 2013. (Docs. 1, 19 at 2-3) On November 25, 2019, Defendant filed the Motion, arguing that this Court does not have jurisdiction to order the requested refunds because Plaintiffs have not fully paid their tax liabilities for each year as required by Flora v. United States, 362 U.S. 145 (1960). The Motion is fully briefed and ready for review. (Docs. 20, 21, 28)
Under Federal Rule of Civil Procedure, ("Rule") 12(b)(1), a party may move to dismiss a complaint for lack of subject matter jurisdiction. A court must dismiss the complaint when "the court determines at any time that it lacks subject matter jurisdiction[.]" Fed. R. Civ. P. 12(h)(3). The plaintiff bears the burden of establishing jurisdiction. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994). Rule 12(b)(1) motions may challenge jurisdiction facially or factually. Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004). In a facial challenge, the defendant asserts the insufficiency of the complaint's allegations to invoke federal jurisdiction as a matter of law. Whisnant v. United States, 400 F.3d 1177, 1179 (9th Cir. 2005). To adjudicate a facial challenge, a court assumes the truth of the allegations in the complaint and draws all reasonable inferences in favor of the plaintiff. Id. at 1177; Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).
In the Amended Complaint, Plaintiffs state that they are seeking a "Tax Refund for the taxable years ending December 31, 2005, 2008, 2009, 2010, 2011, 2012 and 2013." (Doc. 19 at 2) In the Motion, Defendant argues that Plaintiffs have not paid their full tax liability for the years 2008, 2009, 2010, and 2012. (Doc. 20-1 at 5-6) Further, Defendant asserts that the IRS did not make any assessments against Plaintiffs for tax year 2011, so there is no refundable amount at issue. (Doc. 20-1 at 6) Plaintiffs to do not address these arguments in their response, and Defendant asserts that the Court should consider the lack of response as an admission. (Doc. 28 at 2) The Court agrees and will not consider the arguments set forth in the Amended Complaint regarding tax years 2008, 2009, 2010, 2011, and 2012. Therefore, the only taxable years at issue in this case are 2005 and 2013. The Court will review the arguments regarding each tax year separately.
As to taxable year 2005, Defendant argues that the Court lacks jurisdiction to hear the claim because Plaintiffs still owe $6,503,947.88 in outstanding tax liabilities. (Doc. 20-1 at 3-4) Defendant argues that the United States Supreme Court made clear in Flora v. United States, 362 U.S. 145, 177 (1960), that a plaintiff must pay any outstanding tax liability before a district court has jurisdiction to hear a claim for a partial tax refund under 28 U.S.C. § 1346. (Doc. 20-1 at 4) In response, Plaintiffs argue that they are not seeking a refund for their 2005 tax liability. (Doc. 21 at 2-3) Instead, Plaintiffs argue they are seeking a refund of $406,843.16, which represents the amount Plaintiffs sent as a deposit for an offer to compromise their 2005 tax liability. (Doc. 21 at 2-3) Plaintiffs assert that Treasury Regulation § 301.7122-1(h) explicitly required the IRS to refund the deposit amount once the offer to compromise was rejected, and therefore, their claim for "wrongful collection" under 28 U.S.C. § 1346 is not governed by the Flora case. (Doc. 21 at 12)
Here, the Court finds that the correct characterization of the $406,843.16 is a partial payment for Plaintiffs' 2005 outstanding tax liabilities—as opposed to Plaintiffs' assertion that the sum was a "deposit" for their offer to compromise. Although Plaintiffs are correct in arguing that Treasury Regulation § 301.7122-1(h) requires the IRS to refund any deposit made once an offer to compromise has been rejected, the Court finds that the $406,843.16 does not qualify as a "deposit" under the facts as alleged by Plaintiffs.
Plaintiffs assert that in 2016 they made a "lump sum" offer to compromise and sent the $406,843.16 as a 20% down payment pursuant to 26 U.S.C. § 7122(c)(1). (Doc. 21 at 3, 12) Plaintiffs fail to acknowledge, however, that in July of 2006, the IRS issued a public notice explaining that the 20% down payment for lump sum offers to compromise under 26 U.S.C. § 7122(c)(1) should be treated as a nonrefundable "payment of tax" and not a "deposit" as described in Treasury Regulation § 301.7122-1(h). Notice 2006-68, sec. 1.02, 2006-2 C.B. 105; Brown v. Comm'r of Internal Revenue, T.C. Memo. 2019-121, 2019 WL 4415190 at *6-7 (2019) ( ); Isley v. Comm'r of Internal Revenue, 141 T.C. 349, 372 (2013) ( ). Consequently, the Courtfinds that Flora does prohibit Plaintiffs from asserting a claim under 28 U.S.C. § 1346 for the $406,843.16 without first paying the remaining outstanding liability for the 2005 tax year.
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