Sarmiento v. United States
| Decision Date | 31 August 2011 |
| Docket Number | No. 10–CV–1209 (ILG).,10–CV–1209 (ILG). |
| Parties | SARMIENTO, et al., Plaintiffs, v. UNITED STATES of America, Defendants. |
| Court | U.S. District Court — Eastern District of New York |
OPINION TEXT STARTS HERE
Carlton M. Smith, Cardozo School of Law Tax Clinic, New York, NY, for Plaintiffs.
Karen Elizabeth Wozniak, U.S. Department of Justice, Washington, DC, for Defendants.
Before this Court is the defendants' motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, For the following reasons, that motion is granted in part and denied in part.
German A. Sarmiento and his wife Aura M. Montoya (“plaintiffs”) commenced this action against the United States Internal Revenue Service (“IRS,” “defendant” or “Government”) under § 28 U.S.C. § 1346 seeking to recover the sum of $1,932 withheld by the IRS to which they claim to be entitled.1 (Compl. at ¶¶ 24, 27, 30.) Plaintiffs married in 1996 and are still married. ( Id. at ¶ 7.) Together they have a minor child under the age of seventeen. ( Id. at ¶ 1.)
Liability for unpaid taxes, penalties plus interest that accrued over the years during which they filed separately and jointly was sought to be resolved. Towards that end, in May of 2007, the plaintiffs sought to compromise their tax liabilities by an Offer–in–Compromise (“OIC”) agreement pursuant to § 26 U.S.C. 7122.2 The IRS accepted the OIC submitted by each on November 14, 2007. (Compl. at ¶¶ 8, 9; Ex. C at 2.) Section V(f) of those agreements provides, in part, that:
The IRS will keep all payments and credits made, received or applied to the total original liability before submission of this offer.... As additional consideration beyond the amount of my/our offer, the IRS will keep any refund, including interest, due to me/us because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer. The date of acceptance is the date on the written notice of acceptance issued by the IRS to me/us or to my/our representative.( Id. at ¶ 11.) (emphases added).
Plaintiffs timely filed a joint Form 1040 income tax return for the 2007 tax year for which they claim they owed no taxes. ( Id. at ¶ 13.) That return reflected a tax liability of $2,663 and an “additional child tax credit” of $864 pursuant to 26 U.S.C, § 24(d) and an earned income credit of $2,831 pursuant to 26 U.S.C. § 32. Plaintiffs seek a refund of $1,032—the difference between $2,663 and $3,695, the sum of the two credits. Plaintiffs additionally claim an economic stimulus rebate (“ESR”) of $900 pursuant to the Economic Stimulus Act of 2008 (“ESA”), discussed below.3 ( Id. at ¶ 15.)
Rather than issuing the Sarmientos a check for $1,932, the sum of the credits and ESR, the IRS kept it contending that the $1,932 is an “overpayment” for the 2007 tax year which it is entitled to keep pursuant to the terms of the two OICs. ( Id. at ¶¶ 4, 6, 16.) The plaintiffs claim that the $1,932 is not an “overpayment” within the meaning of the OIC, and was erroneously withheld. ( Id. at ¶¶ 32, 33.) This suit is to recover both the $1,032 “overpayment” for the 2007 tax year and the $900 ESR, in addition to any relevant interest, damages and costs. ( Id. at ¶¶ 26, 29, 33, 34, 36–38.)
A complaint should be dismissed which does not allege facts sufficient to make the asserted claim plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). A claim is plausible “when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Determining plausibility is “a context-specific task.” Id. at 1950. For purposes of a motion to dismiss, all factual allegations in the complaint are accepted as true and all reasonable inferences are drawn in the light most favorable to the plaintiff. Arar v. Ashcroft, 585 F.3d 559, 567 (2d Cir.2009).
An OIC is a contract between the taxpayer and the IRS. Maniolos v. United States, 741 F.Supp.2d 555, 565–66 (S.D.N.Y.2010). It “has long been settled that an agreement compromising unpaid taxes is a contract and, consequently, that it is governed by the rules applicable to contracts generally.” United States v. Lane, 303 F.2d 1, 4 (5th Cir.1962). Contracts with the Government are governed by federal common law. Up State Fed. Credit Union v. Walker, 198 F.3d 372, 375 fn. 4 (2d Cir.1999). In developing federal common law, federal courts often look to state law. Barnes v. Am. Int'l Life Assurance Co., 681 F.Supp.2d 513, 520 (S.D.N.Y.2010). “When it comes to general rules of contract interpretation, there is little difference between federal common law and New York law.” Id. Alexander & Alexander Servs., Inc. v. These Certain Underwriters at Lloyd's, 136 F.3d 82, 86 (2d Cir.1998) (citations omitted). Where the language of a contract is unambiguous, the parties' intent is determined within the four corners of the contract, without reference to external evidence. Feifer v. Prudential Ins. Co., 306 F.3d 1202, 1210 (2d Cir.2002). A court may dismiss a breach of contract claim on a Rule 12(b)(6) motion, where a contract's language is clear and unambiguous and dictates that result. Maniolos, 741 F.Supp.2d at 566–67. However, where the language of a contract is ambiguous, its construction presents a question of fact, which precludes summary dismissal. Id.
The plaintiffs 2007 joint tax return reported a total tax liability of $2,663. This liability was offset by an additional child tax credit given to the plaintiffs of $864 pursuant to 26 U.S.C. § 24(d) and earned income credit of $2,831 pursuant to 26 U.S.C. § 32. The sum of these two credits exceeds the 2007 tax liability by $1,032. The excess is an “overpayment” under § 6401 4 to which, all other things being equal, the Sarmientos would be entitled as a refund pursuant to section 6402(a).5 See In Re Molina, 2009 WL 1587292 at *3 fn. 4 (Bkrtcy.N.D.Ohio May 29, 2009).
Here, however, the OIC agreement precludes that answer in terms that are unambiguous. The agreement provides that the “IRS will keep any refund, including interest, due to me/us because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.” (emphases added) (Compl. at ¶ 11.) Without making a fortress out of the dictionary, the return of the sum of an “overpayment” of tax liability is not refundable to the tax payer. The OIC explicitly permits the IRS to retain it as consideration of foregoing by compromise the larger sum due for unpaid taxes which it might otherwise have enforced. If that were the entirety of the dispute, the determination of the matter would be foreclosed. The dispute, however, is centered on the portion of the OIC which permits the Government, as additional consideration for compromising the collection of the full amount of tax due, to keep any refund due to the tax payer because of an “overpayment” of the tax due for the calendar year in which the IRS accepts the OIC. The IRS accepted the offer on November 14, 2007. In plain terms, the IRS is entitled to keep the refund the taxpayer might otherwise claim for an “overpayment” made in the 2007 tax year. The Government's motion to dismiss claims related to the $1,032 in “overpayment” pursuant to 26 U.S.C. § 24(d) and 26 U.S.C. § 32 is granted.
On February 13, 2008, President Bush signed the ESA. The purpose of the ESA was “to put cash into the hands of lower-and middle-income families so that by spending it, they would stimulate the United States economy.” In re Wooldridge, 393 B.R. 721, 726 (Bankr.D.Idaho 2008). Economic Stimulus Act of 2008, Pub. L. No. 110–185, 122 Stat. 613, 613 (2008) (). The ESA broadly provides that any “qualified individual” shall receive an ESR equal to that taxpayer's net income tax liability, but no more than $600 for a single person or $1,200 for a married couple filing a joint return and no less than $300 for a single person and $600 in the case of a joint return. 26 U.S.C.A § 6428(a). For every “qualifying child,” filers are also entitled to an additional $300. § 6428(b)(1)(B). Individuals with no net tax liability are eligible to receive a stimulus payment, provided they had minimum qualifying income of $3,000. § 6428(b)(2).
Both the Government and the plaintiffs claim that they are entitled to keep the ESR. The parties' dispute centers on whether the ESA treats the ESR as an (advance) refund or credit against the 2008 tax liability, as the plaintiffs argue; or rather as the IRS argues, as a refund or credit (or here an overpayment) for the 2007 tax year to which the Government is entitled to keep. The question of whether the ESR should be regarded as a credit or refund for the 2007 tax year or rather an advance refund against the 2008 taxable year “is a difficult one” with “arguments supporting both sides.” In Re Schwinn, 400 B.R. 295, 302 (Bankr.D.Kan.2009).
The relevant provisions as to which year the ESR implicates are as follows:
Subsection 6428(a) provides:
“In general.—In the case of an eligible individual, there shall be allowed as a credit against the tax imposed by subtitle A for the first taxable year beginning in 2008....”
Subsection (f), entitled “Coordination with advance refunds of credit” provides:
(1) In general.—The amount of credit which would (but for this paragraph) be allowable under this section shall be reduced (but not...
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