Sarmiento v. United States

• Decision Date: 02 May 2012
• Docket Number: Docket Nos. 11–3752 (L), 11–4495 (XAP).
• Citation: 109 A.F.T.R.2d 2012,678 F.3d 147
• Parties: German A. SARMIENTO and Aura M. Montoya, Plaintiffs–Appellants–Cross–Appellees, v. UNITED STATES of America, Defendant–Appellee–Cross–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

678 F.3d 147

109 A.F.T.R.2d 2012-1993

German A. SARMIENTO and Aura M. Montoya, Plaintiffs–Appellants–Cross–Appellees,

v.UNITED STATES of America, Defendant–Appellee–Cross–Appellant.^*

Docket Nos. 11–3752 (L), 11–4495 (XAP).

United States Court of Appeals, Second Circuit.

Argued: March 7, 2012.

Decided: May 2, 2012.

Carlton M. Smith, Director, Benjamin N. Cardozo School of Law Tax Clinic, New York, NY, for Plaintiffs–Appellants.

Damon W. Taaffe, Attorney (Jonathan S. Cohen, Attorney, Tamara W. Ashford, Deputy Assistant Attorney General, on the brief), Tax Division, U.S. Department of Justice, for Defendant–Appellee.^**

Before: KATZMANN, PARKER, and WESLEY, Circuit Judges.

KATZMANN, Circuit Judge:

In this case, we are called on, in principal part, to determine whether specialized tax terms in an Offer–in–Compromise (“OIC”) agreement derive their meaning from the Internal Revenue Code or from ordinary “plain English.” Plaintiffs–Appellants German Sarmiento and Aura Montoya (“plaintiffs”) filed this action seeking to recover tax refunds that Defendant–Appellee the United States withheld from them pursuant to OIC agreements they each entered into with the United States Internal Revenue Service (“IRS”) in 2007. Under the OIC program, authorized under § 7122(a) of the Internal Revenue Code (or the “Code”), the IRS may agree to compromise delinquent taxpayers' unpaid tax liabilities in exchange for the payment of a fixed sum, as well as certain “additional consideration.” I.R.C. § 7122(a); Treas. Reg. § 301.7122–1(e). As is provided in the OIC standard form, IRS Form 656, this “additional consideration” includes “any refund, including interest, due to [the taxpayer] because of overpayment of any tax or other liability, for tax periods extending through the calendar year in which the IRS accepts the offer.” Compl. ¶ 11 (quoting IRS Form 656 (2007)). Pursuant to the “additional consideration” provision in the OIC agreement, the IRS withheld payment of certain tax refunds to which plaintiffs were otherwise entitled. Specifically, the IRS withheld: (1) a payment under the Economic Stimulus Act of 2008 (“ESA”), Pub.L. No. 110–185, 122 Stat. 613 (Feb. 13, 2008) (codified at I.R.C. § 6428), and (2) a tax refund for the 2007 tax year based on plaintiffs' entitlement to an Earned Income Tax Credit (“EITC”) under I.R.C. § 32 and an Additional Child Tax Credit (“ACTC”) under I.R.C. § 24(d).

Plaintiffs filed a Complaint in the United States District Court for the Eastern District of New York (Glasser, J.) seeking to recover the tax refunds from the United States. See28 U.S.C. § 1346(a)(1) (granting federal courts jurisdiction over civil actions against the United States for recovery of wrongfully collected internal revenue taxes). The United States moved to dismiss the Complaint, and, by Memorandum and Order dated August 31, 2011, the district court granted the motion in part and denied the motion in part. In particular, the district court held that plaintiffs were not entitled to a tax refund for the 2007 tax year resulting from the EITC and ACTC tax credits, but were entitled to the stimulus payment under the ESA. See Sarmiento v. United States, 812 F.Supp.2d 137, 141–42 (E.D.N.Y.2011).

For the reasons described below, we conclude that plaintiffs are not entitled to any of the withheld tax refunds they seek in this action. Specifically, we hold: (a) that all the payments withheld by the IRS constitute tax “refund[s]” under the OIC agreements' “additional consideration” provision, (b) that tax refunds made pursuantto the ESA apply to the 2007 tax year, and (c) that, by entering into OIC agreements, plaintiffs contracted away their right to “any refund” to which they were otherwise entitled for the 2007 tax year, including ESA payments. Accordingly, we affirm the district court's Order in part, reverse the district court's Order in part, and remand the case for further proceedings consistent with this Opinion.

BACKGROUND

The following facts are drawn from the allegations in plaintiffs' Complaint, together with those “documents ... incorporated in it by reference” and “matters of which judicial notice may be taken.” Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002) (internal quotation marks omitted).

Sarmiento and Montoya have been married “since before 1996” and live with their minor child. Compl. ¶ 7; J.A. 22. Both Sarmiento and Montoya work as independent contractors—Sarmiento as a taxi driver and Montoya as a cleaner of commercial office space—and were for many years unaware of their obligation to make estimated Medicare and Social Security tax payments on their self-employment income. Accordingly, by 2007, Sarmiento and Montoya jointly owed the United States more than $30,000 in unpaid tax liabilities pertaining to the 1996, 1997, 1999, 2000, 2001, 2003, and 2004 tax years.

The Internal Revenue Code authorizes the government to “compromise any civil ... case arising under the internal revenue laws.” I.R.C. § 7122(a). Accordingly, a taxpayer with outstanding tax liabilities may offer to settle and discharge those liabilities by paying part of what she owes to the IRS. See id. § 7122(c)-(f) (establishing the process by which a taxpayer may offer to compromise her outstanding tax liabilities, as well as the standards by which the IRS evaluates such offers). The IRS provides a standard form—Form 656—with which a taxpayer may make an “Offer–in–Compromise” to the IRS. See Compl. ¶ 11. Form 656 includes a number of conditions that the taxpayer must certify that she has read, understands, and agrees to. See J.A. 48. Among these conditions is the taxpayer's agreement that:

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.

Compl. ¶ 11; see also, e.g., J.A. 48 (requiring the offering taxpayer to agree to be a compliant taxpayer for the following five years).

On November 14, 2007, Sarmiento and Montoya entered into separate OIC agreements with the IRS wherein they agreed to pay a total of $2,000—$1,000 each—to compromise their approximately $30,000 in outstanding tax liabilities. The letters from the IRS accepting plaintiffs' offers each reiterated that “the conditions of the offer include the provision that as additional consideration for the offer, we will retain any refunds or credits that you may be entitled to receive for 2007 or for earlier tax years,” including “refunds you receive in 2008 for any overpayments you made toward tax year 2007 or toward earlier tax years.” J.A. 45, 52. Sarmiento and Montoya both completed their $1,000 payments to the IRS in 2008. Id. at 59–60.

Meanwhile, on February 13, 2008, Congress enacted the Economic Stimulus Act of 2008, Section 101 of which granted “2008 recovery rebates for individuals” in the form of tax credits. SeePub.L. No. 110–185 (codified at I.R.C. § 6428). Specifically, subsections (a) and (b) of ESA § 101 grants eligible individuals a tax credit for the 2008 tax year in an “amount equal to the lesser of—(1) net income tax liability, or (2) $600,” with a minimum rebate of $300. I.R.C. § 6428(a)-(b). Further, in order to distribute this tax credit as soon as possible, subsection (g) of ESA § 101 allows taxpayers to receive an “advance refund” of their 2008 tax credit. Id. § 6428(g). Subsection (g), entitled “Advance refunds and credits,” states:

(1) In general.—Each individual who was an eligible individual for such individual's first taxable year beginning in 2007 shall be treated as having made a payment against the tax imposed ... for such first taxable year in an amount equal to the advance refund amount for such taxable year.

(2) Advance refund amount.—For purposes of paragraph (1), the advance refund amount is the amount that would have been allowed as a credit under this section for such first taxable year if this section (other than subsection (f) and this subsection) had applied to such taxable year.

Id. To the extent a taxpayer is eligible for an “advance refund” pursuant to subsection (g), subsection (f) provides that the otherwise applicable 2008 tax credit “shall be reduced (but not below zero)” by that amount. Id. § 6428(f). To facilitate the rapid distribution of the stimulus payments, subsection (g)(3) directs that any refund or credit should be made “as rapidly as possible” and that no refund or credit will be made after December 31, 2008. Id. § 6428(g)(3).

In early 2008, Sarmiento and Montoya filed a joint tax return for the 2007 tax year by means of an IRS standard Form 1040, in which they reported no income tax liability and self-employment payroll taxes of $2663. In addition, they claimed two refundable credits: an EITC of $2831 and an ACTC of $864. Accordingly, Sarmiento and Montoya requested a 2007 tax year refund of $1032—the difference between the sum of their EITC and ACTC credits and their reported tax liability. In addition, because they each had “qualifying income” over $3000 and a dependent “qualifying child,” Sarmiento and Montoya jointly claimed a $900 tax refund under the ESA. SeeI.R.C. § 6428(b)(1). The IRS concluded, however, that the $1932 in tax refunds that plaintiffs requested constitute “additional consideration” under the terms of plaintiffs' OIC agreements with the IRS, and therefore withheld payment of those funds. ¹

On June 30, 2009, Sarmiento and Montoya filed an administrative claim with the IRS under I.R.C. § 7422 seeking to recover the withheld tax refunds. The IRS denied plaintiffs' claim by letter dated September 4, 2009. On March 17, 2010, Sarmiento and Montoya, with the assistance of the Benjamin N. Cardozo School of Law Tax Clinic, filed suit in the district court to recover the withheld tax refunds, plus interest and costs.

The United States moved to dismiss the Complaint. By Memorandum and...