Tilley v. U.S., 1:02CV629.

• Decision Date: 11 July 2003
• Docket Number: No. 1:02CV629.,1:02CV629.
• Citation: 270 F.Supp.2d 731
• Court: U.S. District Court — Middle District of North Carolina
• Parties: Thomas E. TILLEY and Iris M. Tilley, Plaintiffs, v. UNITED STATES of America, Defendant.

270 F.Supp.2d 731

Thomas E. TILLEY and Iris M. Tilley, Plaintiffs, v. UNITED STATES of America, Defendant.

No. 1:02CV629.

United States District Court, M.D. North Carolina.

July 11, 2003.

Iris M. Tilley, Chapel Hill, NC, pro se.

Thomas E. Tilley, Chapel Hill, NC, pro se.

John W. Stone, Jr., Office of U.S. Attorney, Greensboro, NC, Jonathan D. Carroll, U.S. Department of Justice, Washington, DC, for U.S.

ORDER

DIXON, United States Magistrate Judge.

This is an action for refund of taxes, brought by Plaintiffs Thomas E. Tilley and Iris M. Tilley ("Tilleys"). Defendant United States of America ("United States") has filed a motion [Doc. # 13] to dismiss and for summary judgment. The United States has also filed a motion [Doc. # 19] for protective order pursuant to Rule 26(c) protecting it from having to respond to the Tilleys' discovery requests. The parties have consented to the jurisdiction of a magistrate judge under 28 U.S.C. § 636(c). In this posture, the matter is ripe for disposition.

I. Background

In this suit, the Tilleys seek a refund of taxes paid for the tax periods 1991, 1992, 1994 and 1995. The Tilleys timely filed joint returns for the 1991 and 1992 tax periods. By notice of deficiency dated November 14, 1995, the United States determined deficiencies and accuracy-related penalties for 1991 and 1992 totaling $84,858. See Tilley v. Commissioner, 73 T.C.M. (CCH) 2763, T.C. Memo.1997-222, 1997 WL 240958 (May 12, 1997). The Tilleys filed a petition with the Tax Court challenging their liability to this sum. The Tax Court determined that the Tilleys were liable for the 1991 and 1992 deficiencies. See id.

The Tilleys did not file returns for the 1994 and 1995 tax periods. By notice of deficiency dated November 14, 1996, the United States determined deficiencies and penalties in the tax of Thomas Tilley for the 1994 and 1995 tax periods. The United States calculated that Thomas Tilley had a taxable income of $147,743 in 1994 and $133,458 in 1995, resulting in a tax deficiency of $87,352, and penalties totaling $24,068. (Gov.Ex. 2). Thomas Tilley did not petition the Tax Court concerning the 1994 and 1995 deficiencies.

In 1999, The United States collected the entire amount of the tax and penalties due for the 1991, 1992, 1994 and 1995 tax periods. (See Compl. ¶ VI(b); Gov. Ex. 1). In September 2000, the Tilleys filed an administrative claim for refund, and in November 2001, they filed a supplement to their administrative claim for refund. Receiving no response to their administrative claim for refund, the Tilleys filed suit in this court on August 1, 2002.

In their complaint, the Tilleys argue that they are entitled to a tax refund because:

(1) the statutory notice of deficiency for 1994 and 1995 was invalid, since the IRS failed to file a valid involuntary return for Thomas Tilley;

(2) the IRS failed to issue and serve valid notices of assessments and demands for payments as required by 26 U.S.C. Section 6303(a);

(3) the taxes were unconstitutional, since a tax measured by an individual's so-called income is in the nature of a capitation tax and can only be imposed by apportionment;

(4) the taxes were collected in violation of the Fourth Amendment of the United States Constitution, since an executive warrant was not issued;

(5) the taxes were collected in violation of the Ninth Amendment of the United States Constitution;

(6) the IRS failed to allow business expenses and personal deductions;

(7) a valid assessment does not exist as a matter of law; and

(8) the taxes were collected in violation of 26 U.S.C. Sections 6320 and 6330, because the IRS failed to hold a collection due process hearing as requested.

(Compl.¶ VI(d)).

The parties attended a discovery conference on December 9, 2002, and agreed on a discovery plan. In their joint Rule 26(f) report, the parties indicated that discovery would be needed on only one issue, "whether plaintiffs are entitled to business and personal deductions and if so, the amounts." (Doc. # 8, ¶ 2). On February 19, 2003, the Tilleys mailed to the United States requests for admissions, interrogatories, and requests for production. In this discovery the Tilleys did not seek information on business or personal deductions, but rather sought admissions and information on the administrative procedures of the Internal Revenue Service (IRS) in handling tax filings, deficiencies assessments and collections in this case and in general. (See, e.g., Request for Admission # s 13-82; Interrogatory # s 4-20; Request for Production # s 2-14). Many of the requests for admissions also ask the IRS to give legal statements regarding the Internal Revenue Code. (See, e.g., Request for Admission # 89 ("Admit that the term `individual' is not defined in the Internal Revenue Code"), # 93 ("Admit that Section 61(a) of the Internal Revenue Code defines `gross income' as all income from whatever source derived, but does not define income"), and # 94 ("Admit that in the absence of gain, there is no income in the constitutional sense, and thus no `gross income' under Section 61(a)")).

The United States did not respond to this discovery request, but rather filed a motion to dismiss and for summary judgment on March 21, 2003. The United States moved to dismiss the Tilleys' claims insofar as they relate to the tax years 1991 and 1992, on grounds that the tax liability for this period was previously litigated in Tax Court. The United States also moved for summary judgment on the Tilleys' claim that the IRS failed to conduct a collection due process hearing, on grounds that the Tax Court had already made a determination on this issue. In addition, the United States moved for dismissal of the Tilleys' claims based on constitutional or procedural defects in the collection process, on grounds that these claims are frivolous. Finally, the United States moved for summary judgment on the Tilleys' claim that they are entitled to business and personal deductions for the years 1994 and 1995, on grounds that they failed to show that they are entitled to deductions for these years. (See United States' Motion to Dismiss and for Summary Judgment, Doc. # 13, pp. 1-2; United States' Brief in Support of its Motion to Dismiss and for Summary Judgment, Doc. # 14 [hereinafter "Br. in Supp."]).

The Tilleys filed a response, accompanied by a Declaration of Thomas Tilley that includes copies of "receipts for personal deductions and business expenses" for the 1994 and 1995 tax periods. (Doc. # `s 16-17 [hereinafter "Pls' Resp." and "Declaration"]). The United States replied, maintaining that the Tilleys have not met their burden of showing that they are entitled to a refund. (Doc. # 18 [hereinafter "Reply"]). The United States also filed, on May 12, 2003, a motion for protective order to protect it from having to respond to the Tilleys' discovery requests.

II. Discussion

A. Protective Order

A protective order under Rule 26(c) to stay discovery pending determination of a dispositive motion is an appropriate exercise of the court's discretion. Chavous v. District of Columbia Financial Resp. and Mgmt. Asst. Auth., 201 F.R.D. 1, 2 (D.D.C.2001); Simpson v. Specialty Retail Concepts, Inc., 121 F.R.D. 261, 263 (M.D.N.C.1988); see FED.R.CIV.P. 26(C). The court should not, however, stay discovery which is necessary to gather facts in defense of the motion. 201 F.R.D. at 3; 121 F.R.D. at 263.

In this case, the United States has filed a motion to dismiss and for summary judgment, which, if granted, would dispose of the case. Thus a stay of discovery is appropriate if the discovery requested by the Tilleys is not relevant to the opposition of the motion.¹ To determine whether the discovery sought is irrelevant, the court must examine the merits of the United States' dispositive motion. If the Tilleys' claims fail as a matter of law, or if the discovery sought has no bearing on an issue of material fact, a protective order is proper. For the reasons stated below, the Tilleys' claims fail as a matter of law, and, particularly with regard to the issue of itemized deductions, the discovery sought relating to the IRS's administrative procedures has no bearing on an issue of material fact. Therefore, the United States' motion for protective order will be granted.

B. Motion to Dismiss and Summary Judgment

i. Standard

A claim is subject to dismissal under Rule 12(b)(6) if, under the facts alleged and under any facts that could be proved consistent with the facts alleged, the claim is legally insufficient. Eastern Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th Cir.2000). In other words, a motion to dismiss allows a court to eliminate claims that are "fatally flawed in their legal premises." Parham v. Pepsico, Inc., 927 F.Supp. 177, 178 (E.D.N.C. 1995). If matters outside the complaint pertaining to the claim are presented to the court, the motion will be treated as one for summary judgment. FED.R.CIV.P. 12(b)(6).

A claim is subject to summary judgment under Rule 56(c), "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." FED.R.CIV.P. 56(C). A party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the [record] which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its burden, the non-moving party must then "set forth specific facts showing that there is a genuine issue for trial." Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (quoting FED.R.CIV.P. 56(e)).

In making a determination on a...