U.S. v. Forma

Decision Date19 December 1994
Docket Number94-6078,Nos. 93-6234,s. 93-6234
Citation42 F.3d 759
Parties-315, 95-1 USTC P 50,012 UNITED STATES of America, Appellant, v. John & Patricia FORMA, Appellees.
CourtU.S. Court of Appeals — Second Circuit

Gabriel W. Gorenstein, Asst. U.S. Atty., New York City (Mary Jo White, U.S. Atty., Steven M. Haber, Asst. U.S. Atty., on the brief), for appellant.

Anthony M. Collura, New York City (Ronald A. Balzano, Silverman, Collura & Chernis, on the brief), for appellees.

Before: PRATT, LEVAL and CALABRESI, Circuit Judges.

CALABRESI, Circuit Judge:

This case presents a modest question: Is tax different? It is well-established that, while a counterclaim by a defendant in response to an original action brought by the Government may be used to set off and thus partially or totally to defeat a recovery by the Government, it cannot support an affirmative recovery on the claim by the defendant unless there is an independent basis for jurisdiction. The defendants here, nevertheless In an action brought by the Government in the United States District Court for the Southern District of New York (Robert W. Sweet, Judge) to recover tax deficiencies, the defendants John and Patricia Forma won a judgment against the Government of $124,324 on their counterclaim. The Government appeals, contending primarily that, to the extent the counterclaim sought an affirmative award (as opposed to a set off reducing any award to the Government on its original claims), the District Court lacked subject matter jurisdiction. We agree, and we therefore vacate the judgments entered against the Government.

contend that they should be able to obtain an affirmative recovery from the Government on their counterclaim despite their conceded failure to meet jurisdictional requirements that would permit an independent action. They make this claim, it would seem, because they believe that tax is different. We acknowledge that tax is different, but not in ways that would avail them in this case.


This dispute dates back to the early 1980s when the Internal Revenue Service ("IRS") determined that John and Patricia Forma had failed to pay certain income taxes for the 1977 and 1978 tax years. Accordingly, the IRS made four assessments against the Formas totalling nearly $250,000. 1

In the six-year statutory administrative collection period which followed, see 26 U.S.C. Sec. 6502(a)(1) (1988), 2 the IRS collected nearly $150,000 of the $250,000 assessed. During this period, the Formas apparently made no claim that they did not owe the taxes assessed against them. Specifically, the Formas neither contested the assessments in the Tax Court, nor did they opt to pay the assessed taxes in full and then file an administrative refund claim with the IRS or an independent refund suit in the District Court.

In September 1988, having been unable to collect the full amount of the assessed taxes through administrative efforts, the Government filed this action against the Formas in the District Court and sought to reduce the four assessments to judgment. In the course of discovery, the Formas uncovered what appeared to be procedural irregularities in the assessments. According to the Formas, these alleged procedural irregularities--the failure to record the assessments against John Forma and the failure to send deficiency notices--rendered the assessments invalid and unenforceable. On this basis, the Formas moved to dismiss the Government's action. The Government cross-moved for summary judgment, asserting that all four assessments had been properly recorded and that John Forma had waived the deficiency-notice requirement by executing an IRS Form 870 for each assessment. In November 1989, the District Court ruled that factual disputes over whether John Forma had executed waivers for each assessment precluded the entry of judgment for either party at that time. 3

Subsequently, in October 1990, the Formas filed an amended answer, which included a counterclaim seeking a return of the nearly $150,000 the Government had already collected on the disputed assessments. 4 Thereafter, the Special Assistant United States Attorney ("SAUSA") who was handling this case for the Government, apparently discouraged by his inability to obtain documents from the IRS that he considered necessary After some delay, the Formas moved to reinstate their counterclaim. The SAUSA did not oppose the Formas' motion, nor did he seek to reinstate the Government's original claim. Moreover, after the District Court approved the reinstatement of the Formas' counterclaim, the SAUSA failed to file a timely response. The Formas then sought a default judgment against the Government, which the SAUSA apparently did not oppose. As a result, in June of 1991, the District Court entered a judgment formally dismissing with prejudice the Government's main suit and granting the Formas a default award against the Government for $158,262.90 plus interest. 5 According to the District Court, this represented a "refund to [the Formas of] the sum of all amounts collected from them in furtherance of the disputed assessments." Judgment of District Court at 3, United States v. Forma, No. 88 Civ. 6458 (S.D.N.Y. June 4, 1991).

agreed with the Formas to a dismissal of all claims without prejudice, subject to reinstatement by either party.

Three months later, the Government informed the Formas and the District Court that the SAUSA's actions, which had led to the default judgment against the Government, had been completely unauthorized. The Government then moved in the District Court to have the default judgment vacated under Rules 60 and 55 of the Federal Rules of Civil Procedure, arguing that (1) the Court lacked subject matter jurisdiction over the Formas' counterclaim, and (2) the Formas had not adequately demonstrated a "claim or right to relief" on the merits, which Rule 55(e) requires before the entry of a default judgment against the Government.

On February 26, 1992, the District Court rejected the Government's jurisdictional claim. See United States v. Forma, 784 F.Supp. 1132 (S.D.N.Y.1992). The Court recognized that the Formas had not satisfied the statutory prerequisites for filing an independent refund action, but nevertheless concluded that, under principles of equity, it had jurisdiction to examine all parts of the entire transaction/tax year that the Government had placed at issue in its original suit. See 784 F.Supp. at 1137-39. The District Court conceded that there should have been a hearing pursuant to Rule 55(e) prior to the entry of a default judgment against the Government. And, accordingly, it vacated the judgment to allow for such a hearing.

At the Rule 55(e) hearing in October 1992, the Formas pressed their claims as to the invalidity of the IRS's four assessments for the 1977 and 1978 tax years. The District Court ruled that the assessments had all been properly recorded, but also found, with respect to two of the assessments, that the Government had demonstrated neither the sending of a deficiency notice nor the execution of a waiver. Over the Government's claims that other statutory provisions and case law would further limit the Formas' recovery, the District Court entered a final judgment of $124,324 (plus interest) on the Formas' counterclaim. This was the sum total of the two assessments that the Court had found to be invalid.


As the District Court recognized, if there was no subject matter jurisdiction over the Formas' counterclaim, then the default judgment entered against the Government is void and must be vacated, see Fed.R.Civ.P. 60(b)(4), and the Formas' counterclaim must be dismissed, see Fed.R.Civ.P. 12(h)(3). Since subject matter jurisdiction is a legal question and there are no disputes over the subsidiary facts pertaining to this issue, we review de novo the District Court's holding that it had jurisdiction over the Formas' counterclaim. See Mackensworth v. S.S. American Merchant, 28 F.3d 246, 252 (2d Cir.1994); New York Chinese TV Programs, Inc. v. U.E. Enterprises, Inc., 996 F.2d 21, 23 (2d Cir.1993).

I. Jurisdictional Bars to Independent Refund Action

The doctrine of sovereign immunity persists in our law, see generally Nevada v. Hall, 440 U.S. 410, 414-16, 99 S.Ct. 1182, 1185-86, 59 L.Ed.2d 416 (1979); United States v. Horn, 29 F.3d 754, 761-62 (1st Cir.1994), and operates as a jurisdictional limitation on suits against the United States. As the Supreme Court has repeatedly said, "the United States, as sovereign, 'is immune from suit save as it consents to be sued ... and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.' " United States v. Testan, 424 U.S. 392, 399, 96 S.Ct. 948, 953, 47 L.Ed.2d 114 (1976) (quoting United States v. Sherwood, 312 U.S. 584, 586, 61 S.Ct. 767, 769, 85 L.Ed. 1058 (1941)). Accord FDIC v. Meyer, --- U.S. ----, ----, 114 S.Ct. 996, 1000, 127 L.Ed.2d 308 (1994).

Through 28 U.S.C. Sec. 1346(a)(1), Congress has broadly consented to suits against the United States in the district courts for the refund of any federal taxes "alleged to have been erroneously or illegally assessed or collected, ... or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws." 6 But, other statutory provisions, as well as the Supreme Court's interpretation of Sec. 1346(a)(1), establish a range of restrictions that qualify a taxpayer's right to bring an independent refund suit in the district court. Specifically, 26 U.S.C. Sec. 7422(a) provides that a taxpayer must have first filed a "claim for refund or credit" with the IRS to maintain a refund suit; 7 and 28 U.S.C. Sec. 1346(a)(1) has been read by the Supreme Court to require full payment of an assessed tax before a taxpayer can invoke the jurisdiction of the district courts for the refund of any portion of such tax, see Flora v. United...

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