1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8
Craig K . Potts, et al., ) No. CV-19-04965-PHX-SPL ) 9 ) 10 Plaintiffs, ) ORDER vs. ) ) 11 ) United States of America, ) 12 ) 13 Defendant. ) ) 14 )
15 Currently before the Court is a Motion to Dismiss for Lack of Jurisdiction (the 16 “Motion”) filed by the United States of America (“Defendant”). (Doc. 20) For the 17 following reasons, the Court will grant the Motion. 18 I. Background 19 Craig K. Potts and Kristen H. Potts (“Plaintiffs”) are husband and wife and reside 20 in Scottsdale, Arizona. (Doc. 19 at 4) In August of 2019, Plaintiffs brought this action 21 pursuant to 28 U.S.C. § 1346 seeking a tax refund for the taxable years of 2005, 2008, 22 2009, 2010, 2011, 2012 and 2013. (Docs. 1, 19 at 2-3) On November 25, 2019, Defendant 23 filed the Motion, arguing that this Court does not have jurisdiction to order the requested 24 refunds because Plaintiffs have not fully paid their tax liabilities for each year as required 25 by Flora v. United States, 362 U.S. 145 (1960). The Motion is fully briefed and ready for 26 review. (Docs. 20, 21, 28) 27 II. Legal Standard 28 Under Federal Rule of Civil Procedure, (“Rule”) 12(b)(1), a party may move to 1 dismiss a complaint for lack of subject matter jurisdiction. A court must dismiss the 2 complaint when “the court determines at any time that it lacks subject matter 3 jurisdiction[.]” Fed. R. Civ. P. 12(h)(3). The plaintiff bears the burden of establishing 4 jurisdiction. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994). Rule 12(b)(1) 5 motions may challenge jurisdiction facially or factually. Safe Air for Everyone v. Meyer, 6 373 F.3d 1035, 1039 (9th Cir. 2004). In a facial challenge, the defendant asserts the 7 insufficiency of the complaint’s allegations to invoke federal jurisdiction as a matter of 8 law. Whisnant v. United States, 400 F.3d 1177, 1179 (9th Cir. 2005). To adjudicate a facial 9 challenge, a court assumes the truth of the allegations in the complaint and draws all 10 reasonable inferences in favor of the plaintiff. Id. at 1177; Wolfe v. Strankman, 392 F.3d 11 358, 362 (9th Cir. 2004). 12 III. Discussion1 13 In the Amended Complaint, Plaintiffs state that they are seeking a “Tax Refund for 14 the taxable years ending December 31, 2005, 2008, 2009, 2010, 2011, 2012 and 2013.” 15 (Doc. 19 at 2) In the Motion, Defendant argues that Plaintiffs have not paid their full tax 16 liability for the years 2008, 2009, 2010, and 2012. (Doc. 20-1 at 5-6) Further, Defendant 17 asserts that the IRS did not make any assessments against Plaintiffs for tax year 2011, so 18 there is no refundable amount at issue. (Doc. 20-1 at 6) Plaintiffs to do not address these 19 arguments in their response, and Defendant asserts that the Court should consider the lack 20 of response as an admission. (Doc. 28 at 2) The Court agrees and will not consider the 21 arguments set forth in the Amended Complaint regarding tax years 2008, 2009, 2010, 2011, 22 and 2012. Therefore, the only taxable years at issue in this case are 2005 and 2013. The 23 Court will review the arguments regarding each tax year separately. 24 A. Taxable Year 2005 25 As to taxable year 2005, Defendant argues that the Court lacks jurisdiction to hear 26 the claim because Plaintiffs still owe $6,503,947.88 in outstanding tax liabilities. (Doc. 20-
27 1 Because the Court finds that it does not have subject matter jurisdiction in this case, 28 it does not address Defendant’s arguments regarding res judicata. 1 1 at 3-4) Defendant argues that the United States Supreme Court made clear in Flora v. 2 United States, 362 U.S. 145, 177 (1960), that a plaintiff must pay any outstanding tax 3 liability before a district court has jurisdiction to hear a claim for a partial tax refund under 4 28 U.S.C. § 1346. (Doc. 20-1 at 4) In response, Plaintiffs argue that they are not seeking a 5 refund for their 2005 tax liability. (Doc. 21 at 2-3) Instead, Plaintiffs argue they are seeking 6 a refund of $406,843.16, which represents the amount Plaintiffs sent as a deposit for an 7 offer to compromise their 2005 tax liability. (Doc. 21 at 2-3) Plaintiffs assert that Treasury 8 Regulation § 301.7122-1(h) explicitly required the IRS to refund the deposit amount once 9 the offer to compromise was rejected, and therefore, their claim for “wrongful collection” 10 under 28 U.S.C. § 1346 is not governed by the Flora case. (Doc. 21 at 12) 11 Here, the Court finds that the correct characterization of the $406,843.16 is a partial 12 payment for Plaintiffs’ 2005 outstanding tax liabilities—as opposed to Plaintiffs’ assertion 13 that the sum was a “deposit” for their offer to compromise. Although Plaintiffs are correct 14 in arguing that Treasury Regulation § 301.7122-1(h) requires the IRS to refund any deposit 15 made once an offer to compromise has been rejected, the Court finds that the $406,843.16 16 does not qualify as a “deposit” under the facts as alleged by Plaintiffs. 17 Plaintiffs assert that in 2016 they made a “lump sum” offer to compromise and sent 18 the $406,843.16 as a 20% down payment pursuant to 26 U.S.C. § 7122(c)(1). (Doc. 21 at 19 3, 12) Plaintiffs fail to acknowledge, however, that in July of 2006, the IRS issued a public 20 notice explaining that the 20% down payment for lump sum offers to compromise under 21 26 U.S.C. § 7122(c)(1) should be treated as a nonrefundable “payment of tax” and not a 22 “deposit” as described in Treasury Regulation § 301.7122-1(h). Notice 2006-68, sec. 1.02, 23 2006-2 C.B. 105; Brown v. Comm’r of Internal Revenue, T.C. Memo. 2019-121, 2019 WL 24 4415190 at *6-7 (2019) (finding that it was not an abuse of discretion for a settlement 25 officer to retain the 20% down payment after rejecting an offer to settle); Isley v. Comm’r 26 of Internal Revenue, 141 T.C. 349, 372 (2013) (finding that a settlement officer did not err 27 when he retained an offer-in-compromise down payment as a “collection alternative” and 28 applied the amount to the petitioner’s outstanding liabilities). Consequently, the Court 1 finds that Flora does prohibit Plaintiffs from asserting a claim under 28 U.S.C. § 1346 for 2 the $406,843.16 without first paying the remaining outstanding liability for the 2005 tax 3 year. 4 B. Taxable Year 2013 5 As to taxable year 2013, Defendant argues that the Court lacks jurisdiction to hear 6 the claim because Plaintiffs still owe $40,435.39 in outstanding tax liabilities. (Doc. 20-1 7 at 6-7) In response, Plaintiffs assert that they have paid their entire tax liability for 2013, 8 and Defendant used the wrong calculation in the Motion to assess their tax liability for 9 2013. (Doc.
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1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8
Craig K . Potts, et al., ) No. CV-19-04965-PHX-SPL ) 9 ) 10 Plaintiffs, ) ORDER vs. ) ) 11 ) United States of America, ) 12 ) 13 Defendant. ) ) 14 )
15 Currently before the Court is a Motion to Dismiss for Lack of Jurisdiction (the 16 “Motion”) filed by the United States of America (“Defendant”). (Doc. 20) For the 17 following reasons, the Court will grant the Motion. 18 I. Background 19 Craig K. Potts and Kristen H. Potts (“Plaintiffs”) are husband and wife and reside 20 in Scottsdale, Arizona. (Doc. 19 at 4) In August of 2019, Plaintiffs brought this action 21 pursuant to 28 U.S.C. § 1346 seeking a tax refund for the taxable years of 2005, 2008, 22 2009, 2010, 2011, 2012 and 2013. (Docs. 1, 19 at 2-3) On November 25, 2019, Defendant 23 filed the Motion, arguing that this Court does not have jurisdiction to order the requested 24 refunds because Plaintiffs have not fully paid their tax liabilities for each year as required 25 by Flora v. United States, 362 U.S. 145 (1960). The Motion is fully briefed and ready for 26 review. (Docs. 20, 21, 28) 27 II. Legal Standard 28 Under Federal Rule of Civil Procedure, (“Rule”) 12(b)(1), a party may move to 1 dismiss a complaint for lack of subject matter jurisdiction. A court must dismiss the 2 complaint when “the court determines at any time that it lacks subject matter 3 jurisdiction[.]” Fed. R. Civ. P. 12(h)(3). The plaintiff bears the burden of establishing 4 jurisdiction. Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 377 (1994). Rule 12(b)(1) 5 motions may challenge jurisdiction facially or factually. Safe Air for Everyone v. Meyer, 6 373 F.3d 1035, 1039 (9th Cir. 2004). In a facial challenge, the defendant asserts the 7 insufficiency of the complaint’s allegations to invoke federal jurisdiction as a matter of 8 law. Whisnant v. United States, 400 F.3d 1177, 1179 (9th Cir. 2005). To adjudicate a facial 9 challenge, a court assumes the truth of the allegations in the complaint and draws all 10 reasonable inferences in favor of the plaintiff. Id. at 1177; Wolfe v. Strankman, 392 F.3d 11 358, 362 (9th Cir. 2004). 12 III. Discussion1 13 In the Amended Complaint, Plaintiffs state that they are seeking a “Tax Refund for 14 the taxable years ending December 31, 2005, 2008, 2009, 2010, 2011, 2012 and 2013.” 15 (Doc. 19 at 2) In the Motion, Defendant argues that Plaintiffs have not paid their full tax 16 liability for the years 2008, 2009, 2010, and 2012. (Doc. 20-1 at 5-6) Further, Defendant 17 asserts that the IRS did not make any assessments against Plaintiffs for tax year 2011, so 18 there is no refundable amount at issue. (Doc. 20-1 at 6) Plaintiffs to do not address these 19 arguments in their response, and Defendant asserts that the Court should consider the lack 20 of response as an admission. (Doc. 28 at 2) The Court agrees and will not consider the 21 arguments set forth in the Amended Complaint regarding tax years 2008, 2009, 2010, 2011, 22 and 2012. Therefore, the only taxable years at issue in this case are 2005 and 2013. The 23 Court will review the arguments regarding each tax year separately. 24 A. Taxable Year 2005 25 As to taxable year 2005, Defendant argues that the Court lacks jurisdiction to hear 26 the claim because Plaintiffs still owe $6,503,947.88 in outstanding tax liabilities. (Doc. 20-
27 1 Because the Court finds that it does not have subject matter jurisdiction in this case, 28 it does not address Defendant’s arguments regarding res judicata. 1 1 at 3-4) Defendant argues that the United States Supreme Court made clear in Flora v. 2 United States, 362 U.S. 145, 177 (1960), that a plaintiff must pay any outstanding tax 3 liability before a district court has jurisdiction to hear a claim for a partial tax refund under 4 28 U.S.C. § 1346. (Doc. 20-1 at 4) In response, Plaintiffs argue that they are not seeking a 5 refund for their 2005 tax liability. (Doc. 21 at 2-3) Instead, Plaintiffs argue they are seeking 6 a refund of $406,843.16, which represents the amount Plaintiffs sent as a deposit for an 7 offer to compromise their 2005 tax liability. (Doc. 21 at 2-3) Plaintiffs assert that Treasury 8 Regulation § 301.7122-1(h) explicitly required the IRS to refund the deposit amount once 9 the offer to compromise was rejected, and therefore, their claim for “wrongful collection” 10 under 28 U.S.C. § 1346 is not governed by the Flora case. (Doc. 21 at 12) 11 Here, the Court finds that the correct characterization of the $406,843.16 is a partial 12 payment for Plaintiffs’ 2005 outstanding tax liabilities—as opposed to Plaintiffs’ assertion 13 that the sum was a “deposit” for their offer to compromise. Although Plaintiffs are correct 14 in arguing that Treasury Regulation § 301.7122-1(h) requires the IRS to refund any deposit 15 made once an offer to compromise has been rejected, the Court finds that the $406,843.16 16 does not qualify as a “deposit” under the facts as alleged by Plaintiffs. 17 Plaintiffs assert that in 2016 they made a “lump sum” offer to compromise and sent 18 the $406,843.16 as a 20% down payment pursuant to 26 U.S.C. § 7122(c)(1). (Doc. 21 at 19 3, 12) Plaintiffs fail to acknowledge, however, that in July of 2006, the IRS issued a public 20 notice explaining that the 20% down payment for lump sum offers to compromise under 21 26 U.S.C. § 7122(c)(1) should be treated as a nonrefundable “payment of tax” and not a 22 “deposit” as described in Treasury Regulation § 301.7122-1(h). Notice 2006-68, sec. 1.02, 23 2006-2 C.B. 105; Brown v. Comm’r of Internal Revenue, T.C. Memo. 2019-121, 2019 WL 24 4415190 at *6-7 (2019) (finding that it was not an abuse of discretion for a settlement 25 officer to retain the 20% down payment after rejecting an offer to settle); Isley v. Comm’r 26 of Internal Revenue, 141 T.C. 349, 372 (2013) (finding that a settlement officer did not err 27 when he retained an offer-in-compromise down payment as a “collection alternative” and 28 applied the amount to the petitioner’s outstanding liabilities). Consequently, the Court 1 finds that Flora does prohibit Plaintiffs from asserting a claim under 28 U.S.C. § 1346 for 2 the $406,843.16 without first paying the remaining outstanding liability for the 2005 tax 3 year. 4 B. Taxable Year 2013 5 As to taxable year 2013, Defendant argues that the Court lacks jurisdiction to hear 6 the claim because Plaintiffs still owe $40,435.39 in outstanding tax liabilities. (Doc. 20-1 7 at 6-7) In response, Plaintiffs assert that they have paid their entire tax liability for 2013, 8 and Defendant used the wrong calculation in the Motion to assess their tax liability for 9 2013. (Doc. 21 at 6-7) Specifically, Plaintiffs assert that they filed two amended tax returns 10 for 2013 and Defendant improperly based the liability calculation on their original return 11 instead of the amended returns. (Doc. 21 at 6-7) 12 The Court finds Plaintiffs’ argument unpersuasive. In Fayeghi v. Commissioner of 13 Internal Revenue, 211 F.3d 504 (9th Cir. 2000), the Ninth Circuit rejected a petitioner’s 14 argument that a court could enjoin a collection of tax because the petitioner filed an 15 amended tax return. The court explained that the IRS may accept amended returns for 16 limited purposes, but it is not statutorily required to do so or to treat an amended return as 17 superseding an original return. Id. at 507; see also Longino v. Comm’r of Internal Revenue, 18 T.C. Memo. 2013-80, 2013 WL 1104430 at *7 (2013) (finding that the IRS did not err in 19 issuing a notice of deficiency based on the petitioner’s original return and not the amended 20 return); Pace v. Comm’r of Internal Revenue, T.C. Memo. 2010-272, 2010 WL 5071598 21 at *3 (2010) (“[T]he Commissioner is not required to treat an amended return as 22 superseding an original return . . . [a]nd it is within the Commissioner’s discretion to 23 determine the deficiency using the original return.”). Therefore, Defendant did not err in 24 using Plaintiffs’ original 2013 tax return to assess Plaintiffs’ tax liability, and it remains 25 that this Court does not have jurisdiction to hear a claim under 28 U.S.C. § 1346 because 26 Plaintiffs have not paid their entire 2013 tax liability. Accordingly, 27 /// 28 /// 1 IT IS ORDERED that Defendant’s Motion to Dismiss (Doc. 20) is granted. 2 IT IS FURTHER ORDERED that the Clerk of Court shall enter judgment of dismissal, without prejudice, for lack of subject matter jurisdiction. 4 Dated this 24th day of July, 2020. 5
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