Opinion
No. CIV 0l-385-TUC-WDB
April 12, 2002
ORDER
Pending before the Court is Defendants' Motion to Dismiss (Doc. # 6). As set forth more fully below, Defendants' motion is DENIED; the United States is substituted as the proper party defendant; and the United States is ordered to file an Answer on or before May 3, 2002.
Allegations in Plaintiffs' Complaint
As set forth in the Complaint, this refund claim arises out of Plaintiffs' timely filed 1040 tax return for the 1999 tax year in which they claimed an overpayment of $16,487 and requested a refund of the same amount. The IRS sent Plaintiffs a notice indicating that the 1999 overpayment was being credited to pay previously owed tax obligations — $9.38 for 1997 income taxes and $16,837.62 for 1985 business taxes under Form 940 (federal unemployment taxes). Plaintiffs filed an administrative claim for payment of the $16,837.62 since they believed the credit ("forfeiture") was unlawful since the applicable collection period had expired. That administrative claim was denied, an Plaintiff then filed this refund suit.
Defendants' Motion to Dismiss
In their motion and memorandum, Defendants fail to cite any particular procedural rule upon which they seek dismissal of Plaintiffs Complaint. Furthermore, additional filings have only further clouded the issue. For example, Defendants' proposed order of dismissal cites Rule 12(b)(6), Fed.R.Civ.P.; however, Declarations signed by Defendants' counsel indicate that the Certificates of Assessments and Payments (Forms 4340) were being submitted in support of their Motion for Summary Judgment. After reviewing all the pleadings, the Court will treat Defendants' motion as a Rule 12(b)(6) motion.
Standard of Review
In deciding a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P., this Court's review is generally limited to the contents of the Complaint. See Clegg v. Cult Awareness Network, 18 F.3d 752, 754 (9th Cir. 1994) (citations omitted). All allegations of material fact in the Complaint are taken as true and construed in the light most favorable to the nonmoving party. See id. A complaint should not be dismissed unless it appears beyond a doubt that Plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. See Id. However, the Court is not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged. See Id.
In this particular case, Defendants have submitted Certificates of Assessments and Payments (Forms 4340) in support of their motion. Rule 12(b)(6), Fed.R.Civ.P., provides that if "matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56." While some exceptions to this provision exist, the Certificates do not fall within the exceptions that would allow the Court to consider the Certificates in conjunction with a Rule 12(b)(6) motion since they are not documents attached to the Complaint nor are they referenced extensively in the Complaint. See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 986 (9th Cir. 1999). Further weighing against the Court's consideration of the Certificates at this time is the fact that Plaintiffs have specifically challenged the accuracy of the Certificates presented by Defendants. See id. While the Certificates of Assessment and Payments are presumptively valid evidence of proper assessments, the presumption can be rebutted. See e.g., Hughes v. U.S., 953 F.2d 531, 535 (9th Cir. 1992). Thus, the Court believes it is appropriate at this time to exclude the Certificates from consideration on the pending motion.
Discussion
Looking solely to the allegations of the Complaint and accepting them as true, the Court finds that Plaintiffs have alleged facts which, if proven, would entitle them to relief.
In their Complaint, Plaintiffs have alleged that there was an overpayment of tax for 1999 and that they are entitled to a refund. See 26 U.S.C. § 6511(a). Plaintiffs have also alleged that they have exhausted their administrative remedies. See 26 U.S.C. § 7422(a). Furthermore, Plaintiffs have alleged that the IRS' crediting of their 1999 overpayment against their 1985 Form 940 taxes occurred outside the applicable collection period and, thus, was unlawful.
26 U.S.C. § 6402 grants to the IRS the discretion, in the case of any tax overpayment, to credit the amount of such overpayment against any liability within the applicable period of limitations. Furthermore, "[a]ny credit against a liability in respect of any taxable year shall be void if any payment in respect of such liability would be considered an overpayment under section 6401(a)." 26 U.S.C. § 6514(b). Overpayment include payments made after the period allowed for assessment or collection has expired. See 26 U.S.C. § 6401(a).
Contrary to the very words of these statutes, the IRS contends that it can exercise its statutory authority to credit any tax overpayment even if the assessment at issue occurs after the applicable limitation periods have expired. Defendants' argument is disingenuous at best. In support of their argument, they cite cases that address the equitable principle of setoff which was recognized in Lewis v. Reynolds, 284 U.S. 281 (1932). One treatise has summarized the equitable principle of setoff as a equitable device that "allows issues that are time-barred by the expiration of the period of limitations to be raised by the government, or counter-raised by a taxpayer, where they arise from the same type of tax for the same taxpayer for the same taxable period presented by the refund suit." Gerald A. Kafka Rita A. Cavanagh, Litigation of Federal Civil Tax Controversies, 16.03 (Supp. 2001) (1999 WL 629594 (W.G. L.)) (emphasis added). See also Dysart v. US., 340 F.2d 624 (Ct.Cl. 1965) (distinguishing between the equitable principles of setoff and equitable recoupment in tax refund cases). Based upon the allegations of the Complaint, the IRS credited Plaintiffs' 1999 tax overpayment against Plaintiffs' alleged 1985 outstanding tax liability. Therefore, the equitable doctrine of setoff does not encompass the IRS' claim of the 1985 tax liability in this refund suit involving Plaintiffs' 1999 alleged tax overpayment. Thus, again looking to the text of statutes cited above, Congress clearly limited the IRS' authority to credit tax overpayments to the applicable period of limitations. Accordingly, the IRS cannot credit an overpayment against a barred deficiency for a different taxable year. See e.g., 15 Mertens Law of Fed. Income Tax'n § 58.89 (Supp. 2002). Furthermore, Plaintiffs clearly may raise the statute of limitations defense in this refund action. See e.g., Sokolow v. US., 169 F.3d 663, 665 (9th Cir. 1999) (holding that even the equitable setoff principle set forth in Lewis is susceptible to a statute of limitations defense by a taxpayer).
Thus, the critical question in this case is whether the applicable assessment and collection periods expired prior to the IRS' crediting of the Plaintiffs' 1999 tax overpayment. Resolution of this question requires, at a minimum, a determination of when the relevant taxes, interest, and penalties were assessed and whether such assessments were valid. The Court cannot resolve such facts from the face of the Complaint. As a result, Plaintiffs may be entitled to relief if as they allege, the applicable limitations periods had expired on the 1985 tax liability prior to the IRS' crediting of their 1999 alleged tax overpayment.
Finally, Defendants argue that since 26 U.S.C. § 6402(a) makes crediting a tax liability with an overpayment a discretionary act, judicial review is precluded. See In re Ryan, 64 F.3d 1516, 1524 (11th Cir. 1995) and Kalb v. United States, 505 F.2d 506, 509 (2nd Cir. 1974), cert. denied, 421 U.S. 979 (1975). Ryan and Kalb, however, dealt with the issues regarding whether a taxpayer could direct application of payments and whether a taxpayer could challenge how the IRS credited an overpayment. The issue in this case, however, is whether the IRS' credit of Plaintiffs alleged overpayment occurred outside the statutory authority of the agency. Thus, Ryan and Kalb are distinguishable and do not prevent judicial review of Plaintiffs' refund claim. Thus, Defendants' motion to dismiss must be denied.
Substitution of Proper Party Defendant
In its motion, Defendants assert that Commissioner of the Internal Revenue Service is not a proper defendant and that the United States should be substituted for him. Plaintiff did not object to Defendants' request. Thus, upon a review of the pertinent authority, the Court finds that substitution of the United States as the proper party defendant is appropriate. See 26 U.S.C. § 7422(f)(2). Accordingly, the Clerk of the Court shall amend its records and the caption to reflect the United States as the Defendant in this matter; and all future filings shall be captioned as follows: Louis Escalante, Jr., et.al., v. United States, CV 01-385-TUC-WDB;
Conclusion
Accordingly, IT IS HEREBY ORDERED that:
1. Defendants' Motion to Dismiss (Doc. #6) is DENIED;
2. The United States is SUBSTITUTED for the Commissioner of the Internal Revenue Service as the proper party defendant;
3. The Clerk of the Court shall amend its records and the caption to reflect the United States as the Defendant in this matter;
4. All future filings shall be captioned as follows: Louis Escalante, Jr., et. al., v. United States, CV 01-385-TUC-WDB; and
5. Defendant United States shall FILE its Answer to Plaintiffs' Complaint on or before May 3, 2002.