Summary
In Christian v. United States, 46 Fed. Cl. 793, 818 (2000) and Barbieri v. United States, 15 Cl. Ct. 747 (1988) this Court has held "that filing of a class action under Rule 23 of the Court of Federal Claims tolls the statute of limitations just as it does under the Federal Rule of Civil Procedure 23."
Summary of this case from Athey v. U.S.Opinion
No. C 98-2083 MJM.
March 20, 2000.
ORDER
Plaintiff Doris Hansen, Executor of the Estate of Christian Hansen ("the Estate"), initiated this tax action against Defendant United States on September 4, 1998. In the present Order, the Court must address two pending motions. In the first, the United States moves to dismiss the case, or in the alternative, for summary judgment for lack of subject matter jurisdiction. In the second, the Estate moves for summary judgment on the grounds that the Internal Revenue Service ("the IRS") incorrectly assessed the Estate's tax liability. For the following reasons, the United States' motion to dismiss is granted, and the Estate's motion for summary judgment is denied as moot.
BACKGROUND
Christian Hansen died on July 29, 1980. The executor of Hansen's estate reported a federal estate tax liability of $504,629.33 on its United States Estate Tax Return Form 706. The Executor elected to defer the estate tax liability for the first five years (paying only the interest on the tax during this period), and pay the substance of the installments over the following ten years pursuant to 26 U.S.C. ("I.R.C.") § 6166(a) (1998). Subsequently, the IRS audited the Estate and determined that the Estate owed an additional $121,224.76.
I.R.C. § 6166(a) states, in pertinent part:
Extension of time for payment of estate tax where estate consists largely of interest in closely held business
(a) 5-year deferral; 10-year installment payment. —
(1) In general. — If the value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.
Throughout the fifteen-year period, the Estate made installment payments to the IRS. (Doc. 16, Ex. C.) The Estate submitted the installments payments in late April or early May of each year except for 1985, when the Estate submitted no payment. Id. In 1984 and 1985, the IRS granted the Estate abatements of $62,214.95 and $2,813.52.
On March 25, 1996, the IRS sent the Estate a notice requesting full payment of the balance of the unpaid taxes by April 29, 1996 in the amount of $350,456.28. On April 29, 1986, the Estate submitted a payment of $25,000. On that same day, the Estate's fifteen-year deferment period expired. On July 26, 1996, the IRS sent another notice and demand for payment in the amount of $338,296.33. In response to the notice and demand for payment, the Estate submitted $28,596.88 to the IRS with an offer in compromise on September 15, 1996. The IRS rejected the offer in compromise and did not apply the $29,596.88 to the Estate's tax liability.
The second notice and demand for payment reflected the Estate's April 1996 payment of $25,000.
The IRS accelerated the Estate's tax liability on February 3, 1998 pursuant to I.R.C. § 6166(g)(3). The Executor asserts that the Estate did not receive original notice that the IRS intended to accelerate the Estate's tax debt. The Executor contends that it has paid in full its federal estate tax liability, and filed the instant action on September 4, 1998.
I.R.C. § 6166(g) states:
(g) Acceleration of payment. —
(3) Failure to make payment of principal or interest. —
(A) In general. — Except as provided in subparagraph (B), if any payment of principal or interest under this section is not paid on or before the date fixed for its payment by this section (including any extension of time), the unpaid portion of the tax payable in installments shall be paid upon notice and demand from the Secretary.
ANALYSIS
The plaintiff bears the burden of establishing subject matter jurisdiction. Hoekel v. Plumbing Planning Corp., 20 F.3d 839, 840 (8th Cir. 1994). When determining whether to dismiss under Rule 12(b)(1), the Court must presume that the factual allegations which implicate jurisdiction are true. Titus v. Sullivan, 4 F.3d 590, 593 (8th Cir. 1993). The Court will grant the motion to dismiss if the plaintiff fails to allege an element necessary to establish subject matter jurisdiction. Id.
In order to maintain an action against the United States, a plaintiff must demonstrate that the United States has waived its sovereign immunity and consented to be sued. Federal Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 475 (1994). A waiver of sovereign immunity must be strictly construed in favor of the sovereign. Lane v. Pena, 518 U.S. 187, 192 (1996).
Internal Revenue Code § 1346(a)(1) waives the United States Government's sovereign immunity in that it grants the federal district courts jurisdiction over tax refund suits. Imperial Plan, Inc. v. United States, 95 F.3d 25, 26 (9th Cir. 1996). Section 1346(a)(1) permits challenges to tax assessments in limited circumstances. Horkey v. United States, 715 F. Supp. 259, 261 (D.Minn. 1989) (Murphy, J.). The provision states:
(a) The district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of (1) Any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.
In 1958, the Supreme Court determined that full payment of assessed tax liability is a prerequisite to filing a refund suit in federal district court. Flora v. United States, 357 U.S. 63, 75 (1958), on rehearing, 362 U.S. 145 (1960). In Flora, the Court noted that although "the requirement of full payment may in some instances work a hardship," Congress has made no attempt to amend the rule in "successive statutory revisions." Id. at 76. The Court concluded that any amelioration is "a matter for the Congress, not the Court." Id.
Federal courts have applied the Flora full payment rule to plaintiffs who elect to pay their tax liability in installments under § 6166. Rocovich v. United States, 933 F.2d 991, 993 (Fed. Cir. 1991); Abruzzo v. United States, 24 Cl. Ct. 668, 671 (1991). Thus, § 6166 provides no exception to the full payment rule, even to the plaintiff who makes a § 6166 election and has no recourse in the United States Tax Court to contest the assessment. Rocovich, 933 F.2d at 995. Consequently, under this line of cases, a plaintiff that has failed to pay in full an assessed tax liability is barred from proceeding in the district court. As in the earlier Flora decision, the Federal Circuit left to Congress any proposed change in the full payment rule: "While the Flora rule may result in economic hardship in some cases, it is Congress' responsibility to amend the law." Id. at 995.
Internal Revenue Code § 7479 allows taxpayers to petition the Tax Court for declaratory judgment with respect to whether the taxpayer may make a § 6166 election or whether the taxpayer is entitled to an extension of time to pay installments. I.R.C. § 7479. However, § 7479 does not allow the taxpayer to contest the amount of the assessed tax and thus does not apply to this case.
On July 22, 1998, the Internal Revenue Service Restructuring and Reform Act ("the IRS Reform Act") was signed into law. 26 U.S.C. § 1 et seq. Section 7422(j) of the Act states:
(j) Special rule for actions with respect to estates for which an election under section 6166 is made. —
(1) In general. — The district courts of the United States and the United States Court of Federal Claims shall not fail to have jurisdiction over any action brought by the representative of an estate to which this subsection applies to determine the correct amount of the estate tax liability of such estate (or for any refund with respect thereto) solely because the full amount of such liability has not been paid by reason of an election under section 6166 with respect to such estate.
(2) Estates to which subsection applies. — This subsection shall apply to any estate if, as of the date the action is filed —
(A) no portion of the installments payable under section 6166 have been accelerated;
(B) all such installments the due date for which is on or before the date the action is filed have been paid.
I.R.C. § 7422(j). Section 7422(j) of the Act abrogates the strict requirements of the full payment rule in the context of a plaintiff who has elected under § 6166 to satisfy an estate tax liability by making installment payments. The new provision affords plaintiffs access to federal court to dispute their estate tax assessments provided that the plaintiffs fulfill the provision's jurisdictional preconditions.
First, both the plain language and the legislative history of § 7422(j) make clear that although full payment is no longer an absolute jurisdictional prerequisite, the new provision requires that "the estate must have fully paid each installment of principal or interest due . . . before the date the suit is filed." S. Rep. 105-174, 105th Cong., 2d Sess. 1998, reprinted in 1998 WL 197371 (Leg. Hist.); H. Rep. 105-599, 105th Cong., 2d Sess. 1998, reprinted in 1998 U.S.C.A.N. 297. Second, taxpayers are not relieved of the liability to make installment payments during the pendency of the suit. Section 7422(j) mandates that the taxpayer continue to make installment payments during the pendency of the litigation in federal court. Id. Finally, if the IRS has accelerated any portion of the estate tax liability, the plaintiff is jurisdictionally precluded from litigating in federal court until the taxpayer makes full payment of the assessed tax liability. Id.
In this case, the IRS notified the Estate on March 25, 1996 that $350,456.28 was due in full when the Estate's fifteen-year deferment period expired on April 29, 1996. On April 29, 1996, the Estate submitted a payment of $25,000. On July 23, 1996 after receiving the $25,000 payment, the IRS sent another notice to the Estate which requested payment in the amount of $338,296.33. It is undisputed that as of October 4, 1998, the IRS has assessed the Estate's tax liability at $393,703.66, and the debt remains unsatisfied. Presumably, the IRS will continue to assess penalties until the Estate satisfies the debt.
The Estate maintains that it "has disagreed with the manner in which the balance due has been computed for a number of years." On October 9, 1996, the Estate submitted an offer in compromise and a check for $28,596.88. In its resistance to the IRS motion to dismiss, the Estate declares that it "believes" that the $28,596.88 it submitted as an offer in compromise represents the entire amount of estate tax and interest due. Essentially, the Estate argues that it should be able to litigate the underlying merits of the tax assessment in federal court prior to paying the assessed tax liability. Indeed, the Estate argues that it should not even be compelled to make timely installment payments before litigating the action in this Court.
In its argument, the Estate plainly concedes that it has failed to pay the assessed tax liability. Yet, the Estate insists that its failure to pay the assessed tax or make timely installment payments poses no jurisdictional obstacle. The Estate's argument, however, ignores completely the jurisdictional preconditions listed in § 7422(j) that are pertinent to this case. First, § 7422(j)(2)(B) requires that all installments are paid in full at the time the taxpayer files suit. I.R.C. § 7422(j)(2)(B). Since the Estate was admittedly not current in its installment payments when it filed suit in this Court, the Estate is jurisdictionally barred from litigating this action in federal court. Second, the Estate makes no argument that it continued to make timely installment payments during the pendency of this litigation. Indeed, it filed suit after the entire tax liability became due. Finally, the IRS accelerated the Estate's entire tax liability on February 3, 1998. Section 7422(j)(2)(A) mandates that in the event that the IRS has accelerated an assessed tax debt, the taxpayer must make full payment before a plaintiff is entitled to pursue an action in federal court. I.R.C. § 7422(j)(2)(A). Since the IRS accelerated the Estate's debt prior to the Estate filing the suit, the Estate must pay its assessed tax liability in full or it is barred from proceeding in federal court.
Contrary to the Estate's assertion in its statement of disputed facts (Doc. 19.), the acceleration of the Estate's tax liability on February 3, 1998 was sufficient to implicate I.R.C. § 7422(j)(2)(A). Even if the IRS failed to notify the Estate that it intended to accelerate the tax liability, § 6166(g)(3) does not require that the taxpayer receive notice of acceleration. I.R.C. § 6166(g)(3). Thus, even if the Estate failed to receive notice of the acceleration, such failure does not diminish the legal effect of the IRS's act of accelerating the liability.
Under the Estate's interpretation of § 7422(j), any time that a taxpayer disagrees with the amount of an assessed tax, the taxpayer would be allowed to proceed in federal court. Such a conclusion runs at odds with the plain language and the legislative history of § 7422(j). Moreover, a reading of § 7422(j) which allows taxpayers to contest a tax assessment in the federal courts prior to paying the assessed tax or at least make timely installment payments would fundamentally alter the carefully structured system of tax litigation in the United States which provides for voluntary assessment and payment. See Flora, 362 U.S. at 176; Horkey, 715 F. Supp. at 261. Accordingly, this Court declines to read § 7422(j) in such a manner. Since the Estate has failed to satisfy the jurisdictional prerequisites of § 7422(j) and its entire tax liability is currently due, the Estate is barred from pursuing an action in this Court. Until the Estate paid in full the assessed tax, this Court does not have subject matter jurisdiction to hear the case. Since the Court does not have subject matter jurisdiction to hear the case, the Estate's motion for summary judgment is moot.
The Supreme Court describes the practical effect of allowing a taxpayer to contest a tax assessment in the district courts:
Such a law would be open to wide abuse and probably seriously impair the government's ability to collect taxes. Many taxpayers, without legitimate grounds for contesting an assessment, would make a token payment and sue for refund, hoping at least to reduce the amount they would ultimately have to pay.Flora, 362 U.S. at 176.
The United States also moves to dismiss on the grounds that the Estate failed to file a claim for refund or credit with the IRS. Section 7422(a) "imposes, as a jurisdictional prerequisite to a refund suit, filing a refund claim with the IRS that complies with IRS regulations." Ahmed v. United States, 147 F.3d 791, 795 (8th Cir. 1998). The Estate admits that it never filed a claim for refund. (Doc. 18, at 3.) The Estate's failure to comply with the requirement that it must file a refund claim also serves to persuade the Court that it lacks subject matter jurisdiction to hear the case.
ORDER
Accordingly, IT IS ORDERED that the United States' Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction (Doc. 13.) is GRANTED, and the Estate's claims are dismissed without prejudice.
The Estate's motion for summary judgment (Doc. 22.) is DENIED as moot.