Opinion
CASE NO. 4:02CV386.
May 6, 2003.
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
Pending before the Court is the United States' Motion to Dismiss for Lack of Subject Matter Jurisdiction, and having considered the motion, the response thereto, and the replies, the Court is of the opinion that the Defendant's motion should be granted.
In August 2001, Plaintiff filed an Amended U.S. Corporation Income Tax Return, Form 1120X, with the Internal Revenue Service ("IRS") seeking a refund in the amount of $364,521 on the basis of a carry back to 1 997 of a capital loss incurred in 1998 in the amount of $829,335.
During 2001, the IRS was in the process of auditing Plaintiff's 1997 tax return. Based on this audit, the IRS made numerous adjustments with respect to Plaintiff's 1 997 tax return. Prior to the carry back of the 1998 loss, these audit adjustments resulted in a tax deficiency for the 1997 tax year.
In a letter dated September 13, 2002, the IRS notified Plaintiff as follows:
We are sorry, but cannot allow the above claim for an adjustment to your tax, for the following reasons:
You filed a claim for $364,521. Revenue Report adjustments reduced this refund claim amount to $19,798. In addition, an accuracy penalty was assessed-further reducing this claim to a full disallowance of the claim.
Our decision is based on provisions of the Internal Revenue laws and regulations. This letter is your legal notice that your claim is fully disallowed.
If you wish to bring suit or proceedings for the recovery of any tax, penalties or other moneys for which this disallowance notice is issued, you may do so by filing such a suit with the United States District Court having jurisdiction, or with the United States Court of Federal Claims. The law permits you to do this within 2 years from the mailing date of this letter.
The United States asserts that Plaintiff's claim for refund based upon the carry back of the 1998 capital losses to the 1997 tax year was allowed in full by the IRS. However, the refund was credited against the deficiency in the 1997 tax year created by the audit adjustments. The Revenue Agent's Report provides that "[o]n 08/08/2001, you filed amended tax return 1120X for the 9712 tax year. This amended return is carrying back a capital loss from the 9812 tax year in the amount of $829,335. As a result of our examination, we have allowed your claim in full as shown per the RAR." Notwithstanding this full allowance the taxpayer still owed money on his 1997 return. The taxpayer did not pursue his administrative remedies, but took the IRS at its word and filed suit in this Court.
Defendant moves to dismiss Plaintiff's complaint because the United States has not waived sovereign immunity and even though the IRS said sue, it now says the taxpayer can't sue.
Tax Liability and Claim for Refund
The United States may not be sued except to the extent it has consented to such by statute. Shanbaum v. United States, 32 F.3d 180, 182 (5th Cir. 1994) (citation omitted). A waiver of sovereign immunity cannot be implied, but must be unequivocally expressed. Id. 26 U.S.C. § 7422(a) provides:
No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.
Ordinarily, there is no jurisdiction in district courts over suits for refund until the taxpayer has paid the full amount of the contested amount and has filed a claim with the IRS. See Thomas v. United States, 755 F.2d 728 (9th Cir. 1985);Shanbaum, 32 F.3rd at 182.
Plaintiff asserts that this Court has jurisdiction over this case based upon this September letter. The United States asserts that Plaintiff received this letter from the IRS which inadvertently refers to a full disallowance. The United States' attorney admitted at the hearing on the motion that the letter was somewhat misleading. However, Plaintiff's counsel candidly admitted that without the letter, this Court probably would not have jurisdiction.
All parties concede that the IRS letter is in error in respect to the disallowance of his carry back claim. However, Plaintiff asserts that it relied on the IRS letter in filing this lawsuit which instructed Plaintiff to file suit in the United States District Court. Defendant asserts that Plaintiff fails to cite a single case to support the proposition that a letter can confer jurisdiction. Defendant cites the Court to Steel v. Commissioner, 1997 WL 578690 (S.D.N.Y. 1997). In the Steel case, after the taxpayer received a notice from IRS telling the taxpayer to file suit in U.S. District Court, the taxpayer asserted that through the letter the Government acceded to the filing of a the lawsuit in federal court. The Steel court found that the "law is clear that the IRS cannot create subject matter jurisdiction where, as here, such jurisdiction plainly does not exist under applicable law." The Court agrees. Although there could be an estoppel argument if the Plaintiff was now prohibited from asserting an administrative claim, a letter, even if mistaken, at this point in time cannot confer jurisdiction upon the Court.
There is no dispute that the claim was allowed in full. Based upon this letter, the Plaintiff is contesting the audit adjustments for the 1997 tax year. Plaintiff has not followed the administrative requirements to contest the 1 997 audit adjustments. Therefore, the Court lacks jurisdiction over any claim for refund, and these claims should be dismissed.
RECOMMENDATION
Based upon the forgoing, it is the recommendation that Defendant's Motion to Dismiss should be GRANTED and Plaintiff's case should be dismissed without prejudice. However, the Court recommends dismissal only if Plaintiff is not barred from filing an administrative claim since the delay in filing an administrative claim was caused by the IRS's misleading letter.
Within ten (10) days after receipt of the magistrate judge's report, any party may serve and file written objections to the findings and recommendations of the magistrate judge. 28 U.S.C.A. § 636(b)(1)(C).
Failure to file written objections to the proposed findings and recommendations contained in this report within ten days after service shall bar an aggrieved party from de novo review by the district court of the proposed findings and recommendations and from appellate review of factual findings accepted or adopted by the district court except on grounds of plain error or manifest injustice. Thomas v. Arn, 474 U.S. 140, 148 (1985); Rodriguez v. Bowen, 857 F.2d 275, 276-77 (5th Cir. 1988).