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Riter v. United States

United States District Court, D. Utah, Central Division

January 15, 2019




         District Judge David Nuffer Magistrate Judge Evelyn J. Furse In this suit, Plaintiff Kenneth Riter, a tax return preparer, seeks the recovery of penalties collected by Defendant United States of America (“United States”) through the Internal Revenue Service (“IRS”). (Compl., ¶¶ 1, 5, ECF No. 2.) For tax years 2010, 2011, 2012, 2013, and 2014, Mr. Riter received a notice from the United States dated June 27, 2016 assessing penalties under 26 U.S.C. § 6694(b) for each year in the amount of $5, 000, or a combined total of $25, 000. (Id., ¶ 13.) On July 22, 2016, Mr. Riter filed a claim for refund and paid $750, or 15% of the total penalty, for each tax year, totaling $3, 750 for the five tax years. (Id., ¶ 15.) On November 16, 2017, the United States denied Mr. Riter's refund claims. (Id., ¶ 26.) Mr. Riter subsequently filed this lawsuit against the United States on December 8, 2017, seeking a refund of all penalties paid for tax years 2010, 2011, 2012, 2013, and 2014. (Id. at 9.)

         The United States moves to dismiss Mr. Riter's suit for lack of subject matter jurisdiction. (United States' Mot. to Dismiss for Lack of Subject Matter Jurisdiction (“Mot.”), ECF No. 8.) Specifically, the United States argues Mr. Riter did not pay the full amount of the penalties as generally required to maintain a suit in federal district court under 28 U.S.C. § 1346(a)(1) and the Supreme Court's decision in Flora v. United States, 362 U.S. 145, 177 (1960). (Id. at 6-7.) The United States further argues that Mr. Riter failed to comply with the timing requirements of 26 U.S.C. § 6694(c)(2)-a limited exception to the full payment rule-that allows a tax preparer to maintain a suit in federal district court if he pays 15% of the total penalties and files his suit either (1) thirty days from the date the United States denies his refund claim, or (2) thirty days after six months from the date of filing his refund claim with the United States, whichever comes first. (Id. at 3-7.) The United States points out that December 16, 2017 is thirty days after the denial of Mr. Riter's refund claim and that thirty days after six months from the date Mr. Riter filed his refund claim is February 21, 2017, making the thirty days after six months of filing for a refund the earlier date. (Id. at 5-6.) The United States argues that because Mr. Riter did not file his lawsuit by February 21, 2017, the limited exception to the full payment rule “cease[d] to apply” after that date, and the full payment rule applied instead. (Id. at 6.) Accordingly, because Mr. Riter failed to comply with § 6694(c) or fully pay the challenged assessments, the United States claims this Court lacks subject matter jurisdiction over Mr. Riter's suit and must dismiss it. (Id. at 6-7.)

         In response, Mr. Riter argues that 26 U.S.C. § 6694(c)(2) is not a jurisdictional provision but instead a claims processing rule. (Mem. in Opp'n to United States' Mot. to Dismiss for Lack of Subject Matter Jurisdiction (“Opp'n”) 5-9, ECF No. 9.) He claims that pursuant to the Supreme Court's decision in United States v. Wong, 575 U.S. __, 135 S.Ct. 1625, 1632 (2015), courts should presume a time bar presents a non-jurisdictional requirement unless Congress clearly identifies the bar as jurisdictional. (Id.) Mr. Riter further contends that because § 6694(c)(2) “does not contain the word ‘jurisdiction' or any language that would suggest that it is a jurisdictional mandate, ” it constitutes a claims processing rule and does not automatically bar this suit. (Id.) If § 6694(c)(2) presents a claims processing rule, Mr. Riter argues that the “Court can still hear the case and ultimately exercise its equitable powers, ” even if he missed the deadline established by that statue. (Id. at 9-10.) Finally, Mr. Riter argues that the cases the United States cites analyzing § 6694(c)(2) do not correctly interpret the language of that statute and are not binding. (Id. at 13-14.) Instead Mr. Riter asserts that the Court should adopt his novel interpretation of that statute. (Id. at 14-16.)

         The undersigned[1] held a hearing on the United States' Motion on October 2, 2018. (ECF No. 16.) Having considered the briefs and arguments of the parties, the undersigned finds ample legal authority holding that 26 U.S.C. § 6694(c)(2) and the nearly identical provision 26 U.S.C. § 6703(c)(2) provide limited exceptions to section § 1346's full payment rule. Mr. Riter filed his suit in December 2017, well after § 6694(c)(2)'s February 21, 2017 deadline. Thus the full payment rule applies to his claims, and Mr. Riter admits that he paid only 15% of the penalties at issue. Because § 6694(c)(2)'s limited exception to the full payment rule ceased to apply after February 21, 2017, and Mr. Riter did not fully pay the penalties, the Court lacks jurisdiction over his claims pursuant to § 1346(a)(1) and Flora. Accordingly, the undersigned RECOMMENDS that the District Judge DISMISS Mr. Riter's Complaint for lack of subject matter jurisdiction.


         A motion to dismiss brought pursuant to Federal Rule of Civil Procedure 12(b)(1) challenges the Court's subject matter jurisdiction. “Subject-matter jurisdiction involves a court's authority to hear a given type of case.” Radil v. Sanborn W. Camps, Inc., 384 F.3d 1220, 1224 (10th Cir. 2004). Federal district courts “have limited subject matter jurisdiction and may only hear cases ‘when empowered to do so by the Constitution and by act of Congress.'” Id. at 1225 (quoting 16 James Wm. Moore, Moore's Fed. Practice § 108.04(2) (3d ed. 2003)). “Since federal courts are courts of limited jurisdiction, there is a presumption against [] jurisdiction, and the party invoking federal jurisdiction bears the burden of proof.” Penteco Corp. P'ship-1985A v. Union Gas Sys., Inc., 929 F.2d 1519, 1521 (10th Cir. 1991).

         As a sovereign, “the United States and its officers enjoy immunity from suit except in instances where the United States has expressly waived that protection.” Flute v. United States, 808 F.3d 1234, 1239 (10th Cir. 2015). “[T]he United States may not be sued without its consent and [] the existence of consent is a prerequisite for jurisdiction.” United States v. Mitchell, 463 U.S. 206, 212 (1983). Therefore, “to sue the government a waiver of sovereign immunity must [] be found somewhere in the federal code.” Fletcher v. United States, 730 F.3d 1206, 1211 n.2 (10th Cir. 2013). Any “waiver of sovereign immunity is to be strictly construed, in terms of its scope, in favor of the sovereign.” Dep't of Army v. Blue Fox, Inc., 525 U.S. 255, 261 (1999).

         While a challenge to subject matter jurisdiction may be either facial or factual, Merrill Lynch Bus. Fin. Servs., Inc. v. Nudell, 363 F.3d 1072, 1074 (10th Cir. 2004), in this case, the United States makes a facial attack to subject matter jurisdiction, arguing that the “the allegations contained in the complaint in this case are insufficient on their face to support federal jurisdiction.” (Mot. at 2.) “[A] facial attack on the complaint's allegations as to subject matter jurisdiction questions the sufficiency of the complaint. [] In reviewing a facial attack on the complaint, a district court must accept the allegations in the complaint as true.” Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995) (citation omitted).


         28 U.S.C. § 1346(a)(1) “waives sovereign immunity and grants subject-matter jurisdiction to the district courts.” Wyodak Res. Dev. Corp. v. United States, 637 F.3d 1127, 1130 (10th Cir. 2011). The statute provides that “district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims” over:

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[.]

28 U.S.C. § 1346(a)(1). This waiver of sovereign immunity, however, depends on the claimant satisfying certain prerequisites. In Flora, the Supreme Court held that § 1346(a)(1) “requires full payment of the assessment before an income tax refund suit can be maintained in a Federal District Court” and that this requirement “is a jurisdictional prerequisite to suit.” 362 U.S. at 146, 177; see also Ardalan v. United States, 748 F.2d 1411, 1413 (10th Cir. 1984) (“The Supreme Court, this circuit, and all other federal circuits have long held that [§ 1346(a)(1)] requires the taxpayer to first pay the full amount of an income tax deficiency assessed by the IRS before he/she may challenge the assessment in a suit for refund . . .”); Diversified Grp. Inc. v. United States, 841 F.3d 975, 981 (Fed. Cir. 2016) (“In Flora, the Supreme Court determined that § 1346(a)'s jurisdictional grant includes a ‘full payment requirement,' which demands-as a jurisdictional prerequisite-full payment of the tax or penalty before a party could sue for a refund.”); Magnone v. United States, 902 F.2d 192, 193 (2d Cir. 1990) (“[T]he full payment rule requires as a prerequisite for federal court jurisdiction over a tax refund suit, that the taxpayer make full payment of the assessment, including penalties and interest.”).

         Congress enacted two statutes-one applying to tax preparers and the other to “any person”-providing limited exceptions to Flora's full payment requirement. See 26 U.S.C. § 6694(c); 26 U.S.C. § 6703(c). These statutes allow a tax preparer or other person to bring a refund action in district court after paying only 15% of a penalty assessed under applicable sections provided that they follow the other requirements of the statutes. The statutes require that the tax return preparer or other person pay 15% of the penalty and file a claim for refund no later than thirty days after receiving notice and demand of any penalty. 26 U.S.C. § 6694(c)(1); 26 U.S.C. § 6703(c)(1). The tax return preparer or other person must then file suit in district court challenging the penalty (1) “within 30 days after the day on which his claim for refund of any partial payment of any penalty under subsection (a) or (b) is denied, ” (2) “or, if earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim for ...

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