SUMMARY: Plaintiff brought this action alleging taxes assessed for the tax years of 1981-1989 were erroneously assessed and/or collected. Defendant brought a motion to dismiss claiming that plaintiff was only challenging the assessment for 1985-1989 and was seeking under the Doctrine of Equitable Recoupment to offset the deficiencies of the earlier years. HELD: plaintiff's claim for a refund for tax years 1981-1984 was dismissed because plaintiff conceded that taxes were properly assessed for those years, and was dismissed for the tax years 1986-1989 because plaintiff's amended returns were untimely. The amended return for the 1985 tax year was timely filed; therefore plaintiff was allowed to proceed with her claim on that year.

Case Name: Mavis Jones v. USA
Case Number: A3-98-142
Docket Number: 22
Date Filed: 3/31/00
Nature of Suit: 870

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NORTH DAKOTA
SOUTHEASTERN DIVISION

ORDER

Before the court is defendant the United States of America's motion to dismiss due to lack of subject matter jurisdiction. (Doc. #14.) After reviewing defendant's motion the court denies the motion with respect to the 1985 tax year and grants the motion with respect to the 1981-1984 and 1986-1989 tax years.

I. Background

Plaintiff brought this action alleging taxes assessed and collected by defendant for the years of 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, and 1989 were illegally and erroneously assessed and/or collected. (Complt, ¶ 8.) However, plaintiff's response to defendant's motion to dismiss it suggests that plaintiff is only challenging alleged overpayments for the tax years of 1985-1989 and seeks under the Doctrine of Equitable Recoupment to offset the unchallenged deficiencies of the earlier years; therefore, the court will review this motion in the light that plaintiff does not seek to relitigate the disallowed losses and deductions of 1981-1984, but rather seeks to have her 1985 ⁽¹⁾-1989 tax obligation recomputed and to have any overpayment go toward offsetting the tax deficiencies from 1981-1984. ⁽²⁾

Plaintiff was married to Frank R. Jones, now deceased, during the tax years in question. During their marriage plaintiff and Frank Jones filed joint tax returns. In 1980 Frank Jones invested in a Finalco computer leasing tax shelter (Finalco transaction). The Joneses' 1980-1984 federal income tax returns reflected losses and tax deductions from various computer leases stemming from the Finalco transaction. These losses and deductions were later disallowed by the IRS. In 1985-1989 the Joneses made a profit on the Finalco transaction. The income from the Finalco transaction was reported on the Joneses' 1985-1989 tax returns in a manner which was consistent with the reported losses and deductions of the previous years. Allegedly, application of the IRS position on the tax years of 1980-1984 to the subsequent years resulted in the Joneses overpaying their taxes for the1985-1989 tax years.

Plaintiff timely filed an amended return for the 1985 tax year in which she sought a refund of one dollar and reserved the right to amend the claim after issuance of a final determination by the Tax Court on the Finalco transaction. Although plaintiff filed the amended return for 1985 within the statute of limitations, she never amended the claim for refund after the final decision of the Tax Court. In April of 1998 plaintiff filed amended returns for the tax years of 1986-1989. According to 26 U.S.C. § 6511, the amended returns were untimely and thus barred by the statute of limitations. Plaintiff now asserts that she is entitled to offset any resulting deficiencies for the tax years 1981-1984 with refunds for overpayment of income taxes in the years 1985-1989. Plaintiff argues that despite the bar by the statute of limitations, the Doctrine of Equitable Recoupment permits the use of the overpayments from 1985-1989 to offset deficiencies from earlier years. Defendant contends that the district court lacks subject matter jurisdiction to hear the claim.

II. Standard for Motion to Dismiss

When considering a motion to dismiss under the Federal Rules of Civil Procedure, Rule 12(b)(6), a court accepts all factual allegations in the complaint as true and construes them in the light most favorable to the plaintiff. Leatherman v. Tarrant Co. Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993); Springdale Educ. Assoc. v. Springdale Sch. Dist., 133 F.3d 649, 665 (8th Cir. 1998). A court may dismiss a complaint only if it is clear that the plaintiff can prove no set of facts which would entitle the plaintiff to relief. Coleman v. Watt, 40 F.3d 255, 258 (8th Cir. 1994).

III. Analysis

Plaintiff is not challenging the deficiencies of the 1981-1984 tax years, but rather alleges that she overpaid in 1985-1989 and seeks to have that overpayment applied to offset the deficiencies of the earlier years. Defendant argues that the district court lacks subject matter jurisdiction to hear the claim because 26 U.S.C. § 7422(a) requires that a refund claim be duly filed in order to waive the sovereign immunity of defendant. In order to be duly filed, the refund claim must be filed within the applicable period of time which, according to 26 U.S.C. § 6511, requires that a refund claim be filed within three years of the date on which the tax return was filed or within two years of the date on which the tax was paid, whichever is later. Plaintiff filed and paid the tax obligation for 1985-1989 in a timely fashion. She filed her claim for refund for 1985 within three years of filing the 1985 return. On April 27, 1998, Plaintiff filed an amended federal income tax refund claim for the tax years 1981, 1982, and 1986-1989, well after the § 6511 deadline.

Plaintiff asserts that the Doctrine of Equitable Recoupment should be applied in order to obtain a fair result. Equitable recoupment is an equitable remedy that may be used in a timely proceeding to "seek recoupment of a related, and inconsistent, but now time-barred tax claim relating to the same transaction;" however, equitable recoupment may not serve as the sole basis for jurisdiction. See United States v. Dalm, 494 U.S. 596, 608 (1990)(noting that the Court has not allowed equitable recoupment as the sole basis for jurisdiction). Dalm clarifies that "unless a claim for refund of a tax has been filed within the time limits imposed by § 6511(a), a suit for refund, regardless of whether the tax is alleged to have been 'erroneously,' 'illegally,' or 'wrongfully collected,' §§ 1346(a)(1), 7422(a), may not be maintained in any court." Id. at 602. Plaintiff asserts equitable recoupment as her sole basis of support for her 1986-1989 claims; therefore, the courts finds that it is barred from hearing plaintiff's 1986-1989 refund claims due to lack of subject matter jurisdiction. The court grants defendant's motion to dismiss with respect to the 1986-1989 tax years.

Plaintiff filed a protective claim for the 1985 tax year in a timely manner and defendant concedes that ordinarily this would allow her to pursue a refund suit. However, defendant argues that the protective claim filed by plaintiff in 1989 for the 1985 tax year did not sufficiently set forth the facts and explanation for the refund requested. Defendant claims that Treasury Regulation § 301.6402-2(b)(1) requires that "a refund claim under IRC § 7422(a) must set forth in detail each ground upon which a refund is claimed and facts sufficient to appraise the Commissioner of the exact basis thereof." (Def. Br. In Support of Mtn. to Dismiss, Doc #15 at 19-20.)

Plaintiff asserts that she is only required to provide defendant with sufficient notice of the claim. In this instance plaintiff put defendant on notice of the possible overpayment and claimed refund for the 1985 tax year when she filed an amended return in 1989. The amended return also informed defendant that the overpayment in 1985 related to the Finalco leasing transaction and to the disallowed deductions for losses taken in the earlier years. Case law in the Eighth Circuit has suggested that putting the IRS on notice of the nature of the claim may be sufficient. See First National Bank of Fayetteville, Arkansas v. United States, 727 F.2d 741, 744 (8th Cir. 1984)(stating that the reason for the rule is to provide the IRS with adequate notice of the nature of the claim). In this case, if the court accepts all factual allegations at true and construes them in the light most favorable to plaintiff, it must find that the IRS was put on adequate notice of the claim; therefore, the court denies defendant's motion to dismiss plaintiff's 1985 claim for refund.

The court finds that plaintiff is not challenging the deficiency assessments for the 1981-1984 tax years and accordingly dismisses them from any claim for refund. That is not to say that should the court later find that plaintiff overpaid in the 1985 tax year, that overpayment could not be applied to offset the deficiencies from the 1981-1984 tax years.

Dated: March _____, 2000.

Karen K. Klein
United States Magistrate Judge

1. Plaintiff's brief inconsistently treats the 1985 tax year. The brief sometimes groups 1985 with the 1981-1984 deficiencies for disallowed loss deductions and sometimes groups it with the 1986-1989 overpayments. In fact, at one point she treats 1985 inconsistently within the same sentance: "Ms. Crahan satisfies this requirement because she is seeking to force the Internal Revenue Service to allocate the overpayments from 1985 to 1989 to offset the asserted deficiencies from the open tax years of 1982 through 1985." (Plaintiff's Response to Defendant's Motion to Dismiss for Lack of Subject-Matter Jurisdiction, Doc. #19 at 13.)

2. Plaintiff has actually paid the deficiencies only for 1981 and 1982. The 1983 and 1984 assessments remain unpaid.