Logan v. United States of America
Filing
35
OPINION and ORDER granting 16 defendant's motion to dismiss. See Opinion and Order for details. (CMG)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
A. SCOTT LOGAN,
Plaintiff,
v.
Case No:
2:18-cv-99-FtM-29MRM
UNITED STATES OF AMERICA, by
and through its Agent, the
Commissioner
of
Internal
Revenue,
Defendant.
OPINION AND ORDER
This matter comes before the Court on defendant's Motion to
Dismiss (Doc. #16) filed on April 13, 2018.
Plaintiff filed a
Response in Opposition (Doc. #20) on May 4, 2018.
Defendant filed
a Reply to the Response to the Motion to Dismiss (Doc. #27) on May
18, 2018, and Plaintiff filed a Sur-Reply (Doc. #32) on May 31,
2018.
For
the
reasons
set
forth
below,
the
Court
grants
defendant’s Motion to Dismiss.
I.
This cases arises out of the sale of Xerox stock in 1999.
According to the Amended Complaint (Doc. #15): In 1986, Plaintiff
A. Scott Logan (Plaintiff) co-founded Wood Logan Associates, Inc.
(WLA), a variable annuity sales and marketing company.
¶¶ 11, 12.)
years,
(Doc. #15,
WLA engaged in multiple mergers over the next several
ultimately
merging
with
Manulife
Financial
Corporation
(Manulife) in 1999.
(Id. ¶¶ 25, 26, 33, 34.)
As part of that
merger, Manulife acquired Plaintiff’s shares in WLA.
(Id. ¶ 34.)
Plaintiff sought to invest a portion of his proceeds from the WLA
merger into foreign currencies.
(Id. ¶ 45-48.)
Upon the advice
of his legal and tax advisors, Plaintiff used multiple trusts (the
Logan Trusts) to form an entity called Tigers Eye Trading, LLC
(Tigers Eye).
(Id. ¶¶ 59, 72.)
Plaintiff, as trustee of the
Logan Trusts, used Tigers Eye to execute a trading strategy in the
Euro currency on behalf of the Logan Trusts.
(Id. ¶¶ 45, 48, 72.)
Plaintiff withdrew the Logan Trusts from Tigers Eye in December of
1999, and “Tigers Eye distributed Xerox stock to the Logan Trusts
in redemption of their interests.”
(Id. ¶ 73.)
subsequently sold the Xerox stock.
The Logan Trusts
(Id. ¶ 74.)
In 2000, the Logan Trusts filed their 1999 federal income tax
returns and reported that the Xerox stock sale resulted in a shortterm capital loss.
(Id. ¶¶ 75, 76, 78.)
Plaintiff then “reported
the trust losses from the sale of Xerox stock on his 1999 Federal
income tax return.”
(Id. ¶ 79.)
In 2002, the IRS audited Tigers
Eye, and ultimately determined that Plaintiff was not entitled to
claim the short-term capital loss for the 1999 Xerox stock sale.
(Id. ¶¶ 82, 96.)
As a result, the IRS assessed against Plaintiff
a $2,456,598.40 gross valuation misstatement penalty.
127.)
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(Id. ¶
In June of 2017, Plaintiff filed an administrative claim for
a refund with the IRS (Original Claim).
(Doc. #15-1.)
In the
Original Claim, Plaintiff asserts that he is entitled to a refund
of the $2,465,598.40 penalty the IRS assessed against him because
(1) Plaintiff reasonably relied upon the advice of his legal and
tax advisors in reporting that the Xerox stock sale resulted in a
short-term capital loss; and (2) when the IRS assessed the penalty
against Plaintiff, the IRS retroactively enforced law that did not
exist when Plaintiff filed his 1999 tax return.
(Id., pp. 4-6.)
On March 31, 2018, Plaintiff filed an Amended Complaint (Doc. #15),
seeking a refund of the $2,465,598.40 penalty the IRS assessed
against him.
(Id. ¶ 105.)
The Amended Complaint asserts four grounds for Plaintiff’s
entitlement to a refund. 1
(Id. ¶¶ 107-141.) Counts One and Two
assert the same two grounds for relief stated in the Original
Claim.
(Doc. #15, ¶¶ 107-119; Doc. #15-1, pp. 4-6.)
Count Three
asserts that Plaintiff is entitled to a refund because the IRS
failed to compare “the correct adjusted basis of the Logan Trusts’
Xerox stock versus the reported adjusted basis of the Xerox stock”
and
therefore
“did
not
provide
1
grounds
for
gross
valuation
The Amended Complaint is structured as a one-count complaint.
Below the single count, the Amended Complaint asserts four grounds
for Plaintiff’s entitlement to a refund.
Because the Amended
Complaint alleges that each ground is “sufficient on its own merit
to require a refund,” the Court treats each ground as an individual
Count. (Doc. #15, ¶ 104.)
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penalties against” Plaintiff in the Notice of Deficiency.
#15, ¶¶ 124, 129.)
(Doc.
Count Four asserts that Plaintiff is entitled
to a refund because the Revenue Agent that examined Tigers Eye
failed to obtain managerial approval to assess the penalty against
Plaintiff.
(Id. ¶¶ 131-141.)
On April 13, 2018, the United States of America (Defendant)
filed a Motion to Dismiss.
(Doc. #16.)
In it, Defendant argues
the Court lacks subject matter jurisdiction over Counts III and IV
because, under the variance doctrine, the arguments asserted in
those Counts were not first asserted in the Original Claim.
On
May 1, 2018, Plaintiff filed an amended administrative claim for
refund with the IRS (Amended Claim) (Doc. #20-9), which includes
the
arguments
asserted
in
Counts
III
and
IV
of
the
Rules
of
Civil
Amended
Complaint.
II.
Rule
12(b)
(1)
of
the
Federal
Procedure
provides for dismissal of an action if the court lacks subject
matter jurisdiction.
A motion to dismiss under Rule 12(b)(1) may
assert either a factual attack or a facial attack on jurisdiction.
Morrison v. Amway Corp., 323 F.3d 920, 924 (11th Cir.2003).
A
facial attack requires the Court to determine whether the pleader
has sufficiently alleged a basis for subject matter jurisdiction.
Stalley ex rel. U.S. v. Orlando Reg'l Healthcare Sys., Inc., 524
F.3d 1229, 1233 (11th Cir. 2008).
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In contrast, a factual attack
challenges “the existence of subject matter jurisdiction . . .
irrespective of the pleadings . . . .”
Lawrence v. Dunbar, 919
F.2d 1525, 1529 (11th Cir. 1990) (internal citation and quotation
omitted).
Thus, in reviewing a factual attack on subject matter
jurisdiction, the Court may consider “material extrinsic from the
pleadings, such as affidavits or testimony.”
Stalley, 524 F.3d
at 1233.
III.
Defendant asserts a factual attack on the Court’s subject
matter
jurisdiction
over
Counts
III
and
IV.
In
particular,
Defendant argues the Court lacks subject matter jurisdiction over
Counts III and IV because Plaintiff failed to raise the arguments
in those Counts in his Original Claim prior to filing the Amended
Complaint.
A.
The Variance Doctrine
Under the variance doctrine, “[a] taxpayer may not sue the
United States for a tax refund until [he] first files a refund
claim with the government” in compliance with 26 U.S.C. § 7422 and
its accompanying treasury regulations.
Charter Co. v. United
States, 971 F.2d 1576, 1579 (11th Cir. 1992).
Section 7422’s
accompanying regulations “require the taxpayer to detail each
ground upon which a refund is claimed.”
§
301.6402-2(b)(1)).
Any
Id. (citing Treas. Reg.
subsequent
litigation
of
the
“government's denial of a refund claim is limited to the grounds
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fairly contained within the refund claim.”
Id.
Thus, a federal
court has “no jurisdiction to entertain taxpayer allegations that
impermissibly vary or augment the grounds originally specified by
the taxpayer in the administrative refund claim.”
Id. at 1579.
The purpose of the variance doctrine is to allow the “IRS to
resolve disputes in the first instance without litigation . . . .”
Sanders v. United States, 740 F.2d 886, 890 (11th Cir. 1984).
Courts employ an “essential requirements” test to determine
whether a taxpayer’s lawsuit impermissibly varies from the grounds
stated in the underlying administrative refund claim.
971 F.2d at 1580.
Charter,
Under this test, “[a]lthough crystal clarity
and exact precision are not demanded, at a minimum the taxpayer
must identify in its refund claim the ‘essential requirements’ of
each and every refund demand.”
B.
Id.
Counts III and IV do not Comply with the Variance Doctrine
Plaintiff’s Original Claim contains two grounds for relief:
that Plaintiff is entitled to a refund because (1) Plaintiff
reasonably relied upon the advice of his legal and tax advisors
when he reported that the Xerox stock sale resulted in a shortterm capital loss; and (2) when the IRS assessed the penalty
against Plaintiff, the IRS retroactively enforced law that did not
exist when Plaintiff filed his 1999 tax return.
4-6.)
(Doc. #15-1, pp.
These two grounds for relief are also asserted in the
Amended Complaint as Counts I and II.
- 6 -
(Doc. #15, ¶¶ 107-119.)
The Amended Complaint contains two additional grounds for
relief (Counts III and IV) which were not specifically raised in
the Original Claim.
Count III asserts that Plaintiff is entitled
to a refund because the IRS failed to compare “the correct adjusted
basis of the Logan Trusts’ Xerox stock versus the reported adjusted
basis of the Xerox stock” and therefore “did not provide grounds
for gross valuation penalties against” Plaintiff in the Notice of
Deficiency.
(Doc. #15, ¶¶ 124, 129.)
Count IV asserts that
Plaintiff is entitled to a refund because the Revenue Agent that
examined Tigers Eye failed to obtain managerial approval to assess
the penalty against Plaintiff.
(Doc. #15, ¶¶ 131-141.)
The Court finds that Counts III and IV substantially vary
from the Original Claim.
Counts I and II, which mirror the two
grounds asserted in the Original Claim, essentially state as an
affirmative defense that Plaintiff was unaware that he improperly
reported the Xerox stock sale proceeds on his 1999 federal tax
return.
In contrast, Counts III and IV, which were not raised in
the Original Claim, state that the IRS failed to comply with
certain procedural requirements prior to assessing the penalty
against Plaintiff.
While all four Counts seek the same ultimate
relief – a refund of the $2,456,598.40 penalty assessed against
Plaintiff – Counts III and IV allege Plaintiff is entitled to the
refund for entirely different reasons than those asserted in the
Original Claim.
In fact, the Amended Complaint even states that
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each Count “is sufficient on its own merit to require a refund” of
the penalty
assessed
against
Plaintiff.
(Doc.
#15,
¶
104.)
However, the IRS was not given an opportunity to consider two of
these independent bases for a refund (Counts III and IV) prior to
Plaintiff’s filing the Amended Complaint.
Although Counts III and IV were not specifically raised in
the Original Claim, Plaintiff argues they nonetheless do not
substantially vary from the Original Claim because the IRS is
required to investigate all possible grounds for recovery upon
receiving a refund claim.
See Lewis v. Reynolds, 284 U.S. 281,
283 (1932); Rev. Rul. 81-87, 1981-1 C.B. 580.
Thus, Plaintiff
argues, Counts III and IV were implicitly included in his Original
Claim.
The Court disagrees.
In Lewis, the Supreme Court held that the IRS has the authority
to “reaudit a return whenever repayment is claimed” by a taxpayer,
even if the statute of limitations “may have barred the assessment
and collection of any additional” tax.
Lewis, 284 U.S. at 283.
The Court reasoned that the government has the authority “to retain
payments already received when they do not exceed the amount which
might have been properly assessed and demanded.”
Id.
Rev. Rul.
81-87 expands upon the holding in Lewis and provides that, when
the IRS receives a claim for a refund, “the correct tax is to be
determined
by
including
all
adjustments,
regardless
of
the
expiration of the periods of limitation,” but a refund will only
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be granted if it is “covered by [a] timely claim[].”
Rev. Rul.
81-87 further provides that the IRS must ensure it considers all
adjustments beneficial to the taxpayer, so as not to detriment
“the taxpayer by including only adjustments that increase the tax.”
While Lewis and Rev. Rul. 81-87 do indeed provide that the IRS
must consider all adjustments - both detrimental and beneficial to
a taxpayer - they do not displace the variance doctrine.
They
simply address a taxpayer’s entitlement to a refund, not whether
a taxpayer’s administrative claim provides a district court with
subject matter jurisdiction over a subsequent tax refund lawsuit.
Thus, although a litigant may be entitled to a refund under Lewis
and
Rev.
doctrine.
Rul.
81-87,
See
courts
Charter,
971
must
still
F.2d
at
enforce
1579
the
(holding
variance
that
the
“district court correctly declined to consider . . . claim on the
basis of the variance doctrine”).
Plaintiff
lastly
argues
that
Counts
III
and
IV
do
not
substantially vary from the Original Claim because the Original
Claim contained a checked box which stated that Plaintiff sought
a refund for any “[r]easonable cause or other reason allowed under
the law . . . .”
(Doc. #15-1, p.1.)
Thus, Plaintiff argues, the
claims stated in Counts III and IV were fairly included in the
Original Claim, and the IRS should have independently investigated
the issues raised in those Counts when it considered the Original
Claim.
The Court disagrees.
- 9 -
The variance doctrine requires a “taxpayer to do more than give
the government a good lead based upon the government's purported
ability to infer interconnectedness.”
Charter, 971 F.2d at 1579-
80.
Indeed, the IRS may take a refund claim “at its face value
and
examine
only
those
necessarily directed.”
points
to
which
[its]
attention
is
Alabama By-Prod. Corp. v. Patterson, 258
F.2d 892, 900 (5th Cir. 1958). 2
The Court therefore finds the
checked box on Plaintiff’s Original Claim insufficient to identify
the “essential elements” of the refund demands asserted in Counts
III and IV.
In sum, the Court finds that Counts III and IV substantially
vary from Plaintiff’s Original Claim.
Thus, under the variance
doctrine, the Court lacks subject matter jurisdiction over Counts
III and IV.
C.
The Amended Claim Does not Retroactively Establish Subject
Matter Jurisdiction
On May 1, 2018, after Defendant filed its Motion to Dismiss,
Plaintiff filed his Amended Claim with the IRS, which includes the
arguments made in Counts III and IV of the Amended Complaint.
(Doc. #20-9.)
Plaintiff relies on Mutual Assurance, Inc. v.
2
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.
1981) (en banc), the Eleventh Circuit adopted as binding precedent
all the decisions of the former Fifth Circuit handed down prior to
the close of business on September 30, 1981.
- 10 -
United States, 56 F.3d 1353 (11th Cir. 1995) and St. Joseph Lead
Co. v. United States, 299 F.2d 348 (2d Cir. 1962) to argue that
the Amended Claim “relates back to and constitutes part of the
Original Claim.”
(Doc. #20, p. 15.)
Thus, Plaintiff contends,
the Amended Claim cures “any perceived jurisdictional questions”
under the variance doctrine because the Amended Complaint does not
substantially vary from the Amended Claim.
The Court disagrees.
In Mutual, the plaintiff filed an administrative claim for a
refund with the IRS, seeking $495,728 in overpaid taxes for the
1987 tax year.
Mutual, 56 F.3d at 1354.
The IRS granted the
plaintiff’s request and refunded it in full.
Id.
Nine days after
the statute of limitations for filing a claim with the IRS for the
1987 tax year passed, the IRS “discovered a miscalculation of the
company's
unpaid
determined
that
$489,601
loss
the
refund.
administrative
reserves
plaintiff
Id.
refund
The
claim,
for
was
the
1987”
entitled
plaintiff
seeking
to
then
the
tax
an
year
and
additional
filed
additional
a
second
$489,601
refund; the IRS denied the second claim because it was not filed
within the applicable statute of limitations.
subsequently
$489,601.
filed
Id.
a
lawsuit
against
the
Id.
IRS
to
The plaintiff
recover
the
The government moved to dismiss the complaint for
lack of subject matter jurisdiction because the litigation arose
from an untimely administrative claim.
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Id.
The Eleventh Circuit held that although the plaintiff filed
the second administrative claim outside the statute of limitations
period, it was not time barred because the second claim related
back to the first, timely administrative claim.
Id. at 1356-57.
The court reasoned that the second claim simply corrected the
“defective
prayer
for
relief”
in
the
original
claim,
which
incorrectly sought a refund of $495,728 instead of “the actual
overpayment for that year [which] was $985,329.”
Similarly,
in
St.
Joseph
Lead,
the
Id. at 1356.
plaintiff
filed
an
administrative claim for a refund with the IRS, which the IRS
denied.
St. Joseph Lead, 299 F.2d at 349.
The plaintiff then
filed a lawsuit against the IRS in order to receive its tax refund.
Id.
After the plaintiff filed its complaint, the IRS notified the
plaintiff
that
it
was
reconsidering
its
denial
of
the
administrative claim because the IRS incorrectly computed the
plaintiff’s tax liability.
Id.
Upon learning of this, although
the statute of limitations for filing a claim had passed, the
plaintiff “reexamined its figures” and “filed an amended claim
seeking the benefit of a correct computation.”
denied the amended claim.
Id.
Id. The IRS also
Afterwards, the plaintiff amended
its complaint, seeking a refund for the amount stated in its
amended administrative claim.
Id. at 350.
The IRS argued it was
entitled to summary judgment because the amended claim “was barred
by the statute of limitations.”
Id.
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The Second Circuit held that the amended claim was not time
barred because the amended claim corrected an accounting error of
the original, timely filed claim.
Id. at 351.
The court so held
because “the original claim was closely related to the amended
claim” and therefore “relate[d] back to the time the original claim
was filed and the original action brought.”
Id.
Here, the Court finds St. Joseph Lead and Mutual unpersuasive
because those cases do not establish that the Amended Claim renders
the variance doctrine inapplicable.
The courts in Mutual and St.
Joseph Lead analyzed whether the amended administrative claims
were
barred
by
the
statute
of
limitations,
not
whether
the
complaints substantially varied from the underlying administrative
claims.
See Mutual, 56 F.3d at 1355 (noting that the “sole issue
raised on” appeal was whether amended claim was barred by the
statute of limitations); St. Joseph Lead, 299 F.2d at 350 (noting
that “[t]he issue to be resolved” was whether the amended claim
“f[ell]
within
Plaintiff’s
the
Amended
limitations
Claim
is
period”).
not
an
issue
The
timeliness
before
the
of
Court.
Instead, the thrust of Defendant’s Motion to Dismiss is that the
Amended Complaint substantially varies from Plaintiff’s Original
Claim.
Plaintiff must first afford the IRS an opportunity to consider
the arguments in the Amended Claim before asserting them in his
Amended Complaint.
For instance, the plaintiff in St. Joseph Lead
- 13 -
did not amend its complaint until after the IRS considered and
denied its amended administrative claim.
F.2d at 349-50.
St. Joseph Lead, 299
Similarly, the plaintiff in Mutual did not file
its complaint until after the IRS denied its amended administrative
claim.
Mutual, 56 F.3d at 1354.
Here, however, Plaintiff filed
his Amended Claim after he filed his Amended Complaint.
Because
“subject-matter jurisdiction depends on the state of things at the
time of the action brought,” the Court “look[s] to the [A]mended
[C]omplaint to determine jurisdiction.”
Rockwell Int'l Corp. v.
United States, 549 U.S. 457, 473 (2007)(internal citation and
quotation omitted).
At the time Plaintiff filed his Amended
Complaint, the Court was without subject matter jurisdiction over
Counts III and IV. 3
Mutual and St. Joseph do not alter the Court’s
subject matter jurisdiction analysis.
In conclusion, the Court lacks subject matter jurisdiction
over Counts III and IV because they substantially vary from the
grounds asserted in the Original Claim.
Counts III and IV are
therefore dismissed.
3
Defendant additionally argues the Court lacks subject matter
jurisdiction over Counts III and IV because the Amended Claim is
a nullity.
Specifically, Defendant argues that once Plaintiff
filed a lawsuit for a tax refund, the IRS lacked jurisdiction to
consider the Amended Claim. Because Plaintiff filed the Amended
Claim after the Amended Complaint, thus depriving the Court of
subject matter jurisdiction over Counts III and IV as discussed
supra, the Court need not assess the merits of that issue.
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Accordingly, it is hereby
ORDERED AND ADJUDGED:
Defendant's
Motion
to
Dismiss
(Doc.
#16)
is
GRANTED
as
follows:
1.
Counts III and IV are dismissed without prejudice for
lack of subject matter jurisdiction.
DONE and ORDERED at Fort Myers, Florida, this 21st day of
June, 2018.
Copies:
Counsel of Record
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