Wu et al v. United States of America et al
Filing
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MEMORANDUM Opinion and Order Signed by the Honorable Sharon Johnson Coleman on 6/9/2015:Mailed notice(rth, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MICHAEL H. WU and CHRISTINA T. WU,
Plaintiffs,
v.
UNITED STATES OF AMERICA,
Defendant.
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Case No. 14-cv-3925
Judge Sharon Johnson Coleman
MEMORANDUM OPINION AND ORDER
On August 1, 2014, the government moved to dismiss Michael and Christina Wu’s (the
“Wus”) second amended complaint in its entirety for lack of subject matter jurisdiction and
failure to state a claim. The Court denied the government’s motion and set a status hearing. In
light of the parties’ oral motions, the Court allowed the Wus leave to file an amended complaint
and set a briefing schedule for the government’s motion to reconsider the order denying its
motion to dismiss. The Wus filed their third amended complaint, asserting the same claims
identified in their previous complaint with some changes to the penalties claims. The
government then filed its motion for reconsideration and also moved to dismiss the third
amended complaint. Both parties addressed the motions to dismiss and reconsideration, and the
Court heard oral argument on June 5, 2015. The Court considered the evidence and arguments in
the government’s motion for reconsideration together with its motion to dismiss. For the reasons
below, the Court dismisses the two refund claims for 2009 taxes and denies the motion for
reconsideration as moot.
Legal Standard
A court must dismiss any action which lacks subject matter jurisdiction. The party
asserting jurisdiction has the burden of establishing it under Rule 12(b)(1). United Phosphorus,
Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003). “On a motion to dismiss for lack of
subject matter jurisdiction, the court is not bound to accept the truth of the allegations in the
complaint, but may look beyond the complaint and the pleadings to evidence that calls the
court’s jurisdiction into doubt.” Bastien v. AT & T Wireless Servs., Inc., 205 F.3d 983, 990 (7th
Cir. 2000). However, when reviewing a defendant’s Rule 12(b)(6) motion to dismiss, the Court
accepts all well-pleaded factual allegations in the complaint as true and draws all reasonable
inferences in the non-movant’s favor. Erickson v. Pardus, 551 U.S. 89, 94, 127 S.Ct. 2197, 167
L.Ed.2d 1081 (2007). Detailed factual allegations are not required, but the plaintiff must allege
facts that when “accepted as true ... state a claim to relief that is plausible on its face.” Ashcroft
v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim has facial plausibility when the
complaint’s factual content allows the Court to draw a reasonable inference that the defendants
are liable for the misconduct alleged. Id.
Discussion
1. Four Refund Claims for Late Penalties Totaling $15,960
The Court refers and incorporates herein the summary of facts from its opinion denying
the government’s motion to dismiss the second amended complaint. (See Dkt. #32.) The
government contends that this Court lacks subject matter jurisdiction over the four refund claims
for late penalties totaling $15,960, because the Wus never submitted those claims to the IRS.
Federal law confers jurisdiction on district courts over suits seeking recovery of IRS taxes and
penalties, 28 U.S.C. § 1346(a), however, a taxpayer may not file a refund suit “until a claim for
refund or credit has been duly filed with the Secretary [of Treasury],” or, the IRS. 26 U.S.C. §
7422(a); Nick’s Cigarette City, Inc. v. United States, 531 F.3d 516, 520 (7th Cir. 2008) (citing
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Martin v. United States, 833 F.2d 655, 658-59 (7th Cir. 1987) (holding that “[a] timely sufficient
claim for refund is a jurisdictional prerequisite to a refund suit”)).
The Wus do not contend that the claim forms attached to their complaint as Exhibits A-4
to A-7 were ever filed with the IRS. Rather, the Wus allege that they informally filed
“protective” claims for refund prior to filing this action and the attached formal claims amend the
ones filed informally. Protective claims for refund are not provided for in the Internal Revenue
Code, however, the IRS’ practice of allowing informal claims, oftentimes referred to as
protective claims, has been developed through case law and in IRS publications. See e.g., United
States v. Commercial Nat’l Bank, 874 F.2d 1165, 1171 (7th Cir. 1989); Internal Revenue Manual
(“IRM”) § 4.90.7.1 at ¶ 5. Informal claims toll the statute of limitations until a taxpayer can file
a formal refund request. See Commercial Nat’l Bank, 874 F.2d at 1170; United States v. Kales,
314 U.S. 186, 190, 191,193 (1941). A “protective” claim is generally viewed narrowly and
applied to instances where the taxpayer’s right to receive a refund is contingent upon the
occurrence of a future event such as a change in tax law, an audit or pending litigation. See Id.;
IRM § 4.90.7.1. Although a taxpayer oftentimes follows her informal submissions with proper
formal claims before initiating litigation, it is not a requirement; particularly where, as is the case
here, the IRS has considered and disallowed the claim. See Greene-Thapedi v. United States,
549 F.3d, 530, 533 (7th Cir. 2008) (pre-litigation “formal claims” allow the government an
opportunity to address the problem administratively); Commercial Nat’l Bank, 874 F.2d at 1174.
Here, the Wus contend in their pleadings and in oral argument that their IRS filings in the
March 18, 2010, “Request to Waive Tax Penalty” and the June 23, 2011, “Appeal Request for
Abatement for Tax Penalties” letters are protective or informal claims. 1 The March 18, 2010,
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Although the June 23, 2011, letter is attached to the Wus’ response to the government’s first motion to
dismiss, the Court notes that it is properly considered given the plaintiffs’ pro se status and that the Court
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letter cannot serve as a protective or an informal claim. This letter was a request to “waive”
penalties, not a request to refund penalties. Indeed, the Wus did not pay the penalties until four
months after the letter and thus were in no position to claim a refund on March 18, 2010. (See
Dkt. #34, Compl. at Ex. A-4 – A-7.) 2 Further, the letter fails to state an informal claim in that it
does not request a refund of tax penalties nor set forth in detail each ground upon which the
refund is claimed. Commercial Nat’l Bank of Peoria, 874 F.2d at 1171.
However, the June 23, 2011, letter to the IRS sets forth in detail a request for a refund of
“late payment penalty” and “late filing penalties” on returns filed for years 2007 to 2009. (Dkt.
#22 at Ex. V.) The letter also explains the grounds supporting the refund claim, including that
the delay in filing their returns was “due to reasonable cause.” (Id. citing IRS Regulation §
301.651-1(c)(1).) The Court finds that the June 23, 2011, letter constitutes an informal claim.
Because this refund claim was made before the statute of limitations had run on March 13, 2013,
the claim is duly filed with the IRS. 26 U.S.C. § 6511(a) (claim for refund must be filed within
the later of 3 years of filing a tax return or 2 years from time tax paid). Additionally, pursuant to
26 U.S.C. § 6532(a)(1), a plaintiff must file her federal court complaint within two years of
receiving notice of claim disallowance. At the earliest, the Wus received notice of disallowance
of this informal refund claim on April 19, 2013, (Dkt. #34 at Ex. C), and thus the statute of
limitations had not run by the time they filed this action on May 28, 2014. For all these reasons,
the Wus have satisfied their burden of establishing that this Court has subject matter jurisdiction
is considering a jurisdictional issue and may look to evidence beyond the complaint and the pleadings.
Bastien, 205 F.3d at 990. Further, the Court recognizes as it did in open court, the difficulty of pursuing
IRS claims for practitioners and laypersons alike and that the interest of justice is best served by allowing
the Wus to refer to a previously filed document.
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The Court recognizes the Wus’ apparent typo on their forms providing for a payment date of August 2,
2010. However, from the record as well as the parties’ statements in open court, the Court understands
the second payment date to be July 2, 2010.
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over the four penalty refund claims. Although confusing and perhaps improperly worded, the
Court cannot ignore the fact that these claims need to be litigated further to determine if they are
meritorious.
2. Refund Claim for $688.41 in Interest
This claim seeks refund of Mr. Wu’s overpayment of interest for tax year 2008. The
government does not contend that the Wus have completely failed to state a claim. Rather, it
argues that the Court should find that the claim for interest is only in the amount of $10.10.
Although the parties agree that Mr. Wu is entitled to some refund of interest paid, they dispute
the late period for which the interest payment was assessed, and accordingly the amount.
The Wus seek a refund for interest paid on June 1, 2010, and July 2, 2010, alleging that
the IRS inappropriately assessed interest because it determined that their June 1, 2010, payment
was late when it was received on June 11, 2010. (Dkt. #34, Compl. at Ex. A-1; Dkt. #39 at 5-6.)
However, it is unlikely that the Wus paid interest for a late payment before the payment was
deemed late (the payment was due June 7, 2010). Nonetheless, the Wus argue that the payment
was not late because the Code provides that the date of the postmark shall be deemed the date of
payment. See 26 U.S.C. § 7502.
On the other hand, the IRS argues that the $688.41 was “interest properly charged” for
late payment of Mr. Wu’s 2008 tax for excess IRA contributions for the period from April 15,
2009, to June 11, 2010, but present no facts or evidence regarding when this amount was
assessed against the Wus. Instead, the government explains that the amount of interest due on
April 15, 2009, was actually $689.00, which was not paid by the Wus until June 1, 2010. The
government admits that interest was charged up until June 7, 2010, and that the Court should find
that Mr. Wu has stated a claim for interest in the amount of $10.10 (the difference between
interest charged from June 2, 2010, until June 7, 2010). In a perplexing departure, the Wus
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contend in response that the $688.41 figure is the difference between the amount Mr. Wu paid on
July 2, 2010, for 2007, 2008, 2009 taxes and penalties ($12,956.84) and the amount assessed for
tax year 2009 ($12,268.43). (Dkt. #39 at 5; Dkt. #34, Ex. B-4.) While the conclusion is the
same, it is unclear under which theory the Wus seek recovery.
Further complicating matters, it appears that the Wus paid the $688.41 (or $689.00
according to the government) in interest twice: the first time on June 1, 2010, in the payment of
$32,443.12 that the government admits included the interest assessed for 2008 (Dkt. #37 at 4);
and a second time on July 2, 2010, as noted above. Also unclear is whether any portion of the
apparent overpayment, whether $10.10, $688.41, or some other figure, was used by the IRS to
satisfy the Wus’ other outstanding tax liability, as it appears that their payments were applied
piecemeal to taxes, penalties and interest owed at the IRS’ discretion. (Dkt. #34, Ex. C.)
Whether or not this method is appropriate under the Code, it has caused confusion that the IRS
may be able to readily resolve by conferring with the Wus outside of the adversarial process.
The motion to dismiss this claim is denied.
3. Two Refund Claims, Totaling $26,511.61 for 2009 Taxes
The Wus each seek a refund for the taxes they paid on their 2009 excess IRA
contributions. The government contends that the Court lacks subject matter jurisdiction over
Mrs. Wu’s claim because it was untimely filed. Pursuant to 26 U.S.C. § 6532(a)(1), a plaintiff
must file her federal court complaint within two years of receiving notice of claim disallowance.
Mrs. Wu received notice of disallowance on July 20, 2010, yet did not file this action until May
28, 2014. (See Dkt. #12 at Ex. G-4, p. 44.) Accordingly, Mrs. Wu has not timely filed her claim
and therefore it is dismissed.
The government further contends that notwithstanding the jurisdictional issue, both Mr.
and Mrs. Wu fail to state a claim because each needed to withdraw the excess contributions by
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the end of 2009 to avoid the excess contribution tax for tax year 2009. The Court agrees.
The IRS imposes a tax of 6 percent of the amount of excess contributions in an IRA for
each taxable year that the IRA contains excess contributions. 26 U.S.C. § 4973(a)(1). The tax is
assessed in the year in which the contributions are deposited and for each subsequent year at the
end of which the contributions remain in the IRA. Id. § 4973(b)(1), (2). The Wus made excess
contributions to their IRAs in 2007 and did not withdraw these funds until March 23, 2010.
They now seek a refund of excess contribution taxes paid for 2009. Thus, the applicable
provisions are those related to excess contributions from previous years which are found in an
individual’s account at the end of a subsequent year. A taxpayer can reduce the amount of
excess contribution from a preceding year by withdrawing the amount so that it is not reflected in
the IRA “as of the close of the calendar year in which the taxable year begins.” 26 U.S.C.
§ 408(d)(2)(C); § 4973(b)(2)(A). In other words, in order for the Wus to avoid the 6 percent tax
for the 2007 excess contributions which remained in their IRAs in 2009, they at a minimum
needed to withdraw the excess funds by the end of calendar year 2009.
Understandably, the Wus misconstrue the Code when they argue that they need only have
withdrawn their 2007 excess contributions which remained in their accounts at the end of 2009
by the day their 2009 taxes were due, or April 15, 2010. However, withdrawals made before the
tax return due date are only considered against excess contributions made in that same tax year.
26 U.S.C. §§ 4973(b), 408(d)(4). Accordingly, the Wus withdrawals in 2010 were not sufficient
to eliminate their excess contribution tax liability for year 2009 and their claims fail.
Conclusion
For the foregoing reasons, defendants’ motion to dismiss [37] is granted in part and
denied in part. Mrs. Wu’s refund claim for 2009 taxes is dismissed without prejudice for lack of
subject matter jurisdiction. Mr. Wu’s refund claim for 2009 taxes is dismissed with prejudice for
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failure to state a claim. Defendant’s motion to dismiss the four refund claims for late penalties
and the claim for interest is denied. Defendant’s motion for reconsideration [37] is denied as
moot. Further, for the reasons above, the Court reiterates its statements at the hearing that the
complicated history and posture of this case make it a strong candidate for sincere settlement
talks.
SO ORDERED.
__________________________________
SHARON JOHNSON COLEMAN
United States District Judge
DATED: June 9, 2015
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