Union Pacific Railroad Company v. United States of America

Filing 67

MEMORANDUM AND ORDER - IT IS ORDERED that: U.P.'s motion for a hearing (Filing No. 45 ) is denied. The government's motion to dismiss (Filing No. 31 ) is denied. Ordered by Senior Judge Joseph F. Bataillon. (TCL)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
UNION PACIFIC RAILROAD COMPANY,
in its own capacity and in its capacity as
successor to Union Pacific Railroad
Company;
Plaintiff,

8:14CV237
MEMORANDUM AND ORDER

v.
UNITED STATES OF AMERICA,
Defendant.

This matter is before the court on defendant United States of America's
(hereinafter, "the Government's" or "the IRS's") motion to dismiss for lack of jurisdiction
(Partial), Filing No. 31.1 The government contends that this court lacks jurisdiction over
plaintiff Union Pacific Railroad Company's ("U.P.'s") tax refund claims for 1995 and
1996. It argues that U.P. failed to file its tax refund suit within two years of the IRS's
disallowance of the refund claims.

The parties submit documentary evidence in

connection with the motion. Filing No. 33, Index of Evid., Exs. A-M; Filing No. 44, Index
of Evid., Exs. 1-12.
I.

FACTS

U.P. filed this action seeking a refund of over $74 million in employment taxes
paid under the Railroad Retirement Tax Act, I.R.C. § 3201, et seq., for tax years 1991
through 2007 on August 12, 2014. Filing No. 1, Complaint. It seeks refunds of RRTA
taxes it paid on its employees' exercise of certain stock options, vesting of certain

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Also pending is U.P.'s motion for a hearing, Filing No. 45. The court finds a hearing is not
necessary and the motion will be denied.

restricted stock and “restricted stock units,” and certain payments made under collective
bargaining agreements. Id. at 4-10. Jurisdiction is based on 28 U.S.C. § 1346(a)(1).
The record shows that U.P. filed its Employer’s Annual Railroad Retirement Tax
Returns (IRS Forms CT-1) for tax years 1995 and 1996 on February 27, 1996, and
February 26, 1997, respectively. Filing No. 33-1, Index of Evid., Ex. A, 1995 Form CT1; Filing No. 33-2, Ex. B, 1996 Form CT-1.

The IRS issued two forms captioned

"Department of the Treasury, Internal Revenue Service, Consent to Extend the Time to
Assess Employment Taxes" IRS Forms SS-10, one dated December 23, 1998, and
another dated January 18, 2000. Filing No. 33-3, Index of Evid., Ex. C, 1998 Form SS10; Filing No. 33-4, 2000 Form SS-10. Those documents extended the deadline for the
IRS to assess several types of taxes, including RRTA taxes, against U.P. for several tax
years, including 1995 and 1996. See id. The first extended deadline was March 1,
2000, and the second extended deadline was March 1, 2001. Id. In a Form SS-10
dated January 16, 2001, the IRS again extended the deadline to March 1, 2002. Filing
No. 33-5, Index of Evid., Ex. E, 2001 Form SS-10.
On August 26, 2002, U.P. filed claims for refund (IRS Forms 843) with the IRS for
RRTA taxes in the amounts of $30,060,960 for 1995 and $25,358,473 for 1996. Filing
Nos. 33-6 & 33-7, Exs. F and G, 1995 & 1996 Forms 843. U.P.’s representative signed
the claims on August 23, 2002. Id., Ex. F at UPRR-000037; Ex. G at UPRR-000057.
The claims included, but were not limited to, requests for refunds of RRTA taxes paid
with respect to challenged transactions 1995 and 1996. Id., Ex. F at UPRR-000038; Ex.
G at UPRR-000058 (claims encompassed “other miscellaneous payments”).

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On June 27, 2003, the Cincinnati Service Center of the IRS sent U.P., by certified
mail, a “Letter 105C” stating as follows: “This letter is your legal notice that we have
disallowed your claim(s).

We can’t allow your claim(s) for refund or credit for the

period(s) shown above for the reason(s) listed below.” Id., Ex. H at UPRR-000042. Set
forth below was the statement: "The statute [of limitations for filing refund claims] for
both of these periods has expired." Id. Further, the letter states "[t]he SS-10s provided
by you cover 1991, 1992, and 1993. Tax periods 1994-1997 were lined through and
initialed by both the IRS official and the VP of Taxes at Union Pacific." Id. The letter
continued as follows:

"However, these [sic] information does not impact the

disallowance. Additionally, the SS-10 extended the statute to March 1, 2002. Your
Forms 843 weren’t executed until August 23, 2002." Id.
On July 25, 2003, U.P. sent the IRS, by certified mail, a letter protesting the
“disallowance of the refund claims filed on Forms 843” for 1995 and 1996. Id., Ex. I at
UPRR-000046. The protest letter stated in part: “Your letter dated June 27, 2003
stated that the claims were disallowed because the statute for both of these periods has
expired. Union Pacific Railroad Company (UPRR) disagrees that the time for filing a
claim for these periods has expired.” Id. In the letter, U.P. argued that, under I.R.C. §
6511(c), its period for filing a refund claim was extended until six months after the date
on which the statute of limitations for assessment expired, which, in this case, was
September 1, 2002.

Id. at UPRR-000047 to -000048.

The Government does not

dispute that the IRS issued the notice of disallowance in error, reconsidered its decision,
and subsequently allowed portions of U.P.’s 1995 and 1996 refund claims. See Filing
No. 32, Government Brief at 9.
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On February 9, 2005, IRS Revenue Agent Beth Nichols sent a fax to Jim Coulton
at U.P. Filing No. 33-10, Ex. J. That correspondence stated "[t]he Cincinnati Service
Center determined that both claims were late filed. This decision has been reversed.
The claims were later determined to be timely filed.” Id. at UPRR-000051. In a note
attached to the fax, Agent Nichols stated that “[t]he taxpayer’s position is correct”
regarding the timeliness of the refund claims. Id. at UPRR-000052.
On August 22, 2012, the IRS Appeals Office sent U.P. two letters regarding its
RRTA refund claims for 1995 and 1996, respectively. Filing No. 33-11 & Filing No. 3312; Index of Evid., Exs. K and L. In the letters, for each tax year, the IRS Appeals Office
allowed part of the claimed amount and disallowed the remainder. Id. The Appeals
Office disallowed the amounts claimed for refunds in connection with “signing bonuses”
and “stock equity.” Id. The letters also stated:
You were previously issued your legal notice dated June 27, 2003 (copy
enclosed). Therefore, your period for filing [a] refund suit began to run
when the legal notice was issued disallowing your claims. The Service
reconsidered your refund claim for which it had already issued a
disallowance; however, the reconsideration of the disallowance does not
extend the 2 year limitation period to file a refund suit. Appeals may allow
a claim for refund after the 2 year period for filing a refund suit has
expired; however, the 2 year period for filing a refund suit is not extended.
Id. at UPRR-000055, -000061.
The IRS continued to examine the 1995 and 1996 refund claims until it issued its
decisions on August 22, 2012. See Exs. K & L, Appeal Letters at 1 (entitled "in re:
Railroad Retirement Tax," and stating "[w]e considered your protest and the evidence
and arguments in support of the above claim."). The IRS offered the following rationale
for the denial:

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the term "money" as used in the statutory language of I.R.C. § 3231(e)(1)
is not limited to cash currency and includes other types of compensation
including stock options. The language in I.R.C. § 3231(e) in its entirety is
not ambiguous by the use of the word "money" to clearly extend to
compensation paid in various forms including cash and noncash.
Therefore, payments of stock options were determined to meet the RRTA
definition of compensation.
Id. at UPRR-000055.
Also, the government admits that records associated with Union Pacific's 1995
and 1996 refund claim files were destroyed.

Filing No. 44, Index of Evid., Ex. 8,

Response to Plaintiff’s First Set of Request for Admission at 2. Other relevant records,
like Nichols’ Activity Records, have not been produced presumably because they could
not be found. Id., Ex. 12, Second Declaration of Robert R. Martinelli at 3.
II.

LAW

Jurisdiction is a threshold issue for the court. See Steel Co. v. Citizens for a
Better Env’t, 523 U.S. 83, 94-96 (1998); see also Arbaugh v. Y & H Corp., 546 U.S. 500,
506 (2006) (“The objection that a federal court lacks subject-matter jurisdiction . . . may
be raised by a party, or by a court on its own initiative, at any stage in the litigation, even
after trial and the entry of judgment.”). The party seeking to invoke federal jurisdiction
carries the burden of proof on that issue. See DaimlerChrysler Corp. v. Cuno, 547 U.S.
332, 342 (2006); V S Ltd. P’ship v. Department of Hous. & Urban Dev., 235 F.3d 1109,
1112 (8th Cir. 2000).
A complaint can be challenged for lack of jurisdiction under Fed. R. Civ. P.
12(b)(1) either “on its face or on the factual truthfulness of its averments.” Titus v.
Sullivan, 4 F.3d 590, 593 (8th Cir. 1993). “In a facial challenge to jurisdiction, all of the
factual allegations concerning jurisdiction are presumed to be true and the motion is
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successful if the plaintiff fails to allege an element necessary for subject matter
jurisdiction.” Id. In a factual attack on the jurisdictional allegations of the complaint,
however, the court can consider competent evidence such as affidavits, deposition
testimony, and the like in order to determine the factual dispute.

Id.

In such a

challenge, the court is free to weigh the evidence and satisfy itself as to the existence of
its power to hear the case. Osborn v. United States, 918 F.2d 724, 730 (8th Cir. 1990).
Under 28 U.S.C. § 1346(a)(1), a district court has jurisdiction over a “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). The
Internal Revenue Code provides that taxpayers seeking a refund of taxes unlawfully
assessed must comply with the tax refund procedures set forth in the Code. United
States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 4 (2008). Under those procedures, a
taxpayer must file an administrative claim with the Internal Revenue Service before filing
suit against the Government. Id. Such a claim must be filed within three years of the
filing of a return or two years of payment of the tax, whichever is later. Id.; I.R.C. §
7422(a).
The limitations period for bringing a § 7422 refund suit in the district court is two
years from the time the IRS notifies the taxpayer via certified or registered mail of the
disallowance of the claim. 26 U.S.C. § 6532(a)(1); Treas. Reg. § 601.103(c)(3); see
Kaffenberger v. United States, 314 F.3d 944, 951 (8th Cir. 2003). "Congress provided a
mechanism that allows the IRS and the taxpayer to extend the period for bringing suit to
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recover a refund beyond the normal two-year statutory period." Kaffenberger, 314 F.3d
at 952; I.R.C. § 6532(a)(2) (“The 2–year period prescribed in paragraph (1) shall be
extended for such period as may be agreed upon in writing between the taxpayer and
the Secretary.”).

Congress did not intend to prevent taxpayers and the IRS from

agreeing, after the two-year statute of limitations has passed, to extend the time in
which a taxpayer may bring suit for a refund. Kaffenberger, 314 F.3d at 953.
The IRS acts within its statutory authority in entering into an agreement to extend
the time to bring suit on a refund claim, even though the statutory time period for
bringing suit had lapsed prior to the date of the agreement. Kaffenberger, 314 F.3d at
953.

Moreover, there is authority for the proposition that a statutory notice of

disallowance may be deemed to have been withdrawn by the IRS, and, at least under
certain circumstances, oral representations that withdrawal has taken place may suffice
to prove that such is the case. First Alabama Bank, N.A. v. United States, 981 F.2d
1226, 1229 (11th Cir. 1993); Haber v. United States, 831 F.2d 1051, 1052–1053 (Fed.
Cir. 1987); Beardsley v. United States, 126 F. Supp. 775, 777 (D. Conn. 1954) (finding
no statutory prohibition on Commissioner's withdrawal of disallowance). Where a notice
is withdrawn by the Commissioner and a new notice mailed, the statute runs from the
date of the second mailing. Beardsley, 126 F. Supp. at 777.
III.

DISCUSSION

The court finds this action was timely filed because it was filed within two years of
the IRS issuing its notice of disallowance in August 2012. Although the government
contends the 2003 notice started the limitations period for U.P. to file suit, the record

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shows the IRS reversed its decision, and then effectively withdrew the 2003 notice such
that the two-year period of limitations to file suit did not run.
The 2003 notice was not a disallowance of the merits of the claim, it was a
determination that the claims were untimely. U.P. timely protested that determination
and the determination was ultimately reversed. The IRS action withdrawing the 2003
notice or rendering it ineffective was communicated to U.P. in the 2005 fax. The IRS
continued to examine the 1995 and 1996 claims until it issued the notice of
disallowance in 2012. There was no substantive disallowance to bring to federal court
until the IRS ruled on the merits of the dispute. The 1995 and 1996 claims were not
disallowed on their merits until August 22, 2012.
Accordingly, the court finds the government's motion to dismiss the 1995 and
1996 claims should be denied.
IT IS ORDERED that:
1.

U.P.'s motion for a hearing (Filing No. 45) is denied.

2.

The government's motion to dismiss (Filing No. 31) is denied.

Dated this 1st day of July, 2016.
BY THE COURT:
s/ Joseph F. Bataillon
Senior United States District Judge

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