Riter v. USA

Filing 21

MEMORANDUM DECISION AND ORDER ADOPTING 17 REPORT AND RECOMMENDATIONS re 8 Motion to Dismiss for Lack of Jurisdiction and overruling objection. Case is dismissed without prejudice. Signed by Judge David Nuffer on 3/15/19 (alt)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
KENNETH RITER,

v.

MEMORANDUM DECISION AND
ORDER ADOPTING [17] REPORT &
RECOMMENDATION AND
OVERRULING [18] PLAINTIFF’S
OBJECTION

UNITED STATES OF AMERICA,

Case No. 2:17-cv-1265-DN

Plaintiff,

Defendant.

District Judge David Nuffer
Magistrate Judge Evelyn J. Furse

Magistrate Judge Evelyn J. Furse’s Report and Recommendation 1 under 28 U.S.C.
§ 636(b)(1)(B) recommends that Defendant United States of America’s motion to dismiss 2 be
granted and that Plaintiff Kenneth Riter’s claims be dismissed without prejudice for lack of
subject matter jurisdiction. More specifically, the Magistrate Judge found that (1) Mr. Riter
failed to pay the full amount of penalties generally required in order to maintain suit in federal
district court under 28 U.S.C. § 1346; and (2) Mr. Riter did not satisfy the timing requirements of
26 U.S.C. § 6694(c) to be able to proceed under Section 6694(c)’s limited exception to the full
payment rule. 3 Mr. Riter objected to the Report and Recommendation, asserting that dismissal
was improper because (1) 26 U.S.C. § 6694(c) is a claim processing rule, subject to equitable
tolling; (2) the United States had the burden of showing that Section 6694(c) is jurisdictional and

1

Report and Recommendation to Grant United States’ Motion to Dismiss for Lack of Subject Matter Jurisdiction
(ECF No. 8) (“Report and Recommendation”), docket no. 17, entered Jan. 15, 2019.

2

United States’ Motion to Dismiss for Lack of Subject Matter Jurisdiction (“Motion to Dismiss”), docket no. 8, filed
Mar. 19, 2018.
3

Report and Recommendation at 3, 5-12, docket no. 17.

failed to meet that burden; and (3) equitable tolling should apply because the tax penalty was not
legally assessed by the Internal Revenue Service (“IRS”). 4 The United States responded to the
objection. 5
De novo review has been completed of those portions of the report, proposed findings
and recommendations to which objection was made, including the record that was before the
Magistrate Judge and the reasoning set forth in the Report and Recommendation. 6 The analysis
and conclusion of the Magistrate Judge are correct. Therefore, the analysis and conclusion of the
Magistrate Judge are accepted and the Report and Recommendation 7 is adopted.
DISCUSSION
The Magistrate Judge’s analysis of jurisdiction is correct. 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.’” 8 28 U.S.C. § 1346 grants federal district courts subject
matter jurisdiction to hear tax refund suits, such as Mr. Riter’s lawsuit. However, the exercise of
jurisdiction is subject to what is generally known as the full payment rule, which requires that a
party fully pay the assessed liabilities before suit can be maintained in federal district court. 9
This “pay first and litigate later” principle is well-settled. 10

4

Objection to Report and Recommendation to Grant United States’ Motion to Dismiss for Lack of Subject Matter
Jurisdiction (ECF No. 8), docket no. 18, filed Jan. 28, 2019.

5

United States’ Response to Plaintiff’s Objection to Report and Recommendation Jurisdiction, docket no. 20, filed
Feb. 12, 2019.
6

28 U.S.C. § 636(b).

7

Docket no. 17.

8

Report and Recommendation at 4; Radil v. Sanborn W. Camps, Inc., 384 F.3d 1220, 1225 (10th Cir. 2004)

9

Flora v. United States, 362 U.S 145, 177 (1960).

10

Flora 362 U.S. at 167-68. Ardalan v. United States, 748 F.2d 1411, 1413 (“The Supreme Court, this circuit, and
all other federal circuits have long held that [28 U.S.C. § 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 under § 1346(a)(1).”).

2

26 U.S.C. § 6694(c) provides a limited exception to the full payment rule, allowing a
taxpayer to pay only 15% of the penalty before filing suit in district court. However, the taxpayer
must file a refund claim with the IRS and initiate suit in district court “within 30 days after the
day on which his claim for refund of any partial payment of any penalty . . . is denied (or, if
earlier, within 30 days after the expiration of 6 months after the day on which he filed the claim
for refund)[.]” 11 Contrary to Mr. Riter’s assertion, Section 6694(c) is neither a claim processing
rule nor a jurisdictional bar to suit. 28 U.S.C. § 1346 is the applicable statutory provision that
provides subject matter jurisdiction over tax refund suits. The Magistrate Judge’s
recommendation follows clearly established law that (1) the failure to pay the full penalty
precludes suit; and (2) 26 U.S.C. § 6694(c) is a limited exception to the full payment rule that
ceases to apply if suit is not filed within the time period identified. 12
Here, the facts relevant to jurisdiction are undisputed. The United States, through the
IRS, assessed penalties against Mr. Riter for tax years 2010-2014. 13 Notice of the penalties was
sent to Mr. Riter on June 27, 2016. 14 On July 22, 2016, Mr. Riter filed a claim for refund and
paid $750 for each tax year. 15 This amount constituted 15% of the total penalty. 16 On November

11

26 U.S.C. § 6694(c)(2).

12

26 U.S.C. § 6694(c)(2); see e.g., Taylor v. Comm’r of Internal Revenue, 732 F. App’x 599 (9th Cir. 2018)
(unpublished); Kline v. United States, 586 F. Supp. 338 (N.D. Ohio 1984); Bailey v. United States, No. CV-1402471-TUC-RCC, 2016 WL 7743404 (D. Ariz. Dec. 6, 2016) (unpublished); O'Keefe v. United States, No. 80-6316ME, 1981 WL 1745 (D. Or. Jan. 2, 1981); and Mayo v. United States, No. 81-2125, 1982 WL 1652 (W.D. La. May
10, 1982).
13

Complaint ¶¶ 6-9, 13, docket no. 2, filed Dec. 8, 2017; Motion to Dismiss at 3, docket no. 8; Memorandum in
Opposition to United States’ Motion to Dismiss for Lack of Subject Matter Jurisdiction at 1-4, docket no. 9, filed
Mar. 30, 2018.
14

Complaint ¶ 13.

15

Id. ¶ 15.

16

Id. ¶¶ 13, 15.

3

16, 2017, the United States denied Mr. Riter’s refund claim. 17 Mr. Riter initiated his lawsuit on
December 8, 2017, seeking a refund of the penalties paid and other related relief. 18
Mr. Riter did not pay the full penalty as required to maintain suit in federal district court
under 28 U.S.C. § 1346(a). Mr. Riter also failed to meet the requirements of 26 U.S.C. § 6694(c),
which would have provided a limited exception to the full payment rule. 19 As a result, the court
lacks jurisdiction over the tax refund suit.
Without subject matter jurisdiction, equitable considerations and the merits of the case
cannot be addressed. 20 Although the allegations made by Mr. Riter are concerning, including the
IRS’s lack of communication, 21 Mr. Riter is not without relief. He can pay the full penalty to
cure the deficiency in jurisdiction or pursue his right to challenge the penalty in the United States
Tax Court. Regardless, as the party invoking federal jurisdiction, Mr. Riter has the burden of
establishing a basis for federal subject matter jurisdiction. 22 Having failed to do so, the United
States’ motion to dismiss is granted.

17

Id. ¶ 26.

18

Complaint, docket no. 2, filed Dec. 8, 2017.

19

The Magistrate Judge correctly calculated that Mr. Riter was obligated to file his suit by February 21, 2017 in
order to take advantage of Section 6694(c)’s limited exception to the full payment rule.
20

Haynes Trane Service Agency v. Am. Standard, Inc., 573 F.3d 947, 964 (10th Cir. 2009) (“[A]n equitable remedy
. . . is not proper if there is an adequate remedy at law.”); Garling v. United States Envl. Prot. Agency, 849 F.3d
1289, 1299 n.6 (10th Cir. 2017) (declining to address argument that equitable tolling should apply because action
must be dismissed for lack of subject matter jurisdiction).
21

Mr. Riter has alleged that the IRS did not respond to his request for a conference with the Appeals Office (sent
March 7, 2017), request for a collection due process hearing (sent September 27, 2016), or request for a due process
hearing (sent July 12, 2017). Complaint ¶¶ 11, 20, 24. Although Mr. Riter filed his claim on July 22, 2016, the IRS
did not respond until almost 16 months later when it sent its denial on November 16, 2017. Id. ¶¶ 15, 26.
22

“Because the jurisdiction of federal courts is limited, ‘there is a presumption against our jurisdiction, and the party
invoking federal jurisdiction bears the burden of proof.’” Marcus v. Kansas Dep't of Revenue, 170 F.3d 1305, 1309
(10th Cir. 1999) (citing Penteco Corp. v. Union Gas Sys., Inc., 929 F.2d 1519, 1521 (10th Cir.1991).

4

ORDER
IT IS HEREBY ORDERED that the Report and Recommendation 23 is ADOPTED and
that Mr. Riter’s Objection 24 is OVERRULED.
IT IS FURTHER ORDERD that this case is DISMISSED without prejudice.
The clerk of the court shall close the case.
Dated March 15, 2019.
BY THE COURT:
____________________________
David Nuffer
United States District Judge

23

Docket no. 17.

24

Docket no. 18.

5