Chenette v. United States

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5 UNITED STATES DISTRICT COURT

6 NORTHERN DISTRICT OF CALIFORNIA

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SUSANNA CHENETTE,

8 Case No. 19-cv-02998-JCS

Plaintiff,

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v. ORDER DENYING MOTION TO

10 DISMISS AND VACATING OCTOBER

UNITED STATES OF AMERICA, 25, 2019 MOTION HEARING

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Defendant. Re: Dkt. No. 11

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14 I. INTRODUCTION

15 Plaintiff Susanna Chenette brings this action against Defendant the United States seeking a

16 tax refund pursuant to 26 U.S.C. § 7422. The United States does not dispute that Chenette

17 overpaid her taxes. Nonetheless, it brings a Motion to Dismiss (“Motion”) in which it seeks

18 dismissal of the Complaint on the basis that the claim that Plaintiff filed with the Internal Revenue

19 Service was untimely and therefore there is no subject matter jurisdiction over this action. The

20 Court finds that the Motion is suitable for determination without oral argument and therefore

21 vacates the motion hearing scheduled for October 25, 2019 at 9:30 a.m. The Case

22 Management Conference set for the same date will remain on calendar but will be conducted

23 at 2:00 p.m. rather than 9:30 a.m. as originally scheduled. For the reasons stated below, the

24 Motion is DENIED.1

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1 II. BACKGROUND

2 A. Allegations in Complaint

3 Chenette’s claim for a tax refund in this case relates to taxes she paid in connection with

4 sales of stock in 2012. Complaint ¶¶ 18-21. In particular, she alleges that she sold some stock that

5 had been given to her by her grandfather and that when she did so, she took a loss on many of the

6 shares. Id. ¶ 18. She alleges that she kept a detailed spreadsheet listing “the stock certificate

7 numbers, her exact bases in all the shares, details of all splits, some price history, and gifting dates

8 for all of the stock sold.” Id. & Ex. 6 (Stock Spreadsheet). She also kept “detailed personal

9 accountings and updated her spreadsheet to identify which stock she sold at the time she filed her

10 taxes.” Id. ¶ 21. Chenette alleges that she reported the loss she took and the stock sale to the IRS

11 properly in her 2012 tax return. Id. ¶ 22.

12 Chenette alleges that in September 2014, she received a letter from the IRS (“the

13 September 2014 Letter”) accusing her of underreporting income for the tax period that ended in

14 2012 and demanding payment in the amount of $24,384.00, which included almost $5,000 in

15 penalties. Id. ¶¶ 2, 22. According to the Complaint, the September 2014 Letter did not actually

16 make changes to Chenette’s account but merely proposed the additional assessment. Id. ¶ 23. The

17 allegedly underreported taxes were not formally assessed until December 8, 2014. Complaint ¶ 2.

18 With interest, the assessment was $18,000.21. Id.; see also Complaint, Ex. 1 (IRS Account

19 Transcript for Chenette for tax period ending December 31, 2012 (“IRS Account”), showing that

20 on December 8, 2014 Chenette was assessed $17,219 in additional taxes and late payment interest

21 in the amount of $781.21 (“December 8 Assessment”)).

22 In the meantime, on October 14, 2014, Chenette responded to the September 2014 Letter

23 informing her of the proposed assessment with a letter to the IRS (“October 2014 Letter”) in

24 which she “politely and respectfully explain[ed] her tax calculations, complete with detailed

25 spreadsheets and equations.” Complaint ¶ 24 & Ex. 3 (October 2014 Letter); see also United

26 States’ Motion to Dismiss at 2 (stating that Chenette’s October 2014 Letter “provide[d] a detailed

27 explanation as to why Ms. Chenette did not agree with the proposed additions to her federal

1 Complaint, Ex. 3. Chenette further alleges that “[b]ecause of the threatening nature of the large

2 sum of money the IRS was seeking in its September 2014 Letter, including penalties and interest,

3 [she] also submitted a sum of money ($19,445.00) to stop the accrual of fines, interest, or

4 penalties.” Id. ¶ 25. Chenette states in the October 2014 Letter that her check remitting this

5 amount was enclosed with the letter. Complaint, Ex. 3. An entry dated October 14, 2014 on

6 Chenette’s IRS Account describes this sum as “[a]dvance payment of tax owed” and it is reflected

7 as a credit of $19,445. Id. ¶ 26 & Ex. 1. On December 8, 2014 the IRS used the credit to satisfy

8 the December 8 Assessment. Id. ¶ 3.

9 Chenette alleges that on December 22, 2014 the IRS “internally reviewed [the] additional

10 assessment and confirmed the IRS’s position.” Id. ¶ 29 & Ex. 1. On the same date, the IRS issued

11 a refund in the amount of $1,450.68 on Chenette’s advance payment. Id. ¶ 30. Chenette alleges

12 that in January 2015 she received a notice that the IRS had “processed her October 2014 letter and

13 adjusted her tax liability[,]” resulting in the $1,450.68 refund she had been sent on December 22,

14 2014. Id. ¶ 30 & Ex. 1. According to Chenette, this was the first time she was given notice that

15 the IRS had increased her tax liability for 2012. Id. ¶ 31.

16 Subsequently, Chenette alleges, she continued to challenge the IRS’s calculation of her

17 2012 tax liability. Id. ¶ 33. She alleges that “[a]lthough she had no new information to provide,

18 [she] decided to submit the information in a different form.” Id. In particular, “as the two-year

19 statute of limitations to request a refund of her overpayment approached, Ms. Chenette decided to

20 file an amended return for 2012.” Id. ¶ 34. She alleges she filed a 1040x for 2012 on November

21 11, 2016. Id. ¶ 35. She further alleges that as an attachment to this filing she “submitted the same

22 information she submitted in her October 2014 Letter explaining her bases calculations and

23 providing the Stock Spreadsheet.” Id. (emphasis in Complaint) & Exhibit 2. In February 2017, the

24 IRS requested additional information in response to Chenette’s 1040x, asking her to complete

25 Form 8949. Id. ¶ 36. Chenette completed the form and returned it to the IRS around February 27,

26 2017. Id. ¶ 37. Form 8949 is a “formal spreadsheet” that contained the same information

27 Chenette had provided in her October 2014 Letter and her 1040x. Id.

1 the IRS owed her a refund of $18,000.12. Id. ¶ 38 & Ex. 4 (June 12, 2017 notice). However,

2 Chenette never received a refund, despite formal protests and repeated attempts to obtain the

3 refund. Id. ¶¶ 41-61. Rather, the IRS refused to issue the refund and ultimately told Chenette

4 after almost two years of failing to respond to her requests that her November 2016 claim for a

5 refund was untimely under 26 U.S.C. § 6511(a) and 26 U.S.C. § 7422(d). Id. ¶ 58.

6 In her Complaint, filed on May 30, 2019, Chenette asserts a claim for a refund pursuant to

7 26 U.S.C. § 7422.

8 B. Statutory Framework Governing Claims for a Tax Refund

9 Under the Tax Code, a civil action for a tax refund may not be brought until the taxpayer

10 has filed an administrative claim with the Internal Revenue Service (“IRS”). See 26 U.S.C. §

11 7422(a) (no civil action for tax refund may be maintained “until a claim for refund or credit has

12 been duly filed with the Secretary, according to the provisions of law in that regard, and the

13 regulations of the Secretary established in pursuance thereof.”). Further, in order for the civil

14 action to be considered timely, the administrative claim must have been filed with the IRS within

15 the time period allowed for administrative claims. Omohundro v. United States, 300 F.3d 1065,

16 1067 (9th Cir. 2002) (“A taxpayer’s failure to file an administrative claim within the time periods

17 imposed by statute divests the district court of jurisdiction over an action for a refund or credit”).

18 That time period is set forth in 26 U.S.C. § 6511(a), which provides that the administrative claim

19 must be filed “within 3 years from the time the return was filed or 2 years from the time the tax

20 was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer,

21 within 2 years from the time the tax was paid.”

22 When a taxpayer remits funds to the IRS, it may or may not be considered a payment for

23 the purposes of Section 6511(a). In particular, in some situations, funds that are remitted to the

24 IRS are considered a deposit rather than a payment and therefore do not start the running of the

25 two-year limitation period set forth in Section 6511(a). Section 6603 of the Tax Code authorizes

26 taxpayers to make deposits “to suspend running of interest on potential underpayments.” That

27 section provides, in relevant part, as follows:

taxpayer may make a cash deposit with the Secretary which may

1 be used by the Secretary to pay any tax imposed under subtitle A

or B or chapter 41, 42, 43, or 44 which has not been assessed at

2 the time of the deposit. Such a deposit shall be made in such

manner as the Secretary shall prescribe.

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(b) No interest imposed.--To the extent that such deposit is used by

4 the Secretary to pay tax, for purposes of section 6601 (relating to

interest on underpayments), the tax shall be treated as paid when

5 the deposit is made.

6 (c) Return of deposit.--Except in a case where the Secretary

determines that collection of tax is in jeopardy, the Secretary shall

7 return to the taxpayer any amount of the deposit (to the extent not

used for a payment of tax) which the taxpayer requests in writing.

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9 26 U.S.C. § 6603.

10 The IRS has promulgated Revenue Procedure 2005-18, which sets forth certain rules and

11 procedures which govern whether a taxpayer’s remittance will be considered a deposit or a

12 payment. Among other things, it provides that “[a] taxpayer may make a deposit under section

13 6603 by remitting to the Internal Revenue Service Center at which the taxpayer is required to file

14 its return, or to the appropriate office at which the taxpayer’s return is under examination, a check

15 or a money order accompanied by a written statement designating the remittance as a deposit.”

16 Rev. Proc. 2005-18 § 4.01(1). In subsequent sections, the Revenue Procedure addresses whether

17 an “undesignated remittance” will be considered to be a payment or a deposit in various scenarios.

18 Id. §§ 4.03 – 4.05.

19 C. The Motion

20 In the Motion, the United States contends Chenette’s claim must be dismissed for lack of

21 subject matter jurisdiction because the remittance she sent to the IRS on October 14, 2014 was a

22 payment and therefore the limitations period for filing an administrative claim expired two years

23 from that date, that is, on October 14, 2016. As Chenette did not file a formal claim until

24 November 2016, the United States asserts, her administrative claim was untimely.2 In making this

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2 The Court notes that while Chenette alleges she filed a formal administrative claim on or about

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November 11, 2016, see Complaint ¶ 35, the United States has submitted a Form 4340 Certificate

of Assessments, Payments, and Other Specified Matters that appears to reflect that the claim was

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submitted on November 14, 2016. See Watson Decl., Ex. 1. This discrepancy has no bearing on

1 argument, the United States relies heavily on the fact (which is undisputed) that Chenette did not

2 expressly designate the remittance she sent to the IRS as a deposit. The United States argues that

3 under Ninth Circuit authority, a remittance that is not designated as a deposit is properly

4 considered a payment rather than a deposit.

5 Chenette challenges the United States’ characterization of the governing case law, arguing

6 that it improperly relies on Ninth Circuit cases that involve late payers rather than audits,

7 mischaracterizes or omits relevant Circuit Court and Supreme Court authority addressing

8 remittances in audit situations, selectively cites its own Revenue Procedure, and ignores key facts

9 alleged in the Complaint. She argues that the question of whether her remittance was a payment

10 or a deposit should be considered under a “facts and circumstances test” that directs courts to

11 consider the taxpayer’s intent when making the remittance, how the remittance was treated by the

12 IRS when it was received and when the tax liability to which the remittance was applied was

13 defined. Under that test, she argues that her remittance should be considered a deposit.

14 Alternatively, she argues that to the extent that the United States’ characterization of the facts in

15 its Motion to Dismiss diverges in significant respect from the allegations in the Complaint,

16 resolution of this question at the pleading stage is inappropriate and she should be permitted to

17 conduct discovery before the question is decided.

18 Chenette also argues that even if the remittance she made on October 14, 2014 was a

19 payment, her civil action is not barred because the allegations in the Complaint show that she

20 submitted an informal claim long before the deadline, namely, when she submitted her October

21 2014 Letter challenging the proposed assessment. As this informal claim was followed by a

22 formal claim that remedies any formal defects or lack of specificity, Chenette argues, it was

23 sufficient to render her civil action timely under the informal claim doctrine.

24 The United States did not file a response to Chenette’s Opposition and the deadline for

25 doing so has now passed.3

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than a deposit. It also does not change the Court’s analysis with respect to the applicability of the

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informal claim doctrine, discussed below. Therefore, the Court need not resolve whether the

1 III. ANALYSIS

2 A. Legal Standard Under Rule 12(b)(1)

3 Federal courts are courts of limited jurisdiction. Kokkonen v. Guardian Life Ins. Co. of

4 Am., 511 U.S. 375, 377 (1994). Accordingly, “federal courts have a continuing independent

5 obligation to determine whether subject-matter jurisdiction exists” over a given claim. Leeson v.

6 Transamerica Disability Income Plan, 671 F.3d 969, 975 (9th Cir. 2012) (internal quotation marks

7 and citations omitted). Rule 12(b)(1) allows defendants to move to dismiss a claim for lack of

8 subject-matter jurisdiction. Fed. R. Civ. P. 12(b)(1). On a motion to dismiss for lack of subject

9 matter jurisdiction under Rule 12(b)(1), it is the plaintiff’s burden to establish the existence of

10 subject matter jurisdiction. Kingman Reef Atoll Invs., LLC v. United States, 541 F.3d 1189, 1197

11 (9th Cir. 2008).

12 A party challenging the court’s subject matter jurisdiction under Rule 12(b)(1) may bring a

13 facial challenge or a factual challenge. See White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). “If

14 the defendant brings a facial attack, arguing that the allegations in the complaint are insufficient to

15 demonstrate the existence of jurisdiction, the court’s inquiry is much the same as when ruling on a

16 motion to dismiss brought under Rule 12(b)(6).” Org. for Advancement of Minorities with

17 Disabilities v. Brick Oven Rest., 406 F. Supp. 2d 1120, 1124 (S.D. Cal. 2005) (citing Moore’s

18 Federal Practice § 12.30). This means the court accepts the factual allegations in the complaint as

19 true. Miranda v. Reno, 238 F.3d 1156, 1157 (9th Cir. 2001). Where a defendant brings a factual

20 challenge, on the other hand, “a court may look beyond the complaint to matters of public record

21 without having to convert the motion into one for summary judgment.” White, 227 F.3d at 1242

22 (citation omitted).

23 B. Legal Standards Governing Subject Matter Jurisdiction in Tax Cases Against

the United States

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“Under settled principles of sovereign immunity, the United States, as sovereign, is

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immune from suit, save as it consents to be sued . . . and the terms of its consent to be sued in any

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1 court define that court’s jurisdiction to entertain the suit.” United States v. Dalm, 494 U.S. 596,

2 608 (1990) (internal quotations and citations omitted). Pursuant to 28 U.S.C. § 1346(a), the

3 United States has waived its sovereign immunity and district courts have jurisdiction over suits to

4 recover internal revenue taxes. 28 U.S.C. § 1346(a)(1) (providing that “the district courts shall

5 have original jurisdiction . . . of . . . “[a]ny civil action against the United States for the recovery

6 of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or

7 any penalty claimed to have been collected without authority or any sum alleged to have been

8 excessive or in any manner wrongfully collected under the internal-revenue laws.”). “However,

9 ‘[n]o suit [for refund] . . . shall be maintained in any court . . . until a claim for refund or credit has

10 been duly filed with the Secretary [of the Treasury], according to the provisions of law in that

11 regard, and the regulations of the Secretary established in pursuance thereof.’” Imperial Plan, Inc.

12 v. United States, 95 F.3d 25, 26 (9th Cir. 1996) (quoting 26 U.S.C. § 7422(a)). In Imperial, the

13 Ninth Circuit explained that “[t]o be ‘duly filed,’ a claim must be filed in accordance with, inter

14 alia, the provisions of I.R.C. § 6511.” Id. (quoting Miller v. United States, 38 F.3d 473 (9th Cir.

15 1994)). Thus, filing a timely claim is a jurisdictional prerequisite to an action for recovery of

16 taxes paid.” Id.

17 C. Whether the Court has subject matter jurisdiction under the informal claim

doctrine

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In the Motion, the United States advanced a single theory in support of dismissal, namely,

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that Chenette’s October 14, 2014 remittance was a payment and therefore, the administrative

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claim that she filed in November 2016 was untimely. Yet Chenette argued in her Opposition brief

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that even if her 2014 remittance was a payment, there is subject matter jurisdiction over her claim

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for a tax refund under the informal claim doctrine (an argument to which the United States did not

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respond). Because the Court finds that Chenette is correct, it does not address the question of

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whether the October 14, 2014 remittance was a payment that started the two-year limitation period

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under Section 6511.

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Under the informal claim doctrine, an informal claim with “technical deficiencies” that is

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filed within the statutory period may stop the running of the statute of limitations for a refund

1 claim where it is followed by a valid refund claim filed after the statutory period has run. Comm’r

2 of Internal Revenue v. Ewing, 439 F.3d 1009, 1015 (9th Cir. 2006) (citing First Sec. Bank of

3 Idaho, N.A. v. Comm’r, 592 F.2d 1046, 1049 (9th Cir.1979)); see also Weiler v. United States, 82

4 F.3d 424 (9th Cir. 1996) (noting that there are “limited circumstances in which the IRS can be

5 deemed to have waived the formal requirements of refund claims”) (citing United States v. Kales,

6 314 U.S. 186 (1941), and Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945)). In Ewing,

7 the Ninth Circuit explained that the doctrine is “concerned with claims that are ‘deficient merely

8 in one or two of the technical requirements imposed by the Treasury regulation [26 C.F.R. §

9 301.6402–2(b)(1)].’” Id. (citing BCS Fin. Corp. v. United States, 118 F.3d 522, 524 (7th Cir.

10 1997); and citing Kaffenberger v. United States, 314 F.3d 944, 954 (8th Cir. 2003) (citing Kales

11 and stating that “the Supreme Court has endorsed informal claims filed within the statutory period

12 that have technical deficiencies, as long as a valid refund claim is subsequently made after the

13 period has run”).

14 “The question whether an informal claim has been filed is largely one of fact.” Martin v.

15 United States, 833 F.2d 655, 661 (7th Cir. 1987) (citations omitted). “The general test is whether

16 ‘[t]he Commissioner’s attention should have been focused on the merits of the particular dispute’

17 by the alleged informal claim.” Kuehn v. United States, 480 F.2d 1319, 1320–21 (Ct. Cl. 1973)

18 (quoting Angelus Milling Co., 325 U.S. at 297); see also Kales, 314 U.S. 194 (holding that an

19 informal claim must “fairly advis[e] the [IRS] Commissioner of the nature of the taxpayer’s

20 claim). In applying this test, courts consider whether the claim is “sufficient to apprise the [IRS]

21 that a refund is being claimed,” and “specifies the tax and the year or years for which the refund is

22 being sought sufficiently so that the Service can investigate the claim.” Palomares v. Comm'r of

23 Internal Revenue, 691 F. App’x 858, 859 (9th Cir. 2017) (quoting Michael I. Saltzman, IRS Prac.

24 & Proc. ¶ 11.08(2); and citing Kales, 314 U.S. at 194); see also 26 C.F.R. § 301.6402-2

25 (providing that a claim for a tax refund “must set forth in detail each ground upon which a credit

26 or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof”

27 and further providing that “[t]he statement of the grounds and facts must be verified by a written

1 Milling Co. explained that “[i]t is not enough that in some roundabout way the facts supporting the

2 claim may have reached [the IRS Commissioner].” 325 U.S. at 297.

3 Here, the Court finds that Chenette’s October 2014 Letter is sufficient to constitute an

4 informal claim. The IRS does not dispute that it received the letter, and Chenette’s IRS Account

5 reflecting the payment that was enclosed with the letter further supports the conclusion that it did.

6 See Complaint, Ex. 1. Further, the October 2014 Letter clearly identified the tax year at issue; and

7 in the words of the United States, it contained “a detailed explanation as to why Ms. Chenette did

8 not agree with the proposed additions to her federal income tax liability.” Motion at 2. In

9 addition, Chenette signed the letter under penalty of perjury. Indeed, the United States has pointed

10 to no deficiencies in this informal claim and does not assert that the facts contained within it were

11 insufficient to advise the Commissioner of the nature of her claim. The Court finds that the facts

12 contained in the October 2014 Letter were sufficient to apprise the Commissioner of Chenette’s

13 claim.

14 Of particular significance to the Court is the fact that the October 2014 Letter contained

15 substantially the same information as the 1040x Form that she subsequently submitted in

16 November 2016. The United States has not identified any deficiencies with the 1040x Form,

17 treating it as a claim for a refund (albeit untimely) without making any objection to the claim as to

18 form or content. See Motion to Dismiss at 3 (“On November 14, 2016, Ms. Chenette filed a Form

19 1040X, Amended U.S. Individual Income Tax Return, which the IRS treated as an administrative

20 claim for refund.”). Even more telling is that approximately seven months after Chenette

21 submitted the Form 1040x, the IRS issued a notice that she was entitled to a refund of the

22 December 8 Assessment, indicating that the explanation contained in the Form 1040x – and thus

23 in the October 2014 Letter as well – was sufficient to apprise the IRS of the issues and allow it

24 investigate, ultimately leading it to conclude that Chenette had correctly calculated her 2012 tax

25 liability in her original 2012 tax return. See Complaint, Exs. 2 (Form 1040x), 3 (October 2014

26 Letter) & 4 (June 12, 2017 Notice of Refund Due).

27 In sum, the Court finds that Chenette timely filed an informal claim when she submitted

1 the informal claim doctrine, her claim is timely and the Court has subject matter jurisdiction over

2 this action.

3 || IV. CONCLUSION

4 For the reasons stated above, the Motion is DENIED.

5 IT IS SO ORDERED.

6 Dated: October 16, 2019

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J PH C. SPERO

8 ief Magistrate Judge

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