EState of Davenport v. U.S.

736 F.Supp.2d 1087

106 A.F.T.R.2d 2010

ESTATE OF Sarah M. DAVENPORT, Plaintiff,

v.UNITED STATES of America, Defendant.

Civil Action No. 09-CV-13591.

United States District Court,

E.D. Michigan,

Southern Division.

Aug. 16, 2010.

John D. Mabley, Smith and Mabley, Farmington Hills, MI, for Plaintiff.

Stephen T. Lyons, U.S. Department of Justice, Washington, DC, for Defendant.

OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

PAUL D. BORMAN, District Judge.

I. INTRODUCTION

This is a federal tax case. Plaintiff, the Estate of Sarah M. Davenport ("the Estate"), seeks a $262,932 refund of federal estate taxes assessed and collected by Defendant, the United States, following the death of Sarah M. Davenport ("Decedent"). The government argues that the Court lacks jurisdiction over this case pursuant to 26 U.S.C. § 7422(a) because the Estate failed to file with the IRS, prior to the commencement of this action, a "claim for refund." Alternatively, the government contends that the Estate is precluded, under res judicata principles, from re-litigating issues related to its tax liability in light of the final judgment entered by the Tax Court in Estate of Davenport v. Comm'r, No. 16060-04, T.C. Memo 2006-215, 2006 WL 2845690 (Oct. 5, 2006) (unpublished).

The government filed its Motion for Summary Judgment on March 15, 2010. This matter is fully briefed and the Court heard oral argument on July 28, 2010. For the reasons that follow, the government's motion will be granted.

II. FACTS ¹

A.

Decedent died on October 31, 2000. Prior to her death, Decedent and her parents jointly sued for damages resulting from alleged negligence during Decedent's delivery at birth ("the negligence lawsuit"). The negligence lawsuit resulted in a settlement agreement whereby two annuities were created for the benefit of Decedent.

A cash payment was also made as part of the settlement agreement. The cash was used, in part, to pay attorney fees incurred by the Davenports in prosecuting the negligence lawsuit. The remainder of the cash payment went to Decedent's parents.

B.

On July 31, 2001, the Estate filed an estate tax return listing the assets of Decedent. The return also claimed certain deductions. Importantly, the claimed deductions did not include the attorney fees, mentioned above, which were incurred approximately nine years before Decedent's death in connection with the negligence lawsuit.

Moreover, the existence of the two annuities was noted on the tax return, but the value of the annuities was listed as zero because the Estate took the position that the annuities belonged to Decedent's parents and not to Decedent.

C.

The Estate's tax return was audited by the IRS and a deficiency in the amount of $507,103 was assessed. The deficiency was based, in part, on the Estate's failure to include the value of the two annuities in the gross estate.

The Estate timely petitioned the Tax Court for a redetermination of the claimed deficiency. Following trial, the Tax Court sustained the deficiency in the determined amount of $507,103, ruling that the valueof the two annuities should have been included in the gross estate. The Memorandum Findings of Fact and Opinion of the Tax Court is attached as Exhibit 1 to the government's motion.

D.

On January 18, 2008, the Estate filed an amended estate tax return, which listed an estate tax due of $163,718. This amount was paid with the filing of the amended return; the Estate does not seek a refund of this amount.

Importantly, the amended return included the value of the two annuities in the gross estate pursuant to the Tax Court's ruling. However, the Estate, for the first time, claimed a deduction for the attorney fees incurred nine years earlier in connection with the negligence lawsuit.

E.

The amended return was audited by the IRS, who disallowed the claimed attorney fees deduction. A deficiency of $262,932 was assessed against the Estate. The Estate paid the deficiency on May 1, 2009. So far as the Court is aware, nothing further was filed with the IRS prior to the commencement of this lawsuit. That is, after the Estate paid the $262,932 deficiency, but prior to the commencement of this lawsuit, the Estate filed nothing with the IRS.

F.

The present lawsuit was filed on September 11, 2009. The Estate seeks a refund in the amount of $262,932, which is the amount of the deficiency assessment it paid on May 1, 2009.

III. ANALYSIS

The government argues that it is entitled to summary judgment for two reasons. First, the government contends that the Court lacks jurisdiction over this case pursuant to 26 U.S.C. § 7422(a) because the Estate failed to file a "claim for refund" prior to filing this lawsuit. Second, and alternatively, the government argues that the doctrine of res judicata precludes the present lawsuit. The Court agrees with both arguments and addresses each, in turn.

A. The Court Lacks Jurisdiction

The Court's jurisdiction over this matter is premised on 28 U.S.C. § 1346(a)(1), which confers concurrent jurisdiction upon federal district courts and the Court of Federal Claims over "[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected." However, under the Internal Revenue Code,

[n]o suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected ... until a claim for refund has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

26 U.S.C. § 7422(a). Via § 1346(a)(1), then, "Congress has expressly waived sovereign immunity for suits against the United States by taxpayers seeking to recover tax refunds." Kaffenberger v. United States, 314 F.3d 944, 950 (8th Cir.2003). But via § 7422(a), "Congress limited that waiver by requiring a taxpayer to file an administrative claim [for refund] with the Secretary of Treasury before bringing a [refund] lawsuit." Id. at 950-951. Summarizing,

[a] taxpayer seeking a refund of taxes erroneously or unlawfully assessed or collected may bring an action against the Government either in United States district court or in the United States Court of Federal Claims. The Internal Revenue Code specifies that before doing so, the taxpayer must comply withthe tax refund scheme established in the Code. That scheme provides that a claim for a refund must be filed with the Internal Revenue Service (IRS) before suit can be brought, and establishes strict timeframes for filing such a claim.

United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 4, 128 S.Ct. 1511, 170 L.Ed.2d 392 (2008) (citations omitted).

The sole question for determination is whether the Estate properly filed a claim for refund prior to the commencement of this refund suit. The Court finds that it did not and, accordingly, will dismiss this case for lack of jurisdiction pursuant to § 7422(a).

As stated in a treatise,

[t]o maintain a suit for refund, several conditions must be met:

(1) Full Payment-The deficiency amount, generally interpreted as including penalties and interest, must be paid in full;

(2) Credit Claim-The taxpayer must have filed an administrative claim for ... refund with the Service within the appropriate period of limitations;

(3) Action Upon Claim-The claim for refund must have either been acted upon by the Service or six months must have passed since it was filed;

(4) Notice of Disallowance-The suit for refund must have been brought within two years from the date of the mailing of the notice disallowing the refund claim (if one is sent) or within the period of an agreed extension; and

(5) Original Claim-If the suit is based on the rejection of a refund claim, or failure of the Service to act on it, the suit must state the same grounds as the claim that was filed with the Service.

Mertens, Law of Federal Income Taxation § 58A:1 (2006).

Critically, "[n]o overpayment will exist prior to the date of payment, and any refund claim filed prior to the existence of an overpayment will not be effective for subsequently paid amounts." Kafka & Cavanagh, Litigation of Federal Civil Tax Controversies § 13.06 (2d ed. 1995). See also Ackerman v. United States, 643 F.Supp.2d 140, 146 (D.D.C.2009) ("the term 'claim for refund' requires that payment be made before a claim is filed"); Canterna v. United States, Dep't of Treasury, I.R.S., 2003 WL 22753566, at *4 (W.D.Pa. Oct. 1, 2003) (unpublished) ("[i]t is axiomatic that a claim for refund presupposes that the tax and interest have been paid"); Brielman v. United States, 1974 WL 643, at *1 (D.Mass. Aug. 27, 1974) (unpublished) ("[t]he language of [§ 7422(a) ] clearly contemplates a claim after payment and requires the filing of such a claim before suit can be instituted"); Gilmore v. United States, 1977 WL 1139, at *1 (W.D.Tex. Jan. 26, 1977) (unpublished) ("[s]ince there can be no valid claim for refund until after the payment of the tax in question, any claim for refund made prior to payment of the tax is not 'duly filed' "). These cases all stand for the proposition that, in order to satisfy the jurisdictional requirements of § 7422(a), the taxpayer must first pay the deficiency, then file a claim for refund, and then file a refund lawsuit, in that precise order.² TheAckerman court has explained the rationale for this "pay-first" requirement:

First, common sense dictates that a person cannot request a "refund" when the entity to which she makes her request does not have her money. Second, IRS regulations, which section 7422 requires a taxpayer to follow to "duly file [ ]" a "claim for refund," 26 U.S.C. § 7422(a), state that " [a]fter payment of the tax, a taxpayer may, within the applicable period of limitations, contest the assessment by filing with the district director a claim for refund of all or any part of the amount paid...." See 26 C.F.R. § 601.103 (

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