Ivanhoe v. United States

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ROBERT J. IVANHOE and ANNE G. IVANHOE v. UNITED STATES OF AMERICA

CIVIL No. 3:20CV00148(SALM)

United States District Court, D. Connecticut

July 28, 2022

RULING ON DEFENDANT'S MOTION TO DISMISS OR FOR SUMMARY JUDGMENT [Doc. #30] AND PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT [Doc. #29]

HON SARAH A. L. MERRIAM UNITED STATES DISTRICT JUDGE

Plaintiffs Robert J. Ivanhoe and Anne G. Ivanhoe (“plaintiffs” or “the Ivanhoes”) bring this action against the United States of America (“defendant” or “USA”) for recovery of federal income tax. The Ivanhoes allege that the assessment of additional tax liability for tax year 2012 by the Internal Revenue Service (“IRS”) was “erroneously or illegally assessed and collected.” Doc. #8 at 1.

Pursuant to Federal Rule of Civil Procedure 56(a), plaintiffs move for summary judgment. See Doc. #29. Defendant moves for dismissal under Rules 12(b)(1), 12(b)(2),^[1] and 12(b)(6), or in the alternative, for summary judgment pursuant to Rule 56(a). See Doc. #30. For the reasons set forth below, defendant's motion to dismiss [Doc #30] is GRANTED, and plaintiffs' motion [Doc. #29] is DENIED, as moot.^[2]

I. LEGAL STANDARD - Rule 12(b) Dismissal

“The United States moves to dismiss the plaintiffs' refund claim under Rule 12(b)(1), Rule 12(b)(6), and sovereign immunity[.]” Doc. #30-1 at 14.

As an initial matter, the Court must determine whether review is appropriate under Rule 12(b)(1) or Rule 12(b)(6). “The standards of review for a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction and under 12(b)(6) for failure to state a claim are substantively identical.” Feldheim v. Fin. Recovery Servs., Inc., 257 F.Supp.3d 361, 365 (S.D.N.Y. 2017) (citation and quotation marks omitted). However, “there is a key distinction in that evidence outside the pleadings may, if necessary, be considered under Rule 12(b)(1), but not under 12(b)(6), unless the Court converts the motion into one for summary judgment.” Mercer v. Schriro, 337 F.Supp.3d 109, 122 (D. Conn. 2018).

Because defendant seeks dismissal on sovereign immunity grounds, review is appropriate under Rule 12(b)(1). See, e.g., Cangemi v. United States, 13 F.4th 115, 134 (2d Cir. 2021) (“Because the district court dismissed Plaintiffs' tort claims against the United States ... on sovereign immunity grounds, that was a jurisdictional dismissal under Rule 12(b)(1).”); Morabito v. New York, 803 Fed.Appx. 463, 465 n.2 (2d Cir. 2020), as amended (Feb. 27, 2020), cert. denied, 141 S.Ct. 244 (2020), reh'g denied, 141 S.Ct. 886 (2020) (“Although the district court characterized its dismissal as falling under Rule 12(b)(6), it is more appropriately characterized as a dismissal under Rule 12(b)(1), as it was based on sovereign immunity.”); Hamm v. United States, 483 F.3d 135, 137 (2d Cir. 2007) (“[W]here a waiver of sovereign immunity does not apply, a suit should be dismissed under Fed.R.Civ.P. 12(b)(1) and not Fed.R.Civ.P. 12(b)(6) for failure to state a claim[.]”).

“Under Rule 12(b)(1), a district court must dismiss an action or claim for lack of subject matter jurisdiction ‘when the district court lacks the statutory or constitutional power to adjudicate it.'” Mercer, 337 F.Supp.3d at 122 (quoting Makarova v. United States, 201 F.3d 110, 112 (2d Cir. 2000)).

In a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(1), the defendant may challenge either the legal or factual sufficiency of the plaintiff's assertion of jurisdiction, or both. How the district court proceeds to resolve the motion to dismiss depends upon whether the motion presents a factual challenge. If the defendant challenges only the legal sufficiency of the plaintiff's jurisdictional allegations, the court must take all facts alleged in the complaint as true and draw all reasonable inferences in favor of plaintiff[.] But where evidence relevant to the jurisdictional question is before the court, the district court may refer to that evidence.

Robinson v. Gov't of Malaysia, 269 F.3d 133, 140 (2d Cir. 2001) (citations and quotation marks omitted). “[W]here jurisdictional facts are placed in dispute, the court has the power and obligation to decide issues of fact by reference to evidence outside the pleadings, such as affidavits.” Tandon v. Captain's Cove Marina of Bridgeport, Inc., 752 F.3d 239, 243 (2d Cir. 2014) (citation and quotation marks omitted).

“[T]he party asserting subject matter jurisdiction has the burden of proving by a preponderance of the evidence that it exists.” Id. (citation and quotation marks omitted). Because “[t]he doctrine of sovereign immunity is jurisdictional in nature, ... plaintiff[s] bear[] the burden of establishing that [their] claims fall within an applicable waiver.” Makarova, 201 F.3d at 113.

II. BACKGROUND

A. Procedural Background

Plaintiffs filed this action on February 3, 2020. See Doc. #1. On February 7, 2020, plaintiffs filed an Amended Complaint. See Doc. #8. On February 26, 2020, plaintiffs filed a return of service stating that defendant was served at 135 High Street, Hartford, CT. See Doc. #9 at 1. On April 1, 2020, counsel for defendant filed an appearance. See Doc. #10. On that same date, defendant filed a “Stipulation Regarding Service Upon the United States of America[,]” stating that there is an IRS office located at 135 High Street, Hartford, CT, but that defendant was not properly served because “service is effected upon the United States by delivering the summons and complaint to the United States Attorney's Office in the district where the action is brought and by mailing a copy of both the summons and complaint to the Attorney General of the United States in Washington, D.C.” Doc. #11 at 1 (citing Fed.R.Civ.P. 4(i)(1)) (capitalizations removed). Defendant “agree[d] to waive formal service of the summons and complaint as of” that date, and “[t]he parties stipulate[d] that the start date of the 60-day period for the United States to respond to the amended complaint” was the date of the filing of that stipulation, April 1, 2020, and defendants' response was therefore due on June 1, 2020. Id. at 1-2. On April 7, 2020, Judge Michael P. Shea, the then-presiding Judge, entered an order acknowledging the parties' stipulation and ordering defendant to “file a response to the complaint by 6/1/20.” Doc. #12. On October 29, 2020, after having received two consented-to extensions of time, see Docs. #13, #14, #15, #16, defendant filed its Answer. See Doc. #17.

On January 13, 2021, Judge Shea entered a Scheduling Order that required any dispositive motions to be filed by November 1, 2021. See Doc. #20 at 1. On October 15, 2021, this case was transferred to the undersigned “for all further proceedings.” Doc. #25.

On November 15, 2021, after having received an extension of time, see Doc. #28, the parties filed the instant dispositive motions. See Docs. #29, #30. On December 17, 2021, again after having received an extension of time, see Doc. #32, the parties filed memoranda in opposition to the cross-motions. See Docs. #33, #34. On December 22, 2021, defendant filed a motion, with plaintiffs' consent, “to strike its earlier Memorandum in Opposition to Plaintiffs' Motion for Summary Judgment (Doc. 34) (‘Memorandum') and Local Rule 56(a)2 Statement of Facts in Opposition to Summary Judgment (Doc. 34-1) (‘Statement of Facts') (collectively, the ‘Opposition') and substitute [revised] versions of the Memorandum and Statement of Facts[.]” Doc. #36 at 1. On that same date, the Court granted defendant's motion, see Doc. #37, and defendant filed its Amended Memorandum in Opposition. See Doc #38. On February 2, 2022, after having received an extension of time, see Doc. #43, the parties filed reply memoranda. See Docs. #44, #45.

B. The Partnership Structure

This matter concerns three separate entities: Stellar GT Promote (“Promote”), Stellar Member (“Stellar Member”), and Stellar GT, LLC (“Stellar GT”).^[3] “During the 2012 calendar year, plaintiff Robert J. Ivanhoe was a passive member in [Promote], in which he owned a 2.5% interest.” Doc. #33-1 at 1, 6.^[4] During 2012, Promote “had a 55% interest in” Stellar and a “77.8% interest in Stellar Member[.]” Id. at 1-2. Stellar Member, in turn, had a 45% interest in Stellar. See id. at 2. Promote held a 35.001% indirect interest in Stellar “through its 77.78% interest in Stellar Member, which in turn held the remaining 45% in Stellar.” Id. Thus, Promote held a 90.001% interest in Stellar, “consist[ing] of its direct 55% interest and its indirect 35.001% interest[.]” Id.

C. TEFRA Framework^[5]

The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) was enacted to, “among other things, centralize[] the treatment of many partnership taxation issues.” Uniquest Delaware LLC v. United States, 294 F.Supp.3d 107, 118 (W.D.N.Y. 2018) (citation and quotation marks omitted). With respect to partnership taxation, TEFRA gives the IRS the ability to make any necessary changes to treatment of partnership items at the partnership level, and determine each partner's tax liability based on the treatment of the partnership items at the partnership level. See id. at 118-19.

Under the Internal Revenue Code (the “IRC”) partnerships are not subject to income tax directly. See 26 U.S.C. §701 (“A partnership as such shall not be subject to the income tax imposed by this chapter. Persons carrying on business as partners shall be liable for income tax only in their separate or individual capacities.”); 26 C.F.R. §1.701-1 (“Partners are liable for income tax only in their separate capacities. Partnerships as such are not subject to the income tax imposed by subtitle A but are required to make returns of income under the provisions of section 6031 and the regulations thereunder.”). “A partnership must...