Kim v. United States

664 F.Supp.3d 1062

Paul Young KIM, Plaintiff, v. UNITED STATES of America, Defendant.

Case No. 5:22-cv-00691-SPG-SP

United States District Court, C.D. California

Signed March 28, 2023

Dennis N. Brager, Guy Hyman Glaser, Brager Tax Law Group APC, Los Angeles, CA, for Plaintiff.

Gavin L. Greene, Jolene Tanner, AUSA - Office of U.S. Attorney, Tax Division, Los Angeles, CA, for Defendant.

ORDER DENYING, IN PART, AND GRANTING, IN PART, DEFENDANT'S MOTION TO DISMISS [ECF No. 16]

SHERILYN PEACE GARNETT, UNITED STATES DISTRICT JUDGE

Before the Court is Defendant United States of America's ("Defendant") motion to dismiss ("Motion") pursuant to Federal Rule of Civil Procedure 12(b)(6). (ECF No. 16 ("Mot.")). Having considered the submissions of the parties in support of and in opposition to the Motion, the relevant law, the record in this case, and the arguments during the hearing on the Motion, the Court DENIES, in part, and GRANTS, in part, Defendant's Motion.

I. BACKGROUND

The complaint alleges as follows: Paul Young Kim ("Plaintiff") is a United States citizen who, until September 13, 2015, resided in South Korea and was subject to South Korea's social security laws. (ECF No. 1 ("Compl.") ¶¶ 1, 7). Plaintiff relocated to the United States and on September 14, 2015, began residing in California. (Id. ¶ 8). For the taxable year ending December 31, 2015, Plaintiff timely filed a Form 1040 "U.S. Individual Tax Return" ("2015 Return") with the internal Revenue Service ("IRS"). (Id. ¶ 9). In addition to the amount of regular income tax owed, Plaintiff reported in the 2015 Return that he owed $644,382 in Net Investment Income Tax ("NIIT"). (Id. ¶ 10). After subtracting payments, Plaintiff requested a refund from the IRS of $140,171 for the 2015 tax year. (Id. ¶ 11).

On or about March 16, 2017, Plaintiff filed a 1040X "Amended Individual U.S. Income Tax Return" ("Amended Return") for the 2015 tax year seeking a refund of $638,232 in NIIT Plaintiff had reported and paid based on his original 2015 Return. (Id. ¶ 12). Plaintiff attached to his claim for a refund the following statement explaining why Plaintiff believed he was entitled to the requested refund:

[Plaintiff] was a resident of South Korea through September 13, 2015 and was subject to the Korean National Pension Law. Under the U.S. - Korea Social Security Agreement, a Korean Resident is exempt from the U.S. Social Security tax and Medicare tax. Thus, the Taxpayer should not be subject to the [NIIT] on any income before he became a California resident on September 14, 2015.

(Id. ¶ 13). On March 5, 2020, an IRS examiner sent Plaintiff a letter in which the examiner proposed to fully disallow Plaintiff's refund claim. (Id. ¶ 14). The IRS examiner wrote that the NIIT was an income tax, not a Medicare tax, and thus not subject to exemption under the U.S. - South Korea Social Security Totalization Agreement ("Totalization Agreement"). (Id.). The IRS examiner also concluded in the letter that foreign tax credits could not be used to offset the NIIT. (Id.). On March 17, 2020, Plaintiff submitted his response disagreeing with the IRS examiner on both points. (Id. ¶ 15).

On May 28, 2020, Plaintiff's CPA submitted a Protest to the IRS disputing the proposed determination. (Id. ¶ 16). Attached to this Protest was another Form 1040X "Amended U.S. Individual Income Tax Return" for the 2015 tax year ("Second Amended Return") explaining that it was "filed as a protective claim for a decision that [the NIIT] could be reduced by Foreign Tax Credit under the U.S. - S. Korea Income Tax Treaty." (Id.). On October 19, 2021, the IRS' Independent Office of Appeals sustained the determination made in the IRS examiner's March 5, 2020, letter. (Id. ¶ 17). The Independent Office of Appeals found: (1) the NIIT was an income tax, and not a Medicare tax, and thus not subject to exemption under the Totalization Agreement; and (2) foreign tax credits could not be used to offset the NIIT. (Id.).

On April 22, 2022, Plaintiff filed a Complaint against the Defendant. The Complaint asserts two claims for a refund of the NIIT. First, Plaintiff requests the Court declare that "[t]he NIIT is a Medicare Tax and Plaintiff is thus exempt from paying NIIT under the Totalization Agreement. (Id. ¶¶ 19-23). Alternatively, Plaintiff requests the Court declare that Plaintiff is entitled to Foreign Tax Credits to reduce and offset the entire NIIT paid. (Id. ¶¶ 24-25). Defendant filed the instant Motion on July 22, 2022. (Mot.). Plaintiff filed his opposition on October 10, 2022. (ECF No. 19). Finally, Defendant filed its reply on November 2, 2022. (ECF No. 20).

II. LEGAL STANDARD

Under Federal Rule of Civil Procedure 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. Dismissal is proper "when the complaint either (1) lacks a cognizable legal theory or (2) fails to allege sufficient facts to support a cognizable legal theory." Somers v. Apple, Inc., 729 F.3d 953, 959 (9th Cir. 2013) (citation omitted). To survive a 12(b)(6) motion, the plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A plaintiff must allege facts sufficient to "raise a right to relief above the speculative level." Id. at 555, 127 S.Ct. 1955 (citation omitted). In other words, a plaintiff must allege sufficient facts to "nudge [ ] their claims across the line from conceivable to plausible. Id. at 570, 127 S.Ct. 1955. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 663, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted). In deciding whether the plaintiff has stated a claim upon which relief can be granted, the court accepts the plaintiff's allegations as true and draws all reasonable inferences in favor of the plaintiff. Usher v. City of L.A., 828 F.2d 556, 561 (9th Cir. 1987) (citation omitted). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Ashcroft, 556 U.S. at 678, 129 S.Ct. 1937. Although, in ruling on a Rule 12(b)(6) motion, a court generally may only consider allegations contained in the four corners of the complaint, the court may also consider documents referenced in the complaint but not explicitly incorporated therein without converting a Rule 12(b)(6) motion to a motion for summary judgment if the complaint relies on the documents and their authenticity is not contested. Swartz v. KPMG LLP, 476 F.3d 756, 763 (9th Cir. 2007) (per curiam); Lee v. City of L.A., 250 F.3d 668, 688-89 (9th Cir. 2001) (citation omitted). Additionally, the Court may consider matters properly subject to judicial notice. Swartz, 476 F.3d at 763 (citation omitted). The Court may take judicial notice of matters that are either (1) generally known within the trial court's territorial jurisdiction or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. Fed. R. Evid. 201(b).

III. DISCUSSION

Defendant argues that the Complaint's first claim for a refund should be dismissed because the NIIT is an income tax, not a Medicare tax, and therefore Plaintiff is not exempt under the Totalization Agreement from being taxed on his net investment income. (Mot. at 10-16). Defendant also argues that the Complaint's second claim for a refund should be dismissed because Plaintiff cannot reduce and offset the entire NIIT paid for the 2015 tax year by the Foreign Tax Credit under the United States - Republic of Korea Income Tax Convention. (Id. at 16-20). The Court addresses each of Defendant's arguments in turn.

A. Plaintiff's First Claim for Refund Based on the Totalization Agreement is Arguably Plausible

Generally, "workers in the United States are taxed to support the payment of social security benefits to the retired and to individuals with disabilities" with the expectation that those same workers, "having contributed to the national economy while actively employed," will themselves "later become eligible beneficiaries of social security benefits." Eshel v. Comm'r, 831 F.3d 512, 514 (D.C. Cir. 2016) (citation omitted). "That system gets complicated, however, for Americans who work overseas for part of their careers and, during those years, are required to pay taxes into a foreign government's social security system." Id.

To address the above issue, Congress amended the Social Security Act (the "SSA") in 1977 to authorize the President to enter into agreements creating "totalization arrangements" between the social security systems of the United States and the social insurance or pension systems of a foreign country. SSA 1977, § 317(a), Pub. L. No. 95-216, 91 Stat. 1538. Currently codified as Section 233 of the SSA, the purpose of the amendment was to allow for such totalization arrangements to establish "entitlement to and the amount of old-age, survivors, disability, or derivative benefits based on a combination of an individual's periods of coverage under the social security system" established by the United States and the foreign country. 42 U.S.C. § 433(a). The SSA defines the term "social security system" to mean "with respect to a foreign country, a social insurance or pension system which is of general application in the country and under which periodic benefits, or the actuarial equivalent thereof, are paid on account of old age, death, or disability." 42 U.S.C. § 433(b)(1). "Periods of coverage" is defined by section 433 to mean "a period of payment of contributions or a period of earnings based on wages for employment or on self-employment income . . . ." 42 U.S.C. § 433(b)(2). "Any agreement establishing a totalization arrangement" must provide that ...