Mitchell v. United States

AUSTIN G. MITCHELL, JR., and LUCINDA J. MITCHELL, Plaintiffs, v. UNITED STATES OF AMERICA, Defendant.

No. 21-10889

United States District Court, E.D. Michigan, Southern Division

April 7, 2022

OPINION AND ORDER GRANTING DEFENDANT'S MOTION TO DISMISS (ECF NO. 31)

GEORGE CARAM STEEH, UNITED STATES DISTRICT JUDGE.

Defendant United States of America, seeks dismissal of Plaintiffs' complaint in this dispute involving income taxes. Because the court concludes that it lacks subject matter jurisdiction over Plaintiffs' claims, it will grant Defendant's motion.

BACKGROUND FACTS

Plaintiffs Austin and Lucinda Mitchell allege that they are victims of an unscrupulous tax preparer, who used their identities to prepare fraudulent tax returns. They hired Damian Jackson, of Diamond Tax Services, to prepare their tax return for 2009. Jackson filed a return in their names for 2009 and amended returns for 2006, 2007, and 2008. These returns fraudulently claimed excessively large refunds, to be directed to Jackson's address. The Mitchells contend that Jackson did not show these returns to them.

If the Internal Revenue Service (IRS) had accepted the 2008 return as filed, the refund would have been $655, 233. The IRS audited the 2008 return and issued a notice on March 8, 2010 that the Mitchells may have claimed a frivolous position on their return. Ultimately, in 2012, the IRS adjusted the return to reflect their actual income and withholding resulting in a tax of $15, 056 for 2008. The IRS also assessed late return and late payment penalties and interest. The Mitchells claim that they did not receive notice of the assessments. The IRS contends that the Mitchells have not paid their 2008 income tax liability and owe $22, 923.45 as of October 22, 2021.

The Mitchells' 2009 return also claimed a fraudulent refund of $326, 728. The IRS audited the return, determined the amount of tax due, and assessed penalties and interest. The IRS assert that the Mitchells owe $27, 888.62 in taxes, penalties, and interest for 2009 as of October 22, 2021.

In addition, in 2012 the IRS assessed frivolous return penalties against the Mitchells for the tax years 2006-2009, in the amount of approximately $35, 000 for each taxpayer. According to the IRS, these amounts have not been paid. The Mitchells clam that they did not receive notice of the audits or frivolous return penalties.

As a result of their unpaid tax liabilities, the IRS has recorded five notices of federal tax liens (NFTLs) against the Mitchells with the Wayne County Register of Deeds. These NFTLs were recorded in 2013 and 2016. The Mitchells allege that they did not receive notice of the NFTLs.

In 2011, the United States brought a civil action against Damian Jackson and his co-conspirators. Jackson was enjoined from preparing federal tax returns for others and was required to provide a copy of the order to his customers. Case No. 11-14108 (E.D. Mich.), ECF No. 30 (Permanent Injunction Order dated August 9, 2012). Jackson was also prosecuted criminally for conspiring to defraud the government. Case No. 14-20450 (E.D. Mich.). Although the timing is not clear, the Mitchells assert that they did not discover the fraudulent returns “until years after Jackson, et al. perpetrated the identity theft scheme against them.” ECF No. 26 at ¶ 51.

On August 12, 2019, the Mitchells submitted an Identity Theft Affidavit, IRS Form 14039, requesting that the IRS abate “the unlawful assessments made against the Mitchells by reason of the identity theft returns filed by Jackson, et al.” Id. at ¶¶ 54-55. The IRS informed them that they should file Form 14157, Return Preparer Complaint, and Form 14157-A, Return Preparer Fraud and Misconduct Affidavit, which they did on May 6, 2020. The Mitchells allege that the IRS has not responded to their submissions.

In 2020, the Mitchells also filed their “actual” tax returns for 2008, 2009, 2010, and 2012, to replace the fraudulent tax returns filed by Jackson. ECF No. 26 at ¶¶ 61-63. They allege that they paid some of their 2008, 2009, and 2010 tax liability, as well as some of the 2008 frivolous return penalty. Id. at ¶ 52. The Mitchells claim a refund, alleging that these amounts were erroneously or illegally assessed.

The Mitchells filed an administrative claim with the IRS on November 30, 2020, pursuant to Treasury Regulation § 301.7432-1(f). The Mitchells asserted that the taxes, penalties, and NFTLs were unlawful and that they had suffered damages in the amount of $20, 000, 000. According to the Mitchells, the IRS has not responded to their administrative claim.

The Mitchells filed this action on April 21, 2021, and an amended complaint on October 5, 2021. They seek a refund for amounts erroneously assessed and collected, to quiet title, damages for failure to release the liens, and mandamus relief. They claim that their tax debt has been certified as “seriously delinquent, ” which has prevented Mrs. Mitchell from obtaining a passport. The government seeks dismissal pursuant to Rules 12(b)(1) and 12(b)(6), primarily asserting that the court lacks subject matter jurisdiction over the Mitchells' claims.

LAW AND ANALYSIS

I. Standard of Review

Under Fed.R.Civ.P. 8(a)(2), a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Although this standard does not require “detailed factual allegations, ” it does require more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). To survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege facts that, if accepted as true, are sufficient “to raise a right to relief above the speculative level” and to “state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570; see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

A motion under Rule 12(b)(1), such as one based upon sovereign immunity, challenges the court's subject matter jurisdiction and consists of either a facial or factual attack:

A facial attack is a challenge to the sufficiency of the pleading itself. On such a motion, the court must take the material allegations of the petition as true and construed in the light most favorable to the nonmoving party. A factual attack, on the other hand, is not a challenge to the sufficiency of the pleading's allegations, but a challenge to the factual existence of subject matter jurisdiction. On such a motion, no presumptive truthfulness applies to the factual allegations, and the court is free to weigh the evidence and satisfy itself as to the existence of its power to hear the case.

United States v. Ritchie, 15 F.3d 592, 598 (6th Cir. 1994) (citations omitted). Although Defendant does not specify the type of attack it is asserting, the court concludes that it lacks subject matter jurisdiction based upon the allegations in Plaintiffs' complaint and attached exhibits.

II. Count I - Refund Claim

In Count I, Plaintiffs seek a refund for taxes and penalties erroneously or illegally assessed or collected. See 28 U.S.C. § 1346(a)(1). Congress has waived sovereign immunity for such claims against the United States, under certain conditions. See United States v. Dalm, 494 U.S. 596, 601 (1990). One of the jurisdictional prerequisites to suit is the filing of an administrative claim for refund:

No 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, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit 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); Dalm, 494 U.S. at 601-602. In addition to filing an administrative claim for refund, the taxpayer must also pay his full tax liability prior to filing suit. Flora v. United States, 362 U.S. 145, 146 (1960) (noting that “full payment of the assessment is a jurisdictional prerequisite to suit”); see also Dunlap v. Lew, 2017 WL 9496075, at *2 (6th Cir. June 2, 2017).

Plaintiffs' complaint does not allege that they filed an administrative claim for refund or paid their full tax liability prior to filing suit. (Their 2020 administrative claim did not seek a refund.) Plaintiffs filed an administrative claim on December 16, 2021, after they filed their complaint on April 21, 2021, and amended complaint on October 5, 2021. This post-suit filing does not salvage their claim, however, as an administrative claim must be filed prior to the filing of the complaint. See United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 8 (2008) (“Taxpayers seeking refunds of unlawfully assessed taxes must comply with the Code's refund scheme before bringing suit, including the requirement to file a timely administrative claim.”). Because Plaintiffs neither paid their full deficiency nor filed a claim for refund prior to filing suit, their refund claim must be dismissed for lack of jurisdiction. See Estate of Davenport v. United States, 736 F.Supp.2d 1087, 1091-92 (E.D. Mich. 2010) (“[I]n 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.”).

III. Count II - Quiet Title Claim

In Count II of the complaint, Plaintiffs seek to quiet title pursuant to 28 U.S.C. § 2410, alleging that the IRS wrongfully recorded tax liens on their property. This statute provides a “limited” waiver of sovereign...