Schlabach v. United States

JOHN SCHLABACH, Plaintiff, v. UNITED STATES OF AMERICA, and its agents, Defendant.

No. 2:18-cv-00053-SMJ

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WASHINGTON

March 25, 2019

ORDER GRANTING DEFENDANT'S CONVERTED MOTION FOR SUMMARY JUDGMENT

Before the Court, without oral argument, is Defendant the United States of America's converted motion for summary judgment, ECF No. 9. The United States seeks summary judgment in its favor on Plaintiff John Schlabach's pro se complaint against the Internal Revenue Service ("IRS").¹

Schlabach seeks an order invalidating the civil monetary penalties the IRS charged him for filing frivolous income tax returns regarding tax years 2009, 2010, 2012, and 2013, and refunding the money he paid or the IRS applied toward those penalties. The United States argues the Court lacks subject matter jurisdiction over Schlabach's refund claims for tax years 2009, 2010, and 2012, and Schlabach failsto state a facially plausible refund claim for tax year 2013. Having reviewed the file and relevant legal authorities, the Court grants the United States' motion.

BACKGROUND

Schlabach filed his complaint on February 13, 2018. ECF No. 1. The United States moved to dismiss Schlabach's complaint on August 28, 2018. ECF No. 9. The Court granted the United States' motion to dismiss on October 24, 2018. ECF No. 14. Schlabach moved for partial relief from the Court's dispositive order on November 23, 2018. ECF No. 15. On January 18, 2019, the Court partially granted Schlabach's request, vacated its dispositive order, and converted the United States' motion to dismiss into one for summary judgment. ECF No. 19.

The Court's January 18, 2019 order also directed the parties to respond to the material facts that the Court identified may not be genuinely in dispute. Id. at 1-2, 6-7, 9-10, 12-13. The Court issued this directive under Federal Rule of Civil Procedure 56(f)(3). Id. at 6, 9. The Court then instructed the parties to respond with all materials pertinent to the specific facts identified in the order. Id. at 7, 10, 12-13; ECF No. 23. The parties responded accordingly. ECF Nos. 21, 21-1, 21-2, 22, 22-1, 22-2, 22-3, 24. Viewing all evidence and drawing all reasonable inferences in the manner most favorable to Schlabach, the undisputed facts are as follows.

On November 28, 2016, the IRS notified Schlabach that it charged him $10,000 in frivolous filing penalties, plus $324.69 in interest, for tax year 2013.ECF No. 10 at 7-8; ECF No. 21-1 at 3; ECF No. 21-2 at 10-11. On May 1, 2017, the IRS notified Schlabach that it applied his 2015 income tax overpayment of $1730.87 to the frivolous filing penalties for tax year 2013. ECF No. 10 at 9; ECF No. 21-1 at 3; ECF No. 21-2 at 13. On May 15, 2017, the IRS notified Schlabach that it applied his 2016 income tax overpayment of $8724.68 to the frivolous filing penalties for tax year 2013. ECF No. 10 at 10; ECF No. 21-1 at 3; ECF No. 21-2 at 14. Through these credits, Schlabach paid the full amount of the frivolous filing penalties for tax year 2013. ECF No. 9-1 at 39-41.

On June 10, 2017, Schlabach filed a claim with the IRS seeking a refund of the money it applied to the frivolous filing penalties for tax year 2013. ECF No. 10 at 12; ECF No. 21-1 at 4; ECF No. 21-2 at 15. On November 13, 2017, the IRS rejected Schlabach's refund claim for tax year 2013. ECF No. 10 at 13-14; ECF No. 21-1 at 4; ECF No. 21-2 at 16-17.

On December 4, 2017, the IRS notified Schlabach that it charged him $15,000 in frivolous filing penalties for tax years 2009, 2010, and 2012. ECF No. 9-1 at 30, 33, 36; ECF No. 10 at 15-20. Sometime between December 26, 2017 and January 2, 2018, Schlabach paid the U.S. Department of the Treasury $2250, or the equivalent of fifteen percent of the frivolous filing penalties for tax years 2009, 2010, and 2012. ECF No. 9-1 at 10, 30, 33, 36; ECF No. 10 at 21-28. Schlabach did not pay the full amount of the frivolous filing penalties for those tax years. ECF No. 9-1 at 30-31, 33-34, 36-37. On January 16, 2018, Schlabach filed claims with the IRS seeking a refund of the money he paid toward the frivolous filing penalties for tax years 2009, 2010, and 2012. ECF No. 10 at 26-28.

Schlabach filed this lawsuit on February 13, 2018. ECF No. 1. As of February 13, 2018, the IRS had not yet rejected Schlabach's refund claims for tax years 2009, 2010, and 2012, and less than a month had expired since he filed them. ECF No. 9-1 at 9-12, 14-16, 18-20, 30-31, 33-34, 36-37; ECF No. 10 at 26-28.

Schlabach claims he "has converted all his received paychecks into lawful money of the United States ("U.S. Notes"), pursuant to the provisions of 12 U.S.C. § 411." ECF No. 1 at 1; accord ECF No. 21-1 at 1-2; ECF No. 21-2 at 3. Schlabach explains his "process is to stamp 'Redeemed in Lawful Money pursuant to 12 U.S.C. § 411' on the endorsement line of each of his paychecks to assert his demand made to the Federal Reserve Bank where his checks are cashed and/or deposited." ECF No. 1 at 1; accord ECF No. 21-1 at 2; ECF No. 21-2 at 3. Schlabach claims federal reserve notes are obligations of the United States that may be redeemed in U.S. notes, which the Supreme Court has ruled are not subject to taxation. ECF No. 1 at 1-2, 5-6; accord ECF No. 21-1 at 1-2; ECF No. 24 at 9. Schlabach elaborates his belief that the law "provides access to . . . lawful money 'upon demand'" and "assures 'full discharge' of all obligations upon assignment or transfer of payments to the United States." ECF No. 1 at 5; accord ECF No. 21-1 at 1-2.

For tax year 2013, Schlabach filed an IRS Form 1040 entitled "U.S. Individual Income Tax Return." ECF No. 21-2 at 8; see also ECF No. 21-1 at 3. In his Form 1040, Schlabach claimed $54,084 in "[w]ages, salaries, tips, etc." from IRS Form W-2; subtracted $54,084 in "[o]ther income" he purported to have "REDEEMED IN LAWFUL MONEY PER 12 U.S.C. 411 ab initio"; then claimed zero dollars in "total income," "adjusted gross income," "taxable income," and tax liability. ECF No. 21-2 at 8-9; see also ECF No. 21-1 at 3. Schlabach signed his Form 1040, declaring he "examined this return and accompanying schedules and statements, and to the best of [his] knowledge and belief, they are true, correct, and complete." ECF No. 21-2 at 9; see also ECF No. 21-1 at 3.

The IRS determined the position Schlabach took in his 2013 tax return was frivolous under argument codes 16 and 30, as described further below. ECF No. 22-2 at 5-7; ECF No. 22-3 at 16-17.

LEGAL STANDARD

The applicable summary judgment standard appears in the Court's January 18, 2019 order, ECF No. 19 at 10-11, and is incorporated herein.

DISCUSSION

A. The Court lacks subject matter jurisdiction over Schlabach's refund claims for tax years 2009, 2010, and 2012.

The Court must dismiss a civil action if at any time it determines it lacks subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1), (h)(3). Federal courts havelimited subject matter jurisdiction. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994). A federal court presumes a civil action lies outside its limited jurisdiction and the burden to prove otherwise rests on the party asserting jurisdiction exists. Id. The opposing party can never forfeit or waive a challenge to subject matter jurisdiction. Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006).

A district court has original jurisdiction over a taxpayer's civil action against the United States seeking "recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws." 28 U.S.C. § 1346(a)(1). But as a jurisdictional prerequisite, the taxpayer must pay the full amount of the disputed tax, penalty, or sum. Flora v. United States, 362 U.S. 145, 146, 177 (1960); Thomas v. United States, 755 F.2d 728, 729 (9th Cir. 1985); Diamond v. United States, 603 F. App'x 947, 949 & n.1 (Fed. Cir. 2015). Next, the taxpayer must duly file a claim for refund or credit and the IRS must either reject it or fail to act on it in six months. I.R.C. §§ 7422(a), 6532(a). If these conditions are not satisfied, "[n]o suit or proceeding shall be maintained in any court." § 7422(a). Indeed, "[n]o suit or proceeding . . . shall be begun." § 6532(a).

Schlabach has not met these jurisdictional prerequisites for his refund claims regarding tax years 2009, 2010, and 2012. It is undisputed that Schlabach paid thetreasury department only fifteen percent, rather than the full amount, of the frivolous filing penalties for those tax years. Further, while Schlabach filed refund claims for those tax years, it is undisputed that he initiated this lawsuit without waiting for the IRS to either reject them or fail to act on them in six months.

Schlabach argues that, for the Court to acquire jurisdiction, he only needed to pay fifteen percent of the frivolous filing penalties within thirty days of notice. However, the statutory provision he relies on no longer applies to frivolous filing penalties. I.R.C. § 6703(c)(1) (amended by Omnibus Budget Reconciliation Act of 1989, Pub. L. No 101-239, § 7736(a), 103 Stat. 2106, 2404, to strike reference to penalties under I.R.C. § 6702); see Diamond, 603 F. App'x at 949 & n.1. The Court lacks jurisdiction over Schlabach's refund claims for tax years 2009, 2010, and 2012. Therefore, the Court does not reach the parties' remaining arguments for those claims.

B. No reasonable trier of fact could find for Schlabach on his refund claim for tax year 2013.

The Court now turns to Schlabach's refund claim for tax year 2013. The IRS may impose a $5000 civil penalty on a person who files a frivolous tax return. I.R.C. § 6702(a).² The penalty applies if (1) the person files a document that purports tobe a tax return, (2) the document either contains information that on its face indicates the self-assessment...