United States v. Shadoan

ORDER ON DEFENDANTS' MOTION TO DISMISS

Hon. Tanya Walton Pratt, Chief Judge United States District Court

This matter is before the Court on Defendants James J. Shadoan's ("Shadoan") and Christine A. Craig's ("Craig") (collectively, "Defendants") Motion to Dismiss. (Filing No. 22.) Also pending before this Court is Plaintiff United States of America's ("United States") Motion for Leave to File Surreply (Filing No. 30), and Defendants' Motion to Strike Plaintiff's Surreply in Opposition to Motion to Dismiss or, in the Alternative, for Leave to Respond to Plaintiff's Surreply (Filing No. 33). The United States initiated this action against the Defendants and the Indiana Department of Revenue ("IDOR") based on several issues related to the Defendants' individual income taxes and refunds. The United States alleges or seeks the following: return of erroneous

refund under 26 U.S.C. § 7405 (Count I); reinstated liens against pre-bankruptcy property of Shadoan (Count II); reduce Shadoan's 2009-2013 liabilities for tax and interest to a judgment (Count III); and reduce Defendants' 2015 income tax liability to a judgment (Count IV). (Filing No. 1.) Defendants have moved to dismiss this case based on a lack of subject matter jurisdiction or because the United States failed to state claims upon which relief can be granted. For the following reasons, the Court grants in part and denies in part the Motion to Dismiss.

I. BACKGROUND

The following facts are not necessarily objectively true, but as required when reviewing a motion to dismiss, the Court accepts as true all factual allegations in the complaint and draws all inferences in favor of the United States as the non-moving party. See Bielanski v. County of Kane, 550 F.3d 632, 633 (7th Cir. 2008).

Beginning in August 2011, a delegate from the Secretary of the Treasury made assessments against Shadoan for his individual tax liabilities for tax years 2009 through 2013^[1]. (Filing No. 1 at 2.) The assessment for the 2013 tax year, was made on November 24, 2014. Id. at 3. After Shadoan failed to pay these assessments, federal tax liens arose in favor of the United States, pursuant to 26 U.S.C. §§ 6321 and 6322, attaching to all property and rights of property of Shadoan. Id. These liens include additional amounts for penalties and interest. Id. The United States recorded these federal tax liens with the County Recorder of Hamilton County, Indiana. Id. at 6-7.

Shadoan and Craig were married on May 31, 2013. Id. at 4. When filing their 2014 individual income taxes, the Defendants, after receiving extensions, filed married filing separately

tax returns on October 15, 2015. Id. On June 5, 2018, Shadoan filed for Chapter 7 bankruptcy. Id. An order of discharge in the bankruptcy case was issued on September 15, 2018. Id.

On October 8, 2018, after receiving the bankruptcy discharge, the Defendants filed an amended 2014 individual income tax return (Form 1040X) selecting married filing jointly status. Id. The amended return sought a refund of $8, 704, plus statutory interest. Id. On or before July 8, 2019, the Internal Revenue Service ("IRS") processed the return and determined that the total overpayment due was $10, 567.84 (the "2014 Overpayment"). Id. at 5. Approximately one week later, the 2014 Overpayment was reduced by $8, 494.37 to pay IDOR based on Shadoan's state income tax debts, pursuant to 26 U.S.C. § 6402(e). Id. The remaining $2, 073.46 was refunded to Defendants on or shortly after July 8, 2019. Id. The IRS release of the Notice of Tax Lien on December 17, 2020 was erroneous, because liens on real property pass through a Chapter 7 bankruptcy undisturbed. Id. at 7.

The United States filed this lawsuit on March 9, 2021 seeking several things, including the return of the 2014 Overpayment from both Defendants and IDOR alleging the Defendants filed an untimely amended return. (Filing No. 1.) The United States also seeks a determination that the federal tax liens against Shadoan were validly reinstated and asks that the 2009-2013 income tax liabilities for Shadoan and the 2015 income tax liability for Defendants be reduced to judgments. Id. Defendants filed their Motion to Dismiss on May 19, 2021, asking this Court to dismiss all claims the Motion to Dismiss filed pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). (Filing No. 22.) Following the initial briefing, the United States requested leave to file a surrepply. (Filing No. 30.) After filing a response in opposition to the United States' motion, Defendants filed a Motion to Strike Plaintiff's Surreply or, in the Alternative, for Leave to Respond to Plaintiff's Surreply. (Filing No. 33.)

II. LEGAL STANDARDS

A. Motion to Dismiss under Rule 12(b)(1)

A motion to dismiss under Federal Rule of Civil Procedure Rule 12(b)(1) challenges the court's subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1). Federal courts are courts of limited jurisdiction and all claims must fall within the limits defined in Article III, Section 2 of the U.S. Constitution and related statutes. See, e.g., 28 U.S.C. §§ 1331-32, 1343, 1367. To survive a Rule 12(b)(1) motion, the plaintiff bears the burden of establishing subject matter jurisdiction. Ctr. for Dermatology & Skin Cancer, Ltd. V. Burwell¸770 F.3d 586, 588-89 (7th Cir. 2014). "The plaintiff has the burden of supporting the jurisdictional allegations of the complaint by competent proof." Int'l Harvester Co. v. Deere & Co., 623 F.2d 1207, 1210 (7th Cir. 1980). "In deciding whether the plaintiff has carried this burden, the court must look to the state of affairs as of the filing of the complaint; a justiciable controversy must have existed at that time." Id. When addressing a Rule 12(b)(1) challenge, the court must "accept as true all well-pleaded factual allegations and draw all reasonable inferences in favor of the [non-moving] party." St John's United Church of Christ v. City of Chicago, 502 F.3d 616, 625 (7th Cir. 2007) (quoting Long v. Shorebank Dev. Corp., 182 F.3d 548, 554 (7th Cir. 1999)). Furthermore, "[t]he district court may properly look beyond the jurisdictional allegations of the complaint and view whatever evidence has been submitted on the issue to determine whether in fact subject matter jurisdiction exists." Id. (citation and quotation marks omitted).

B. Motion to Dismiss Under Rule 12(b)(6)

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenges the legal sufficiency of a claim. Fed.R.Civ.P. 12(b)(6). To survive a Rule 12(b)(6) motion, the allegations in the complaint must meet a standard of "plausibility." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 564 (2007).

A claim is facially plausible "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, 678 (2009). The plaintiff must demonstrate "more than a sheer possibility that a defendant has acted unlawfully." Id. The court accepts all well-pleaded factual allegations in the complaint as true and construes all reasonable inferences in the non-moving party's favor. Bielanski, 550 F.3d at 633. However, courts "are not obliged to accept as true legal conclusions or unsupported conclusions of fact." Hickey v. O'Bannon, 287 F.3d 656, 658 (7th Cir. 2002).

III. DISCUSSION

Defendants move to dismiss the Complaint filed by the United States due to jurisdictional and other defects that preclude the relief sought. In addition to the Motion to Dismiss, the parties have each filed related motions before the Court: the United States moved for leave to file a surreply in opposition to Defendants' motion to dismiss (Filing No. 30), and Defendants moved to strike the United States' surreply or, in the alternative, for leave to respond to the surreply (Filing No. 33). The Court will address these two related motions before turning to the Motion to Dismiss.

A. Preliminary Motions

1. United States' Motion for Leave to File a Surreply

The United States alleges that Defendants improperly submitted new arguments for the first time in their reply brief in support of their Motion to Dismiss, permitting them to file a surreply. (Filing No. 30.) "The purpose for having a motion, response and reply is to give the movant the final opportunity to be heard and to rebut the non-movant's response, thereby persuading the court that the movant is entitled to the relief requested by the motion." Lady Di's Inc. v. Enhanced Servs. Billing, Inc., No. 1:09-cv-0340-SEB-DML, 2010 WL 1258052, at *2 (S.D.

Ind. Mar. 25, 2010) (quotation omitted). But "new arguments and evidence may not be raised for the first time in a reply brief. Reply briefs are for replying, not raising new arguments or arguments that could have been advanced in the opening brief." Reis v. Robbins, 4:14-cv-00063-RLY-TA, 2015 WL 846526, at *2 (S.D. Ind. Feb. 26, 2015) (quotation omitted). Courts allow a surreply only in limited circumstances to address new arguments or evidence raised in the reply brief or objections to the admissibility of evidence cited in the response. See, e.g., id.

The Court has reviewed the parties' briefing, including the United States' proposed surreply brief. In their reply brief, Defendants presented several new arguments and designated previously undisclosed pieces of evidence including the following: (1) Craig's June 23, 2021 filed IRS Form 8379 (Filing No. 29-3); (2) Shadoan's June 15, 2021 administrative appeal (Filing No. 29-2);...