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Maryann Larkin and Thomas Larkin v. United States of America

November 3, 2011


The opinion of the court was delivered by: Daniel T. K. Hurley United States District Judge



Maryann and Thomas Larkin bring this lawsuit seeking to reverse a decision of the Internal Revenue Service (IRS). Plaintiffs claim that they are entitled to a refund of interest they paid for the fiscal year 2007, which they claim was erroneously assessed by the IRS due to an "optics/form(s)/software/systems problem" which allegedly prevented the IRS from correctly processing an offset of an overpayment from another tax year as plaintiffs requested. Plaintiffs asked the IRS to refund the interest and penalties but the IRS declined to do so. *fn1

Plaintiffs contend that a refund or abatement should have been granted because there was never a tax deficiency for year 2007, and that the IRS erroneously assessed interest against them as a result of a "broken" computer system which is incapable of processing multi-year transactions correctly. In their current complaint, they accordingly seek a refund of interest and associated penalties paid relative to tax year 2007, as well as declaratory and injunctive relief in the form of a judgment establishing the existence of the claimed IRS error and an injunction directing the IRS to "correctly finalize [the] individual and corporate tax returns" which they previously submitted. As jurisdictional premise for this suit, their complaint invokes 26 U.S.C. §1331 and 26 U.S.C. §§6404(h). In their more recent response to the defendant's motion to dismiss, they alternatively assert 28 U.S.C. §1346(a)(1) and 28 U.S.C. §1332(a) as bases for the assertion of this court's jurisdiction over their dispute.

On behalf of a putative class, presumably consisting of all persons and entities filing 1040X forms showing a "loss carry-back" between 2003 to the present, the Larkins further seek an injunction directing the IRS to "fix the 1040X form and/or to create another form allowing for proper allocation of funds to future but closed tax years;" "fix the software/system to process the multi-year delayed loss carry back tax returns correctly;" "reprocess all tax returns (All 1040X?) between 2003 and the date of the relief that have a loss carry back," and "record and pay all funds allocated and/or distributed to taxpayers resulting from the reprocessing, including interest on interest."

II. Defendant's Motion to Dismiss

The defendant argues that this action should be dismissed for lack of subject matter jurisdiction because the Tax Court is the exclusive forum for judicial review of an IRS' refusal to abate interest under 26 U.S.C. §6404(e). Additionally, the defendant argues that the waiver of sovereign immunity established by 28 U.S.C. §1346(a) and 26 U.S.C. §7422, providing district courts with jurisdiction to hear tax refund suits once certain jurisdictional pre-requisites are met, does not extend to claims for declaratory or injunctive relief against the United States.

In response, plaintiffs acknowledge that they did request a return of interest from the IRS but contend that this case nevertheless is not properly viewed as a claim for interest abatement because they are seeking the return of interest that was improperly assessed as a result of an erroneously determined tax deficiency. In other words, they argue that because they paid the proper total amount of tax due for tax year 2007, there was never a tax deficiency, and therefore never a "proper accrual of interest" for any tax liability associated with that tax year. Without a "proper accrual of interest, they reason, "there is no interest abatement as the primary problem" [Response DE# 8, p. 9], such that their case is more properly viewed as a claim for tax refund falling under the jurisdictional sweep of 28 U.S.C. §1346(a). As they do not formally abandon their invocation of 26 U.S.C. 6404(h) as an alternative source of jurisdiction, the court examines both potential jurisdictional premises in the discussion which follows.

III. Discussion

A. Plaintiffs' Claim for Abatement of Interest under 26 U.S.C. § 6404(h)

Under Section 6404(e) of the Internal Revenue Code, the Secretary of the Treasury is allowed to abate (or forgive) interest that has accrued on unpaid federal income taxes during non-payment, "if the assessment of interest on a deficiency is attributable to unreasonable error or delay on the part of the IRS." Section 6404(h) allows for judicial review of an agency decision not to grant such relief, but the district courts and the Court of Federal Claims lack jurisdiction to hear cases regarding the abatement of interest attributable to unreasonable errors and delays by the IRS -- only "the Tax Court provides the exclusive forum for judicial review of a refusal to abate interest under §6404(e)(1).." Hinck v United States, 550 U.S. 501, 506-07, 127 S. Ct. 2011, 2013, 167 L. Ed.2d 888 (2007). Therefore, the court does not have jurisdiction over the Larkins' request for review of a request for abatement of interest pursuant to 26 U. S C. §6404. Prati v United States, 81 Fed. Cl. 422 (Fed. Cl. 2008).

II. Plaintiffs' Claim for Refund of Interest under 26 U.S. C. §1346(a)(1)

In their response to defendants' motion to dismiss, plaintiffs alternatively assert subject matter jurisdiction under 26 U.S.C. §1346(a), which provides:

The district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of: (1) Any civil action against the United States for the 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 ...

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