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Auto Pride Collision East, Inc. v. United States

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

December 21, 2017

AUTO PRIDE COLLISION EAST, INC., Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.

          OPINION AND ORDER GRANTING DEFENDANT'S MOTION TO DISMISS (ECF NO. 7)

          Paul D. Borman United States District Judge

         Plaintiff Auto Pride Collision East, Inc. ("Auto Pride") files this action against the United States seeking an abatement of tax penalties assessed for failure to file timely tax returns, failure to timely make required tax payments, and failure to timely make required tax deposits. Defendant the United States has filed a motion to dismiss arguing that Plaintiff has failed to satisfy the jurisdictional prerequisites for maintaining this abatement action and that therefore this Court lacks subject matter jurisdiction over the action. Defendant additionally argues that, even assuming the Court could entertain subject matter jurisdiction over the suit, the Complaint fails to state a claim upon which relief can be granted. The Court has determined that oral argument will not assist the Court in resolving the matters raised in the motion and therefore will determine the matter on the briefs. See E.D. Mich. L.R. 7.1(f)(2). For the reasons that follow, the Court GRANTS the motion to dismiss.

         INTRODUCTION

         Auto Pride alleges in the Amended Complaint that it does not contest and has paid the underlying tax, which was not timely paid due to the negligence of a third party payroll service. Auto Pride admits in the Amended Complaint that it has not paid the penalties assessed for the admitted failures to file and to pay and seeks an abatement of those penalties in this action. The United States now moves to dismiss for lack of subject matter jurisdiction, asserting that Auto Pride has not met the jurisdictional prerequisites to filing this action, i.e. full payment of the assessed penalty. The United States alternatively argues that Auto Pride fails to state a claim on which relief can be granted because reliance on a third-party payer, who failed to timely file and pay Auto Pride's taxes, is not a "reasonable cause" excuse under the Internal Revenue Code to avoid the failure to file and failure to pay penalties.

         For the reasons that follow, the Court concludes that Plaintiff has failed to meet the jurisdictional prerequisites for filing this action and therefore the Court lacks subject matter jurisdiction over these claims. Because the Court concludes that it lacks subject matter jurisdiction, it need not address Defendant's alternative argument that Plaintiffs claim fails on the merits because the excuse proffered for failing to timely file and pay taxes does not meet the statutory "reasonable cause" standard.

         I. BACKGROUND

         The following allegations are taken from Plaintiffs Complaint. Auto Pride is a tax paying corporation formed under the laws of the State of Michigan. (ECF No. 3, Amended Complaint ¶ 1.) Plaintiff is subject to the employment and income tax requirements of withholding and remitting taxes withheld from employees' payroll checks to deposit and pay over to the United States Treasury. (Id. ¶ 4.) Beginning on or about the third quarter of 2011 and continuing through the last quarter of 2012, specifically: third quarter 2011, fourth quarter 2011, first quarter 2012, second quarter 2012, third quarter 2012 and fourth quarter 2012, Plaintiff failed to properly withhold, deposit, file and pay payroll deposits. (Id. ¶ 5.) At the time of these failures, Plaintiff had its payroll processes administered through a third-party payroll administrator who was a professional tax preparer and bookkeeper. (Id. ¶ 6.)

         The Internal Revenue Service sent Plaintiff notices of the failure to remit and all said notices were received by the third-party payroll provider as agent of record for Plaintiff. Unknown to Auto Pride, the bookkeeper attempted to file and pay all the deficient returns and taxes prior to the principals of Auto Pride having knowledge of the issue. (Id. ¶¶ 7-8.) Upon assessment of significant penalties in addition to the tax, the third party payroll provider approached the Plaintiff and explained what had happened. At that point in time, the original tax had been paid, with the only remaining debt being the penalty. (Id. ¶¶ 9-10.)

         Shortly after these events occurred, Plaintiff terminated the third party payroll provider and hired another firm to provide the service. The new payroll firm, also an office of certified public accountants, filed a request to abate the penalties based in part on Plaintiffs reliance on a professional in handling the payroll responsibilities for Plaintiff. (Id. ¶¶ 11-12.) According to Plaintiff, the Internal Revenue Service did not reply to the requests of the Taxpayer in a timely manner and the Taxpayer filed a number of requests for an update or determination of its request continuing until March, 2017. (Id. ¶13, Ex. A.) The Plaintiff avers that the Taxpayer appeal was denied, according to the IRS, some time ago but only recently communicated to the taxpayer. (Id. ¶14.)

         The United States submits the Declaration of Thomas P. Cole, the attorney from the Tax Division of the United States Department of Justice to whom this case has been assigned, which the Court may consider in determining whether it has jurisdiction to hear this case. (ECF No. 7-1, Sept. 6, 2017 Declaration.) Mr. Cole's Declaration attaches certain documents, including IRS Account Transcripts and correspondence between Auto Pride and Debra Barker, an IRS Revenue Officer, and correspondence between Auto Pride and the IRS Appeals Office. Included among the Exhibits attached to Mr. Cole's Declaration is a May 28, 2013 letter from Robert Dunigan, President of Auto Pride, to Ms. Barker, requesting an abatement of all penalties and interest for 2011 and 2012. (ECF No. 7-3, May 28, 2013 letter.) The letter explains that in early 2013, the IRS informed Mr. Dunigan that the required withholding deposits were not being timely filed and that timely quarterly reports were not being filed. (Id.) The letter explains that the Mr. Dunigan inquired of the bookkeeper regarding this notice and was assured that all taxes were current and up to date. Upon further investigation, it was discovered that the payments were not being made, causing the business owner to promptly pay the outstanding amounts, fire the bookkeeper, and hire a CPA firm to do the payroll and taxes.

         On June 20, 2013, Revenue Officer Barker responded to the May 28, 2013 letter, and denied the request for a penalty adjustment, explaining that the information contained in the May 28, 2013 letter did not establish reasonable cause for adjusting the penalty and explaining to Plaintiff the Appeal Procedures. (ECF No. 7-4, Cole Decl. Ex. 3, June 20, 2013 Letter.) On July 1, 2013, Robert Taylor of the CPA firm Taylor & Morgan sent a letter to Ms. Barker stating that Auto Pride would like to appeal the tax decision regarding their abatement request and stating that a detailed explanation would follow explaining Auto Pride's entitlement to relief. (ECF No. 7- 5, July 1, 2013 Letter.) On October 30, 2013, Leonard Bartold of the IRS Appeals Office sent a letter to Mr. Dunigan at Auto Pride explaining that based on the facts presented, "including the additional information you submitted, " the determination had been made that there was "no basis for abatement of the penalty(s)... within the protective framework of reasonable cause." (Id.) The letter explained that the case was then closed in Appeals and explaining that in order to file suit with the United States District Court or the United States Court of Federal Claims, Auto Pride had to pay the balance of the assessed penalty, file a Form 843, Claim for Refund and Request for Abatement, with the IRS Service Center which would issue a formal notice of claim disallowance, giving Auto Pride two years to bring formal suit. (Id.)

         A year later, on October 10, 2014, Auto Pride's present counsel wrote a letter to the IRS attaching Form 843s for Auto Pride for the last two quarters of 2011 and all quarters of 2012, dated October 10, 2014, and asking for "consideration" of the enclosures. (ECF No. 7-7, Oct. 10, 2014 Letter.) In response to the October 10, 2014 letter from Mr. Salim, on November 5, 2014, the IRS sent Auto Pride a letter explaining that a review of the case file shows that Auto Pride had previously exercised its appeal rights with respect to the penalties assessed. (ECF No. 7-8, Nov. 5, 2014 Letter.) The letter again explained that the next level of appeal would be to file a petition with the court, which could be done "after the penalties are paid" and a claim for refund had been filed with the Service Center and a formal disallowance issued. (Id.)

         The Plaintiffs Complaint contains three counts for "abatement of penalty" under IRC §§ 6651, 6652, and 6656.

         II. ...


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