Huang v. United States

Background

Jiaxing Huang received gifts from her non-resident foreign parents in 2015 and 2016 to help her relocate to the United States and acquire a house. She filed her taxes using TurboTax. According to the opinion, TurboTax advised users that recipients did not need to report money they received, so Huang did not file the required Forms 3520 for those years.

After Huang learned in April 2018 that the foreign gifts had to be reported, she promptly filed the forms. The Internal Revenue Service automatically assessed penalties of $62,496.25 for 2015 and $28,742.50 for 2016. Huang requested abatement based on reasonable cause, but the IRS denied that request. During an IRS appeal, the penalty amount increased to more than $153,000 before the agency abated $117,243.25. The remaining $36,495.50 was sustained based on a lack of reasonable cause.

Huang later paid the remaining assessment and filed a refund claim. She sought refunds for the penalties and amounts withheld from later tax refunds. Her complaint asserted four claims: reasonable cause for the late filings; arbitrary and capricious IRS administration of the penalties; lack of statutory authority to assess and collect the penalties; and failure to obtain written supervisory approval as required by 26 U.S.C. § 6751.

Motion to dismiss

The United States moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), arguing that the court lacked subject-matter jurisdiction, and under Rule 12(b)(6), arguing that Huang had not stated viable claims. A Rule 12(b)(6) motion tests whether a complaint contains enough factual allegations to plausibly support a legal claim.

Reasonable-cause claim

The court denied the motion as to Huang’s first claim. Huang alleged that the reporting obligation was obscure, that she lacked tax expertise, that she entered the relevant information into TurboTax, that she relied in good faith on TurboTax’s advice, and that she corrected the problem promptly after discovering it.

The court concluded that Huang’s Form 843 refund request and earlier appeal had provided sufficient notice of her reasonable-cause theory to establish jurisdiction for that claim. At the pleading stage, the court also concluded that her allegations plausibly stated that she exercised ordinary business care and prudence. The court emphasized that whether her reliance on TurboTax ultimately establishes reasonable cause is not resolved at this stage. The reasonable-cause claim may proceed to the merits.

Arbitrary-and-capricious claim

The court treated Huang’s challenge to the IRS’s denial of reasonable cause as duplicative of her refund claim. That portion could not proceed as a separate Administrative Procedure Act claim. The court distinguished Huang’s challenge to the IRS’s multiplication and later reduction of the penalty. It concluded that this calculation-error theory was distinct and did not have an alternative adequate remedy in the refund action.

The court nevertheless dismissed the calculation-error component without prejudice because the IRS had apparently corrected the duplication error and the issue therefore appeared moot. The court stated that Huang could alert it if similar errors recurred.

Authority to assess and collect penalties

The court granted the motion as to Huang’s claim that the IRS lacked authority to assess and collect penalties under 26 U.S.C. § 6039F. The court discussed a D.C. Circuit decision involving a similar penalty provision and stated that penalties placed within the tax code could be assessable by implication, particularly because § 6039F provides a reasonable-cause defense. The court also held that Huang had not raised the lack-of-authority theory in her administrative refund claim, so the theory was waived and the claim was dismissed.

Written supervisory approval

The court also granted the motion as to Huang’s claim under 26 U.S.C. § 6751(b), which requires written approval of a penalty assessment by an immediate supervisor or a designated higher-level official. Records incorporated into the complaint showed that a manager approved the 2015 and 2016 assessments on October 16, 2018. Huang argued that the records did not establish that the manager was the required immediate supervisor. The court nevertheless noted that Huang had not raised this argument with the agency, and the order’s conclusion granted the motion as to this claim.

Disposition

The order denied the motion to dismiss Huang’s first claim concerning reasonable cause. It granted the motion as to the other three claims. The order specifically dismissed the penalty-calculation component without prejudice and dismissed the lack-of-authority claim.