Trakhter v. United States

Background

The Internal Revenue Service determined that Lenny Trakhter and Natalya Malakhova formed a construction company in December 2007. They filed a 2008 tax return reporting $8,040 in total tax liability. After auditing the return, the IRS concluded that they had understated the company’s income and overstated its business expenses. The IRS treated missing corporate funds as constructive dividends distributed to the plaintiffs, increasing the company’s net income by $363,902 and requiring the plaintiffs to pay $160,065.98. The IRS obtained that amount on April 5, 2018.

Motion and Legal Standard

The United States moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which allows a party to challenge a federal court’s subject-matter jurisdiction—the court’s legal authority to hear the dispute. The plaintiffs had the burden of establishing jurisdiction.

A tax-refund lawsuit generally may be brought under 28 U.S.C. § 1346 and 26 U.S.C. § 7422, but § 7422(a) requires the taxpayer to file a proper refund claim before suing. The court explained that the claim must be timely and must satisfy the applicable statutory and regulatory requirements. In some circumstances, jurisdiction may still exist if the claim gives the IRS enough information to conduct an intelligent administrative review.

Court’s Analysis

The court identified three problems with the plaintiffs’ refund claim and lawsuit.

First, the plaintiffs sued too soon. Under 26 U.S.C. § 6532(a)(1), when the IRS has not acted on a refund claim, the taxpayer generally must wait at least six months after filing the claim before filing suit. The plaintiffs filed their claim on February 22, 2020, and their complaint on April 3, 2020—less than two months later. The court held that this defect could not be cured by waiting after the lawsuit was filed because jurisdiction is determined when the complaint is filed.

Second, the plaintiffs used Form 843 rather than Form 1040X. The applicable Treasury regulation requires a taxpayer who originally filed Form 1040 or Form 1040A to use Form 1040X for an overpayment refund claim. The plaintiffs argued that preparing Form 1040X would be redundant and burdensome, but the court rejected that argument.

Third, the refund claim was not signed under penalty of perjury. The plaintiffs’ counsel signed the claim and attached a power-of-attorney form, but counsel did not sign under penalty of perjury. The court held that the power-of-attorney form did not satisfy that requirement.

The plaintiffs also argued that their detailed letter, Form 843, and original 2008 tax return gave the IRS enough information to review the claim. The court rejected that argument, concluding that the IRS had not received a meaningful opportunity to consider and resolve the claim because the plaintiffs filed suit less than six months after giving the IRS notice.

Disposition

The court granted the United States’ motion to dismiss for lack of jurisdiction. It dismissed the plaintiffs’ tax-refund complaint without prejudice. The court stated that the plaintiffs may refile after waiting six months from the date they filed their IRS refund claim if the IRS has not acted, or after signing the refund claim under penalty of perjury and using Form 1040X.