Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-00423/USCOURTS-caed-2_06-cv-00423-6/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 26:7422 IRS: Refund Taxes

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1 Jimmie Cox’s first name was misspelled in the Complaint

and subsequent documents. The court will use the correct

spelling, which is “Jimmie,” not “Jimmy.” (Cox Decl. ¶ 2.)

1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

JIMMIE R. COX and SANDRA S.

COX,

 NO. CIV. 06-00423 WBS EFB

Plaintiffs,

v. MEMORANDUM AND ORDER RE:

MOTION TO DISMISS 

UNITED STATES OF AMERICA, 

Defendant.

----oo0oo----

Plaintiffs Jimmie1 R. Cox and Sandra S. Cox filed this

action pursuant to 26 U.S.C. § 7422 for a tax refund of over one

million dollars against defendant United States of America

(“United States”). Plaintiffs also seek damages for lost profits

and dividends resulting from the United States’ levy of

plaintiffs’ shares of stock. The United States now moves to

dismiss plaintiffs’ claim for damages.

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2 Plaintiffs purchased the scheme for their trusts from

George and Dorothy Henderson, who have been convicted of selling

fraudulent trust schemes and defrauding the United States. 

(U.S.’ Mem. in Supp. of Mot. for Summ. J. ¶¶ 1, 10.) Among the

penalties assessed against plaintiffs are fraud penalties for

plaintiffs’ alleged use of trusts to evade tax liability. (U.S.’

Reply in Supp. of Mot. to Dismiss 3:13-16.) 

2

I. Factual and Procedural Background

For the tax years of 1992 through 1997 (“tax years at

issue”), plaintiffs filed Individual Income Tax Returns (Forms

1040) and Trust Income Tax Returns (Forms 1041) with the Internal

Revenue Service (IRS) Center in Ogden, Utah. (First Am. Compl.

(FAC) Exs. 2-13; Censire Decl. ¶ 5.) For each tax year at issue,

plaintiffs requested a refund based on their self-reported

overpayment. (FAC Exs. 2-13.) During the tax years at issue,

plaintiffs also transferred substantially all of their assets

into trusts.2 (Pls.’ Resp. to U.S.’ Stmt. of Undisputed Facts ##

1, 3-5.) 

Subsequently, the IRS audited plaintiffs’ returns for

the tax years at issue. Despite the IRS’ request, plaintiffs did

not provide documentation to substantiate their deductions and

self-reported liabilities. (Id. at # 14; Censire Decl. ¶ 3.) 

The IRS examiner concluded that plaintiffs’ trusts were “sham[s]”

“established for tax avoidance purposes” and, on July 12, 2001,

determined that plaintiffs owed $459,527.00, not including

penalties or interest, for the tax years at issue. (FAC ¶ 16,

Exs. 2-13.) 

Plaintiffs did not challenge the examiner’s

calculations or the resulting assessments in tax court. The IRS

collected plaintiffs’ tax liabilities for the tax years at issue, 

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3 For the tax year of 1998, plaintiffs petitioned the

United States Tax Court after the IRS issued a statutory notice

of deficiency for that tax year. (FAC ¶ 18.) After a settlement

favorable to plaintiffs, the Tax Court entered a decision on

August 8, 2003. (Id. at ¶¶ 18-19.) The parties dispute whether

the Tax Court’s decision has a preclusive effect in this lawsuit. 

(Id. at ¶¶ 27-28; Answer to FAC 4.) 

3

including penalties and interest, when it levied shares of

plaintiffs’ stock on March 5, 2002. (U.S.’ Mem. in Supp. of Mot.

for Summ. J. ¶ 27; FAC ¶ 17.) On March 1, 2004, plaintiffs

unsuccessfully filed administrative claims for a refund (Forms

843) for the tax years at issue.3 (FAC ¶¶ 4, 20-22, Exs. 2-13;

Answer to FAC ¶¶ 20, 22.) 

On February 28, 2006, plaintiffs initiated this action,

seeking a refund of $1,040,099.00 for taxes, penalties, and

interest that plaintiffs paid for the tax years at issue.

Plaintiffs also seek damages for the profits and dividends they

allegedly lost as a result of the IRS’ levy of their shares of

stock. 

After initiating this lawsuit, plaintiffs produced

documentation for the tax years at issue, including bank account

registers, cancelled checks, statements, receipts, invoices, and

bills. (Censire Decl. ¶ 4.) Based on the newly-received

documentation, IRS examiner Denise Censire reexamined plaintiffs’

liabilities for the tax years at issue. (Id. at ¶ 3.) In

conducting the reexamination, Censire analyzed the documentation

plaintiffs provided, plaintiffs’ original tax returns and

schedules, and the adjustments the previous IRS examiner made

during the 2001 audit. (Id. at ¶¶ 5-6.) 

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4 When recalculating the allowable deductions for

plaintiffs’ Schedules A and E, Censire concluded that most of the

checks for alleged expenses omitted notations that sufficiently

described the relationships and purposes of the expense items. 

(Id. at ¶¶ 10, 11.) Unless a receipt, invoice, or bill

corroborated the expenses, Censire did not allow the deductions. 

(Id. at ¶ 10.) Censire also recalculated plaintiffs’ Schedules D

based on plaintiffs’ sale of “a condominium(s)” and “stocks

and/or bonds.” (Id. at ¶ 9.)

In her reexamination, Censire also classified

plaintiffs’ horse racing business as a “not for profit” activity,

thus disallowing deductions that exceeded the income from the

activity pursuant to 26 U.S.C. § 183(a)-(b). (Id. at ¶ 8.) 

Plaintiffs contend their horse racing business qualifies as a

“for profit” activity as defined in 26 U.S.C. § 183(c) and Code

of Federal Regulation section 1.183-2. (Cox Decl. ¶¶ 11-26); 26

U.S.C. § 183(c); 26 C.F.R. § 1.183-2. 

5 The United States recognizes that the proposed

abatement is “in effect a concession of an over-assessment and

collection of tax from plaintiffs.” (U.S.’ Reply in Supp. of

Mot. to Dismiss 2:2-4.) 

4

Based on her reexamination4

 and the resulting Revenue

Agent’s Report, Censire proposed a total abatement of tax and

penalties in the amount of $357,089.00.5 (Id. at ¶ 12.) 

Plaintiffs still dispute approximately $683,010.00 in taxes,

penalties, and interest. (Cox Decl. ¶¶ 7-10.) 

Pursuant to Federal Rule of Civil Procedure 12(b)(1),

the United States now moves to dismiss plaintiffs’ damages claim

for lost profits and dividends resulting from the IRS’ levy of

plaintiffs’ shares of stock. Plaintiffs do not oppose the United

States’ motion to dismiss their claim for damages. 

The United States also requests the court to order the

parties to meet on or before April 4, 2008 for at least six hours

to discuss settlement and to subsequently attend a settlement

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6 Originally, the United States moved for summary

judgment to establish 1) that plaintiffs cannot prove they are

entitled to greater deductions than those the IRS has allowed in

Censire’s reexamination or that they are entitled to a refund

greater than the $357,089.00 proposed abatement; and 2) that

plaintiffs’ horse racing business is a “not for profit” activity. 

It was only after plaintiffs were required to oppose the United

States’ motion, and the judge’s law clerk spent substantial time

researching the issues, that the United States conceded genuine

issues of material fact remain, withdrew its motion for summary

judgment, and requested the court to order a settlement

conference. 

5

conference with the assigned magistrate judge.6

II. Discussion

“Federal courts are courts of limited jurisdiction” and

possess only the power to adjudicate cases that the Constitution

and federal statutes permit. Kokkonen v. Guardian Life Ins. Co.

of Am., 511 U.S. 375, 377 (1994). “A federal court is presumed

to lack jurisdiction in a particular case unless the contrary

affirmatively appears.” Stock W., Inc. v. Confederated Tribes of

the Colville Reservation, 873 F.2d 1221, 1225 (9th Cir. 1989)

(citation omitted). 

Pursuant to 26 U.S.C. § 7433, this court has subject

matter jurisdiction over a taxpayer’s claim for damages against

the United States based on an IRS employee’s intentional,

negligent, or reckless disregard of Internal Revenue Code

provisions or regulations. 26 U.S.C. § 7433(a). Section 7433

provides plaintiffs’ sole remedy to seek damages against the

United States based on the United States’ March 5, 2002 levy of

plaintiffs’ shares of stock. See id. (providing that, except for

damages for failure to release a lien pursuant to § 7432, § 7433

is the exclusive remedy to recover damages for an IRS employee’s

violation of tax provisions or regulations); accord Shwarz v.

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7 While the United States sought dismissal under Federal

Rule of Civil Procedure 12(b)(1) only, dismissal with prejudice

due to the expiration of the statute of limitations must be

pursuant to Rule 12(b)(6). Supermail Cargo, Inc. v. United

States, 68 F.3d 1204, 1206 n.2 (9th Cir. 1995) (“Because the

question [of] whether [plaintiff’s claim against the United

States] is barred by the [federal] statute of limitations is not

a jurisdictional question, it should have been raised through a

Rule 12(b)(6) motion to dismiss for failure to state a claim, not

a Rule 12(b)(1) motion to dismiss for lack of jurisdiction.”)

(emphasis in original); accord Irwin v. Dep’t of Veterans

Affairs, 498 U.S. 89, 96 (1990).

A § 7433 claim would also be subject to dismissal for

failure to exhaust administrative remedies because plaintiffs

have not filed an administrative claim for damages with the IRS. 

See 26 U.S.C. § 7433(d)(1) (“A judgment for damages shall not be

awarded under subsection (b) unless the court determines that the

6

United States, 234 F.3d 428, 433 (9th Cir. 2000). 

As plaintiffs’ non-opposition to the United States’

motion to dismiss recognizes, plaintiffs have not plead a § 7433

claim for damages against the United States. (Pls.’ Opp’n to

U.S.’ Mot. for Summ. J. 1:23-25.) Accordingly, because § 7433 is

the only statute that vests this court with jurisdiction over

plaintiffs’ claim for lost profits and dividends, the court must

dismiss plaintiffs’ damages claim for lack of subject matter

jurisdiction. 

The court must also dismiss plaintiffs’ claim for

damages with prejudice. See Eminence Capital, L.L.C. v. Aspeon,

Inc., 316 F.3d 1048, 1052 (9th Cir. 2003) (dismissal with

prejudice is appropriate if an amendment cannot save the

complaint). Even if plaintiffs amend their First Amended

Complaint to allege a § 7433 claim, the claim would still be

subject to dismissal for failure to state a claim upon which

relief can be granted because the statute of limitations has run

on plaintiffs’ § 7433 claim.7 See 26 U.S.C. § 7433(d)(3) (“[A]n

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plaintiff has exhausted the administrative remedies available to

such plaintiff within the Internal Revenue Service.”); see also

26 C.F.R. § 301.7433-1(d)-(e) (detailing the procedures for a

taxpayer to exhaust administrative remedies). 

7

action to enforce liability created under [§ 7433] . . . may be

brought only within 2 years after the date the right of action

accrues.”); see also 26 C.F.R. § 301.7433-1 (“A cause of action

under paragraph (a) of [§ 7433] accrues when the taxpayer has had

a reasonable opportunity to discover all essential elements of a

possible cause of action.”). 

The court will also grant the United States’ request to

order the parties to discuss settlement and attend a settlement

conference. In the meantime, however, the United States is

encouraged to refund the $357,089.00 that it concedes the IRS

improperly assessed against plaintiffs. If the taxpayer had owed

the United States $357,089.00, the United States most certainly

would have been assessing interest and penalties against him

until receipt of payment. The least the United States could do

is to promptly refund the taxes, interest, and penalties that it

admits the IRS improperly assessed against plaintiffs. See

United States v. 364.82 Acres of Land, 38 F.R.D. 411, 415 (N.D.

Cal. 1965) (“The Government ought to be as frank, fair and honest

with its citizens as it requires its citizens to be with it.”)

(emphasis in original); accord James v. United States, 215 F.R.D.

590, 596 (E.D. Cal. 2002); see also Watkins v. U.S. Army, 875

F.2d 699, 709 (9th Cir. 1989) (“[W]hen the government deals

‘carefully, honestly and fairly with its citizens,’ the public

interest is likewise benefitted.”) (citation omitted). 

///

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8

IT IS THEREFORE ORDERED that the United States’ motion

to dismiss, with prejudice, plaintiffs’ damages claim for lost

profits and dividends be, and the same hereby is, GRANTED. 

IT IS FURTHER ORDERED that the parties meet on or

before April 4, 2008 for at least six hours to discuss settlement

of plaintiffs’ remaining tax liability and, if the matter is not

fully settled in those discussions, the parties shall within

thirty days of that meeting, attend a settlement conference

before Magistrate Judge Brennan. 

DATED: February 28, 2008

 

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