District Court Has Jurisdiction in $163 Million Interest Suit

BANK OF AMERICA CORPORATION,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION

ORDER

THIS MATTER comes before the Court on Defendant’s Motion to Transfer Venue to the Court of Federal Claims, or in the Alternative, to Dismiss for Lack of Subject Matter Jurisdiction ("Defendant’s Motion"), (Doc. No. 32), and the parties’ associated briefs and exhibits; the Magistrate Judge’s Memorandum and Recommendation ("M&R"), (Doc. No. 47), denying Defendant’s Motion to Transfer Venue and recommending that this Court deny Defendant’s alternative Motion to Dismiss; Defendant’s Objections thereto, (Doc. No. 49); and Plaintiff’s responsive briefing, (Doc. No. 50).

I. BACKGROUND

Neither party has objected to the Magistrate Judge’s statement of the factual and procedural background of this case. Therefore, the Court adopts the facts as set forth in the M&R.

II. STANDARD OF REVIEW

A district court may assign dispositive pretrial matters, including motions to dismiss, to a magistrate judge for "proposed findings of fact and recommendations." 28 U.S.C. § 636(b)(1)(A) and (B). The Federal Magistrate Act provides that "a district court shall make a de novo determination of those portions of the report or specific proposed findings or recommendations to which objection is made." Id. at § 636(b)(1)(C); Fed. R. Civ. P. 72(b)(3); Camby v. Davis, 718 F.2d 198, 200 (4th Cir. 1983).

The district court has authority to assign non-dispositive pretrial matters pending before the Court to a magistrate judge to "hear and determine." 28 U.S.C. § 636(b)(1)(A). When reviewing an objection to a magistrate judge’s order on a non-dispositive matter, the district court must set aside or modify any portion of that order which is clearly erroneous or contrary to law. Id.; Fed. R. Civ. P. 72(a). An order transferring a case to another district court is generally viewed as a non-dispositive matter, and thus is reviewed under Rule 72(a). See Cadence Bank, N.A. v. Horry Props., LLC, No. 2:09-cv-44, 2010 WL 4026392, at *2 n.4 (W.D.N.C. Oct. 13, 2010). A magistrate judge’s order is contrary to law if the judge failed to apply or misapplied statutes, case law, or procedural rules. See Catskill Dev. LLC v. Park Place Entm’t Corp., 206 F.R.D. 78, 86 (S.D.N.Y. 2002).

III. DISCUSSION

Defendant filed an objection to the M&R’s recommendation to deny Defendant’s alternative Motion to Dismiss. In support of its objection, Defendant essentially makes two arguments: (1) the Sixth Circuit’s analysis in E.W. Scripps Co. v. United States, 420 F.3d 589 (6th Cir. 2005), and related cases erroneously interpreted 28 U.S.C. § 1346(a)(1); and (2) 28 U.S.C. § 1346(a)(1) only applies to refund — not overpayment — suits. The Court finds both objections meritless and concludes that this Court has subject matter jurisdiction over Plaintiff’s claim.

A. The M&R correctly concluded that the weight of authority provides that district courts have subject matter jurisdiction over overpayment interest claims under 28 U.S.C. § 1346(a)(1).

28 U.S.C. § 1346(a)(1) grants concurrent jurisdiction to district courts and the Court of Federal Claims:

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 have been excessive or in any manner wrongfully collected under the internal-revenue laws;

28 U.S.C. § 1346(a)(1) (2018).

As the M&R notes, most courts that have considered the issue — including the Sixth Circuit — have held that, under § 1346(a)(1), district courts have subject matter jurisdiction over overpayment claims.¹ Indeed, only one unreported district court opinion concludes otherwise.²

The Court finds the Sixth Circuit’s rationale in Scripps persuasive. In Scripps, the Sixth Circuit held that the broad language of § 1346(a)(1) — specifically the phrase "any sum" — includes overpayment interest:

The payment of statutory interest reflects an attempt to return the taxpayer and the Government to the same positions they would have been in if no overpayment of tax had been made. If the Government does not compensate the taxpayer for the time-value of the tax overpayment, the Government has retained more money than it is due, i.e., an "excessive sum."

Scripps, 420 F.3d at 597 (internal citations omitted).

Defendant argues that Scripps misinterprets the phrase "any sum alleged to have been excessive" because the preceding "alleged to have been" indicates the taxpayer’s perspective. (Doc. No. 49 at 13). Defendant contends that overpayment claims involve situations where the United States paid insufficient interest to a taxpayer as opposed to taking an excessive sum of interest from a taxpayer. Id. Thus, from the taxpayer’s perspective, the United States did not take an "excessive sum," but rather paid out an insufficient sum. Id.

As Scripps points out, Defendant’s narrow reading focuses only on the literal, current state of the accounting ledger between the taxpayer and the United States. In the overpayment scenario, even though the United States does not take an "excessive sum" from the taxpayer at first, the government would retain an "excessive sum" by keeping the accumulated interest on funds it was never owed. Regardless of whether the government initially takes an excessive sum from the taxpayer or subsequently pays out an insufficient sum to the taxpayer, the end result is the same from the taxpayer’s perspective: in either scenario, the taxpayer is due money from the United States.

In sum, the Court agrees with the M&R’s conclusion and finds persuasive the rationale set forth in Scripps and found by a great majority of courts that have considered the issue of overpayment claims.

B. Defendant’s interpretation of § 1346(a)(1) and § 7422(a) is unpersuasive.

Second, Defendant argues that because 28 U.S.C. § 1346(a)(1) and I.R.C. § 7422(a) contain overlapping language, § 7422(a)’s header describing "refunds" should be transposed onto § 1346(a)(1) as well. Therefore, Defendant contends § 1346(a)(1) jurisdiction should only apply to ‘refunds’ and not overpayment suits.

As stated above, § 1346(a)(1) grants concurrent jurisdiction to federal district courts and the Court of Federal Claims. 28 U.S.C. § 1346(a)(1). Conversely, I.R.C. § 7422(a) establishes pre-requisites for refund suits:

(a) No suit prior to filing claim for refund. — No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

I.R.C. § 7422(a) (2018); see also United States v. Dalm, 494 U.S. 596, 601 (1990) ("[Section 7422(a)] qualif[ies] a taxpayer’s right to bring a refund suit upon compliance with certain conditions."); Flora v. United States, 362 U.S. 145, 148 (1960) ("[Section 7422(a)] is a jurisdictional condition precedent to maintenance of a refund suit in a District Court.").

Although much of the relevant language of § 1346(a)(1) and § 7422(a) overlap, a plain reading of the qualifying header in § 7422(a) — "No suit prior to filing claim for refund" — explicitly limits the rest of the paragraph to refund suits. In contrast, § 1346(a)(1) includes no such heading. The Court finds this distinction meaningful.

As explained above, and as the parties agree, overpayment claims are not refund suits. This is because the United States is compensating the taxpayer for the interest on the taxpayer’s money, not returning funds improperly paid. See Alexander Proudfoot Co. v. U.S., 454 F.2d 1379, 1384 (Ct. Cl. 1972) ("[I]nterest is paid by the United States, not as a refund of interest previously paid by the taxpayer on demand of the Service, but simply because the Government has had the use of money found to belong to the taxpayer."); (Doc. No. 33 at 12 (citing same language)); (Doc. No. 37 at 10 (referencing same language)). Therefore, the logical conclusion is that the categorical and procedural qualifications of § 7422(a) do not apply to non-refund suits, such as overpayment claims.

Indeed, the majority of courts interpreting § 1346(a)(1) and finding that district courts have subject matter jurisdiction do not entertain § 7422(a) limitation challenges. See Scripps, 420 F.3d at 592 ("That district courts have subject matter jurisdiction over taxpayer suits for interest on tax overpayments at first blush appears so obvious that many courts have found no need to dwell on the question at any great length."). Most district courts have reasoned that if they have jurisdiction over the initial refund claims, then they must also have jurisdiction over suits that concern the amount of interest to be paid on those refunds. See Doolin v. United States, 737 F. Supp. 732, 733-34 (N.D.N.Y. Apr. 20, 1990), rev’d on other grounds, 918 F.2d 15 (2d Cir. 1990).

Defendant cites to Electrical Welfare Trust Fund v. United States, 907 F.3d 165 (4th Cir. 2018) in order to support its position that § 1346(a)(1) and § 7422(a) should be read in pari materia.³ In Electrical Welfare, the plaintiff sued the United States in order to recover over $1 million paid to the Department of Health and Human Services ("HHS") as part of the Affordable Care Act of 2010. Id. at 166. On appeal, the plaintiff claimed that "its payment to the Department of Health and Human Services was an ‘internal-revenue tax’ under § 1346, allowing it to proceed in federal district court." Id. at 165. The Fourth Circuit affirmed the district court’s dismissal for lack of subject matter jurisdiction, finding that the payment was not a "tax" within the meaning of 1346(a)(1)’s "internal-revenue tax." Id. at 170. In reaching this decision, the Fourth Circuit isolated and identified the phrase "internal revenue tax" as the phrase at issue in Electrical Welfare. Id. at 168. In contrast, a different phrase of § 1346(a)(1) controls the instant action: "any sum alleged to have been excessive."

Although the Fourth Circuit in Electrical Welfare read both § 1346(a)(1) and § 7422(a) in pari materia, the Fourth Circuit did so for the limited purpose of interpreting the phrase "internal-revenue tax" — not the "any sum" or "excessive" language at issue here. The Supreme Court previously held that the phrase "internal-revenue tax" should be read in the disjunctive and thus does not impose any qualifications on the phrases "any sum" or "excessive."⁴ Additionally, the claim in Electrical Welfare involved a refund claim where the plaintiff already paid over $1 million to HHS. Id. at 166. Conversely, here, Plaintiff is seeking overpayment interest — not a refund — and therefore, Electrical Welfare is distinguishable.

In sum, the Court is not persuaded by Defendant’s interpretation argument. The Court finds that I.R.C. § 7422(a) and 28 U.S.C. § 1346(a)(1) serve different functions and that § 7422(a) does not limit § 1346(a)(1). The Court agrees with the M&R and finds that this Court has jurisdiction over Plaintiff’s overpayment claims. And for the same reasons, the Court likewise finds that the Magistrate Judge’s denial of Defendant’s Motion to Transfer Venue to the Court of Federal Claims was proper. Therefore, the Court DENIES Defendant’s Motion.

IV. CONCLUSION

After an independent review of the M&R, (Doc. No. 47), Defendant’s Objections thereto, (Doc. No. 49), and a de novo review of the record, the Court concludes that the M&R’s recommendation is correct and in accordance with law.

IT IS THEREFORE ORDERED THAT:

Signed: June 30, 2019.

Robert J. Conrad, Jr.
United States District Judge

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MEMORANDUM AND RECOMMENDATION AND ORDER

THIS MATTER is before the Court on Defendant's “Motion to Transfer to the Court of Federal Claims or, in the Alternative, to Dismiss for Lack of Subject Matter Jurisdiction” (document #32) and the parties' briefs and exhibits.

This matter has been referred to the undersigned Magistrate Judge pursuant to 28 U.S.C. § 636(b)(1) and this Motion is now ripe for the Court's consideration.

Having fully considered the arguments, the record, and the applicable authority, the undersigned denies Defendant's Motion to Transfer, and respectfully recommends that the alternative Motion to Dismiss for Lack of Subject Matter Jurisdiction be denied as discussed below.

I. FACTUAL AND PROCEDURAL BACKGROUND

On September 13, 2017, Plaintiff filed its Complaint, which as amended, seeks to recover $163 million under the Internal Revenue Code. Specifically, Plaintiff seeks interest adjustments in six Bank of America tax years and eleven tax years for Merrill Lynch, which Plaintiff acquired in 2013. Two types of interest are at issue here: interest on tax overpayments (interest the Internal Revenue Service (“IRS”) owes to a taxpayer), and interest on tax underpayments (interest a taxpayer owes to the IRS, sometimes referred to as “deficiency interest”). For some of the years at issue, Plaintiff seeks refunds of underpayment interest. In others, Plaintiff seeks overpayment interest. Some years involve both types of interest.

Defendant has moved to sever and transfer to the Court of Federal Claims nine of Plaintiff's overpayment interest claims, or in the alternative to dismiss those claims for lack of subject matter jurisdiction. Defendant argues that the Court of Federal Claims has exclusive jurisdiction over those claims under the Tucker Act, 28 U.S.C. § 1346(a)(2) since they each exceed $10,000.

II. DISCUSSION

Subject matter jurisdiction is a threshold issue for the Court. Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 96 (1998); Jones v. American Postal Workers Union, 192 F.3d 417, 422 (4th Cir. 1999); Evans v. B.F. Perkins Co., 166 F.3d 642, 647 (4th Cir. 1999). The requirements are so absolute that “[n]o party need assert [a lack of subject matter jurisdiction]. No party can waive the defect, or consent to jurisdiction. No court can ignore the defect; rather a court, noticing the defect, must raise the matter on its own.” Wisconsin Dept. of Corrections v. Schacht, 524 U.S. 381, 389 (1998) (internal citations omitted). See also Ashcroft v. Iqbal, 129 S. Ct. 1937, 1945 (2009) (“Subject-matter jurisdiction cannot be forfeited or waived and should be considered when fairly in doubt”) (citing Arbaugh v. Y & H Corp., 546 U.S. 500, 514 (2006); United States v. Cotton, 535 U.S. 625, 630 (2002)); Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982).

The party asserting federal jurisdiction has the burden of proving that subject matter jurisdiction exists. See, e.g., Lovern v. Edwards, 190 F.3d 648, 654 (4th Cir. 1999); Richmond, Fredericksburg & Potomac R. Co. v. United States, 945 F.2d 765, 768 (4th Cir. 1991); Norfolk Southern Ry. Co. v. Energy Dev. Corp., 312 F. Supp. 2d 833, 835 (S.D.W.Va. 2004).

The Court of Federal Claims' jurisdiction “is 'exclusive' only to the extent that Congress has not granted any other court authority to hear the claims . . .” Bowen v. Mass., 487 U.S. 879, 910 n.48 (1988). Accordingly, “if [28 U.S.C. §] 1346(a)(1) does provide for jurisdiction in U.S. district court, the mere fact that the Tucker Act may also provide jurisdiction in the Court of Federal Claims does not automatically trump the jurisdictional grant of [28 U.S.C. §] 1346.” Roberts v. U.S., 242 F.3d 1065, 1068 (Fed. Cir. 2001) (emphasis in original).

The weight of authority on this issue has upheld the District Courts' subject matter jurisdiction over overpayment interest claims pursuant to 28 U.S.C. § 1346(a)(1). See Ford Motor Co. v. U.S., 768 F.3d 580, 584 (6th Cir. 2014) (refusing to reconsider precedent holding that 28 U.S.C. § 1346(a)(1) applied to overpayment interest), cert. denied, 135 S. Ct. 2858 (2015); E.W. Scripps Co. v. U.S., 420 F.3d 589, 596–97, 598 (6th Cir. 2005) (“In sum, we believe that, through the 'any sum' provision of [28 U.S.C.] § 1346(a)(1), the federal government has waived its sovereign immunity with respect to suits for interest on overpayments of tax that are brought in federal district court.”), aff'g, 2003 U.S. Dist. LEXIS 12677 (S.D. Ohio Jun. 16, 2003); Pfizer, Inc. v. U.S., Dkt. No. 16-cv-01870, Index No. 33, slip op. at 4, 2016 U.S. Dist. LEXIS 153241, at *6 (S.D.N.Y. Oct. 31, 2016) (Pfizer I) (“The weight of authority supports the conclusion that [28 U.S.C.] § 1346(a)(1) grants district courts subject matter jurisdiction over actions seeking overpayment interest), on appeal, No. 17-2307 (2d Cir. Oct. 12, 2017); Wichita Ctr. for Graduate Med. Educ., Inc. v. U.S., No. 16-1054, Index No. 22, slip op. at 7, 2016 U.S. Dist. LEXIS 97639, at *6–7 (D. Kan. Jul. 26 2016) (the court agrees with the Sixth Circuit's view expressed in Scripps); Doolin v. U.S., 737 F. Supp. 732, 734 (N.D.N.Y. Apr. 20, 1990) (“[A] federal district court [has] subject matter jurisdiction over . . . disputes . . . regarding the interest required by Congress to be paid on tax overpayments. . . .”), rev'd on other grounds, 918 F.2d 15 (2d Cir. 1990); Trs. of Bulkeley Sch. v. U.S., 628 F. Supp. 802, 803 (D. Conn. Feb. 18, 1986) (holding that the court had jurisdiction under 28 U.S.C. § 1346(a)(1) and in regard to the Government's argument that the $10,000 limit applied, concluding that “[i]t is unlikely that the Congress would have enacted sub silentio so significant a restriction on the tax jurisdiction of the federal district courts.”); Triangle Corp. v. U.S., 592 F. Supp. 1316, 1318 (D. Conn. Sept. 27, 1984) (holding that the court had jurisdiction under 28 U.S.C. § 1346(a)(1) and noting that “[t]o construe the statutes otherwise would emasculate enforcement of the right to interest and thus fail to effectuate the intent of Congress”), reconsideration denied, 597 F. Supp. 507, 509 (D. Conn. Nov. 28, 1994) (“[T]his court may exercise its jurisdiction over this matter, and . . . the taxpayer may elect [its] forum between the alternative jurisdictions created by Congress.”); Draper v. U.S., 10 A.F.T.R.2d 5446, at *1, 62-2 USTC ¶ 9697, at 82,825 (E.D.Wash. Aug. 17, 1962) (holding that the Court had jurisdiction under 28 U.S.C. § 1346(a)(1)). But see Amoco Prod. Co. v. U.S., 1988 U.S. Dist. LEXIS 954 (N.D. Ill. Feb. 5, 1988) (holding that district court lacked jurisdiction under 28 U.S.C. § 1346(a)(1)).

This Court is persuaded by the majority's rationale. Accordingly, Defendant's Motion to Transfer Venue is denied. For the same reasons, the undersigned respectfully recommends that the alternative Motion to Dismiss for Lack of Subject Matter Jurisdiction be denied.

III. ORDER

FOR THE FOREGOING REASONS, IT IS HEREBY ORDERED that Defendant's “Motion to Transfer to the Court of Federal Claims . . .” (document #32) is DENIED.

IV. RECOMMENDATION

FOR THE FOREGOING REASONS, the undersigned respectfully recommends that Defendant's “. . . Alternative [Motion to] Dismiss for Lack of Subject Matter Jurisdiction” (document #32) be DENIED.

V. NOTICE OF APPEAL RIGHTS

The parties are hereby advised that pursuant to 28 U.S.C. §636(b)(1)(c), written objections to the proposed findings of fact and conclusions of law and the recommendation contained in this Memorandum must be filed within fourteen days after service of same. Failure to file objections to this Memorandum with the Court constitutes a waiver of the right to de novo review by the District Judge. Diamond v. Colonial Life, 416 F.3d 310, 315-16 (4th Cir. 2005); Wells v. Shriners Hosp., 109 F.3d 198, 201 (4th Cir. 1997); Snyder v. Ridenour, 889 F.2d 1363, 1365 (4th Cir. 1989). Moreover, failure to file timely objections will also preclude the parties from raising such objections on appeal. Thomas v. Arn, 474 U.S. 140, 147 (1985); Diamond, 416 F.3d at 316; Page v. Lee, 337 F.3d 411, 416 n.3 (4th Cir. 2003); Wells, 109 F.3d at 201; Wright v. Collins, 766 F.2d 841, 845-46 (4th Cir. 1985); United States v. Schronce, 727 F.2d 91 (4th Cir. 1984).

The Clerk is directed to send copies of this Memorandum and Recommendation and Order to the parties' counsel and to the Honorable Robert J. Conrad, Jr.

SO ORDERED AND RECOMMENDED.

Signed: January 10, 2019

David S. Cayer
United States Magistrate Judge