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Olson v. United States

July 30, 2010

JAMES OLSON, PLAINTIFF AND, COUNTERCLAIM DEFENDANT,
v.
UNITED STATES OF AMERICA DEFENDANT AND COUNTERCLAIM PLAINTIFF,
v.
MICHAEL SHAMROCK COUNTERCLAIM DEFENDANT AND COUNTERCLAIM PLAINTIFF



The opinion of the court was delivered by: Wayne R. Andersen United States District Judge

Wayne R. Andersen District Judge

MEMORANDUM OPINION AND ORDER

This matter is before the Court on Defendant United States of America's motion to dismiss [36], pursuant to Fed. R. Civ. P. 12(b)(1), Counterclaim Plaintiff Michael Shamrock's three counterclaims. For the following reasons, this Court grants United States' motion to dismiss [36] Shamrock's first and third counterclaims and denies United States' motion to dismiss [36] with respect to Shamrock's second counterclaim.

BACKGROUND

In February 2006, the IRS assessed a civil penalty against James Olson for failure to remit employment withholding taxes on behalf of Jimi Construction, Inc (Jimi). In June 2008, Olson filed suit against the United States claiming the civil penalty was improper. Olson claimed Michael Shamrock (Shamrock), an owner of Jimi, handled all of Jimi's financial matters and was therefore responsible for the civil penalty. In June 2009, the United States filed a counterclaim against Olson and joined Shamrock claiming he was also liable for Jimi's failure to remit employment withholding taxes.

However, Shamrock claims he properly remitted employment taxes using the IRS's Electronic Funds Transfer Payment System. Shamrock further claims the IRS provided Shamrock with an incorrect tax payment code and as a result, Shamrock claims the IRS has unlawfully failed to credit the employment taxes as paid. In response to the United States' claim, Shamrock filed three counterclaims against the United States seeking: (1) $250 million in damages for the IRS's alleged breach of a fiduciary duty, (2) $100,000 for overpaid taxes by Jimi Construction, and (3) a court order requiring the IRS to "account for all tax payments, and all transfers and credits and debits of such taxes paid." In opposition, the United States claims sovereign immunity to suit and has filed a motion to dismiss all three counterclaims by Shamrock.

With respect to counterclaims I and III by Shamrock, this Court does not have jurisdiction to adjudicate Shamrock's claims because the United States has not waived sovereign immunity to suit. However, with respect to counterclaim II by Shamrock, this Court has jurisdiction to adjudicate Shamrock's counterclaim against the United States because the counterclaim seeks recoupment arising out of the same transaction that is the subject matter of the United States' suit. Thus, this Court grants the United States' motion to dismiss Shamrock's counterclaims I and III and denies the United States' motion to dismiss with respect to Shamrock's counterclaim II.

LEGAL STANDARD

Federal courts "have only the power that is authorized by Article III of the Constitution and the statutes enacted to Congress pursuant thereto." Transit Express, Inc. v. Ettinger, 246 F.3d 1018, 1023 (7th Cir. 2001). In a suit, the petitioning party must demonstrate that the district court has jurisdiction, which in non-diversity cases may be accomplished by showing that federal law creates a cause of action or that a substantial question of federal law is raised. See Minor v. Prudential Securities, Inc., 94 F.3d 1103, 1105 (7th Cir. 1996); see also Kontos v. United States Dept. of Labor, 826 F.2d 573, 576 (7th Cir. 1987). In considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), the court will accept the nonmoving party's well-pleaded factual allegations as true and draw all reasonable inferences from those allegations in the plaintiff's favor. Rueth v. EPA, 13 F.3d 227, 229 (7th Cir. 1993).

DISCUSSION

I. Counterclaim I -- Damages for Breach of Fiduciary Duty

This Court does not have jurisdiction to adjudicate Shamrock's first counterclaim because Shamrock's first counterclaim seeks affirmative relief beyond recoupment. Normally, the United States is immune from suit unless sovereign immunity is specifically waived by statute or by other limited means. See United States v.Testan, 424 U.S. 392, 399 (1976) (quoting United States v. Sherwood, 312 U.S. 584, 586 (1941)); see also United States v. Dalm, 494 U.S. 596, 608 (1990). However, when the United States brings an action for recoupment against a defendant, as in the instant matter, the United States waives its sovereign immunity for counterclaims "arising out of the same transaction or occurrence." See Federal Sav. & Loan Ins. Corp. v. Quinn, 419 F.2d 1014, 1017 (7th Cir. 1969). This waiver is limited and the counterclaim cannot seek relief in excess or different from that which the United States seeks against a defendant. Id.

Shamrock's first counterclaim alleges the United States breached its fiduciary duty by not crediting Shamrock for payment of employment taxes. For this breach, Shamrock claims $250 million in damages. In contrast, the United States is seeking a tax penalty of $379,204.68 for Shamrock's alleged failure to remit employment taxes. Clearly, Shamrock seeks damages well in excess of the United States' claim for unpaid taxes. Furthermore, Shamrock's breach of a fiduciary duty claim does not even allege recoupment. Thus, the United States has not waived its sovereign immunity pursuant to the recoupment exception.

Furthermore, contrary to Shamrock's arguments, the United States has not waived sovereign immunity pursuant to 28 U.S.C. ยง 1346, 26 U.S.C. ...


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