Ah, the Flora Full Payment Rule Raises Its Ugly Head (1/16/13)

In Roseman v. United States, 2013 U.S. Claims LEXIS 2 (2013), here, a nonpublished opinion and order, the Court of Federal Claims (Judge Allegra) dismissed the taxpayer's trust fund recovery refund suit for failure to meet the prepayment requirement for refund suits.  This just applies the so-called Flora rule (see Flora v. United States, 362 U.S. 145, 150 (1960)) that a refund suit requires full payment, a rule that is mitigated in so-called divisible tax cases to require only the payment for one such divisible tax.  I explain this below, but first address the Rosenman opinion.

The body of the opinion is short, but a good reminder for practitioners and their clients:

Jurisdiction in this tax refund suit lies, if at all, under 28 U.S.C. § 1491(a)(1). n2 As a general rule, before bringing a refund suit, a taxpayer must, inter alia, pay his or her full tax liability. See Shore v. United States, 9 F.3d 1524, 1526 (Fed. Cir. 1993) (citing Flora v. United States, 362 U.S. 145, 150 (1960)); see also Ledford v. United States, 297 F.3d 1378, 1382 (Fed. Cir. 2002). This rule, however, does not apply to so-called divisible taxes, including the penalty under section 6672. Rather, "a taxpayer assessed under section 6672  need only pay the divisible amount of the penalty assessment attributable to a single individual's withholding before instituting a refund action." Boynton v. United States, 566 F.2d 50, 52 (9th Cir. 1977); see also Steele v. United States, 280 F.2d 89, 90-91 (8th Cir. 1960). n3 Courts have held that this requirement is satisfied where a plaintiff pays the penalty attributable to one employee's wages for one quarter. See, e.g., Ruth v. United States, 823 F.2d 1091, 1092 (7th Cir. 1987); USLIFE Title Ins. Co. of Dall. v. Harbison, 784 F.2d 1238, 1243 n.6 (5th Cir. 1986); Boynton, 566 F.2d at 52; Suhadolnik v. United States, 2011 WL 2173683, at *5 (C.D. Ill. June 2, 2011); Todd v. United States, 2009 WL 3152863, at *3-4 (S.D. Ga. Sept. 29, 2009); Lighthall v. Comm'r of Internal Revenue, 1990 WL 53127, at *2 (N.D. Ill. Apr. 12, 1990), aff'd, 948 F.2d 1292 (7th Cir. 1991). n4
   n2 It is worth repeating that jurisdiction for refund suits in this court is not provided by 28 U.S.C. § 1346. See Hinck v. United States, 64 Fed. C1. 71, 74-76 (2005), aff'd, 446 F.3d 1307 (Fed. Cir. 2006), aff'd, 550 U.S. 501 (2007).
   n3 "This relaxed requirement is based on the theory that section 6672 assessments represent  a cumulation of separable assessments for each employee from whom taxes were withheld." Boynton, 566 F.2d at 52.
   n4 Defendant argues that payment must be made for one employee for each of the periods involved. Given the facts presented, this court need not address this argument. 

Plaintiff's payment of $25 per quarter satisfies neither the Flora "full payment" rule nor the Boynton exception for divisible taxes. As confirmed by the tax records filed in this case, the penalties in question were imposed based on a finding that plaintiff was an employee of his corporation. The amount of employment tax owed with respect to plaintiff for any of the quarters at issue far exceeds the $25 payment amount. Accordingly, the jurisdictional prerequisite for bringing this refund action has not been satisfied. 

Based on the foregoing, the court GRANTS defendant's motion to dismiss under RCFC 12(b)(1). The Clerk is hereby ordered to dismiss the complaint.

In my Federal Tax Procedure book (current draft), I state the following in a footnote (updated to cite Rosenman):

The key to these [divisible tax Flora rule] techniques is the divisible tax concept which was discussed earlier beginning on p. 488.  Recall that the Flora rule requires full prepayment of the tax liability.  The concept for the TFRP is that it is the same as the underlying tax liability for withholding (both the income tax withholding and the employee's share of FICA withholding).  These tax liabilities are, in tax concept, divisible taxes – individual liabilities for each employee for each quarter.  They are not aggregated for all employees for the quarter.  Accordingly, under this concept, Flora only requires that the putative responsible person prepay the tax liability for one person for the quarter in order to contest whether the putative responsible person was a responsible person for that quarter.  In many cases, this amount will be less than $100.  Where the records are available to the putative responsible person, the actual minimum liability for one quarter can be determined precisely.  However, because it is often difficult for the putative responsible person to know precisely the amount for the lowest paid employee, an estimate will suffice but, since the prepayment of at least one minimal amount is jurisdictional the estimate should err on the side of caution (i.e., ramp up the amount to be certain that at least one employee’s divisible tax will be covered).  n2156 It is important in making the payment to designate the payment as completely as possible (e.g., trust fund FICA for one unnamed employee for the 1st quarter of 2005).
   n2156 Cf.  IRM 5.7.7.6.(1) (12-01/2003) which states as a predicate to filing claim for refund that the taxpayer (i.e., the putative responsible person) pay the tax for one individual for each applicable period.  Historically, the presumption has been that a minimal amount such as $100 or $200  would do the trick, and the DOJ attorneys have not contested the amount.  However, you should keep in mind that the DOJ attorneys will have access to the underlying records from which a precise determination can be made and might easily spot that the estimated amount paid does not cover the lowest paid employee.  Anecdotal information I have received is that DOJ lawyers are becoming more diligent about insuring the minimum prepayment.  For a case in which the taxpayer paid $25 per quarter and was held to flunk the prepayment requirement, see Roseman v. United States, 2013 U.S. Claims LEXIS 2 (2013), a nonpublished decision (taxpayer  failed to prove that $25 in any quarter would have covered the minimum amount for one employee).

Now, focus back on the Rosenman opinion for some nuance:

1.  Judge Allegra offers a useful reminder in fn2 regarding the jurisdiction of the Court of Federal Claims.

2.  The Court states the mitigation rule in fn3 for a payment of tax for a single employee.

3.  Note the issue raised in fn4, which the Court declines to address.  DOJ Tax is arguing that the mitigation requires payment for one employee in all quarters.  I am not sure that is correct, but maybe I will try to research the issue to see.  Note that Judge Allegra does not buy into the argument nor does he reject it.

Addendum  1/18/13 10:15 AM

Back to footnote 4 and  my point #3 above.  I have obtained the United States Motion for Dismissal memoranda.  Here is the argument from  the original memorandum on the full payment rule that Judge Allegra declined to decide, along with some more nuance as to why the minimal payment did not work.

[*12] 

Although there is non-binding authority holding otherwise, the general structure of federal tax litigation dictates that, to maintain a refund suit for section 6672 penalties for multiple quarters, the taxpayer must first pay the amount of the assessment attributable to one employee for each quarter in suit.  n11 In general, subject matter jurisdiction over tax refund suits is determined on a tax-period basis. See, e.g., Harris v. United States, 33 Fed. Cl. 470,473 (1995) (dismissing refund suit for lack of subject matter jurisdiction over some tax years because the plaintiff had not filed administrative refund claims, and over other tax years because the plaintiff had not fully paid the assessments), aff'd, 106 F.3d 426 (Fed. Cir. 1997) (Table); see also Comm 'r v. Sunnen, 333 U.S. 591, 598 (1948) ("Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate cause of action."). Thus, a taxpayer seeking a refund of income taxes for multiple tax years must pay the full amount of income tax assessed for each such year before filing suit. See, e.g., Tonasket, 218 Ct. Cl. at 709, 712; Snyder v. United  [*13]  States, 539 F.2d 706, 1976 WL 23945, at *1-2 (4th Cir. 1976) (per curiam) (Table); cf Magnone v. United States, 733 F. Supp. 613, 616 (S.D.N.Y. 1989) (explaining that "a taxpayer who owes back taxes for several years may pay interest on and sue with respect to only one of them"), aff'd, 902 F.2d 192 (2d Cir. 1990) (per curiam). There is no reason to treat section 6672 penalties, which are assessed based on a quarterly tax period, any differently. Accordingly, a taxpayer suing for a refund of section 6672 penalties for multiple quarters must pay the amount of the penalty attributable to one employee for each quarter in suit. 

   n11 At least one district court has held, to the contrary, that a taxpayer assessed with§ 6672 penalties need pay only the amount attributable to one employee for one quarter before filing suit for multiple quarters. See Todd v. United States, 2009 WL 3152863, *4 (S.D. Ga. 2009). In addition, obiter dicta in two circuit court cases seem to support the Todd holding. In re Queen, 16 F.3d 411, 1994 WL 12029, at *3 n.* (4th Cir. 1994) (per curiam) (Table) (noting that a taxpayer challenging an assessment of Section 6672 penalties "may not need to pay the entire amount of the assessed penalties ... ; rather, he may be able simply to pay the amount allegedly owed for one quarter for one employee"); USLIFE Title Ins. Co. v. Harbison, 784 F.2d 1238, 1243 n.6 (5th Cir. 1986) (noting that a "Section 6672 liability is a divisible liability" and therefore "a responsible person need only pay the tax attributable to one employee for one quarter in order to maintain a claim for refund"). Finally, two other district court decisions seem to have implicitly followed the Todd rule without explicitly analyzing the question. See Brammer v. United States, 897 F. Supp. 1022, 1023 (N.D. Oh. 1995); Spivak v. United States, 254 F. Supp. 517, 522 (D.C. N.Y. 1966), aff'd on other grounds, 370 F.2d 612 (2d Cir. 1967). 

* * * * 

III. Plaintiff Did Not Fully Pay the Amount of the Assessment Attributable to One Employee For Each (Or Any) Quarter Before Filing Suit. 

* * * * 

The materials on record, moreover, demonstrate that plaintiffs $25 payment per quarter falls short of the amount of the assessment attributable to one employee. As explained above, the section 6672 penalty assessment resulted from the IRS's determination that plaintiff was an employee of the Corporation and the resulting employment tax assessment against the Corporation. Thus, the section 6672 penalty assessment is wholly attributable to one employee, plaintiff. Pursuant to the one-employee full-payment rule, plaintiff was therefore required to pay the full amount of the assessment for each quarter, approximately $15,000 per quarter, before filing this refund suit. [case citations omitted]  Indeed, plaintiff did not fully pay the assessment for any quarter included in the complaint. Thus, even if a taxpayer could maintain a refund suit for section 6672 penalties after paying only the amount of the penalty attributable to one employee for one of the quarters in suit, plaintiff would still have failed to satisfy the jurisdictional prerequisite to this suit.