TFRP Refund Suits - How Much Must be Paid (1/18/13)

I write today on the Government's position -- pressed only once that I am aware of and not accepted or specifically rejected by any court that I am aware of -- that the Trust Fund Recovery Penalty (TFRP) (and any other divisible tax) must meet the Flora full payment rule for each assessed quarter.  For the TFRP, because of the divisible tax concept, only one employee's tax must be paid for a quarter.  But, practitioners filing a TFRP refund suit should consider the impact of the Government's argument should it continue to press it.  I have previously written on the case, but addressed the issue toward the end of that blog entry.  Ah, the Flora Full Payment Rule Raises Its Ugly Head (Federal Tax Procedure Blog 1/16/13), here.  I have decided to present the issue as a separate blog entry because TFRP refund suits are very common; if the Government is correct, the position could require dismissal of the refund suit if the minimum payments are not made for each quarter.

I present the issue by cutting and pasting my revised discussion in my Federal Tax Procedure book and now offer the following excerpts that she the background for the issue and the Government's argument (most footnotes omitted):

The TFRP is generally litigated in refund suits in either the district court or Court of Federal Claims.  There is no “ticket to the Tax Court” (notice of deficiency) in TFRP cases. Denial of access to the Tax Court -- which is a prepayment forum for litigating liability -- can have a harsh effect.  The Flora rule requires in tax refund suits that the tax must be fully paid before the taxpayer may file a refund suit.  It is not unusual for trust fund penalties to be quite large and thus prohibitive if the Flora rule were to apply full bore.  Fortunately, the due process issues – and certainly general fairness issues – that might otherwise inhere in the full bore application of the Flora rule are avoided by two procedural techniques -- one statutory and the other non-statutory -- that permit the putative responsible person to litigate the liability without payment of the entire amount.

The key to these techniques is the divisible tax concept which was discussed earlier beginning on p. ___.  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 the 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). n2158  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).
   n2158  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.  

As noted in discussing the divisible tax concept, this technique to use a partial payment is useful only if the IRS does not collect on the unpaid balance during the pendency of the refund suit.  The first statutory technique in is in the TFRP Code section.  Section 6672(c) provides, in part relevant to the fairness issue presented by the prepayment rule, that the taxpayer may pay the amount required for one person (“not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty,” which as I noted above may be precisely calculated or is usually assumed to be $100 or less), file a claim for refund (the predicate to a refund suit) and furnish a bond for the balance.  Collection measures will then be suspended pending the resolution of the claim for refund and any suit for refund if the IRS does not act on the claim for refund in a way satisfactory to the putative responsible person.  If a refund suit is filed, the IRS will counterclaim for the uncollected balance of the assessment so as to resolve in one proceeding the taxpayer's liability for all employees for all quarters involved. 

The second – and more easily available – statutory technique applies for some (but not all) divisible taxes, including the TFRP.  Section 6331(i) precludes a levy during any period that a proceeding contesting the liability for a divisible tax if the proceeding would be res judicata or collateral estoppel for the unpaid tax liability.  The precise scope of res judicata and collateral estoppel levy relief provision may be uncertain, for example, where the taxpayer pays for one employee for one quarter and the Government has made assessments for other employees or for other quarters where the facts may be materially different.  Technically, until and unless the Government counterclaims, the proceeding might not be res judicata or collateral estoppel as to the other quarters, although arguments could be made that, depending upon the facts, it might be.  But, the Government usually does counterclaim, so the proceeding will be res judicata or collateral estoppel.  Injunctions are available for violation of this prohibition, despite the general rule that injunctions are not available in tax matters. 

There is still another technique, albeit non-statutory,  for suspending collection activity while the case is pending, although its continuing need is probably pre-empted by § 6331(i).  The putative responsible person first meets the Flora rule by paying for one employee for one of the quarters involved ($100 under the above assumptions).  As in the statutory avenues, the Government will then counterclaim for the uncollected balance.  The taxpayer through his counsel will ask (politely) the DOJ Tax attorney handling the case to request that the IRS not pursue collection measures while the putative responsible person's liability for the tax is being litigated.  The IRS will honor the request so long as ultimate collection of the tax is not in jeopardy (a term of art that we have encountered above which does not mean that the IRS is risk free, but that means the taxpayer is not doing something affirmatively to prevent the IRS from collecting). 

I caution readers that the Government has recently taken the position that, a person subject to multiple quarter TFRP assessments must pay the minimum amount for each quarter rather than just one quarter as discussed in the preceding paragraph. n2163 The Court of Federal Claims declined to decide the issue.  Because this issue is so important, I quote the entire argument on the subject from the Government's brief and focus the reader on the text above footnote 4 and the contents of footnote 4 where the Goverenment acknowledges that the direct cases on point hold otherwise, but argues in the text that the structure of the refund jurisdiction provision and Flora require the holding.  The argument is:
  n2163  Roseman v. United States, 2013 U.S. Claims LEXIS 2 at fn. 4 (2013) (“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.”)

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  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).