Revised Opinion in TFRP Case Involving Flora Full Payment Requirement (1/29/14; 2/21/14)

I recently blogged on the Court of Federal Claims' Kaplan case, Kaplan v. United States, 2013 U.S. Claims LEXIS 1530 (10/9/13) application of the Flora rule in the Section 6672, TFRP contextg.  See Litigating Trust Fund Recovery Penalties -- the Flora Rule, Divisible Taxes and Unfairness (Federal Tax Crimes Blog 10/11/13), here.  Readers unfamiliar with the contents of that blog entry might want to review it.  The essence of the concern discussed was a dismissal because of the taxpayer's inability to prove sufficient payment of the TFRP divisible tax for one employee per quarter and show that the amount he paid ($100) was sufficient.

Judge Wheeler has a revised the opinion, Kaplan v. United States, 2014 U.S. Claims LEXIS 24 (2014), here.

Here is the basis for the new opinion:

However, in order to establish the Court's subject matter jurisdiction, Mr. Kaplan must prove by a preponderance of the evidence that he has paid the assessed tax for at least one employee. Cencast Servs., L.P. v. United States, 94 Fed. Cl. 425, 435 n.7, 439 (2010), aff'd, 729 F.3d 1352 (Fed. Cir. 2013). More precisely, he must show that his payments of $100 were sufficient to cover the full assessment attributable to at least one employee in each quarter. This, of course, cannot be done without some record of the amount of payroll taxes assessed per employee per quarter. In his motion for reconsideration, Mr. Kaplan relates in detail his diligent but futile efforts at obtaining these records. Pl.'s Mot. for Recons. 6-11. He then explains that he is unable to provide this evidence for exactly the same reason he is not liable for the assessed taxes, that is, he is not a responsible person under § 6672. Id. at 12. 

Thus, assuming these representations are true, Mr. Kaplan is caught in an "evidentiary Catch-22." In order to prove the merits of his argument that he is not a "responsible person," he must first produce the evidence for which he is not responsible. This inequity is magnified by the fact that the Government is itself unable to state what minimum payment would be sufficient. See id. at 9-10; Def.'s Resp. to Pl.'s Mot. for Recons. 7.\ 

In the end, the merits of this case will turn on whether Mr. Kaplan is liable for the full $86,902.76 penalty, and the divisible amount at issue is merely representative of that full amount. Indeed, "[w]hen a taxpayer sues for a refund based on a divisible refund claim, it is meant to 'test the validity of the entire assessment. '" Cencast, 729 F.3d at 1366 (quoting Lucia v. United States, 474 F.2d 565, 576 (5th Cir. 1973)). Under the circumstances of this case, the Court is not inclined to prevent Mr. Kaplan from challenging that full assessment in this forum simply because the representative amount he paid might not be representative enough. Accordingly, the Court accepts the three $100 payments as sufficient to establish subject matter jurisdiction. See, e.g., Schultz v. United States, 918 F.2d 164, 165 (Fed. Cir. 1990) (accepting plaintiff's payment of $100 toward the $20,691.38 penalty assessed against him); Cook v. United States, 52 Fed. Cl. 62, 66 (2002) ($97,760.00 penalty).

I don't have time to develop the concept here, but I think this is a further holding in a line of cases that responsibly mitigate the full bore and inequitable application of the Flora rule.  Congratulations to Professor Rubinstein, counsel for the taxpayer, and kudos to Judge Wheeler.

Addendum 2/21/14 11:30 pm:

Professor Rubinstein has written two outstanding guest blogs for Procedurally Taxing.  They are:

• Refund Suits, Divisible Taxes and Flora: When is a representative payment representative enough? Part 1 (2/17/14), here.
• Refund Suits, Divisible Taxes and Flora: When is a representative payment representative enough? Part 2 (2/19/14), here.

In the conclusion for Part 2, Professor Rubinstein provides caveats to taxpayers and practitioners about obtaining a similar result in future cases:

Rather than eagerly announce that there is now a new jurisdictional rule in section 6672 cases, we think it’s important to note that there were some unique circumstances in this case that, perhaps, prevent broad application of the decision.  First, we were able to recount for the court in detail (along with evidentiary exhibits), the diligent (but futile) search made for employee records.  Second, the government was unable to produce any records to show what minimum payments would be sufficient.  Third, the government had already tried, unsuccessfully, to deprive Kaplan of his choice of forum by filing its own suit in the Western District of Texas to litigate the issue of liability under section 6672.

Even with that caveat, Professor Rubinstein concludes:

That said, we do believe this case is important because, as Professor Townsend observed, “it is a further holding in a line of cases [involving the question of section 6672] responsibly, [which] mitigate[s] the full bore and inequitable application of the Flora rule.”  After all, the Tax Court does not have jurisdiction over these types of assessments, so the deficiency procedures that allow taxpayers to challenge first and pay later are unavailable.  Thus, the real purpose of the refund suit in section 6672 cases isn’t for taxpayers to get back their divisible tax payment(s), but rather to permit them a “day in court” to challenge their underlying liability for the Trust Fund Recover Penalty assessments.  When viewed in this context, Judge Wheeler’s decision is a huge victory, not only for Mr. Kaplan, but also other taxpayers who may lack employee records but still want the opportunity to contest the penalty assessments without the harshness of the Flora rule standing in their way.