Thursday, September 17, 2015

Flora Full Payment Rule and the Rough Edges (9/17/15)

In the class we discuss the rule -- called the Flora rule -- that, in order to maintain a tax refund suit, the taxpayer generally must fully pay the amount of the assessment.  See Flora v. United States, 362 U.S. 145 (1960), here.  There are some key nuances to that rule.  I discuss those nuances in the Student edition pp. 382-384 and in the practitioner edition pp.  545-549.

One of the key nuances is that, if the assessment in question is a "divisible tax," the taxpayer may pay only the divisible amount.  Flora v. United States, p. 175 n.38 (some taxes "may be divisible into a tax on each transaction or event, so that the full-payment rule would probably require no more than payment of a small amount.”)   For example, for trust fund recovery penalty ("TFRP") based on all employees for a particular quarter or quarters, because the underlying trust fund taxes are divisible, the taxpayer contesting assessment of the TFRP, need only pay for one taxpayer for one quarter.

The divisible tax rule mitigates the full bore application of Flora, and usually makes a refund remedy within the reach of a taxpayer subject to a divisible tax assessment.  The problem comes if the tax (or penalty treated as a tax for this purpose) is so large that paying the full assessment is beyond the reach of the taxpayer.

In Diversified Group Inc. v. United States, 123 Fed. Cl. 442, 2015 U.S. Claims LEXIS 1276 (2015), here [see note below at *], appeal docketed, No. 16-1014 (Fed. Cir. October 6, 2015), the promoter of an abusive shelter and his corporation involved with the promotion of the shelter was assessed a penalty under § 6707, here, for failing to register the shelter.   The penalty was over $24 million.  The promoter paid a small amount and sued for refund, hoping to fit within the divisible penalty exception to full payment.  The Court held that the penalty was not divisible, hence requiring the promoter to pay the full penalty before pursuing a refund suit.

I do not know the financial ability of the promoter or his corporation, but for most ordinary people, paying that amount would difficult, probably impossible.

So the question is when a taxpayer is financially unable to meet the Flora full payment rule and must do so for a refund suit remedy, does he have an alternative to obtain a judicial remedy?  Of course, for the types of tax that require a predicate notice of deficiency, the taxpayer can obtain a Tax Court remedy.  But sometimes the taxpayer may not have received the notice of deficiency (the last known address issue) or the type of tax or penalty does not require a notice of deficiency (§ 6707 is one).

In a case like that, the taxpayer or the person assessed a penalty may be able to get a CDP remedy that could lead to a Tax Court review of the liability.  Keith Fogg a contributor on the Procedurally Taxing Blog discusses this issue in Another Flora Decision – Bad News for Tax Shelter Promoters Highlights Possible CDP Jurisdictional Issue (Procedurally Taxing Blog 9/15/15), here.   Keith concludes:  "It appears that they can litigate the merits of this penalty using the CDP process though the path to that answer may not be as clear as one might like and the answer appears to turn on whether the taxpayer has administratively requested penalty abatement after the assessment."  Keith does a great job of discussing his reasoning and nuance, so I strongly encourage readers to read the blog.

CDP review is discussed in the text - student edition, pp. 457-463 and practitioner edition pp. 657-667.

* This blog entry was prepared on the basis of the original opinion.  The court subsequently reissued the opinion on 9/2/15.  I have changed the citation reference and the link.  Although I have not compared to see what might have changed in the reissued opinion, I don't believe anything was changed relevant to the discussion in this blog entry.

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