Substantial § 6700 Promoter Penalty Case Involving Refund Suit and Counterclaim Settled for $5,200,000 (5/25/24)

In Clark v. United States (S.D. Fla. 9:21-CV-82056), CL docket entries here, the taxpayer, Celia R. Clark, an attorney active in the promotion of microcaptive insurance companies for certain claimed tax advantages, brought a suit for refund of § 6700 penalties in the amount of $1,745,544. That amount represented 15% of the aggregate § 6700 penalties of $11,636,919 required in order to meet the jurisdictional requirement (special rule to avoid the Flora full payment requirement) for refund suits for the § 6700 penalties. See Complaint, here, paragraphs 65-67). (Actually, the aggregate amount paid was slightly in excess of 15% of the aggregate penalties.)

The 6700 penalty here for false or fraudulent misstatements as to a material matter is 50% of the gross income derived or to be derived from the penalized conduct. The penalized conduct is the organization or participation in a plan or arrangement in which the person furnishes or causes to be furnished a statement that the person “knows or has reason to know is false or fraudulent as to any material matter.”  being the organization or participation in the sale of a plan or arrangement that claims false tax benefits. I discuss the  § 6700 penalty and the § 6703(c) relief from Flora full payment requirement in my Federal Tax Procedure Book (Practitioner Ed. 2023.2), here, at pp. 853-856.

In the Government’s Answer and Counterclaim, here, the Government responded to the allegations in the complaint and sought judgment for $10,095.359 (Answer pp. 26-27, which seems to be the net amount after application of Clark’s payments with some add-ons.) Among the allegations in the Answer and Counterclaim are (i) a mélange of facts implying or proving (if proved) that Clark knew or had reason to know of the falsity of the scheme and documents implementing the scheme (Answer pp. 16-25, ¶¶ 16-85) and (ii) “From 2008 through 2016, Clark, through her law firm, earned over $23 million in fees from the microcaptive insurance programs.” (Answer p. 25 ¶ 87.) I infer that the alleged aggregate fee amount was the basis for the penalties exceeding $11 million.

By documents filed on May 15 and 17, 2024, the parties sought and the Court (Judge Aileen Cannon, much in the public discussion for other reasons) approved the parties’ settlement. See Doc. 155, here; Doc. 156, here; and Doc. 157, here. I think the procedural steps indicated in the documents are: (1) the Government obtained judgment for $11,636,919 (the aggregate amounts of the original § 6700 penalty assessments (without add-ons) (Doc. 156, par. 1); (2) the parties settled the judgment for $5,200,000 (inclusive of payments Clark had already made (Doc. 156, par. 2); and (3) the Government certified the satisfaction of the money judgment which means the judgment of $11,636,919 is satisfied by payment of the $5,200,000 settlement amount (Doc. 157). Net cost to Clark is thus $5,200,000 (not considering the time value of money) and commotion out of pocket costs (e.g., her attorneys fees and related costs) and aggravation over many years. (A Google Search on "celia r. clark" & tax will produce many hits suggesting that the commotion was substantial.)

JAT Comments:

1. The final penalty cost is substantial. One can infer that the settlement is based on ability to pay rather than doubt as to liability but I don’t know that that is a compelled inference. I think that, if it were a doubt as to liability settlement, the judgment should have been in the amount of the settlement, although I supposed it could have been a blended settlement considering both ability to pay and doubt as to liability. In this regard, I am not sure that, had the case proceeded, the Government would have won although that may have been likely. That is to say that some portion of the settlement may have been based on doubt as to liability, although the Government apparently pushed for and obtained judgment in the full amount. (As to the full amount, note that the judgment was in the amount of the original assessments without add ons that should have been included if indeed the judgment was an admission of liability in the full amount.)

2. Clark seems to have been well-represented with a team including Jeff Neiman, see CL Attorneys page. Jeff’s firm bio, here.

3. The § 6700 penalty is an assessable penalty, meaning that there are no predicates such as, in the case of income tax, a notice of deficiency. Readers may recall the past discussion of the § 6038(b) penalty in Farhy v. Commissioner, ___ F.4^th ___, 2024 U.S. App. LEXIS 10843 (D.C.. Cir. 5/3/24), discussed in DC Circuit Holds IRS Has Assessment Authority for § 6038(b) Penalty, Reversing Tax Court (Federal Tax Procedure Blog 5/3/24; 5/4/24), here.

4. The 15% payment rule in order to avoid the Flora full payment rule is in  § 6703(c), here, which further provides that collection activity should cease if the court proceeding is started within 30 days. Technically, apart from § 6703(c), Clark could have paid the full penalty for one annual period and brought a refund suit for the full penalty paid; that would have permitted her to pay the low year amount of $976,993 for 2009 (see Complaint p. 18 ¶ 65), but that would not have given her relief from collection activity for the unpaid balance. Section 6703(c) gave her that collection relief while the case was pending, at the end of which she paid the settled amount in full.