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.

Tax Procedure Book Errata - Special Flora Mitigation Procedures for Certain Assessable Penalties (9/11/16)

I will revise the book to insert the following with respect to certain assessable penalties -- the return preparer penalties under § 6694 and the penalties under 6700-6703.  These penalties are assessable without predicate notice of deficiency or other such procedures permitting litigation before assessment.  Those penalties can be litigated in a traditional refund suit which will be subject to Flora's full payment rule.  The Flora full payment rule is mitigated in many contexts (included this context) by the divisible tax rule that would apply if the penalties are divisible.  There is another special Flora full payment mitigation rule applying to these penalties.  That mitigation rule is as follows:

This mitigation rule requires that (i) within 30 days of the assessment’s notice and demand, the person assessed the penalty pay 15% of the penalty and file a claim for refund and (ii) then file the refund suit in district court by the earlier of (a) 30 days from the denial of the claim or (b) 6 months and 30 days from the date the refund claim was filed.  If the taxpayer pursues this special district remedy, collection procedures on the balance will be suspended and the statute of limitations on collection will also be suspended.  [See § 6694(c) as to the preparer penalties and §§ 6703(c) as to the §§ 6700-6702 penalties.]

In addition, to the special procedure for partial payment and suit for refund, penalties subject to this special mitigation rule may be litigated in CDP procedures.

I have not yet incorporated these into the current working draft for the next version in 2017, but it will be included in that version.

I picked up the need for this revision from Taylor v. Commissioner, 2016 U.S. Dist. LEXIS 122216 (ED WA 2016), applying the rule to the § 6694 penalty.  In Taylor, the preparer timely paid the 15% and filed the claim for refund.  The denial of the claim was almost two years later.  By the time of denial of the claim, the period for filing the suit for refund for the special procedure had expired. The time for filing that suit was 6 months and thirty days after the filing of the claim for refund.