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.

District Court holds the § 6707 Tax Shelter Reporting penalty Not Divisible (3/12/16)

I previously reported on a case in the Court of Federal Claims, Diversified Group Inc. v. United States, 123 Fed. Cl. 442, 2015 U.S. Claims LEXIS 1276 (2015), here, appeal docketed, No. 16-1014 (Fed. Cir. October 6, 2015), here, that held that the § 6707 penalty was not divisible for purpose of the Flora, here, full payment rule for refund suits.  See Flora Full Payment Rule and the Rough Edges (Federal Tax Procedure Blog 9/17/15), here.  In Pfaff v. United States, Civil Action No. 14-cv-03349-PAB-NYW, 2016 U.S. Dist. LEXIS 30844 (D. Colo. Mar. 10, 2016) [no link available], in a much shorter opinion, the District Court reached the same result that, in my judgment, does not provide anything not covered in the Diversified Group opinion.

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.

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.

Court of Federal Claims Transfers to Tax Court Case Failing Flora Full Payment Rule (1/18/14)

Caution: the decision discussion immediately below has been reversed; the revised decision is discussed toward the end of this blog.

In Clark v. United States, 2014 U.S. Claims LEXIS 3 (Fed. Cl. 2014), here, the Court of Federal Claims, Chief Judge Campbell-Smith, found that the pro-se complaint the taxpayer filed failed to meet the Flora requirement for full payment but, since the complaint had been filed during the 90 days that the plaintiff could have petitioned the Tax Court, the case was ordered transferred to the Tax Court.

I had never seen this disposition before and just thought I would call it to readers' attention in case they ever needed it for their bag of tricks.

Plaintiff has not alleged that she has paid the tax at issue in her tax refund suit. This court does not have jurisdiction to entertain her claim unless the tax has been paid in full. See Flora, 357 U.S. at 75. Plaintiff recognizes that her claim should have been brought before the Tax Court. 

The court next considers whether the claim merits transfer. Plaintiff attached to the complaint the Notice of Deficiency letter from the  [*5] IRS, which contained instructions to file a petition with the Tax Court if plaintiff wished to contest the IRS determination before making any payment. See Notice of Deficiency Letter 1. Plaintiff's deadline to petition the tax court was November 4, 2013. See id. Plaintiff filed suit in this court on October 29, 2013. See generally Compl. According to plaintiff's letter from the IRS, plaintiff's attempt to protest the Notice of Deficiency would have been brought properly in the Tax Court on the date she filed here. The court therefore determines that the transfer of plaintiff's complaint to the United States Tax Court is "in the interest of justice." 28 U.S.C. § 1631. 

III. Conclusion 

For the foregoing reasons, the court finds that it lacks jurisdiction over plaintiff's claim. Plaintiff's motion to transfer is GRANTED. Pursuant to 28 U.S.C. § 1631, the complaint is TRANSFERRED to the United States Tax Court.

The authority cited, 28 USC, 1631 is here.   It short, so I cut and paste it:

28 U.S. CODE § 1631 - TRANSFER TO CURE WANT OF JURISDICTION
Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

CAUTION:

Fourth Circuit Affirmance of Summary Judgment in TFRP case (11/11/13)

In Johnson v. United States, ___ F.3d ___, 2013 U.S. App. LEXIS 22444 (4th Cir. 2013), here, the Fourth Circuit affirmed summary judgment for the Government in a trust fund recovery (also called responsible person) penalty case.  That penalty is imposed by Section 6672, here.  Johnson is a good case to illustrate the potential sweep of this penalty, which is frequently encountered by tax controversy practitioners.

I call readers attention to an excellent blog discussion of Johnson.  See Matt Lee, Fourth Circuit Affirms Responsible Officer Penalty Against Wife for Husband’s Unpaid Employment Taxes (Blank Rome Tax Controversy Watch 11/8/13), here.  I want try to recreate the blog, so to speak.  Mr. Lee's blog entry is very good and detailed.  I do offer his conclusion:

The Johnson case illustrates that personal liability may be assessed against corporate officers where a company fails to pay over employment taxes, even if the corporate officer was unaware of the failure to pay in prior periods.  Once the corporate officer learns of the tax delinquency, he or she has a duty to ensure that corporate funds are used to pay off those liabilities.  If the corporate officer fails to do so, personal liability for those taxes may be asserted. 

One interesting feature is the following from the opinion (footnote omitted):

Subsequently, the IRS assessed trust fund recovery penalties (the "100% penalty") against Mr. and Mrs. Johnson individually, pursuant to 26 U.S.C. § 6672.8 Mrs. Johnson later paid $351.00 toward her assessed penalty. 

On March 30, 2009, Mrs. Johnson filed suit in the United States District Court for the District of Maryland seeking a refund of the penalty she had paid, asserting that the § 6672 assessment against her was erroneous. The Government filed a counterclaim against both of the Johnsons in order to reduce its assessments to judgment, seeking to recover the balance of assessments due, including penalties, interest, and costs. Based upon transcripts of account showing the balances due as of August 22, 2011, the Government ultimately sought to recover $304,355.90 from Mrs. Johnson and $240,071.12 from Mr. Johnson.

I have previously posted on the issue of how much needs to be paid to insure that Flora's requirements are met. See  Flora v. United States, 362 U.S. 145 (1960).  Readers desiring to read the blogs on that issue can do so by clicking the subject labels below for Flora Full Payment Rule and Divisible Tax.

Thanks to the bloggers at Procedurally Taxing, here, for the lead to Mr. Lee's blog entry.  And thanks to Mr. Lee for the entry itself.

Litigating Trust Fund Recovery Penalties -- the Flora Rule, Divisible Taxes and Unfairness (10/11/13)

UPDATE, most of the discussion below is still good, but Judge Wheeler of the Court of Federal Claims issued a new opinion going the opposite way and finding jurisdiction.  I posted a blog entry on the new opinion on 1/29/14.  See Revised Opinion in TFRP Case Involving Flora Full Payment Requirement (Federal Tax Procedure Blog 1/29/14), here.

Tax procedure enthusiasts will know the venerable Flora Rule, sometimes referred to as the Flora rule, after the case of Flora v. United States, 362 U.S. 145 (1960).  The following is a cut and paste of my explanation of this rule in my Federal Tax Procedure book (footnotes omitted):

In order to file a claim for refund and then sue for refund, the taxpayer must be able to assert that he or she overpaid taxes.  The critical question has been how much the taxpayer must pay in order to assert an overpayment.  The historical answer was that the taxpayer must have fully paid the assessment (which includes penalties and interest) in order to bring a refund suit.  This is referred to as the prepayment requirement which tax practitioners sometimes refer to as the Flora rule, after the Supreme Court case, Flora v. United States, 362 U.S. 145 (1960). 

Why is a prepayment rule important?  As the Supreme Court in Flora viewed the history and fabric of the procedures Congress adopted for tax litigation, any other rule would be counterproductive to those procedures.  Congress created the Tax Court as the forum for litigating most tax controversies.  The Tax Court is a prepayment judicial forum, and is the only prepayment judicial forum we have for resolving the merits of tax liabilities (excepting of course collection suits in the district courts).  If the IRS could assert a deficiency of, say, $100,000 and the taxpayer could get a prepayment remedy simply by paying $1 against the assessment that follows, the taxpayer could effectively turn the district courts into a prepayment forum. 

Of course, this highlights one of the problems with the prepayment rule.  A taxpayer who does not have the money to pay (the $100,000 assessed amount in the above example) doesn't really have a choice.  He or she must pursue the prepayment remedy in the Tax Court.  Is that fair?  Do citizens get better choices solely because they have substantial resources?  That is a policy question, and of course the answer is yes (just as substantial resources open up better and more choices throughout the law and life). 

Many authorities and commentators felt that Flora required full payment of not only the principal amount of tax liability, but also any penalties and interest assessed by the IRS.  This, of course, makes the cost of entry to refund litigation more expensive, particularly if distant years are involved where the interest can be more than the tax or penalties.  It is not unusual in tax cases involving old years to have the interest alone, because of the passage of time, cause the total bill with interest to triple or quadruple the principal amount involved.  With this “cost” of refund litigation, many taxpayers are forced to pursue the Tax Court route if it is available to them, as it is when income tax, estate and gift tax and certain types of miscellaneous tax liabilities are in dispute. 

As you can see, one of the issues is whether it is fair to force litigation into the Tax Court simply because the taxpayer is not rich.  (OK, that is a bit of hyperbole, but makes the point.)  And, some taxes and penalties like the TFRP cannot even get to the Tax Court (except late in the process via a CDP hearing, which is a relatively recent development). Accordingly, as I note in the book, the Courts have developed the divisible tax concept to mitigate some unfairness in the Flora rule.  The divisible tax concept (again from my book with only one footnote quoted) is:

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.