Diversified Grp. Inc. v. United States, 2016-1014

• Decision Date: 10 November 2016
• Docket Number: 2016-1014
• Citation: 841 F.3d 975
• Parties: Diversified Group Incorporated, James Haber, Plaintiffs–Appellants v. United States, Defendant–Appellee
• Court: U.S. Court of Appeals — Federal Circuit

841 F.3d 975

Diversified Group Incorporated, James Haber, Plaintiffs–Appellants

v.United States, Defendant–Appellee

2016-1014

United States Court of Appeals, Federal Circuit.

Decided: November 10, 2016

Jasper G. Taylor , III, Norton Rose Fulbright US LLP, Houston, TX, argued for plaintiffs-appellants. Also represented by Richard Lee Hunn .

Francesca Ugolini , Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Ivan Clay Dale , Gilbert Steven Rothenberg , Caroline D. Ciraolo , Diana L. Erbsen .

Before Prost, Chief Judge, Newman and Taranto, Circuit Judges.

Prost

, Chief Judge.

Diversified Group Incorporated (“Diversified”) and its president, James Haber, (collectively, “Appellants”) brought this action against the United States, seeking a refund of payments made toward a federal tax penalty which the Internal Revenue Service (“IRS”) assessed under 26 U.S.C. § 6707

for failure to comply with tax shelter registration requirements under 26 U.S.C. § 6111. The United States Court of Federal Claims (“Claims Court”) held that it lacked jurisdiction over the case because Appellants did not comply with the full payment rule. For the reasons stated below, we affirm.

BACKGROUND

The circumstances giving rise to this appeal are summarized in the Claims Court's decision, Diversified Group, Inc. v. United States , 123 Fed.Cl. 442 (2015)

. We provide information relevant to the issues on appeal here.

Between 1999 and 2001, Appellants sold two tax avoidance strategies to 192 of their clients: the Option Partnership Strategy (“OPS”) and the Financial Derivatives Investment Strategy (“FDIS”). Each strategy involved a set series of transactions, which, when exercised by an individual client, would yield an artificial tax loss or deduction. Each client would contribute the initial amount to be invested in these transactions, as well as pay a fee of 3–4.5%. Diversified did not register any of these services as tax shelters.

The then-applicable version of 26 U.S.C. § 6111¹

required that “[a]ny tax shelter organizer shall register the tax shelter with the Secretary (in such form and in such manner as the Secretary may prescribe) not later than the day on which the first offering for sale of interests in such tax shelter occurs.” 26 U.S.C. § 6111(a)(1)

. Under § 6111(c)(1), a “tax shelter” was defined as:

any investment—(A) with respect to which any person could reasonably infer from the representations made, or to be made, in connection with the offering for sale of interests in the investment that the tax shelter ratio for any investor as of the close of any of the first 5 years ending after the date on which such investment is offered for sale may be greater than 2 to 1, and

(B) which is—

(i) required to be registered under a Federal or State law regulating securities,

(ii) sold pursuant to an exemption from registration requiring the filing of a notice with a Federal or State agency regulating the offering or sale of securities, or

(iii) a substantial investment.

Section 6111(c)(4)

defined a “substantial investment” as an investment where “(A) the aggregate amount which may be offered for sale exceeds $250,000, and (B) there are expected to be 5 or more investors.”

Treasury Department regulations provided that “[r]egistration is accomplished by filing a properly completed Form 8264 with the Internal Revenue Service. The Internal Revenue Service will assign a registration number to each tax shelter that is registered.” Temp. Treas. Reg. § 301.611–1T, A–1, A–47. When an investment qualified as a tax shelter because it was a “substantial investment” under § 6111(c)(1)(B)(iii)

, a separate Form 8264 needed to be filed for each “investment” that made up the “substantial investment” if the investment

differ[ed] from the other investments in a substantial investment with respect to any of the following: (1) Principal asset, (2) Accounting methods, (3) Federal or state agencies with which the investment is registered or with which an exemption notice is filed, (4) Methods of financing the purchase of an interest in the investment, (5) Tax shelter ratio.

Id . at A–48. The regulations made clear that “[s]uch aggregated investments, however, are part of a single tax shelter.” Id .

If a person failed to register a tax shelter under § 6111

, they were subject to a penalty under 26 U.S.C. § 6707. Section 6707(a) provided in relevant part:

(1) Imposition of penalty.—If a person who is required to register a tax shelter under section 6111(a)

—

(A) fails to register such tax shelter on or before the date described in section 6111(a)(1), or

(B) files false or incomplete information with the Secretary with respect to such registration,

such person shall pay a penalty with respect to such registration in the amount determined under paragraph (2) or (3), as the case may be. No penalty shall be imposed under the preceding sentence with respect to any failure which is due to reasonable cause.

(2) Amount of penalty.—Except as provided in paragraph (3), the penalty imposed under paragraph (1) with respect to any tax shelter shall be an amount equal to the greater of—

(A) 1 percent of the aggregate amount invested in such tax shelter, or

(B) $500.

In 2002, the IRS began conducting a penalty audit, pursuant to § 6707

, of Diversified for potential failures to register a tax shelter under § 6111. Eventually, on December 16, 2013, the IRS issued two “Notices of Proposed Adjustment” (“NOPAs”) assessing penalties of $24,868,451 for failure to register OPS and $17,241,032 for failure to register FDIS, respectively. The penalties totaled $42,109,483. According to the IRS, OPS and FDIS each qualified as a “tax shelter” under § 6111

because the computed tax shelter ratio was greater than 2:1 and each was a “substantial investment” under § 6111(c)(4). The IRS calculated each penalty by, pursuant to § 6707(a)(2)(A), computing the “aggregate amount invested”² by each client, multiplying this number by 1%, and summing this result across clients. On January 16, 2014, the IRS reduced the amount due to $24,920,904 because the other $17,188,579 had been “[p]aid by [o]thers.”

On February 28, 2014, Diversified made a payment of $15,500, which was the portion of the OPS penalty that it incurred from its dealings with a single client, Stanley Dziedzic, ($15,450) plus interest ($50). Haber made a payment of $18,370, which was the portion of the FDIS penalty that he incurred from his dealings with another client, Albert Kotite, ($18,310) plus interest ($60). They filed refund claims for each. The IRS denied these claims on April 10, 2014.

Appellants filed the instant action in the Claims Court on July 18, 2014, seeking refunds of the $15,500 and $18,370 payments. On August 26, 2015, the Claims Court dismissed the case under Rule 12(b)(1) of the Rules of the U.S. Court of Federal Claims, finding that it lacked jurisdiction because Appellants had failed to satisfy the “full payment rule,” which, under Supreme Court precedent, requires that a person seeking a refund for a tax or penalty pay in full before filing suit. Flora v. United States , 362 U.S. 145, 177, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960)

. The Claims Court reissued its opinion on September 29 to correct certain citations to statutory language.

Appellants timely appealed. We have jurisdiction pursuant to 28 U.S.C. § 1295(a)(3)

.

DISCUSSION

I

An initial question that we must address is how this appeal comes to us procedurally. The Claims Court issued its opinion on August 26 and entered judgment pursuant to this opinion on September 25. However, this opinion cited to the post-2004 versions of § 6111

and § 6707, instead of the pre-2004 versions which are applicable here. Accordingly, the Claims Court reissued its opinion with corrected citations (but no other changes) on September 29 and entered judgment the following day. However, just before it did this, on September 28, plaintiffs filed a notice of appeal on the Claims Court's original judgment. Appellants argue that this September 28 notice of appeal divested the Claims Court of its jurisdiction such that it did not have jurisdiction to vacate its original judgment and reissue its opinion.

We disagree with Appellants. “Ordinarily, the act of filing a notice of appeal confers jurisdiction on an appellate court and divests the trial court of jurisdiction over matters related to the appeal.” Gilda Indus., Inc. v. United States , 511 F.3d 1348, 1350 (Fed. Cir. 2008)

. Nevertheless, under Rule 60(a) of the Rules of the U.S. Court of Federal Claims, a court “may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record.” A court can make these corrections “on its own” and “without notice,” even after a party has appealed. See id .

The only constraint is that, “after an appeal has been docketed in the appellate court and while it is pending, such a mistake may be corrected only with the appellate court's leave.” Id .

Here, Appellants are technically correct that their September 28 notice of appeal divested the Claims Court of its jurisdiction. Nevertheless, the Claims Court still remained able to issue clerical corrections to its opinion, and it did not need to seek our permission to do so until this appeal was docketed, which did not happen until October 6. The only correction the reissued opinion made was substituting the current versions of § 6111

and § 6707 with their pre-2004 versions, and this substitution did not impact the Claims Court's legal analysis. As such, the corrections were sufficiently separated from the Claims Court's substantive analysis to be considered clerical error. Cf.

Pfizer Inc. v. Uprichard , 422 F.3d 124, 130 (3d Cir. 2005) (“[T]he relevant test for the applicability of Rule 60(a) is whether the change affects substantive rights of the parties and is therefore beyond the scope of Rule 60(a) or is instead a clerical error, a...