Larson v. United States, 16-CV-00245 (VEC)

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtVALERIE CAPRONI, United States District Judge
PartiesJOHN M. LARSON, Plaintiff, v. UNITED STATES OF AMERICA, Defendant.
Docket Number16-CV-00245 (VEC)
Decision Date28 December 2016

JOHN M. LARSON, Plaintiff,

16-CV-00245 (VEC)


December 28, 2016


VALERIE CAPRONI, United States District Judge:

This case arises out of the Internal Revenue Service's ("IRS") assessment of tax penalties against Plaintiff John Larson for failure to register two tax shelters. After paying a portion of the total assessment, Larson sued the Government seeking a refund of his partial payment and an abatement of the penalties in their entirety, or, in the alternative, a determination of "the correct amount" of his liability for the penalties assessed. The Government has moved to dismiss the Complaint in its entirety for lack of subject matter jurisdiction and failure to state a claim. For the following reasons, the Government's motion to dismiss is GRANTED.


Section 6111(a) of the Internal Revenue Code states, in relevant part, that a tax shelter organizer "shall register the tax shelter with the [IRS] not later than the day on which the first offering for sale of interest in such tax shelter occurs." 26 U.S.C. § 6111(a) (1997-2004).1 Absent reasonable cause, a person who is required to register a tax shelter and fails to do so is liable to pay a penalty pursuant to 26 U.S.C. § 6707(1)(a). The amount of the penalty imposed is "an

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amount equal to the greater of—(A) 1 percent of the aggregate amount invested in such tax shelter, or (B) $500." 26 U.S.C. § 6707(a)(2) (1997-2004). The IRS interprets section 6707 to impose joint and several liability, such that "all co-promoters are each liable for 100% of the penalty, but [the IRS] ultimately collects only the full amount once." Internal Revenue Service, Non Docketed Service Advice Review on Section 6707 - Failure to Furnish Information Regarding Tax Shelters, 2003 WL 22205991 (July 18, 2003) (footnote omitted); see also 26 C.F.R. § 301.6707-1T (1984-2014).

In February 2011, the IRS notified Larson that he had failed to register two tax shelters: (1) the Foreign Leveraged Investment Program ("FLIP"), also called the Offshore Portfolio Investment Strategy ("OPIS"); and (2) the Bond Linked Issue Premium Structure ("BLIPS"). Complaint (hereafter, "Compl."), Dkt. 19, ¶¶ 6-7; see also Declaration of Michael A. Halpert (hereafter, "Halpert Decl."), Dkt. 25, ¶ 4. The IRS calculated separate penalties for the two tax shelters. Compl. ¶ 9. For the FLIP/OPIS tax shelter, Larson was assessed a penalty of $24,745,026. Compl. ¶ 9. For the BLIPS tax shelter, Larson was assessed a penalty of $135,487,056. Compl. ¶ 9.2 In August 2011, the IRS assessed $160,232,026 in penalties against Larson for failing to register the two tax shelters. Compl. ¶ 16.3

In December 2012, the IRS Appeals Office reduced the total penalty due to $67,661,349 to reflect penalty payments that had been received from other taxpayers who were jointly and severally liable with Larson. Compl. ¶ 20. Larson alleges that his liability should have been

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reduced further by additional amounts received by the Government that related to promoter liability for the two tax shelters at issue. Compl. ¶¶ 22-24. The IRS has refused Larson's requests for additional information regarding payments made by other taxpayers who are jointly and severally liable for Larson's penalty. Compl. ¶ 25.

The IRS informed Larson that to appeal his penalty assessment, he could file suit in the U.S. District Court or the U.S. Court of Federal Claims, but that, in order to continue his appeal, he was required to "pay the balance due on the assessed penalty(s)," among other required steps. Compl. ¶ 26. The IRS also informed Larson that "the Tax Court cannot consider [his] case" because Larson is "not entitled to receive a formal Notice of Deficiency for the IRC section 6707 penalty." Compl. ¶ 27.

In February 2015, Larson paid $1,432,735 towards the penalty. Compl. ¶ 29. With that payment, Larson filed a Form 843 Claim for Refund and Request for Abatement with the IRS, demanding refund of the $1,432,735 payment and a full abatement of all assessments against him. Compl. ¶ 30; Form 843 (hereafter, "Form 843"), Compl. Ex. A at 1. The IRS denied the Form 843 Claim in May 2015, stating that the penalty was "assessed based on the aggregate amount invested in the shelter" and that the penalty was "non-divisible and must be paid in full before commencing a refund suit." Compl. ¶ 31; Letter 906, Compl. Ex. B at 3. Larson did not make any further payments towards his assessed penalties.

In January 2016, Larson filed this lawsuit. He seeks a refund of his $1,432,735 payment and abatement of the section 6707 penalty pursuant to 26 U.S.C. § 7422; judicial review of the section 6707 penalty under the Administrative Procedure Act ("APA"), 5 U.S.C. § 702, et seq.; an order, pursuant to the APA or 28 U.S.C. § 1361, compelling the IRS to produce information regarding the amounts that co-promoters paid towards the penalty; and an award of attorney's fees.

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In addition, Larson asserts that the penalty is an excessive fine under the Eighth Amendment, but he does not specify in the Complaint the relief that he seeks for the allegedly unconstitutional fine.

The Government has moved to dismiss the Complaint in its entirety. In support of its Motion, the Government submitted a declaration from the IRS in which the IRS explained that, in March 2016, it had reduced Larson's penalty assessment by $4,250,000 to account for additional payments received from "other taxpayers who were jointly and severally liable for some of the penalties with Mr. Larson." Halpert Decl. ¶ 8. The declaration further stated that future payments from other jointly and severally liable taxpayers will be posted to Larson's account. Halpert Decl. ¶ 8. To date, according to the IRS, Larson remains liable for $1,435,052 for failing to register the FLIP/OPIS tax shelter and $60,098,975 for failing to register the BLIPS tax shelter. Halpert Decl. ¶ 9.


A. Tax-Refund Claim

In his first cause of action, Larson seeks a refund of the payment he made and an abatement of the entire amount assessed. Compl. ¶ 35. The Government has moved to dismiss the tax-refund claim for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), arguing that the tax-refund claim is barred by sovereign immunity. In particular, the Government argues that Larson failed to make full payment of the challenged penalty assessments, a prerequisite to suit in federal court.

"Determining the existence of subject matter jurisdiction is a threshold inquiry and a claim is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it." Morrison v. Nat'l Austl. Bank Ltd., 547 F.3d 167, 170 (2d Cir. 2008) (quoting Arar v. Ashcroft, 532 F.3d 157, 168 (2d Cir. 2008)),

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aff'd, 561 U.S. 247 (2010). "In resolving a motion to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), the district court must take all uncontroverted facts in the complaint (or petition) as true, and draw all reasonable inferences in favor of the party asserting jurisdiction." Tandon v. Captain's Cove Marina of Bridgeport, Inc., 752 F.3d 239, 243 (2d Cir. 2014). "A plaintiff has the burden of showing by a preponderance of the evidence that subject matter jurisdiction exists." Lunney v. United States, 319 F.3d 550, 554 (2d Cir. 2003).

"[T]he United States, as sovereign, 'is immune from suit save as it consents to be sued . . . and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.'" United States v. Forma, 42 F.3d 759, 763 (2d Cir. 1994) (quoting United States v. Testan, 424 U.S. 392, 399 (1976)). Sovereign immunity thus acts as a "jurisdictional bar" to a suit against the United States, Lunney, 319 F.3d at 554, absent "an express statutory waiver of sovereign immunity." United States v. Bond, 762 F.3d 255, 259 (2d Cir. 2014); see also EPA. v. Gen. Elec. Co., 197 F.3d 592, 597 (2d Cir. 1999), amended on reh'g, 212 F.3d 689 (2d Cir. 2000). Any "waiver of sovereign immunity is to be construed strictly and limited to its express terms." Lunney, 319 F.3d at 554.

Federal district courts have jurisdiction, concurrent with the United States Court of Federal Claims, over claims for refund of "any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws." 28 U.S.C. § 1346(a)(1). Nevertheless, "other statutory provisions, as well as the Supreme Court's interpretation of § 1346(a)(1), establish a range of restrictions that qualify a taxpayer's right to bring an independent refund suit in the district court." Forma, 42 F.3d at 763. For example, a taxpayer must file a claim for refund or credit with the IRS prior to bringing a tax refund suit. Id. (discussing 26 U.S.C. § 7422(a)). In addition, the Supreme Court has interpreted

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28 U.S.C. § 1346(a)(1) to "require[] full payment of the [challenged] assessment before an income tax refund suit can be maintained in a Federal District Court." Flora v. United States, 362 U.S. 145, 177 (1960) (Flora II); see also Flora v. United States, 357 U.S. 63, 75-76 (1958) (Flora I).4

In "a 'narrow exception'" to Flora's full-payment rule, Diversified Grp, 2016 WL 6647769, at *5 (quoting Korobkin v. United States, 988 F.2d 975, 976 (9th Cir. 1993)), full payment of the challenged assessment is not required for "divisible" taxes, i.e., taxes that "may be divisible into a tax on each transaction or event . . . ." See Flora II, 362 U.S. at 175 nn. 37-38. "If an assessment or penalty is merely the sum of several independent assessments triggered by separate transactions, it is considered...

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