Larson v. United States

• Decision Date: 25 April 2018
• Docket Number: August Term 2017,Docket No. 17-503
• Citation: 888 F.3d 578
• Parties: John M. LARSON, Plaintiff–Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Second Circuit

888 F.3d 578

John M. LARSON, Plaintiff–Appellant,

v.UNITED STATES of America, Appellee.^*

Docket No. 17-503

August Term 2017

United States Court of Appeals, Second Circuit.

Argued: December 15, 2017

Decided: April 25, 2018

Reed J. Hollander, Nelson Mullins Riley & Scarborough, LLP, Raleigh, NC (C. Wells Hall, III, Nelson Mullins Riley & Scarborough, LLP, Charlotte, NC; Megan L. Brackney, Kostelanetz & Fink, LLP, New York, NY, on the brief ), for Plaintiff–Appellant.

Andrew E. Krause, Assistant United States Attorney (Benjamin H. Torrance, Assistant United States Attorney, on the brief ) for Geoffrey S. Berman, United States Attorney for the Southern District of New York, for Appellee.

T. Keith Fogg, Director, Harvard Federal Tax Clinic, Jamaica Plain, MA, for Amicus Curiae Legal Services Center of Harvard Law School, in Support of Plaintiff–Appellant.

Before: Parker, Wesley, and Chin, Circuit Judges.

Wesley, Circuit Judge:

John M. Larson was involved with—and later convicted of crimes related to—the organization of several fraudulent tax shelters. See United States v. Pfaff , 407 Fed.Appx. 506, 508–11 (2d Cir. 2010) (summary order); Pfaff v. United States , 989 F.Supp.2d 301, 303 (S.D.N.Y. 2013). At the time Larson was organizing the tax shelters, the Internal Revenue Service (the "IRS") required organizers/promoters to register tax shelters "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) (current version at 26 U.S.C. § 6111(a) (2005) ). Organizers/promoters who failed to register a tax shelter as required were subject to a penalty of "an 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) (current version at 26 U.S.C. § 6707 (2004) ). Eight years after the IRS notified Larson that he was under investigation, it informed him via letter that it considered him a tax shelter organizer with respect to the tax shelters in question. The letter noted that Larson therefore had a duty to register the tax shelters and was subject to aggregate penalties of $160,232,026¹ for his failure to do so. One month later the IRS informed Larson that it would assess the penalties against him personally.

Shortly thereafter, Larson filed an appeal to the IRS Office of Appeals. That office recognized that the IRS failed to account for the joint and several liability of Larson's co-promoters when computing his penalties, in accord with its view of 26 U.S.C. § 6707. Internal Revenue Service, Non Docketed Service Advice Review, IRS NSAR 20032901F, 2003 WL 22205991 (July 18, 2003). It therefore reduced the penalties assessed against Larson to $67,661,349—a reduction of nearly $93 million—and informed Larson that he would need to pay the remaining penalty amounts and file a Form 843 Claim for Refund and Request for Abatement ("Refund Claim") if he wanted to contest the assessment in federal court. Larson then made a payment of $1,432,735 (the "Initial Payment") and filed his Refund Claim; the IRS rejected Larson's claim because of his failure to pay the entire assessed penalties.

Larson then filed suit in the United States District Court for the Southern District of New York seeking: (1) refund of the Initial Payment and abatement of the remainder of the penalties² pursuant to 26 U.S.C. § 7422 ; (2) judicial review of the IRS's determination of his penalties under the Administrative Procedure Act (the "APA") pursuant to 5 U.S.C. §§ 702, 704 ; (3) a holding that his penalties were an excessive fine under the Eighth Amendment; (4) to compel the IRS to disclose information about the collection of any penalty amounts from his co-promotors; and (5) attorney's fees.

The Government moved to dismiss Larson's refund claim under Federal Rule of Civil Procedure 12(b)(1) for lack of subject matter jurisdiction. The Government argued that because Larson had not paid the assessed penalties in full, the District Court lacked jurisdiction under 28 U.S.C. § 1346(a)(1). The Government also argued that requiring full payment of the assessed penalties prior to any judicial review of the assessment did not violate due process. In a well-reasoned opinion, the District Court agreed. The District Court concluded that the full-payment rule applied to Larson's § 6707 penalties and it therefore lacked subject matter jurisdiction, and that application of the rule did not violate Larson's right to due process. Larson v. United States , 16-245, 2016 WL 7471338, at *3–7 (S.D.N.Y. Dec. 28, 2016).

With regard to Larson's remaining claims, the Government argued that review of a tax deficiency under the APA was unavailable because Congress provided a specific review procedure—tax refund suits—and that the Eighth Amendment does not create a private right of action, preventing the District Court from hearing Larson's excessive fines claim. The District Court again agreed, concluding that Larson had an adequate alternative to APA review and that the Eighth Amendment claim was defeated by the availability of alternative review and, separately, the complaint was factually insufficient. Id. at *8–12.

DISCUSSION

On appeal, Larson makes four main arguments: (1) the full-payment rule only applies to tax deficiency³ cases under § 1346(a)(1) where Tax Court relief was available; (2) the application of the full-payment rule to Larson violates his Fifth Amendment right to due process because he cannot fully pay his penalties and cannot seek review without having paid the penalties; (3) district court review of the IRS's determination pursuant to the APA is proper because of the lack of adequate alternatives to review pursuant to the APA; and (4) the penalties are an excessive fine under the Eighth Amendment. We address each of Larson's arguments in turn.

A. The Full–Payment Rule and 26 U.S.C. § 6707 Penalties⁴

Pursuant to 28 U.S.C. § 1346(a)(1), federal district courts have original jurisdiction of:

[a]ny civil action against the United States for the recovery 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).⁵ It is undisputed that Larson's refund claim arises under § 1346(a)(1).

It is not disputed that Larson cannot bring his claim in the Tax Court. His only judicial recourse is a refund action in the District Court (or the Court of Claims). Unfortunately for him, § 1346(a)(1) does not differentiate between assessed penalties and other tax assessments that are the result of deficiencies. See id. Further, jurisdiction is granted over "[a]ny civil action against the United States for the recovery of ... any penalty claimed to have been collected without authority ...." Id. This provision has long been interpreted to require the full payment of the contested tax as a jurisdictional prerequisite to a tax refund action. Larson's penalties have not been collected: he has not made full payment. The plain language of 26 U.S.C. § 6707 also favors our reading, as the statute does not provide for partial-payment review of Larson's penalties. Further, our reading is supported by Congress's decision to provide partial-payment review for other assessable penalties, but not for § 6707. See 26 U.S.C. §§ 6694(c), 6703(c). If the full-payment rule did not apply to assessable penalties, there would be no reason for Congress to include partial-payment provisions in other assessable penalty statutes. The District Court did not have jurisdiction to hear Larson's claim under § 1346(a)(1).⁶

Larson and amicus both argue that while a pair of Supreme Court decisions— Flora v. United States (Flora I ), 357 U.S. 63, 78 S.Ct. 1079, 2 L.Ed.2d 1165 (1958), and Flora II — held that § 1346(a)(1) included a full-payment requirement, the rule only applies to tax deficiencies—where Tax Court review is available—and not to assessable penalties. In Larson's view, the Flora II Court made its intent apparent when it stated towards the end of its opinion:

A word should also be said about the argument that requiring taxpayers to pay the full assessments before bringing suits will subject some of them to great hardship. This contention seems to ignore entirely the right of the taxpayer to appeal the deficiency to the Tax Court without paying a cent.

Flora II , 362 U.S. at 175, 80 S.Ct. 630. We disagree with Larson's interpretation of this passage. In Flora II , the Supreme Court concluded that § 1346"correctly construed, requires full payment of [an] assessment before an income tax refund suit can be maintained in a Federal District Court." Id. at 177, 80 S.Ct. 630. In Flora I the Supreme Court had reached a similar conclusion: "a construction [of § 1346(a)(1) ] requiring full payment would appear to be more consistent with the established meaning of the statutory language[,] ... the situation with respect to tax suits against the United States at the time [ § 1346(a)(1) ] was enacted, the express purpose of its enactment, and subsequent expressions of congressional intent ...." Flora I , 357 U.S. at 69–70, 78 S.Ct. 1079.

The Flora decisions recognized the Government's "substantial interest" in taxation and in maintaining the "smooth functioning of th[e taxation] system" that Congress intentionally and purposefully crafted. Flora II , 362 U.S. at 175–76, 80 S.Ct. 630 ; see Flora I , 357 U.S. at 69–70, 78 S.Ct. 1079. The Flora II majority focused a significant amount of its opinion on a review of the history of "suit[s] to recover a tax illegally assessed," Flora II , 362 U.S. at 152, 80 S.Ct. 630, and the greater statutory scheme Congress fashioned around § 1346(a)(1), id. at 152–67, 80 S.Ct. 630.⁷ While it is true that Flora I and Flora II acknowledge the existence and availability of Tax Court review, see Flora I , 357 U.S....