Pfaff v. United States

• Decision Date: 10 March 2016
• Docket Number: Civil Action No. 14-cv-03349-PAB-NYW
• Parties: ROBERT A. PFAFF, Plaintiff, v. UNITED STATES OF AMERICA Defendant.
• Court: U.S. District Court — District of Colorado

ROBERT A. PFAFF, Plaintiff, v. UNITED STATES OF AMERICA Defendant.

Civil Action No. 14-cv-03349-PAB-NYW

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

March 10, 2016

ORDER

This matter is before the Court on the Motion to Dismiss [Docket No. 18] pursuant to Fed. R. Civ. P. 12(b)(1) filed by the United States. This Court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1).

I. BACKGROUND

This case arises out of the Internal Revenue Service's ("IRS") assessment of tax penalties against plaintiff Robert Pfaff. The IRS notified plaintiff on or about June 30, 2003 that it had begun an investigation to determine his potential liability for tax shelter promoter penalties under 26 U.S.C. § 6707. Docket No. 1 at 2, ¶ 5. On or about February 15, 2011, the IRS issued a report that determined plaintiff was subject to personal liability under 26 U.S.C. § 6707 for failure to register a tax shelter.¹ Id., ¶ 6;Docket No. 19 at 3. On or about September 11, 2011, the IRS assessed civil penalties against plaintiff in the amounts of $1,397,574 for 1997, $17,824,803 for 1998, $105,039,593 for 1999, and $35,970,056 for 2000. Docket No. 1 at 2, ¶ 8. Plaintiff has at all times disputed the allegations and protested the penalties assessed against him. Id. at 3, ¶ 11.

On or about April 19, 2012, plaintiff made a payment of $228,460 attributable to one of the fifteen OPIS transactions in 1999. Id., ¶ 12. Simultaneous with the payment, plaintiff filed a claim for refund of the $228,460 payment. Id. On or about December 12, 2012, the United States denied plaintiff's claim for a refund and told plaintiff that he was required to pay the full $105,039,593 penalty for the 1999 period before his refund claim would be considered. Id., ¶ 13. On or about December 12, 2012, after an administrative appeal of the civil penalties assessed against plaintiff, the United States reduced the civil penalty assessments to the amounts of $252,594 for 1997, $1,395,780 for 1998, $40,776,749 for 1999, and $25,236,246 for 2000. Id. at 4, ¶ 17.

On December 10, 2014, plaintiff filed a complaint requesting (1) a refund of the $228,460 civil penalty; (2) declaratory judgment that he is not liable for the civil penalties assessed against him for failure to register a tax shelter; and (3) an order directing the United States "to suspend its collection efforts pending the outcome of this tax refund suit." Docket No. 1 at 5, ¶¶ 20-22.

On April 15, 2015, the United States filed the instant motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1). The United States argues that the Court lacks subject matter jurisdiction over plaintiff's tax refund suit. Docket No. 19 at 2. Specifically, theUnited States argues that (1) the Court does not have jurisdiction over plaintiff's tax refund claim because plaintiff's claim is subject to the "full-payment rule" established in Flora v. United States, 362 U.S. 145 (1960); (2) the Court does not have jurisdiction over plaintiff's declaratory judgment claim under the Declaratory Judgment Act, 28 U.S.C. § 2201 et seq.; and (3) under the Anti-Injunction Act, 26 U.S.C. § 7421(a), the Court does not have jurisdiction over plaintiff's request for injunctive relief. Docket No. 19 at 7, 12, 13.

II. STANDARD OF REVIEW

Dismissal pursuant to Fed. R. Civ. P. 12(b)(1) is appropriate if the Court lacks subject matter jurisdiction over claims for relief asserted in the complaint. Rule 12(b)(1) challenges are generally presented in one of two forms: "[t]he moving party may (1) facially attack the complaint's allegations as to the existence of subject matter jurisdiction, or (2) go beyond allegations contained in the complaint by presenting evidence to challenge the factual basis upon which subject matter jurisdiction rests." Merrill Lynch Bus. Fin. Servs., Inc. v. Nudell, 363 F.3d 1072, 1074 (10th Cir. 2004) (quoting Maestas v. Lujan, 351 F .3d 1001, 1013 (10th Cir. 2003)). When resolving a facial attack on the allegations of subject matter jurisdiction, the Court "must accept the allegations in the complaint as true." Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995). To the extent the defendant attacks the factual basis for subject matter jurisdiction, the Court "may not presume the truthfulness of the factual allegations in the complaint, but may consider evidence to resolve disputed jurisdictional facts." SK Finance SA v. La Plata County, 126 F.3d 1272, 1275 (10th Cir. 1997). "Reference toevidence outside the pleadings does not convert the motion to dismiss into a motion for summary judgment in such circumstances." Id. Ultimately, and in either case, plaintiff has "[t]he burden of establishing subject matter jurisdiction" because he is "the party asserting jurisdiction." Port City Props. v. Union Pac. R.R. Co., 518 F.3d 1186, 1189 (10th Cir. 2008).

III. ANALYSIS

A. Tax Refund

The United States makes a factual attack to this Court's jurisdiction with respect to plaintiff's tax refund claim. Docket No. 19 at 6.

The United States argues that, pursuant to the Flora "full-payment rule," this Court does not have jurisdiction over plaintiff's tax refund claim. Docket No. 19 at 7. In Flora, the Supreme Court held that "§ 1346(a)(1), correctly construed, requires full payment of the assessment before an income tax refund suit can be maintained in a Federal District Court." 362 U.S. at 177; see Ardalan v. United States, 748 F.2d 1411, 1413 (10th Cir. 1984) ("The Supreme Court, this circuit, and all other federal circuits have long held that [§ 1346(a)(1)] requires the taxpayer to first pay the full amount of an income tax deficiency assessed by the IRS before he/she may challenge the assessment in a suit for refund under § 1346(a)(1)."). Because the United States claims plaintiff has not paid the full amount of the penalty, it argues that the Court lacks subject matter jurisdiction.

1. Divisible Tax Exception

There are several statutory exceptions to the full-payment rule, see, e.g., 26U.S.C. §§ 6694, 6700, 6701, but plaintiff does not argue that any statutory exception applies here. Rather, plaintiff argues that the judicially created "divisible tax" exception, which "provides that full prepayment of a tax assessment is not a jurisdictional prerequisite for a suit challenging a 'divisible' tax," Ardalan, 748 F.2d at 1414 (citing Fidelity Bank, N.A. v. United States, 616 F.2d 1181, 1182, n.1 (10th Cir. 1980)), applies to his tax refund claim. Docket No. 29 at 4. The Tenth Circuit has found the divisible tax exception applicable to two situations: (1) a challenge to unpaid excise taxes; or (2) a challenge to a 100% penalty pursuant to 26 U.S.C. § 6672 for failure to withhold and pay employment taxes. Id. (citing Church of Scientology of Colorado v. United States, 499 F. Supp. 1085, 1087 (D. Colo. 1980)). Plaintiff's tax refund claim does not fall under either recognized exception. However, plaintiff asks this Court to find the 26 U.S.C. § 6707 promoter penalty divisible and thereby recognize another exception to the full payment rule. Docket No. 29 at 4.

Only one court has addressed the issue of whether the 26 U.S.C. § 6707 promoter penalty is divisible. See Diversified Group, Inc. v. United States, 123 Fed. Cl. 442 (Fed. Cl. 2015), appeal docketed, No. 16-1014 (Fed. Cir. October 6, 2015). There, the Court of Federal Claims agreed with the United States that a § 6707 penalty is not a divisible tax under the recognized exceptions to the full payment rule. Id. at 455 ("There is no § 6707 penalty imposed on each transaction, in the way that a separate tax is imposed on each sale item in the context of an excise tax, or for each employee within the realm of payroll taxes. Thus because the individual transactions that participate in a tax shelter are not registered, the penalty is not divisible and the full payment ruleapplies."). Plaintiff argues that Diversified Group was wrongly decided. Docket No. 34 at 1. As explained below, the Court disagrees.

Plaintiff argues that the "promoter penalty of 26 U.S.C. § 6707 is divisible because it is calculated based on the aggregate of individual amounts triggered by separate transactions." Docket No. 29 at 4. Plaintiff asserts that his position is supported by a footnote from Flora, which provides that "excise tax assessments 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." Id.; see Flora, 362 U.S. at 175, n.38. However, plaintiff has not shown that the tax shelter promoter penalty is analogous to an excise tax for purposes of the divisible tax exception. A § 6707 penalty is assessed against a "person who is required to register a tax shelter" in an amount based on the aggregate of the entire amount of investment in the tax shelter. 26 U.S.C. § 6707(a) (1997-2000).² Registration of a tax shelter pursuant to 26 U.S.C. § 6111 does not require registration of each individual transaction, investment, or sale. 26 U.S.C. § 6111(a)(1) (1997-2000); 26 C.F.R. § 301.6111-1T, A-47 (1997-2000). Thus, a violation of 26 U.S.C. § 6111, which would subject an individual to penalties pursuant to 26 U.S.C. § 6707, is predicated on a single event, namely, failing to register the underlying tax shelter.

Plaintiff argues that the "Determination Letter" he received from the IRS included a detailed report of 245 individual transactions underlying the ultimate assessment of a $160,232,026 penalty, and that the IRS' reliance on individual transactionsdemonstrates that the § 6707 penalties assessed against him are divisible. Docket No. 29 at 5. It is unclear how else the IRS would be able to determine the amount of the penalty pursuant to § 6707 without considering the individual investments. Consideration of underlying transactions in order to determine the amount of a penalty does not render the § 6707 penalty divisible. See 26 U.S.C. § 6707; 26 C.F.R. § 301.6111-1T, A-48 ("such aggregated investments . . . are part of a...