Diversified Group Inc. v. United States
2016 U.S. App. LEXIS 20274
| Fed. Cir. | 2016Background
- Diversified Group and its president James Haber sold two tax-avoidance strategies (OPS and FDIS) to ~192 clients between 1999–2001 and did not register them as tax shelters under pre-2004 § 6111.
- IRS audited and issued Notices of Proposed Adjustment assessing § 6707 penalties totaling about $42.1 million for failure to register OPS and FDIS as tax shelters; penalties were computed as 1% of the aggregate invested amounts.
- Diversified paid $15,500 (Dziedzic portion) and Haber paid $18,370 (Kotite portion), filed refund claims, which the IRS denied; they sued in the U.S. Court of Federal Claims seeking refunds.
- The Claims Court dismissed for lack of jurisdiction under the Flora full-payment rule, finding the § 6707 penalties were not divisible; Diversified appealed.
- The Federal Circuit addressed (1) whether the Claims Court properly made a clerical correction to its opinion after a notice of appeal, and (2) whether the § 6707 penalties were divisible such that partial payments could satisfy Flora.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Claims Court could correct citation errors after a notice of appeal | The Sept. 28 notice of appeal divested the Claims Court of jurisdiction, so it could not reissue judgment on Sept. 29 | Rule 60(a) permits clerical corrections after appeal is filed until the appellate docketing; correction was clerical and did not affect substantive rights | Court: Rule 60(a) allowed the clerical correction; appellate jurisdiction proper and review proceeds |
| Whether § 6707 penalties are divisible for purposes of Flora’s full-payment rule | Penalties are divisible by each client implementation (192 instances); paying two client portions satisfied full-payment as to those assessments | OPS and FDIS each constitute a single tax shelter; liability arises from one failure to register each shelter, so penalties are not divisible by client transactions | Court: § 6707 liability arises from single failure to register a tax shelter (here, OPS and FDIS as each a single shelter); penalties are not divisible; full-payment rule not satisfied; dismissal affirmed |
Key Cases Cited
- Flora v. United States, 362 U.S. 145 (superseded on other grounds) (establishes full-payment rule for refund suits)
- Korobkin v. United States, 988 F.2d 975 (9th Cir. 1993) (explains divisibility exception is narrow and applies when tax is aggregate of independent liabilities)
- Rocovich v. United States, 933 F.2d 991 (Fed. Cir. 1991) (tax liability arising from a single event is not divisible)
- Cencast Servs., L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013) (discusses using a paid transaction as a test case when tax is divisible)
- Univ. of Chi. v. United States, 547 F.3d 773 (7th Cir. 2008) (describes test-case approach and divisibility framework)