888 F.3d 578
2d Cir.2018Background
- John M. Larson organized fraudulent tax shelters and was later criminally convicted in related proceedings; the IRS assessed § 6707 promoter-registration penalties initially totaling about $160 million and later reduced them to roughly $61.5 million after administrative adjustments and co‑promoter payments.
- § 6707 required organizers to register tax shelters and prescribed penalties calculated as the greater of 1% of the aggregate amount invested or $500; the IRS regarded Larson as personally liable for assessed penalties.
- Larson paid $1,432,735 (an initial partial payment), filed a Form 843 refund claim, which the IRS rejected because he had not paid the full assessment, then sued in district court seeking refund/abatement, APA review of the penalty determination, relief under the Eighth Amendment, disclosure of collection from co‑promoters, and attorney’s fees.
- The District Court dismissed the complaint for lack of subject‑matter jurisdiction (applying the full‑payment rule) and for failure to state claims under the APA and Eighth Amendment; Larson appealed.
- The Second Circuit affirmed: it held the full‑payment rule applies to § 6707 penalties, that applying the rule did not violate due process, APA prepayment review was precluded (and refund suit is the adequate remedy), and the Eighth Amendment claim lacked jurisdiction/was inadequately pleaded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 1346(a)(1) full‑payment rule applies to § 6707 assessable penalties | Larson: Flora decisions should be read to limit full‑payment rule to tax deficiencies where Tax Court review exists; assessable penalties are not covered | Govt: § 1346(a)(1) text and scheme include penalties; Congress provided partial‑payment exceptions elsewhere but not in § 6707 | Full‑payment rule applies to § 6707 penalties; district court lacked jurisdiction over prepayment refund suit |
| Whether application of full‑payment rule violates Fifth Amendment due process | Larson: inability to pay bars his access to judicial review; prepayment requirement is unfair and unconstitutional | Govt: administrative appeal (Office of Appeals) plus postpayment judicial review satisfy due process; Mathews balancing favors government interest | No due process violation; administrative review and later judicial review are adequate |
| Whether APA authorizes prepayment judicial review of the IRS § 6707 assessment | Larson: APA provides review because refund suit is inadequate given penalty size and Congress didn’t preclude APA review | Govt: APA review is precluded where Congress provided special and adequate review (refund suit); § 1346 implicitly bars prepayment APA review | APA review precluded; taxpayer must use Congress’s refund/abatement scheme after full payment |
| Whether the penalties are an excessive fine under the Eighth Amendment allowing equitable relief | Larson: penalties are grossly excessive and unconstitutional, warranting equitable relief | Govt: sovereign immunity / Anti‑Injunction Act / Declaratory Judgment Act bar equitable relief; adequate alternative remedies exist | District court lacked jurisdiction for equitable Eighth Amendment relief; claim dismissed (court declined to decide merits) |
Key Cases Cited
- Flora v. United States, 357 U.S. 63 (1958) (discusses full‑payment rule and forum choice for tax disputes)
- Flora v. United States, 362 U.S. 145 (1960) (established that § 1346(a)(1) requires full payment before district court refund suits)
- Mathews v. Eldridge, 424 U.S. 319 (1976) (three‑factor balancing test for due process procedural protections)
- Bowen v. Massachusetts, 487 U.S. 879 (1988) (APA does not displace special statutory review schemes)
- Cheatham v. United States, 92 U.S. 85 (1875) (government may prescribe conditions for submitting tax disputes to courts)