Steffen v. United States, 995 F.3d 1377

Paul Bilzerian was convicted in 1989 of securities fraud, sentenced and ordered to disgorge tens of millions of dollars; Terri Steffen is his spouse and co-appellant.
In 2012 Steffen filed a pro se suit in the Court of Federal Claims seeking an $8,243,145 tax refund under 26 U.S.C. § 1341; a second amended complaint was filed in 2017 by both appellants.
The government moved to dismiss the second amended complaint under RCFC 12(b)(6) in 2018; the Court of Federal Claims granted dismissal with prejudice in July 2019 and denied leave to amend; reconsideration was denied.
§ 1341 requires (1) a reasonable belief, when income was reported, that the taxpayer had an unrestricted right to the funds, and (2) that any deduction over $3,000 be allowable under some other IRC provision (i.e., the § 1341 claim must be tethered).
The court held as a matter of law that funds obtained by fraud cannot support a reasonable, unrestricted-right belief, foreclosing recovery under § 1341; it also found the complaint failed to tether the claimed deduction to another IRC section despite multiple opportunities to amend.
The Court declined special pro se leniency because the appellants are experienced litigants with extensive prior filings; leaving amendment would have been futile, so denial of leave was not an abuse of discretion.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Entitlement to § 1341 refund — reasonable/unrestricted-right belief	Steffen/Bilzerian asserted they reasonably believed they had an unrestricted right to the funds when reporting income	Government argued funds derived from Bilzerian’s fraud; a reasonable belief cannot exist for fraud-acquired funds	Held: No — as a matter of law fraud-tainted funds cannot support the required reasonable/unrestricted-right belief (claim fails)
§ 1341 tethering requirement (deduction > $3,000 must be allowable under another IRC provision)	Plaintiffs contended their pleadings sufficed or could be cured	Government argued plaintiffs failed to identify any other IRC provision making the deduction allowable	Held: No — plaintiffs failed to tether the deduction to another Code section despite multiple chances; dismissal proper
Denial of leave to amend after dismissal with prejudice	Plaintiffs sought leave to amend on reconsideration	Government opposed; court noted repeated opportunities and futility	Held: Denial of leave was not an abuse of discretion because amendment would be futile
Pro se deference / notice of defects	Plaintiffs argued they deserved lenient treatment and lacked notice of the claimed pleading defect	Government and court noted plaintiffs’ extensive litigation history and prior opportunities to cure	Held: Pro se leniency did not excuse failure to state a claim; no abuse in declining special deference

Culley v. United States, 222 F.3d 1331 (Fed. Cir. 2000) (fraudulently acquired funds cannot support a reasonable, unrestricted-right belief under § 1341)
Nacchio v. United States, 824 F.3d 1370 (Fed. Cir. 2016) (explaining § 1341 reasonable-belief element)
Kemin Foods, L.C. v. Pigmentos Vegetales del Centro S.A. de C.V., 464 F.3d 1339 (Fed. Cir. 2006) (leave to amend may be denied when amendment would be futile)
Henke v. United States, 60 F.3d 795 (Fed. Cir. 1995) (pro se status explains ambiguities but does not excuse failures to state a claim)
Haines v. Kerner, 404 U.S. 519 (1972) (pro se pleadings are held to less stringent standards)
Foman v. Davis, 371 U.S. 178 (1962) (leave to amend should be freely given absent justifying reason)
Welty v. United States, 926 F.3d 1319 (Fed. Cir. 2019) (standard of review for dismissal under Rule 12(b)(6))
Boyle v. United States, 200 F.3d 1369 (Fed. Cir. 2000) (standards for de novo review of dismissal)