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Groves v. United States

United States District Court, N.D. Illinois, Eastern Division

May 5, 2017

PHILIP G. GROVES, Plaintiff,


          Gary Feinerman Judge

         Philip Groves brought this suit against the United States, seeking a determination that he is not liable for a civil penalty the IRS assessed against him under 26 U.S.C. § 6700 for promoting abusive tax shelters. Doc. 1. The United States has moved under Federal Rule of Civil Procedure 12(f) to strike the complaint's allegation that the penalty is barred on limitations and laches grounds. Doc. 17. The motion is granted.


         Rule 12(f) provides that a district court “may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.” Defenses or other matter may be stricken “only when they are insufficient on the face of the pleadings.” Heller Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989). In resolving a motion to strike, the court assumes the truth of the complaint's well-pleaded factual allegations, though not its legal conclusions. See United States v. 416.81 Acres of Land, 514 F.2d 627, 631 (7th Cir. 1975).

         Groves is in the business of purchasing and selling Chinese investments. Doc. 1 at ¶ 6. In May 2015, having determined that Groves unlawfully promoted or failed to register certain transactions as tax shelters during the tax years 2002, 2004, and 2005, the IRS assessed a $2.3 million penalty under 26 U.S.C. § 6700. Id. at ¶ 7. On October 5, 2015, the IRS sent Groves a notice and demand for payment, with a due date of October 15. Id. at ¶ 10.

         Following the appropriate procedures, Groves paid 15% of the penalty and filed a refund claim with the IRS. Id. at ¶¶ 12-14. The IRS denied the refund, id. at ¶ 15, and Groves filed this suit to recover the funds, as permitted by 26 U.S.C. § 7422.


         I. Statute of Limitations

         Groves contends that the § 6700 penalty is barred by the three-year statute of limitations under 26 U.S.C. § 6501(a) for assessing and collecting taxes or, in the alternative, by the catch-all five-year statute of limitations under 28 U.S.C. § 2462. Doc. 1 at ¶ 18b. If either statute applies, Groves will prevail in his challenge to the § 6700 penalty, which the IRS imposed a decade after his alleged tax shelter violations.

         A. 26 U.S.C. § 6501(a)

         “In order to establish a violation of 26 U.S.C. § 6700, the Government must prove (1) that the defendant was involved in an abusive tax shelter, and (2) that the defendant made statements about the tax benefits investors would receive if they participated in the shelter which the defendant knew or had reason to know were false or fraudulent.” United States v. Raymond, 228 F.3d 804, 811 (7th Cir. 2000) (internal quotation marks omitted), rev'd on other grounds, Hill v. Tangherlini, 724 F.3d 965, 967 n.1 (7th Cir. 2013). Section 6671 provides that § 6700 penalties “shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes.” 26 U.S.C. § 6671(a). Section 6501(a) provides: “Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed …. For purposes of this chapter, the term ‘return' means the return required to be filed by the taxpayer ….” According to Groves, because a tax assessment has a three-year statute of limitations under § 6501(a), and because § 6671(a) says that § 6700 penalties are to be “assessed and collected in the same manner as taxes, ” § 6700 penalties are subject to § 6501(a)'s three-year limitations period. Doc. 21 at 12-16.

         Courts to have confronted this issue have unanimously held that § 6501(a) does not apply to § 6700 penalties. See Sage v. United States, 908 F.2d 18, 24-25 (5th Cir. 1990); Emanuel v. United States, 705 F.Supp. 434, 436 (N.D. Ill. 1989); Agbanc, Ltd. v. United States, 707 F.Supp. 423, 426-27 (D. Ariz. 1988); cf. Kuchan v. United States, 679 F.Supp. 764, 768 (N.D. Ill. 1988) (holding that penalties assessed under § 6701, a provision analogous to § 6700, are not subject to the § 6501(a) limitations period). The consensus is sound. As the Fifth Circuit correctly explained, while “Section 6501(a) depends on the filing of a tax return to begin the running of the limitations period, ” “Section 6700 assessments do not depend on the filing of a tax return, ” but rather “occur … after the IRS becomes aware that an individual's activities are prohibited by Section 6700.” Sage, 908 F.2d at 25 (quoting Agbanc, 707 F.Supp. at 426). The mismatch between the triggering event under § 6501(a)-the taxpayer's filing a return-and the basis for liability under § 6700-being involved in a tax shelter and making false statements about its benefits-makes the § 6501(a) limitations period an inappropriate fit for the assessment of § 6700 penalties.

         Groves retorts that there is a return available from which to commence the § 6501(a) limitations period: the return on which his clients (the ones who used his tax shelter) allegedly understated their tax liability. Doc. 21 at 13. That argument is unpersuasive. The conduct prohibited by § 6700 is not the taxpayer's filing of an inaccurate return, but a tax shelter proponent's making a statement that falsely touts the shelter's tax benefits. See Raymond, 228 F.3d at 811. In fact, a tax shelter promoter can violate § 6700 even if the taxpayer files no return. See United States v. Benson, 561 F.3d 718, 721-24 (7th Cir. 2009) (holding that the IRS properly applied § 6700 to a person who promoted a tax avoidance scheme that, “[i]nstead of [encouraging taxpayers to] fil[e] false tax returns, … encouraged customers not to file a tax return at all”). And because § 6700 liability does not hinge on a taxpayer's filing a return, the IRS's pursuit of relief under § 6700 cannot possibly be subject to a limitations period, like that in § 6501(a), that commences upon the filing of a return.

         B. 28 ...

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