United States District Court, N.D. Illinois, Eastern Division
PHILIP G. GROVES, Plaintiff,
UNITED STATES OF AMERICA, Defendant.
MEMORANDUM OPINION AND ORDER
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
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).
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.
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.
Statute of Limitations
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.
26 U.S.C. § 6501(a)
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.
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
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.