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DAC Management, LLC v. United States

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

September 8, 2017

DAC MANAGEMENT, LLC, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant. DISTRESSED ASSET CONSULTING, LLC, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.

          MEMORANDUM OPINION AND ORDER

          Gary Feinerman Judge

         DAC Management, LLC and Distressed Asset Consulting, LLC brought these suits under 26 U.S.C. § 6703(c)(2) against the United States, seeking a determination that they are not liable for civil penalties the IRS assessed against them under 26 U.S.C. § 6700. Doc. 1. Because the two cases are materially identical, this opinion cites only to the docket in DAC's case. The United States has moved to dismiss both cases for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). Doc. 36. The motions are granted.

         Background

In resolving a Rule 12(b)(1) motion asserting a facial challenge to subject matter jurisdiction, just as in resolving a Rule 12(b)(6) motion, the court assumes the truth of the complaint's well-pleaded factual allegations, though not its legal conclusions. See Lewert v. P.F. Chang's China Bistro, Inc., 819 F.3d 963, 966 (7th Cir. 2016). The court must also consider “documents attached to the complaint, documents that are critical to the complaint and referred to in it, and information that is subject to proper judicial notice, ” along with additional facts set forth in Plaintiffs' brief opposing dismissal, so long as those additional facts “are consistent with the pleadings.” Phillips v. Prudential Ins. Co. of Am., 714 F.3d 1017, 1020 (7th Cir. 2013) (citation omitted). The facts are set forth as favorably to Plaintiffs as those materials allow. See Pierce v. Zoetis, Inc., 818 F.3d 274, 277 (7th Cir. 2016). In setting forth those facts on a motion to dismiss, the court does not vouch for their accuracy. See Jay E. Hayden Found. v. First Neighbor Bank, N.A., 610 F.3d 382, 384 (7th Cir. 2010).

         DAC and Distressed are Delaware limited liability companies with offices in Chicago. Doc. 1 at ¶ 4. Each was formed by Philip Groves-the plaintiff in a third, related refund suit, Groves v. United States, No. 16 C 2485 (N.D. Ill.)-as part of a joint venture with a Chinese state-owned entity to acquire and manage non-performing loans. Id. at ¶¶ 6-7.

         On May 20, 2015, the IRS determined that DAC and Distressed, together with Groves, “organized and assisted in the promoting of an abusive tax shelter.” Doc. 44-1 at 7; see also Doc. 1 at ¶ 8. Pursuant to 26 U.S.C. § 6700, the IRS assessed a $793, 754 penalty against DAC and a $1, 586, 592 penalty against Distressed; the IRS also assessed a § 6700 penalty against Groves, based on the same underlying conduct, in the amount of $2, 380, 346, the sum of the penalties assessed against DAC and Distressed. Doc. 1 at ¶ 9; Docs. 44-2, 44-3.

         On July 23, 2015, Groves, DAC, and Distressed filed a written protest with the IRS. Doc. 1 at ¶ 11; Doc. 1-1 at 2-37. On October 5, 2015, the IRS issued notices demanding that DAC, Distressed, and Groves pay the assessed penalties by October 15, 2015. Doc. 1 at ¶ 12.

         One day before the deadline, on October 14, 2015, Groves paid fifteen percent of the penalty the IRS assessed against him, and days later he filed a Form 6118 refund claim with the IRS. Id. at ¶¶ 13-14; Doc. 1-1 at 39. (As noted below, 26 U.S.C. § 6703(c)(1) provides that a person seeking to challenge in federal court a § 6700 penalty must first pay the IRS fifteen percent of the assessed penalty within thirty days of the notice and demand for payment.) On January 27, 2016, the IRS disallowed Groves's refund claim. Doc. 1 at ¶ 16; Doc. 1-1 at 160-164. As permitted by § 6703(c)(2), Groves then filed suit-the aforementioned No. 16 C 2485 (N.D. Ill.)-seeking a determination that he is not liable for the penalty assessed against him and a refund of the fifteen percent he paid to the IRS.

         Unlike Groves, neither DAC nor Distressed paid fifteen percent of the penalties assessed against them. Still, on November 6, 2015, DAC and Distressed filed Form 6118 claims with the IRS seeking a refund of the amount that Groves had paid to the IRS. Doc. 1 at ¶ 15; Doc. 1-1 at 41-158. DAC and Distressed allege that the IRS “never disallowed” their respective refund claims. Doc. 1 at ¶ 17.

         On June 3, 2016, DAC and Distressed filed these suits. The suits seek a determination that DAC and Distressed are not liable for the § 6700 penalties assessed against them, and an order requiring the United States to refund the fifteen percent payment that Groves made in October 2015. The suits allege that the penalties assessed against DAC and Distressed are invalid because, among other reasons, they duplicate the penalties assessed against Groves for the same underlying conduct. Id. at ¶ 20(e).

         Discussion

         Under the doctrine of sovereign immunity, “[t]he United States, as sovereign, is immune from suit save as it consents to be sued …, and the terms of its consent to be sued in any court define that court's jurisdiction to entertain the suit.” United States v. Mitchell, 445 U.S. 535, 538 (1980) (alterations in original) (citation and internal quotation marks omitted). In practical terms, “what sovereign immunity means is that relief against the United States depends on a statute, ” United States v. Cook Cty., 167 F.3d 381, 389 (7th Cir. 1999), that expressly sets forth the scope of the waiver, see Mitchell, 445 U.S. at 538.

         As relevant here, the United States has waived immunity from suit “for the recovery of … any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” 28 U.S.C. § 1346(a)(1). Normally, a district court may exercise jurisdiction over such a refund suit only once the plaintiff has made “full payment.” Flora v. United States, 357 U.S. 63, 72 (1958); see also Thomas v. United States, 755 F.2d 728, 729 (9th Cir. 1985) (“Ordinarily, there is no jurisdiction in the district courts over suits for the refund of penalty amounts paid until the taxpayer has paid the full amount of the contested penalty assessment and has filed a claim for refund which the IRS has either rejected or not acted upon.”) (citations omitted). But an exception carved by § 6703(c)(1) allows such a suit if the “person”-a term defined to include a “company, ” 26 U.S.C. § 7701(a)(1), and thus encompassing DAC and Distressed-against whom “notice and demand of any penalty under section 6700 or 6701 is made” pays just fifteen percent of the penalty within thirty days of the date the IRS makes the notice and demand:

If, within 30 days after the day on which notice and demand of any penalty under section 6700 or 6701 is made against any person, such person pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount so paid, no levy or proceeding or proceeding in court for the collection of the remainder of such penalty shall be made, begun, ...

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