United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
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.
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).
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.
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.
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.
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
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.
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).
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.
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, ...