Citigroup Loses on Venue in New York Whistle-Blower Tax Case

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By Gerald B. Silverman

Dec. 5 — Citigroup Inc. will defend itself in state court, rather than federal, in a whistle-blower lawsuit alleging that the company improperly took state net operating loss deductions.

The U.S. District Court for the Southern District of New York, in a victory for the whistle-blower plaintiff, remanded the case to a state trial court, ruling that it lacks jurisdiction because Citigroup failed to raise a federal issue ( New York ex rel. Rasmusen v. Citigroup, Inc. , S.D.N.Y., No. 15-cv-07826, 12/2/16 ).

The lawsuit was filed under the New York False Claims Act by Eric Rasmusen, an Indiana University economics professor who argued that Citigroup improperly took some $800 million in state net operating loss deductions in connection with the sale of stock to the U.S. Treasury Department under the Troubled Asset Relief Program (TARP).

Rasmusen, in a Dec. 5 e-mail to Bloomberg BNA, said the decision “emphasizes one of our main points: that whether Citigroup owes New York State tax is a matter of New York State law, not a matter of what the IRS says in Washington.”

Tax practitioners are closely watching the case against Citigroup and a separate whistle-blower case against Sprint Nextel Corp. because they are among the first and highest-profile tests of the state False Claims Act.

Four-Part Test

The federal court, in a decision by Judge Lewis A. Kaplan, denied Citigroup’s motion to move the case to federal court because it failed to meet the four-part test for asserting a federal claim set forth by the U.S. Supreme Court in a 2013 case.

The court said Rasmusen alleged that Citigroup violated state law, “notwithstanding its compliance with federal law” expressed through Internal Revenue Service notices on the TARP Act.

“Whether or not he prevails on that argument, he has alleged it in a way that decouples his prospects of success on the state law claim from the federal issue,” the court said.

Tactic Removed?

Peter L. Faber, a partner at McDermott Will & Emery LLP, said the decision on jurisdiction could “remove one tactic that has been considered by practitioners handling FCA cases.”

“Some people feel that the federal courts may be better fora in which to litigate these cases than the state courts because of their greater knowledge of federal tax law and their distance from the Albany scene,” Faber told Bloomberg BNA in a Dec. 5 e-mail.

Randall M. Fox, a partner at Kirby McInerney LLP, told Bloomberg BNA in a Dec. 5 e-mail that the decision “recognizes that simply because there may be some reference to federal tax law in a whistle-blower’s case does not mean that the case can be yanked out of New York State courts when the defendant thinks there would be a strategic advantage to applying federal court procedures.”

“Instead, as the court recognized, removal to federal court is allowed only where the question of federal law is front-and-center and there is a real dispute over how the federal law applies,” Fox said.

To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y., at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Text of the decision is at

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