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By Theodore Peyser, Esq.
Roberts & Holland, L.L.P.,Washington, DC, and New York, NY
The Department of Justice has labored hard (and so far, unsuccessfully) to prevent Susan Beard from litigating her liability for §6672 responsible officer penalties in the U.S. Court of Federal Claims. After she filed a refund suit in this court, the United States sued her and her former husband in the U.S. District Court for the Western District of Texas regarding the same penalties and sought to halt her refund suit. In response, the Court of Federal Claims refused to stay the refund suit, enjoined the United States from continuing the district court suit against Ms. Beard, and declined to stay the refund suit while the United States pursues an interlocutory appeal of the injunction to the U.S. Court of Appeals for the Federal Circuit. Beard v. U.S., 99 Fed. Cl. 147 (Fed. Cl. 2011) ("Beard I"); 108 AFTR2d 6138 (Fed. Cl. 2011) ("Beard II").
Where a taxpayer files suit for the recovery of a divisible tax and the decision would be res judicata with respect to the unpaid tax or would estop the taxpayer from contesting liability for the unpaid tax, during the pendency of the refund suit, §6331(i) bars both a levy to collect the unpaid tax and a proceeding in court for collection of any unpaid tax, subject to certain exceptions. This Code provision also gives the court where the refund suit was filed authority to enjoin a barred levy or a proceeding in court for collection of any unpaid tax.
Last year, in Kennedy v. U.S., 2010-2 USTC ¶50,673 (Fed. Cl. 2010), which involved a similar litigation pattern, the U.S. obtained from the Court of Federal Claims a stay of a suit for refund of §6672 responsible officer penalty while it pursued a district court suit to collect unpaid tax of this type. In Kennedy, the taxpayer sought a refund of the penalty relating to one employee for one quarter, and the United States sued in the district court for the unpaid tax for this same quarter as well as the unpaid tax for 17 additional quarters. The court held that district court action was a barred collection proceeding to the extent it involved the quarter involved in the refund suit and that it had the power to enjoin the U.S. from pursuing collection of penalties associated with that one quarter. The court declined to grant an injunction, finding that the taxpayer had failed to satisfy the equitable criteria for such relief, and stayed the refund suit for reasons of judicial economy, including the fact that the district suit involved all 18 quarters of assessed penalties.
The Court of Federal Claims in Beard Idenied the United States' request for a stay of the refund suit, distinguishing Kennedy on the facts. The IRS assessed §6672 penalties against Ms. Beard and her former husband for 24 quarters; she paid $100 for each of the 24 quarters, representing the portion of the assessment relating to one employee in each quarter. She sued for refunds relating to all 24 quarters and the United States sued her and her former husband in the district court for unpaid assessed penalties for the same 24 quarters. Based on the references to collections proceedings in §§6502 and 7401 and the legislative history of §6331(i), the court concluded that the district court action was a proceeding in court for the collection of unpaid tax that is barred by §6331(i)(4)(A), as opposed to a "proceeding relating" to the refund suit (not barred by reason of §6331(i)(4)(A)(ii)). Because the district court action was barred, the requested stay of the refund suit could not be justified or allowed. Considerations of judicial economy were said to be trumped by the preference of Congress to preserve the taxpayer's choice of forum, contrary to Kennedy.
As for Ms. Beard's request for an injunction, the Court of Federal Claims found authority to enjoin the United States in §6331(i)(4)(B). It went on to find that the traditional equitable factors justified an injunction. Ms. Beard succeeded on the merits (the district court action was a "collection proceeding"); she would suffer irreparable harm if the court withheld injunctive relief (with the denial of the stay, she would have to litigate in two courts); the balance of hardships favored an injunction (subjecting her to the cost of two suits constitutes the hardship from which she was supposed to be protected by §6331(i)); and an injunction was in the public interest (this Code section was enacted to prevent the precise action the United States has brought in the district court).
After Beard I, the United States took an interlocutory appeal from the injunction to the U.S. Court of Appeals for the Federal Circuit. In addition, it moved for a stay of proceedings in the Court of Federal Claims. In Beard II, the court denied the motion. As for the likelihood of success on the merits, the court concluded that "the government's new argumentative premises are badly flawed" and "the government has a very weak position." As for irreparable injury, the court viewed the government's potential injury in the form of duplicative discovery as "too speculative" and cited the taxpayer's potential injury (increased costs) if the stay were granted. Finally, public interest was believed to be served by promptly implementing that statute.
Unless the United States prevails in its interlocutory appeal to the Federal Circuit, it will have to alter its traditional strategy in responsible officer litigation - pressing forward in a district court action against multiple defendant-taxpayers and preventing a taxpayer from litigating his own previously- filed refund suit. One possibility would be for the United States to strike first, instituting a district court action against multiple defendants before any refund suit is filed. In any event, a taxpayer who wishes to go forward with a refund suit of this type will be well advised to follow the example of Ms. Beard and make the required token payment for each of the tax periods assessed; otherwise, the United States may succeed in staying the refund suit as it did in Kennedy.
For more information, in the Tax Management Portfolios, see Peyser, 631 T.M., Refund Litigation, and Vasquez and Lowy, 639 T.M., Responsible Person and Lender Liability for Trust Fund Taxes — §§6672 and 3505, and in Tax Practice Series, see ¶3875, Liability for Trust Fund Taxes, and ¶3870, Collection of Tax.
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