A New York State Supreme Court Judge has dismissed a qui tam False Claims Act (“FCA”) suit brought by Eric Rasmusen, an economics professor at Indiana University (the “Relator”), against Citigroup Inc. (“Citigroup”). State of New York ex rel Eric Rasmusen v. Citigroup Inc., No.100175/2013 (Sup. Ct. N.Y. Cnty., May 17, 2017). The suit alleged that Citigroup intentionally failed to pay approximately $800 million in New York State taxes as a result of what the Relator characterized as the improper use of net operating loss (“NOL”) deductions. New York State Supreme Court Judge Charles E. Ramos granted Citigroup’s motion to dismiss the case in a ruling from the bench. 

Facts. During the 2008 financial crisis, Congress established the Troubled Asset Relief Program (“TARP”), authorizing the Department of the Treasury (“Treasury”) to purchase equity interests in publicly traded companies in order to stabilize the troubled banking and financial industry. Pursuant to its authority under TARP, the Treasury purchased approximately $45 billion of stock in Citigroup. The Relator claimed that the purchase of Citigroup’s stock constituted an “ownership change” within the meaning of Internal Revenue Code (“IRC”) § 382. If a corporation experiences an “ownership change” under IRC § 382, the corporation’s ability to carry forward NOLs is restricted if the ownership change occurs between the time the company’s NOLs arise and the time that it uses the NOLs to reduce its tax liability. 

In a series of notices, the Internal Revenue Service (“IRS”) explicitly ruled that purchases of public stock by the Treasury under TARP would not constitute an “ownership change” under IRC § 382, effectively removing the limitation on the use of NOLs imposed by § 382 for banks and financial institutions included in the TARP program. See IRS Notice 2008-100; IRS Notice 2009-14; IRS Notice 2009-38; IRS Notice 2010-2. 

Relying on this explicit IRS authority, Citigroup claimed NOLs on its federal tax returns despite the Treasury’s purchase of Citigroup stock and without any limitations imposed by IRC § 382. Under the former bank franchise tax, the Tax Law allowed NOL deductions, which were “presumably the same as the net operating loss deduction allowed under section one hundred seventy-two of the internal revenue code.” See Former Tax Law § 1453(k-1). 

Although the Relator acknowledged this explicit guidance from the Treasury in his complaint, he nonetheless claimed that the American Recovery and Reinvestment Act of 2009 (“ARRA”) “prospectively repealed” the notices issued by the IRS because Congress expressly stated in the ARRA “that the IRS was not authorized to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.” The Relator therefore alleged that the IRS Notices were improperly issued by the IRS, were not valid under federal law, and that Citigroup erroneously relied on the IRS Notices in its tax reporting. Moreover, even if the IRS Notices were valid under federal law, the Relator claimed that they were not incorporated into the New York State Tax Law. Because Citigroup claimed the NOL deductions on its federal income tax returns, and because the Tax Law incorporates the federal NOL deduction, the Relator claimed that Citigroup improperly and intentionally reduced its New York State tax liability.

The qui tam complaint was filed in 2013 but was not unsealed until September 2015, when New York Attorney General Eric Schneiderman declined to intervene and pursue the case on behalf of the State. Citigroup removed the case to federal court, but the Federal District Court remanded the case back to state court, holding that it lacked subject matter jurisdiction over the case, finding that it failed to raise a federal issue. State of New York ex rel. Eric Rasmusen v. Citigroup, No. 1:15-cv-7826 (LAK) (S.D.N.Y. Dec. 2, 2016). On January 26, 2017, Citigroup sought dismissal of the Relator’s complaint pursuant to CPLR § 3211(a)(1), (3), and (7). 

The Motion to Dismiss. Citigroup moved to dismiss the qui tam complaint, characterizing the Relator’s allegations as “his personal opinion” that Citigroup engaged in fraud “by taking tax deductions that were expressly permitted by authoritative guidance promulgated by” the Treasury. Citigroup sought dismissal for three principal reasons. First, the Relator alleged no “nonpublic facts” to support his allegations.  

The FCA expressly requires dismissal of any actions based on facts that were publicly disclosed prior to the suit’s filing. N.Y. State Fin. Law § 190(9)(b). According to Citigroup, the facts underlying the Relator’s suit were widely and publicly disclosed in various forms from scholarly articles to the media. Citigroup even pointed to a blog post written by the Relator, in which he allegedly admits that the complaint was based not on any nonpublic facts but rather on his “specialized legal analysis.” 

Second, Citigroup claimed that the complaint failed to plead that it submitted a false record or statement in connection with its New York tax returns as required by the FCA. Instead, Citigroup noted that it relied on explicit federal authority in claiming its NOL deductions and that the Tax Law expressly refers to and incorporates federal law concerning NOL deductions. Citigroup’s NOL deductions were therefore claimed in full compliance with federal and New York law. 

Finally, Citigroup claimed that even if the Relator had properly pleaded that Citigroup made claims that were “false” under the FCA, the complaint nonetheless failed to plead that Citigroup knew that the allegations were false. FCA liability only attaches to statements and claims that are “knowingly” false. N.Y. State Fin. Law § 189. Citigroup argued that the complaint should be dismissed because the Relator did not even allege that Citigroup “did not honestly believe that its deductions were proper.” Instead, the complaint actually acknowledged that Citigroup relied on explicit federal authority in claiming its NOL deductions. 

On May 17, 2017, Justice Ramos granted Citigroup’s motion to dismiss in a ruling from the bench. There is no written opinion explaining the Judge’s ruling. The Court’s questions during the hearing, however, indicate a strong skepticism of the Relator’s legal theory, including a question asking why the returns filed by Citicorp constitute a false statement, since “[t]hey’re not misrepresenting anything, they’re just saying this is the net operating loss which we have taken under the federal statute . . .” Oral Argument Transcript, p. 20. 

Additional Insights 

In the absence of a written opinion, the basis for the judge’s dismissal is unclear. However, the dismissal of the case before any discovery represents a significant taxpayer victory, and an eventual written decision on the motion could provide valuable guidance for taxpayers defending against qui tam FCA actions. The FCA is still a relatively new statute in New York, and was not made applicable to tax claims until August 2010. To date there has been no in-depth judicial scrutiny in the tax context of what constitutes either a “false” claim or a “knowingly” false claim. Citigroup’s victory in this case indicates that taxpayers may have greater success in defending against qui tam actions brought by relators who are otherwise disconnected from the operation of the taxpayer’s business and who seek recovery of significant damages using the FCA based upon generalized claims and publicly available information. As Citigroup argued in its motion to dismiss, the FCA “does not permit qui tam actions by ‘parasitic . . . opportunists who attempt to capitalize on public information without seriously contributing to the disclosure’ of any fraud” (quoting United States ex rel. Doe v. John Doe Corp., 960 F.2d 318, 321 (2d Cir. 1992)). 

Once the trial court’s decision is final, it may be appealed to the Appellate Division, First Department.