In Gaynor v. United States,[1] the taxpayer sought a refund of a portion of civil penalties that the IRS had assessed against him under 6038 for his failure to file Form 5471 related to his interests in certain foreign corporations. Because the taxpayer paid only a portion of the penalty, the government moved to dismiss his refund suit for lack of subject matter jurisdiction, pursuant to RCFC 12(b)(1). In a case of first impression, the Court of Federal Claims ("CFC") granted the government's motion because it concluded that the 6038 penalty was not divisible and must be paid in full to satisfy the Flora[2] full-payment rule.

BACKGROUND FACTS

The IRS assessed $260,000 in civil penalties against Gaynor due to his failure to file IRS Form 5471 for two foreign corporations, Sonoside and Runcar. Sonoside was a Panamanian corporation created by his father of which Gaynor was named as a beneficial owner. Sonoside was managed by a Swiss investment manager. Gaynor alleges that Sonoside's investment manager never advised him that he had any IRS reporting responsibilities regarding Sonoside. Sonoside funded a separate entity, Runcar, based in Switzerland, for the purpose of licensing an automobile that was to be driven by Gaynor while he was in Switzerland tending to his father's investments. Gaynor was assured that Runcar was a Swiss corporation to which Plaintiff had no IRS reporting responsibilities.

In 2017, Gaynor received a notice from the IRS captioned "Failure to File Form 5471" for Sonoside. In response, on July 26, 2017, Gaynor transmitted Form 5471 for Sonoside to the IRS for the years 20042015, accompanied by a Statement of Reasonable Cause, explaining his failure to file the forms in a timely manner. In September 2017, Gaynor received a notice from the IRS entitled "Failure to File Form 5471" related to Runcar. Just as he maintains regarding Sonoside, Gaynor alleges that he first became aware that he was also required to file Form 5471 for Runcar when he received the Runcar Failure Notice. In December 2017, Gaynor transmitted Form 5471 for Runcar covering the years 20022015, once again accompanied by a Statement of Reasonable Cause.

The IRS responded and advised Gaynor that the IRS had rejected his Statement of Reasonable Cause concerning the Sonoside and Runcar Form 5471 filings. As such, the IRS would assess a $10,000 penalty against Gaynor for each of the years 20042015 for which he had failed to submit the required forms for Sonoside and Runcar, for a total of $260,000.

Gaynor paid the IRS $23,600 toward the penalties assessed against him. Gaynor requested that $9,900 be applied toward the penalty assessed against him for 2010 based on his interest in Sonoside and $9,900 be applied toward the penalty assessed against him for 2010 based on his interest in Runcar. The balance of the payments was allocated $100 to each of the tax years 20042015. Accordingly, following Gaynor's payments, he paid in full the penalties assessed against him for the 2010 tax year. All other years were only partially paid.

Gaynor claimed he was entitled to a refund for $23,600 in those penalties paid to the IRS and sought a declaration that all penalties assessed against him were "unlawful" and that the penalties assessed were improper because of the applicable statute of limitations contained in I.R.C. 6038. The government filed a motion to dismiss Gaynor's refund suit for lack of subject matter jurisdiction, pursuant to RCFC 12(b)(1).

ANALYSIS

The bounds of the court's jurisdiction under the Tucker Act are defined in 28 U.S.C. 1491, which provides,

The United States Court of Federal Claims shall have jurisdiction to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.

I.R.C. 7422(a) provides the CFC with jurisdiction (pursuant to the Tucker Act) to decide claims seeking a refund of taxes or penalties the IRS collected. However, for a taxpayer to maintain a tax refund suit in the CFC, the taxpayer must first pay the contested tax assessment "in full." I.R.C. 7422. This is generally known as the Flora "full-payment rule."[3] Under the Flora rule, a taxpayer must have paid the full amount of the tax (as well as any interest or penalties) that the taxpayer seeks to recover prior to initiating a tax refund suit.[4] "This means that `[w]here the principal tax deficiency has not been paid in full, such tax refund claims are dismissed, regardless of any interest or penalty payments.'"[5]

Gaynor did not allege that he satisfied the Flora full-payment rule in its ordinary sense because Gaynor did not seek a refund for the entire amount of civil penalties assessed against him. Instead, Gaynor made only partial payments. For a partial payment to be deemed payment "in full," the payment or various payments made toward the assessment must themselves be viewed as separate "full" payments--they must be deemed a "divisible" tax or penalty. As stated in Diversified Group,

Stated otherwise, divisible "taxes or penalties . . . are seen as merely the sum of several independent assessments triggered by separate transactions. In such cases, the taxpayer may pay the full amount on one transaction, sue for a refund for that transaction, and have the outcome of this suit determine his liability for all the other, similar transactions." Korobkin v. United States, 988 F.2d 975, 976 (9th Cir. 1993) (per curiam). Thus, if a tax or penalty is considered divisible, partial payment is sufficient to confer jurisdiction on the court over the refund claim.[6]

Accordingly, the court concluded that "if a portion of a tax assessment was paid, and that partial payment could be deemed divisible from the outstanding balance, the `full payment rule' would not bar recovery of the partial payment simply because some other outstanding amount remained.'"[7]

Gaynor involved the assessment of penalties owed pursuant to 6038 for failure to timely file IRS Form 5471. The court concluded that penalties owed pursuant to IRS Form 5471 are not divisible, stating, "With regard to Mr. Gaynor's 2018 payments, the Court holds that he has not satisfied the `full payment rule.' Indeed, Mr. Gaynor only sought a refund of the [amount] which he actually paid rather than for the total amount of civil penalties he owed but did not pay `in full' ($260,000)."

The court noted that 6038(b) requires that the penalty assessed for a failure to file a Form 5471 be $10,000 per year. According to the court, this means that unlike, for example, excise taxes, a penalty imposed against a taxpayer pursuant to 6038(b) for a particular year cannot be considered a collection of separate "transaction[s] or event[s]" and is instead merely a "single act[]" that is "not divisible for any reason[.]"[8] As for tax year 2010, Gaynor paid the 2010 penalties "in full" as required by the Flora rule. However, the court concluded that it lacked jurisdiction because Gaynor did not receive a notice of disallowance, nor did he wait six months after filing his refund claim for the 2010 penalties before initiating the refund suit. Accordingly, the court lacked subject matter jurisdiction to entertain any of Gaynor's claims, pursuant to RCFC 12(b)(1). The court could find no basis to conclude that the penalty owed pursuant to IRS Form 5471 was divisible.