Diversified Group, Inc. v. United States, No. 16-1014 (Fed. Cir. 2016)Annotate this Case
In 1999-2001, Diversified sold tax avoidance strategies to 192 clients: Option Partnership Strategy and the Financial Derivatives Investment Strategy. Each involved transactions, exercised by an individual client, to yield an artificial tax loss or deduction. Each client contributed the initial investment and paid a fee. Diversified did not register the services as tax shelters under 26 U.S.C. 61111. In 2002, the IRS began an audit of Diversified, and, in 2013, issued notices assessing penalties of $24,868,451 for failure to register OPS and $17,241,032 for failure to register FDIS. According to the IRS, the Strategies qualified as tax shelters because the computed tax shelter ratio was greater than 2:1 and each was a “substantial investment” under section 6111(c)(4). Diversified paid the assessments with respect to two clients, then unsuccessfully sought a refund. The Claims Court held, and the Federal Circuit affirmed, that it lacked jurisdiction because Diversified did not comply with the full payment rule. The courts rejected an argument that the penalties were divisible. Section 6707(a) provides that “if a person . . . fails to register such tax shelter . . . such person shall pay a penalty with respect to such registration.” Liability for a section 6707 penalty arises from the single act of failing to register.