It has long been settled law that a taxpayer challenging a tax deficiency assessed by the Internal Revenue Service in federal district court is required to “pay first and litigate later.” Thus, under the “full-payment rule” taxpayers have the choice of either paying such a deficiency and suing for a refund in district court or disputing it in Tax Court. However, an April 25, decision by the U.S. Court of Appeals for the Second Circuit in Larson v. United States, 888 F.3d 578, applied the so-called “full-payment rule” to preclude pre-payment judicial review of a civil penalty in excess of $60 million. While the precise factual scenario giving rise to Larson may be rare, the rule applied in that case also impacts numerous penalty regimes, and the result was sufficiently troubling to the court that it encouraged Congress to redress the anomaly.

The Full-Payment Rule

The statutory basis for the full-payment rule is 28 U.S.C. Section 1346(a)(1), which provides federal district courts with original jurisdiction over any civil action against the United States for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.