Citigroup wins complete dismissal of qui tam suit alleging tax fraud
Davis Polk recently achieved a major victory for its client, Citigroup Inc. On May 30, 2017, Justice Charles Ramos of the New York Supreme Court filed a so-ordered oral argument transcript dismissing a qui tam law suit brought against Citigroup for an alleged violation of the New York False Claims Act. The plaintiff in the case was seeking $2.4 billion in damages.
The plaintiff alleged that Citigroup committed tax fraud between 2010-2012 because of the way it handled certain deductions on its New York taxes in the wake of the U.S. Treasury’s TARP investments in Citigroup after the financial crisis. The plaintiff acknowledged that Citigroup had relied on guidance in the Internal Revenue Bulletin (the “IRS Notices”). However, the relator alleged that the federal government had no authority to issue the IRS Notices, and also that the IRS Notices were inapplicable in New York. The relator further alleged that Citigroup must have known that it could not rely on the IRS Notices when preparing its State tax returns.
The relator filed his complaint in State court in 2013. The complaint remained under seal until 2015. Once the complaint was unsealed and served, Citigroup removed the case to federal court and filed a motion to dismiss. In 2016, after Citigroup’s motion was fully briefed, Judge Kaplan of the Southern District of New York sua sponte remanded the case back to state court for lack of subject-matter jurisdiction.
Citigroup renewed its motion to dismiss in State court, arguing that there were three independent grounds for dismissal. First, the NYFCA contains a public disclosure bar that, with exceptions that did not apply here, prohibits qui tam actions based on allegations that were publicly disclosed before the relator filed suit. Citigroup argued that the public disclosure bar applied here, because the relator concededly had no inside information about Citigroup and based his complaint entirely on public information, such as Citigroup’s own SEC filings and newspaper articles. Second, Citigroup argued that the complaint failed to allege a false statement. Citigroup argued that its treatment of NOLs was correct, because New York tax law follows federal tax law, and therefore, New York permits taxpayers to rely on the IRS Notices. Third, Citigroup argued that the complaint failed to plausibly allege scienter. Citigroup argued that its acknowledgements in its own SEC filings that it was relying on the IRS Notices, the statements in each of the IRS Notices that taxpayers could rely on them, and the fact that no State taxing authority had ever questioned the application of the IRS Notices in New York undermined any suggestion that Citigroup knowingly violated the law.
The Court heard oral argument on May 17, 2017, and at the conclusion of the argument, Justice Ramos indicated from the bench that he would grant Citigroup’s motion to dismiss. On May 30, 2017, Justice Ramos filed a so-ordered copy of the oral argument transcript, dismissing the case.
The Davis Polk litigation team included partner Edmund Polubinski III, who argued the motion, and associates Jessica L. Turner, Alan J. Tabak, Anne Burton Walsh, Ronald J. Krock and Jacob Simon. The tax team included partner Mario J. Verdolini and associate Catherine L. Chu. All members of the Davis Polk team are based in the New York office.