Lyerly et al v. United States of America, No. 2:2015cv00745 - Document 50 (N.D. Ala. 2016)
Court Description: MEMORANDUM OF OPINION. Signed by Judge L Scott Coogler on 11/3/2016. (PSM)
Download PDF
<![CDATA[
Lyerly et al v. United States of America Doc. 50 FILED 2016 Nov-03 AM 10:41 U.S. DISTRICT COURT N.D. OF ALABAMA IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION JONATHAN E. LYERLY AND SHARON LYERLY, Plaint if fs; vs. UNITED STATES OF AMERICA, Defendant . ) ) ) ) ) ) ) ) ) ) ) 2: 15-cv-745-LSC MEMORANDUM OF OPINION Before t he Court are Plaint if fs’ Mot ion for Summary Judgment (doc. 27), Defendant ’ s Mot ion f or Summary Judgment (doc. 29) and Plaint iff s’ Mot ion t o St rike Evidence (doc. 34). Plaint if fs, Jonat han and Sharon Lyerly, brought t his case based on t ax penalt ies t hat t hey allege were wrongfully assessed by t he Int ernal Revenue Service (“ IRS” ). The Lyerlys seek a refund of overpayment s, damages, and a declarat ion of t heir correct t ax liabilit y. For t he reasons st at ed below, Plaint iff s’ mot ion for summary j udgment is due t o be grant ed in part and denied in part . Page 1 of 27 Dockets.Justia.com Defendant ’ s mot ion is due t o be denied. Plaint iff s’ mot ion t o st rike is due t o be denied as moot . 1 I. Background Jonat han (“ Rick” ) and Sharon Lyerly (collect ively “ t he Lyerlys” ) are a married couple living in Hoover, Alabama. Rick is an at t orney wit h a general pract ice who does not do any t ax or bankrupt cy work. Rick suf fers from many healt h problems, including diabet es, high blood pressure, a broken hip, a hernia, a prost at e problem t hat required surgery, five heart bypass surgeries, int ernal bleeding, panic at t acks, and anxiet y. His anxiet y is apparent ly t ied t o dealing wit h financial mat t ers and somet imes manifest s it self as short ness of breat h, sweat ing, shaking, and almost losing consciousness. In 2009, Rick began t o t ake Klonopin for his anxiet y, which helped reduce t hese sympt oms dramat ically. Because of t his anxiet y, Rick relied almost ent irely on ot hers t o t ake care of his financial mat t ers, including filing his t ax ret urns. He delegat ed t his responsibilit y t o Doug Hill (“ Hill” ), his account ant , and various office managers t hat he employed. Rick expect ed his office managers t o gat her and t ransmit financial informat ion t o Hill, who would t hen prepare his t ax ret urns. Rick would simply sign his t ax ret urns, apparent ly wit hout 1 The Court did not consider t he evidence t hat Plaint iffs obj ect t o in t heir mot ion t o st rike. Therefore, t he mot ion t o st rike will be deemed moot . Page 2 of 27 reading t hem. Mary Dobbs served as Rick’ s of fice manager unt il April 2007. She apparent ly did not at t end t o t he t ax mat t ers t hat Rick had assigned her. She was t hen replaced by Joy Simeone (“ Simeone” ), who also did not handle Rick’ s t ax mat t ers appropriat ely. In f act , Rick alleges t hat Simeone embezzled from him and dest royed or alt ered his financial records. However, she also sent a memo t o Rick in Sept ember 2007 about problems t hat t he firm was having in complying wit h t ax obligat ions. Simeone was fired in July 2008 when Rick discovered her embezzlement . Sharon t hen at t empt ed t o gat her t he necessary financial informat ion herself for submission t o Hill. However, she found t his t o be dif ficult because of t he damage Simeone had done t o Rick’ s records. A. Criminal Trial For t he years 2005, 2006, and 2007, Rick f ailed t o file t ax ret urns wit h t he IRS. Rick alleges, and t he IRS disput es, t hat he always int ended t o file t hese ret urns. While t he IRS claims t hat Rick knew he was lat e in filing his t axes, Rick cont ends t hat he t hought his t ax ret urns were covered by “ ext ensions” because Hill never t old him ot herwise. According t o Rick, he did not know his t axes were overdue unt il Jason Ward, an IRS criminal invest igat or, visit ed him on August 27, 2009. Page 3 of 27 During t hat visit , Rick t old Ward t hat he t hought t he ret urns had been handled, but t hat he would check wit h Hill t o make sure. Rick also t old Ward t hat he was welcome t o speak t o Hill if he want ed more informat ion about Rick’ s t axes, and even t old Hill t o cooperat e wit h Ward and t o give him “ what ever he asked for. ” (Pl. Ex. 6 at 310.) Rick explained t hat he kept his financial records on Microsoft Money and inst ruct ed his secret ary t o put t he records on a CD and give it t o Ward. The next day, Ward went t o Hill’ s office, t alked t o Hill, and collect ed some of Rick’ s records. Ward also visit ed and spoke t o Dr. Bair, t he psychologist who was t reat ing Rick for his anxiet y issues. Dr. Bair informed Ward t hat Rick had been diagnosed wit h “ simple phobia and anxiet y disorder primarily focused around financial mat t ers.” (Pl. Ex. 4 at 151.) On Oct ober 10, 2012, t he Unit ed St at es filed an informat ion against Rick in t he Unit ed St at es Dist rict Court for t he Nort hern Dist rict of Alabama, alleging t hree count s of willf ul failure t o file income t ax ret urns for t he years 2005, 2006, and 2007. During t he criminal t rial, Sharon and Rick t est ified t hat Rick had filed his t axes f or t hese years on Oct ober 14, 2010, and t hat t he delay in filing was not willful, but rat her, was for “ reasonable cause. ” Rick was f ound not guilt y of all t hree count s on August 9, 2013. Page 4 of 27 B. 2005 Taxes Even t hough Rick filed his 2005 t ax ret urn in 2010, he did not pay his t axes for t hat year unt il Sept ember 20, 2012, when he mailed t he IRS a check “ For 2005 Tax/ Est imat ed Penalt ies. ” (Pl. Ex. 16 at 2.) The IRS replied t o his payment on December 10, 2012 wit h a let t er st at ing t hat Rick owed $5,273.83 for t he year 2005 for “ penalt ies and int erest figured t o December 31, 2012.” (Pl. Ex. 17 at 1.) Rick responded by sending t he IRS a check on December 29, 2012 marked “ For 2005/ 2007 Taxes” in t he amount of $8, 962. 69, enough t o cover t he $5, 273. 83 he owed on his 2005 t axes and t he $3,688.46 he owed on his 2007 t axes. (Pl. Ex. 19.) The IRS applied t his payment t o Rick’ s 2006 t axes because, according t o t he Unit ed St at es, he submit t ed t he check wit h a 2006 payment voucher. Rick, however, argues t hat t he IRS misapplied t he check and t herefore creat ed a credit balance of $8, 962. 69 for t he year 2006 which was never correct ed. Rick also claims t hat if t he check had been correct ly applied, t he t axes f or t he year 2005 would have been paid in full wit h a credit balance in his f avor. On Sept ember 9, 2013, t he IRS sent t he Lyerlys a let t er st at ing t hat Rick st ill owed $5,384.20 on his 2005 t axes. On Oct ober 4, 2013 Rick replied, explaining t hat t he IRS had misapplied his December 29, 2012 Page 5 of 27 payment . Jacquelyne Yarbrough, an account s manager wit h t he IRS, responded t o Rick’ s let t er, st at ing t hat “ we have not complet ed all t he research necessary for a complet e response . . . You don’ t need t o do anyt hing furt her now on t his mat t er.” (Pl. Ex. 24.) She also st at ed t hat t he IRS would cont act him wit hin 45 days about t he mat t er. (Id.) However, t he IRS never followed up wit h Rick or changed t he applicat ion of t hat payment . C. 2006 Taxes On August 27, 2012, t he Lyerlys received a not ice from t he IRS t hat showed an out st anding balance of $35, 853. 14 on t heir 2006 t axes. (Pl. Ex. 29.) The not ice st at ed “ [s]end us t he amount due . . . by Sept ember 17, 2012, t o avoid addit ional penalt y and int erest charges. ” (Id.) Rick paid t he out st anding balance by check on Sept ember 7, 2012. The December 10, 2012 let t er from t he IRS list ing t he Lyerlys’ out st anding obligat ions showed a balance remaining for t he t ax years of 2005 and 2007, but did not show t here was any balance remaining for 2006. D. 2007 Taxes Rick sent t he IRS a check for $25, 440 on Sept ember 20, 2012 wit h a memo t hat t he payment was f or “ 2007 Tax/ Est imat ed Int erest .” (Pl. Ex. 16.) The IRS responded on December 10, 2012 st at ing t hat “ [t ]he amount Page 6 of 27 [Rick] owe[ d] for t he t ax period . . . includ[ing] penalt ies and int erest figured t o Dec. 31, 2012” was $3, 688.46. (Pl. Ex. 17.) On December 29, 2012, Rick sent t he IRS a check for $8, 962. 69, which included t he $3,688.46 which he owed f or his 2007 t axes and $5, 273.83 t hat he owed for his 2005 t axes. The check was labeled “ For 2005/ 2007 Taxes” , but t he IRS applied t his payment t o Rick’ s 2006 t axes. The Unit ed St at es argues t hat t hey correct ly applied t he check t o t he 2006 t axes because Rick submit t ed t he payment wit h a 2006 payment voucher. However, Rick alleges t hat if t he check had been right fully applied t o t he 2007 t axes, t he 2007 account would have been paid in full and would show a credit balance in his f avor of $1, 492. 40. On May 13, 2013, t he Lyerlys received not ice from t he IRS t hat an overpayment of $6, 989 from t heir 2012 t axes was applied t o t heir 2007 account , leaving a balance of $22,644.28 on t heir 2007 account . Rick alleges t hat t his means t hat his Sept ember 20, 2012 and December 29, 2012 payment s had never been applied t o his 2007 t axes. Regardless, t he part ies disput e what t axes Rick properly owed for 2007. E. 2008 Taxes The Lyerlys filed t heir 2008 t ax ret urn on t ime and submit t ed a payment of $16,228 on Oct ober 19, 2009. However, t he payment was not Page 7 of 27 immediat ely post ed t o t he Lyerlys’ account , according t o an IRS report , “ due t o t he module being frozen by Criminal Invest igat ion. ” (Pl. Ex. 41.) On June 16, 2014, t he Lyerlys received an IRS not ice showing a balance of $4,905.09 on t heir 2008 account . This not ice showed f ailure t o file, failure t o pay proper est imat ed t ax and failure t o pay penalt ies as well as int erest . (Pl. Ex. 43. ) On Sept ember 1, 2014, t he Lyerlys received anot her not ice t hat t hey owed $4, 936.23 for 2008 t axes. (Pl. Ex. 44.) Rick paid t hat balance by check on Sept ember 9, 2014. (Pl. Ex. 45. ) The Lyerlys allege t hat t he penalt ies were wrongful, but t he Unit ed St at es claims t hat t heir payment s were bot h lat e and inadequat e. According t o t he Unit ed St at es, t he Lyerlys should have paid a higher est imat ed t ax amount , and should have paid by April 15, 2009 inst ead of in Oct ober 2009. F. Assessment of Penalties The IRS t ransferred Rick’ s case t o Maria Flournoy (“ Flournoy” ) and her supervisor Dorot hy Randle (“ Randle” ) on August 26, 2013. While t he case was Flournoy’ s responsibilit y, t he case file was updat ed wit h a Civil Penalt y Approval Sheet which st at ed t hat “ Failure t o File and Failure t o Pay penalt ies were considered and det ermined t o be inapplicable . . . no penalt ies will be assert ed by exam in t ax years 2005 t hrough 2007. ” (Pl. Page 8 of 27 Ex. 13.) From Oct ober 1, 2013 unt il Oct ober 17, 2013, t he federal government was shut down, and federal employees, including t hose employed by t he IRS, were ordered not t o report t o work. The Lyerlys claim t hat t his result ed in IRS employees not being allowed t o do any work. The Unit ed St at es assert s t hat “ t he IRS was required t o cont inue t aking act ion t o prot ect t he Unit ed St at es’ propert y int erest s including making assessment s prior t o st at ut e expirat ions as required by law. ” (Doc. 38 at 6. ) The Lyerlys received t wo let t ers dat ed Oct ober 3, 2013 from Randle, which st at ed t hat t he IRS had “ complet ed t he review of t he examinat ion of [t he Lyerlys’ ] t ax ret urn for t he year(s) [2005, 2006, and 2007] .” (Pl. Ex. 14. ) One of t hese let t ers showed no penalt ies and no int erest for t he year 2006, and t he ot her showed no penalt ies and no int erest f or t he years 2005 and 2007. (Id. ) However, Rick t hen received a not ice dat ed Oct ober 9, 2013 of penalt ies and int erest which had been assessed for 2005 and 2006. (Pl. Ex. 25 & 32.) As a result , t he Lyerlys met wit h Randle on Oct ober 30, 2013 t o clear up t he obvious inconsist encies in t he IRS’ s communicat ions. Randle t old t he Lyerlys t hat she would invest igat e t he mat t er, and t hat t he Lyerlys should call her back in four t o six weeks. While t he Lyerlys were at t he IRS office on Oct ober 30, t hey obt ained Page 9 of 27 a copy of t heir account t ranscript for 2005 and 2006, and found t hat t he penalt ies allegedly assessed on Oct ober 9, 2013 were not on t he t ranscript . (Pl. Ex. 26 & 33.) The part ies do not disput e t hat t hese assessment s were logged ont o t he comput er record bet ween Oct ober 30, 2013 and November 19, 2013. As a result , t he Lyerlys claim t hat t he penalt ies were assessed aft er t he Oct ober 14, 2013 st at ut e of limit at ions had expired. However, t he Unit ed St at es insist s t hat quick assessment s are not always immediat ely logged ont o account records. The Lyerlys and t he Unit ed St at es also disput e whet her proper procedures f or assessing t hese penalt ies were followed. For example, t he Lyerlys claim t hat t he required forms were not complet ed and filed prior t o t his assessment and t hat t hey did not receive not ice and an opport unit y t o provide an explanat ion. G. Payment of Penalties On April 15, 2014, t he Lyerlys filed a j oint t ax ret urn for 2013, showing an overpayment of $19,731, which t hey request ed be credit ed t o t heir 2014 t axes. The IRS sent back a not ice t hat t hey had applied some of t he overpayment t o t he Lyerlys’ 2005 t axes. However, t he Lyerlys maint ain t hat t hey did not owe money on t heir 2005 t axes. On Sept ember 1, 2014, Rick received an IRS not ice of int ent t o levy Page 10 of 27 which st at ed t hat he owed a t ot al of $9,913 f or t he year 2005 and $6,003.52 for 2006. This sum included penalt ies, int erest , and t he out st anding t axes on his account . Rick paid t he 2005 and 2006 balances on Sept ember 9, 2014. (Pl. Ex. 27 & 34.) The Lyerlys filed t he current act ion in t his Court seeking a refund of overpaid t axes, a declarat ion of t he proper t ax liabilit y and an order requiring t he IRS t o ret ransfer t he allegedly misallocat ed payment s. They also seek compensat ory damages for ment al anguish as well as punit ive damages. II. Standard of Review Summary j udgment is appropriat e “ if t he movant shows t hat t here is no genuine disput e as t o any mat erial f act and t he movant is ent it led t o j udgment as a mat t er of law.” Fed. R. Civ. P. 56(a). A f act is “ mat erial” if it “ might af fect t he out come of t he suit under t he governing law.” Anderson v. Libert y Lobby, Inc., 477 U.S. 242, 248 (1986). There is a “ genuine disput e” as t o a mat erial fact “ if t he evidence is such t hat a reasonable j ury could ret urn a verdict for t he nonmoving part y.” Id. The t rial j udge should not weigh t he evidence but must simply det ermine whet her t here are any genuine issues t hat should be resolved at t rial. Id. at 249. Page 11 of 27 In considering a mot ion for summary j udgment , t rial court s must give deference t o t he nonmoving part y by “ considering all of t he evidence and t he inferences it may yield in t he light most f avorable t o t he nonmoving part y. ” McGee v. Sent inel Of f ender Services, LLC, 719 F. 3d 1236, 1242 (11t h Cir. 2013) (cit ing El l is v. Engl and, 432 F. 3d 1321, 1325 (11t h Cir. 2005)). In prosecut ing a mot ion f or summary j udgment , “ t he moving part y has t he burden of eit her negat ing an essent ial element of t he nonmoving part y’ s case or showing t hat t here is no evidence t o prove a f act necessary t o t he nonmoving part y’ s case. ” Id. Alt hough t he t rial court s must use caut ion when grant ing mot ions for summary j udgment , “ [s]ummary j udgment procedure is properly regarded not as a disf avored procedural short cut , but rat her as an int egral part of t he Federal Rules as a whole. ” Cel ot ex Corp. v. Cat ret t , 477 U.S. 317, 327 (1986). III. Discussion A. Jurisdiction and Relief The Lyerlys request t hat t he Court order t he IRS t o t ransfer funds t o account s for specific years and det ermine t he proper amount of t axes owed f or each of t hose years. They also request a refund for overpayment of t axes plus int erest , as well as compensat ory and punit ive damages. Page 12 of 27 However, “ [t ]he Unit ed St at es, as sovereign, is immune from suit save as it consent s t o be sued . . . and t he t erms of it s consent t o be sued in any court define t hat court ’ s j urisdict ion t o ent ert ain t he suit .” Unit ed St at es v. Sherwood, 312 U.S. 584, 586 (1941). These t erms “ must be st rict ly observed and except ions t heret o are not t o be implied. ” Sori ano v. Unit ed St at es, 352 U. S. 270, 276 (1957). The Unit ed St at es may be sued for a t ax refund under 28 U.S.C § 1346, which st at es t hat “ [t ]he dist rict court s shall have original j urisdict ion . . . of . . . [ a]ny civil act ion against t he Unit ed St at es f or t he recovery of any int ernal-revenue t ax alleged t o have been erroneously or illegally assessed or collect ed, or any penalt y claimed t o have been collect ed wit hout aut horit y. ” A t axpayer may also sue for t he sum of “ act ual, direct economic damages sust ained . . . as a proximat e result of t he reckless or int ent ional or negligent act ions of t he officer or employee and . . . t he cost s of t he act ion” under 26 U.S.C. § 7433. While t he Elevent h Circuit has not yet published a decision int erpret ing t his st at ut e, t he Fift h Circuit has, and t his Court will look t o t hat circuit ’ s law for guidance. According t o t he Fift h Circuit , a successful suit under t his st at ut e requires “ a t axpayer [t o] est ablish t hat t he Government recklessly or int ent ionally disregarded a provision of t he Code in connect ion wit h t he collect ion of Page 13 of 27 federal t axes. ” Gandy Nursery, Inc. v. Unit ed St at es, 412 F. 3d 602, 605 (5t h Cir. 2005) (“ Gandy II” ). This st at ut e is limit ed t o damages f or “ unaut horized collect ion act ions. ” 26 U.S.C. § 7433. It does not provide a remedy for improper assessment of t axes. Gandy II, 412 F. 3d at 607. The Fift h Circuit explained t he difference bet ween proving a case for improper “ collect ion” as compared t o improper “ assessment ” of t axes in Shaw v. Unit ed St at es. 20 F.3d 182, 184 (5t h Cir. 1994). It clarified t hat in order t o show “ improper assessment , a t axpayer must demonst rat e why no t axes are owed,” while “ t o prove a claim f or improper collect ion pract ices, t he t axpayer must demonst rat e t hat t he IRS did not follow t he prescribed met hods of acquiring asset s.” Id. One t axpayer can bring bot h of t hese claims, but t his “ does not af fect t he separat e and dist inct ive nat ure of each claim.” Id. In Gandy II, t he IRS was f ound t o have reassessed abat ed penalt ies wit hout not ice or demand. 412 F.3d 602 at 605. The court found t hat t hese violat ions of proper procedure “ specifically f ocus on t he reassessment of . . . t ax penalt ies wit hout not ice, not t he means by which t he Government at t empt ed t o t hereaft er collect on t hose monies it believed were owed.” Id. In t his case, t he Lyerlys claim t hat t heir penalt ies were improperly assessed. While t hey can bring suit for a Page 14 of 27 refund under 26 U.S.C. § 7422 and 28 U.S.C. § 1346, t hey cannot sue f or damages based on t hat alleged improper assessment . The Lyerlys do argue t hat t he IRS failed t o follow assessment procedures. There is no claim t hat t he IRS disregarded proper col l ect ion procedures. Inst ead, t he allegat ions are t hat t he Lyerlys do not owe t hese penalt ies. Thus, t he Lyerlys’ only possible remedy in t his act ion is a refund of overpaid t axes and t he Court will t reat t his act ion as a refund act ion. B. Assessment of Penalties The Court has aut horit y t o decide if t he Lyerlys are ent it led t o a refund for t he alleged wrongfully assessed penalt ies for f ailure t o file t ax ret urns for t he years 2005-2007. The Unit ed St at es assert s t hat t hese penalt ies are mandat ory, and t herefore, not wrongly assessed. Conversely, t he Lyerlys allege t hat because t heir failure t o file was due t o reasonable cause and not due t o willful neglect , t he penalt ies should not have been assessed. The relevant st at ut e st at es t hat “ unless it is shown t hat such failure [t o file a ret urn] is due t o reasonable cause and not due t o willful neglect , t here shal l be added . . . 5 percent for each addit ional mont h or fract ion t hereof during which such f ailure cont inues.” 26 U.S.C. § 6651(a)(1). The burden of proving reasonable cause ult imat ely lies wit h t he t axpayer, who must prove “ (1) t hat t he Page 15 of 27 failure did not result from ‘ willful neglect ’ , and (2) t hat t he f ailure was ‘ due t o reasonable cause. ’ ” Unit ed St at es v. Boyl e, 469 U.S. 241, 245 (1985). Reasonable cause f or f ailure t o f ile exist s if “ t he t axpayer ‘ exercised ordinary business care and prudence,’ but nevert heless was unable t o file t he ret urn on t ime.” In re Sanf ord, 979 F. 2d 1511, 1514 & n.8 (11t h Cir. 1992) (quot ing Treas. Reg. § 301. 6651-1(c)(1)). Alt ernat ively, a “ court may find reasonable cause . . . if a t axpayer convincingly demonst rat es t hat a disabilit y beyond his cont rol rendered him unable t o exercise ordinary business care. ” Id. This analysis must be conduct ed for each t ax period where penalt ies were assessed. Id. The Lyerlys claim t hat t hey had reasonable cause for not filing t heir t ax ret urns because Rick had a mult it ude of healt h and emot ional problems, t heir office manager had been embezzling from t hem, and t hey had relied on t heir account ant t o t imely file t heir ret urns. According t o t he Lyerlys, Rick’ s healt h problems required him t o rely on his account ant and of fice manager t o t ake care of f inancial mat t ers such as filing t ax ret urns. A “ serious illness” of t he t axpayer or his immediat e family is considered reasonable cause by t he IRS. Boyl e, 469 US at 245 & n.1. However, “ [t ]he f ailure t o make a t imely filing of a t ax ret urn is not Page 16 of 27 excused by t he t axpayer’ s reliance on an agent , and such reliance is not ‘ reasonable cause’ for a lat e filing.” Id. at 242. Yet , in sit uat ions where “ a t axpayer relied on an at t orney or account ant because t he t axpayer, was, for some reason, incapable . . . of meet ing t he crit eria of ‘ ordinary business care and prudence’ . . . t he disabilit y alone could well be an accept able excuse for a lat e filing.” Id. at 248 & n. 6. In cases where element s t hat may const it ut e reasonable cause are present , t he quest ion of t he exist ence of reasonable cause is a quest ion of fact . Id. at 249 & n.8. Rick’ s reliance on his account ant and of fice manager t o file t he ret urns does not const it ut e reasonable cause for his f ailure t o file but a quest ion of f act remains about whet her his illness was “ serious” enough t o excuse Rick’ s lat e filing. The Unit ed St at es argues t hat Rick’ s illness was not “ serious,” while t he Lyerlys claim t hat his anxiet y was so severe t hat it rendered him incapable of filing t ax ret urns. Furt her, t he IRS considers “ dest ruct ion by casualt y of t he t axpayer’ s records or place of business” t o be reasonable cause, and “ casualt y” is defined by t he IRS as “ an ident ifiable event t hat is sudden unexpect ed, or unusual, ” such as vandalism. Boyl e, 469 US at 245 & n. 1; Int ernal Revenue Service Publicat ion 547 at 2. Here, Simeone indisput ably Page 17 of 27 dest royed some of Rick’ s records. However, it remains a quest ion of f act if t his is enough t o be “ dest ruct ion by casualt y” and const it ut e reasonable cause f or his failure t o file. Because t here is a genuine disput e of mat erial f act as t o t he presence of reasonable cause, t he quest ion of whet her or not penalt ies were mandat ory in t his case is a quest ion for t he finder of fact . C. Statute of Limitations The Lyerlys claim t hat t hey are owed a refund on t he t ax penalt ies t hat t hey paid af t er Oct ober 14, 2013, because t hose penalt ies were barred by t he st at ut e of limit at ions. The Int ernal Revenue Code mandat es t hat “ t he amount of any t ax imposed . . . shall be assessed wit hin 3 years aft er t he ret urn was filed. ” 26 U.S.C. § 6501. Here, t he t ax ret urns f or years 2005, 2006 and 2007 were filed on Oct ober 14, 2010. (Pl. Ex. 15, 28 & 35.) Therefore, any t ax f or t he years 2005-2007 had t o be assessed by Oct ober 14, 2013, t o fall wit hin t he st at ut e of limit at ions. The Lyerlys received let t ers dat ed Oct ober 3, 2013 from t he IRS saying t hat no penalt ies for years 2005-2007 had been assessed. However, Rick t hen received a not ice dat ed Oct ober 9, 2013 assessing penalt ies and int erest . The Lyerlys claim t hat t he IRS could not have assessed t hese penalt ies on Oct ober 9, because t he IRS was closed as part of t he government shut Page 18 of 27 down bet ween Oct ober 1 and Oct ober 17. Thus, t he penalt ies had t o have been assessed aft er Oct ober 17. Regardless, t he Unit ed St at es point s out t hat t he IRS is not required t o ret urn collect ed t axes t hat were assessed beyond t he limit at ions period “ which might have been properly assessed and demanded. ” Lewi s v. Reynol ds, 284 U.S. 281, 283 (1932) modif ied by 284 U.S. 599 (1932). In Lewis, t he administ rat or of an est at e filed a t ax ret urn for 1920 in February of 1921. Id. at 282. The ret urn report ed various deduct ions, and t he payment indicat ed by t he ret urn was submit t ed t o t he IRS. Id. However, in November 1925, t he ret urn was audit ed, and all deduct ions except one— at t orney’ s fees— for were disallowed, leaving a deficiency of $7,297.15, which was paid in March 1926. Id. In July 1926, t he pet it ioners asked t hat t he $7,297. 15 be refunded, claiming t hat t he assessment was barred by t he applicable five-year st at ut e of limit at ions. Id. In 1929, t he IRS found t hat t he deduct ion for at t orney’ s fees should not have been allowed, but set out a new comput at ion deduct ing t he st at e inherit ance t axes. Id. This comput at ion showed t hat t he t axpayers owed more t axes t han t hey had yet paid. As a result , t he request for a refund was rej ect ed. Id. The Court in Lewis held t hat t he Commissioner could lawfully refuse Page 19 of 27 t o refund t axes t he pet it ioners had paid because “ [w]hile no new assessment can be made, aft er t he bar of t he st at ut e has fallen, t he t axpayer, nevert heless, is not ent it led t o a refund unless he has overpaid his t ax.” Id. at 283 (quot at ions omit t ed). The court went on t o hold t hat “ [ a]lt hough t he st at ut e of limit at ions may have barred t he assessment and collect ion of any addit ional sum, it does not oblit erat e t he right of t he Unit ed St at es t o ret ain payment s already received when t hey do not exceed t he amount which might have been properly assessed and demanded. ” Id. Lewi s does not involve t he assessment of penalt ies, which is t he issue before t he Court in t his case. Yet , t he Fift h Circuit applied Lewi s t o a case t hat involved penalt ies for f iling a lat e t ax ret urn. Lof t in & Woodard, Inc. v. Unit ed St at es, 577 F.2d 1206, 1245-47 (5t h Cir. 1978). 2 In Lof t in, a corporat ion was assessed a 10 percent penalt y for a lat e filing of it s 1961 t ax ret urn. Id. at 1245. When, in 1962, t he corporat ion filed for a refund of some of t he 1961 t axes based on carryback of losses suf fered in 1962, t he Commissioner audit ed t he 1961 ret urn and disallowed several of t he deduct ions t hat t he corporat ion had claimed. 2 All decisions of t he former Fift h Circuit handed down prior t o close of business on Sept ember 30, 1981 are binding on t he Elevent h Circuit . Bonner v. Cit y of Prichard, Ala., 661 F.2d 1206, 1209 (11t h Cir. 1981). Page 20 of 27 Id. The disallowance of t hese deduct ions increased t he corporat ion’ s t axable income f or 1961, and t herefore, when t he penalt y was applied t o t he amount of t axable income, t he t axes owed for t hat year increased. Id. The Commissioner t hen used t he newly calculat ed t axes for 1961 as a set of f against t he refund due from t he 1962 losses. Id. The corporat ion brought suit , claiming t hat t he higher penalt y amount ed t o “ addit ional” t axes, which are barred by t he t hree year st at ut e of limit at ions. Id. (cit ing 26 U.S.C. § 6501). However, t he court held t hat t he “ assessment , as a set -of f against a refund, does not represent t he imposit ion of an addit ional or new t ax” because “ t he delinquency penalt y already was in exist ence prior t o t he 1962 ret urn [as] t he 1961 ret urn was filed lat e.” Id. at 1247. The court furt her explained t hat t he increased penalt y “ did not arise because t he Commissioner, in 196[ 2] , suddenly discovered it ems t hat had not been report ed properly. Had t hose it ems been discovered in 1961, t he amount owing under t he lat e filing penalt y would have been increased. ” Id. The Unit ed St at es also relies on Al l en v. Unit ed St at es, which similarly af firmed t he denial of a request f or a refund by a t axpayer. 51 F. 3d 1012 (11t h Cir.1995). In Al l en, t he t axpayer was convict ed of willful failure t o pay t axes for t he years 1975 and 1976. Id. at 1013. In 1985, t he Page 21 of 27 IRS assessed fraud penalt ies for Allen’ s f ailure t o pay, which he paid but quickly request ed a refund. Id. In 1990, based on case law holding t hat fraud penalt ies were improper for cases such as Allen’ s, t he IRS decided t o refund Allen t he fraud penalt ies. Id. However, it of f set t he refund “ by imposing, inst ead, delinquency and negligence penalt ies. ” Id. Allen brought suit , claiming t hat t he delinquency and negligence penalt ies were barred by t he st at ut e of limit at ions. Id. The court , however, held t hat t he reasoning in Lewis applied because “ penalt ies . . . shall be assessed, collect ed, and paid in t he same manner as t axes . . . [and t hat any] reference . . . t o ‘ t ax’ imposed . . . shall be deemed also t o refer t o . . . penalt ies. ” Id. at 1015 (quot ing 26 U.S.C. § 6659). Thus, according t o t he court , if Lewis allowed t ax premiums collect ed af t er t he limit at ions period t o be ret ained by t he IRS, t hen penalt ies assert ed and collect ed aft er t he limit at ions period can also be ret ained. Id. In t he case bef ore t he Court , t he penalt ies were not imposed as t he result of an audit . Yet , like in Lof t in, t he Lyerlys filed t heir t ax ret urn lat e. Therefore, t he reasoning in Lof t in, which st at es t hat “ t he . . . penalt y already was in exist ence . . . as t he . . . ret urn was filed lat e” is applicable. 577 F. 2d at 1247. No mat t er when t he IRS assessed t he penalt y, it was not “ new” based on Lof t in and Lewis, because t he Page 22 of 27 penalt ies “ [ were] already . . . in exist ence” and “ might have been properly assessed and demanded” before t he st at ut e of limit at ions expired. Id.; Lewis, 284 U.S. at 283. The dat e of t he assessment of t hese penalt ies is irrelevant , because t hey were already collect ed and can be ret ained by t he IRS whet her or not t heir assessment was barred by t he st at ut e of limit at ions. Thus, t he Lyerlys are not ent it led t o summary j udgment in t heir f avor based on t heir claim t hat t he penalt ies were barred by t he st at ut e of limit at ions. D. Procedural Requirements and Estoppel The Lyerlys assert t hat t he penalt y assessment s were invalid because t he IRS failed t o follow t he proper procedural requirement s of t he applicable st at ut es and regulat ions. They also claim t hat t he IRS should be est opped from claiming penalt ies and int erest t hat are great er t han t he original amount t hey claimed in early communicat ions wit h t he Lyerlys. As explained above, t he Court in t his case can only provide t he remedy of a refund of overpayment as aut horized under § 1346. Lewi s makes it clear t hat a t axpayer is only ent it led t o a refund if t he t axpayer has overpaid his t axes. 248 U.S. at 283; see al so Leves v. Commi ssioner 796 F. 2d 1433, 1435 (11t h Cir. 1986)(“ [R]emedies for t he allegedly wrongful assessment are t o bring a bring a t imely suit in t he t ax court Page 23 of 27 under . . . § 6212 . . . or pay t he t ax and sue for a refund in dist rict court . . . under § 1346. ” ). In a refund suit such as t his one, “ t he t axpayer bears t he burden of proving t he amount he is ent it led t o recover.” Uni t ed St at es v. Jani s, 428 U.S. 433, 440 (1976). This burden is met if a t axpayer shows t hat “ t he amount he paid t o t he IRS ‘ exceed[ s] t he amount which might have been properly assessed and demanded.’ ” Unit ed St at es v. Ryal s, 480 F.3d 1101, 1109-10 (11t h Cir. 2007) (quot ing Lewi s, 284 U.S. at 283). Thus, t he Lyerlys bear t he burden of showing t hat t here has been an overpayment and t he procedural issues or early communicat ions t hat t hey bring up are not relevant in making t his det erminat ion. None of t his evidence changes t he subst ant ive det erminat ion of t he amount of t axes owed. In Ryal s, t he court held t hat t he t axpayer did not meet his burden of proof because he did “ not claim t hat he paid any t axes in excess of t he amount (s) properly due or t hat he does not owe t he t axes. ” 480 F. 3d at 1110. The Lyerlys’ procedural concerns and est oppel allegat ions do not show t hat t hey did not owe t hese t axes. Furt her, various court s have held t hat procedural or administ rat ive errors are not enough t o show t hat a t axpayer is ent it led t o a refund. See Janis, 428 U.S. at 440; see al so Bl anset t v. Unit ed St at es, 283 F. 2d 474, 479 (8t h Cir. 1960); Decker v. Page 24 of 27 Kort h, 219 F.2d 732, 739 (10t h Cir. 1955); Thomast on Cot t on Mil l s v. Rose, 62 F. 2d 982 (5t h Cir. 1933). Therefore, t he Lyerlys are not ent it led t o summary j udgment in t heir favor based on t he alleged procedural deficiencies in t he IRS’ s assessment of penalt ies or on t heir reliance on IRS let t ers. E. Misapplication of Payments The Lyerlys claim t hat t he IRS misapplied payment s t hat Rick sent t o t he IRS, and because of t hat misapplicat ion, t hey were charged a higher amount of int erest and penalt ies. As discussed above, t he Court has j urisdict ion in t his mat t er only t o order a refund of any overpayment s t hat t he Lyerlys have made. Because t he quest ion of whet her or not t he penalt ies were mandat ory and right f ully assessed is a quest ion of fact , t he Court cannot , at t his st age, det ermine if t he alleged misapplicat ion of payment s result ed in an overpayment . This issue will have t o be resolved aft er t he finder of fact decides if t he Lyerlys owed t he IRS payment f or t he penalt ies assessed. F. 2008 Penalties The Lyerlys allege t hat t hey are owed a refund of t he “ failure t o file,” “ f ailure t o pay proper est imat ed t ax, ” and “ f ailure t o pay” penalt ies which were assessed f or t he year 2008. The Unit ed St at es Page 25 of 27 concedes t hat t he Lyerlys are ent it led t o a credit of $3, 862. 75 for t he failure t o file penalt y. Therefore, summary j udgment in f avor of t he Lyerlys is due t o be grant ed as t o t he 2008 failure t o file penalt ies t o t he ext ent of $3,862.75. However, t he Unit ed St at es disput es t he Lyerlys’ claim for a refund of t he 2008 f ailure t o pay est imat ed t ax and f ailure t o pay penalt ies. According t o t he Unit ed St at es, t he Lyerlys’ ext ension only allowed t hem t o file on Oct ober 15, 2009, but not t o pay on t hat dat e. The Unit ed St at es claims t hat t he Lyerlys st ill had t o pay before April 15, 2009. The Lyerlys claim t hat t hey paid on t ime. Aut omat ic ext ensions give a t axpayer six more mont hs t o file a t imely ret urn but do not ext end t he t ime for payment . 26 U.S.C. § 6081. However, t he IRS can also grant six mont h ext ensions of t ime f or paying t axes, t hough t hese ext ensions are more unusual. 26 U.S.C. § 6161. The record is unclear as t o whet her an ext ension of t ime for payment was grant ed, as neit her side has present ed a copy of t he alleged ext ension, but t he Court assumes t hat t he ext ension grant ed was an aut omat ic ext ension for t ime t o file. Therefore, t he Lyerlys’ mot ion for summary j udgment as t o t his claim is due t o be denied. If an ext ension t o pay t heir t axes was grant ed, such should be present ed at t he t rial of t his mat t er. Page 26 of 27 IV. Conclusion For t he reasons st at ed above, Plaint if f s’ mot ion f or summary j udgment (doc. 27) is due t o be GRANTED in part and DENIED in part . Defendant ’ s mot ion for summary j udgment (doc. 29) is due t o be DENIED. Plaint if fs’ mot ion t o st rike (doc. 34) is due t o be DENIED AS MOOT. Summary j udgment in Plaint iff s’ f avor as t o Plaint iffs’ claims for a refund of f ailure t o file penalt ies f or t he year 2008 is due t o be grant ed. All ot her claims remain. A separat e order consist ent wit h t his opinion will be ent ered by t he Court . DONE and ORDERED t his 3rd day of November 2016. _____________________________ L. Scot t Coogler Unit ed St at es Dist rict Judge Page 27 of 27
]]>
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You
should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
