DAVID C. KEESLER, Magistrate Judge.
Plaintiff Marshall O. Lowery ("Plaintiff" or "Lowery") initiated this action against the United States of America ("Defendant" or "United States") with the filing of his "Complaint" (Document No. 1) on October 3, 2016. The Complaint states that "[t]his is an action for refund of tax preparer penalties and for determination of the Plaintiff's liability for such penalties, brought pursuant to Section 7422 of the Internal Revenue Code ("I.R.C."), 26 U.S.C. § 7422, and I.R.C. § 6694(c)." (Document No. 1, p. 2). The Complaint's only claim for relief is a "Claim for Refund and Determination of Liability, I.R.C. §§ 6694(c) and 7422." (Document No. 1, pp. 14-15).
This action arises from tax returns prepared for tax years 2009 and 2010, when Plaintiff was the sole member of Computer Plus, LLC, d/b/a "Rapid Tax" ("Computer Plus"). (Document No. 1, p. 2). Computer Plus "employed individuals, including the Plaintiff, to provide paid tax preparation services to its clients."
On or about August 7, 2014, Defendant initially sought to impose $170,000 in tax preparer penalties against Plaintiff, arising out of thirty-four (34) tax returns. (Document No. 34, p. 5) (citing Document No. 51-1). On appeal, IRS Appeals Officer Maria A. Frazier ("Frazier") concluded on or about September 23, 2015, that there was insufficient evidence to support a penalty in nine (9) of the twenty-five (25) returns now at issue in this case, and recommended reducing the penalty from $170,000 to $100,000. (Document No. 34, pp. 6-7) (citing Document No. 51-4).
On or about January 24, 2016, Plaintiff sent a request under the Freedom of Information Act, 5 U.S.C. § 552 ("FOIA"), for every document in the IRS files relating to the proposed penalties to be assessed against Plaintiff. (Document No. 1, p. 5). To date, no documents have been provided.
Before the final penalties were assessed, the appeal was reassigned to IRS Appeals Officer Sandra Mical ("Mical"). (Document No. 34, p. 7) (citing Document No. 51-5). On or about January 26, 2016, Mical recommended an assertion of $77,500 in penalties against Plaintiff. (Document No. 51-5, p. 3). Specifically, Mical recommended an assertion of a full penalty ($5,000 each) for each of the six (6) returns Mr. Lowery prepared; and she recommended a 50% penalty ($2,500) as to each of the nineteen (19) returns prepared by independent franchisees or employees of Computer Plus.
"On February 22, 2016, notice and demand was sent to the Plaintiff for alleged tax preparer penalties assessed pursuant to I.R.C. § 6694(b) and arising out of twenty-five (25) tax returns prepared for tax years 2009 and 2010." (Document No. 1, p. 2). On March 22, 2016, Plaintiff filed Forms 6118 ("Claim for Refund of Tax Return Preparer and Promoter Penalties") for each assessed penalty and provided payment in the amount of 15% of each penalty.
The "United States of America's Answer And Counterclaim" (Document No. 6) was filed on December 19, 2016. The parties' "Certification And Report Of F.R.C.P. 26(f) Conference And Discovery Plan" (Document No. 8) was then filed on January 5, 2017, along with their "Joint Stipulation of Consent to Exercise Jurisdiction by a United States Magistrate Judge" (Document No 9). Based on the parties' "Certification And Report. . .," the Court issued a "Pretrial Order And Case Management Plan" (Document No. 10) on January 9, 2017.
The "United States of America's Amended Answer And Counterclaim" (Document No. 28) was filed by consent on December 26, 2017. By its Counterclaim, Defendant seeks to "reduce to judgment outstanding federal tax assessments under 26 U.S.C. § 6694(b) against Counterclaim-Defendant Marshall O. Lowery." (Document No. 28, p. 7). The United States contends that Lowery is the "statutory return preparer of returns filed by Computer Plus doing business as Rapid Tax because he is the sole owner of Computer Plus." (Document No. 28, p. 8). To the extent Plaintiff Lowery contends Computer Plus is the employer of Rapid Tax return preparers, Defendant asserts that the corporate veil should be pierced, as Lowery is the actual employer of Rapid Tax return preparers.
Defendant's Counterclaim further contends that thirty-eight (38) of forty-one (41) returns the IRS examined required income adjustments totaling $856,579, and additional tax liabilities of $192,775, for clients of Computer Plus doing business as Rapid Tax. (Document No. 28, p. 9). As a result, the United States made twenty-five (25) individual penalty assessments under 26 U.S.C. § 6694(b) against Plaintiff "because he either prepared the returns at issue in this case or employed individuals to prepare the returns at issue in this case."
"Plaintiff's Motion For Summary Judgment" (Document No. 33) was filed on February 12, 2018. Plaintiff Lowery seeks summary judgment "on all issues and/or claims for relief set forth in the Complaint." (Document No. 33, p. 1). Defendant's "Cross-Motion For Summary Judgment" (Document No. 36) was filed on February 21, 2018. Defendant United States seeks judgment that Lowery "is liable for 25 return preparer penalties assessed against him and the unpaid balance of $16,045.22 as of November 7, 2016, plus statutory interest." (Document No. 36, p. 1).
On May 29, 2018, the parties filed a "Joint Stipulation" (Document No. 49). The parties' stipulation notes that the amount of "combined penalty assessments for 2009 and 2010" against Plaintiff Lowery is $77,500. (Document No. 49, p. 1). The parties agree that as of May 24, 2018, Plaintiff had paid through direct payment or statutory offsets of his income tax refunds a total amount of $67,374.78. (Document No. 49, p. 2). Defendants now seeks judgment in the amount of $11,416.07, plus statutory interest; and Plaintiff seeks a refund of $67,374.78, plus any additional amounts paid through statutory offsets, and statutory overpayment interest. (Document No. 49, p. 3).
The pending summary judgment motions have been fully briefed.
This matter is now ripe for review and disposition.
The standard of review here is familiar. Summary judgment shall be granted "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The movant has the "initial responsibility of informing the district court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact."
Once the movant's initial burden is met, the burden shifts to the nonmoving party.
When considering cross-motions for summary judgment, a court evaluates each motion separately on its own merits using the standard set forth above.
As noted above, the IRS assessed the underlying twenty-five (25) individual penalties against Plaintiff pursuant to 26 U.S.C. § 6694(b). (Document No. 1, p. 2; Document No. 28, p. 1). In most pertinent part, 26 U.S.C. § 6694(b) states the following:
26 U.S.C. § 6694(b)(1) & (2).
A "tax return preparer" is "any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title." See 26 U.S.C. § 6694(f) (citing I.R.C. § 7701 (a)(36));
"A nonsigning tax return preparer is any tax return preparer who is not a signing tax return preparer but who prepares all or a substantial portion of a return or claim for refund within the meaning of paragraph (b)(3) of this section with respect to events that have occurred at the time the advice is rendered." (Document No. 1, p. 4) (quoting Treas. Reg. § 301.7701-15(b)(2); 26 C.F.R. § 301.7701-15(b)(2)).
26 C.F.R. § 1.6694-1(b)(1)-(3).
Plaintiff contends that for each tax return in question, the IRS was required to determine if Plaintiff signed the tax return as preparer, or whether some other preparer signed the return. (Document No. 1, p. 4). If a person other than Plaintiff signed the return as preparer, then "the signing tax return preparer generally will be considered the person who is primarily responsible for all of the positions on the return or claim for refund giving rise to an understatement unless, based upon credible information from any source, it is concluded that the signing tax return preparer is not primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement."
"The statutory definition of income tax preparer, read in conjunction with the regulations to section 6694, conclusively answers the question of who shall be deemed the preparer as between a signing and non-signing member of a firm."
Of the twenty-five (25) returns at issue in this case, nineteen (19) were signed by preparers other than Plaintiff. (Document No. 1, pp. 6, 8; and Document No. 34, p. 9). Five (5) of these nineteen (19) were prepared by employees of independent franchisees of Computer Plus, and fourteen (14) were prepared by employees of Computer Plus other than Plaintiff. (Document No. 1, pp. 6, 8). The Complaint asserts that "Plaintiff was not a signing tax return preparer for any of these returns." (Document No. 1, ¶¶ 20 and 31). The "United States Of America's Amended Answer And Counterclaim" (Document No. 28) "Denies" Plaintiff's contention that he did not sign any of the nineteen (19) returns; however, Plaintiff notes that Defendant's 30(b)(6) witness acknowledged in deposition testimony that there is no evidence that Plaintiff signed or prepared any part of these returns. (Document No. 34, p. 9) (citing Document No. 34-2) (citing Document No. 51-2).
In support of his motion, Plaintiff first argues that there is no legal or factual basis to conclude that he was the non-signing preparer of any returns prepared by Computer Plus employees. (Document No. 34, pp. 8-10). Plaintiff asserts that Defendant admits that the IRS has done nothing to determine whether the signing preparers of these returns were or were not primarily responsible for the positions on the returns; and admits that there is no evidence Plaintiff prepared any part of these returns. (Document No. 34, p. 9) (citing Document No. 34-2 and Document No. 51-2). Plaintiff further asserts that even if it was determined he played a role in the preparation of these returns, there is no evidence that he disregarded any information provided by the taxpayer, or intentionally or recklessly disregarded any rule or regulation. (Document No. 34, p. 10).
Next, Plaintiff argues that there are three critical flaws to Defendant's position that Plaintiff is liable as the "employer" of any of the signing tax return preparers. (Document No. 34, pp. 10-14). First, "Defendant's own 30(b)(6) witness admits that Computer Plus LLC was the employer of these preparers, not Mr. Lowery." (Document No. 34, p. 11) (citing Document No. 51-2, pp. 20-21, 92-93). Second, there is no evidentiary support indicating Plaintiff had a supervisory role/involvement with these returns, and no basis he had any involvement with these returns. (Document No. 34, pp. 11-12) (citing Document No. 51-7). Third, there is no legal basis that Plaintiff can be liable as the "third-party designee" on some of the returns. (Document No. 34, pp. 13-14). Plaintiff contends that such designation has no relevance to tax preparer liability. (Document No. 34, p. 14).
Plaintiff's third main argument in support of his motion asserts that, as to the six (6) returns that he acknowledges he was the signing preparer, Defendant cannot show that he disregarded information given to him. (Document No. 34, pp. 15-20). Plaintiff notes that liability under § 6694(b) against a tax return preparer requires that the preparer's understatement of tax liability was willful or reckless. (Document No. 34, p. 15). Plaintiff further notes that Defendant has alleged willfulness, but has failed to meet its burden of showing that Plaintiff "disregarded, in an attempt to wrongfully reduce the tax liability of the taxpayer, information furnished by the taxpayer or other persons. Id. (citing Treas. Reg. § 1.6694-3(b)).
Finally, Plaintiff argues that Defendant's veil piercing and alter ego theories are without evidentiary support or legal foundation. (Document No. 34, pp. 21-22). Plaintiff contends "[i]n short, since there is no claim that Computer Plus LLC is liable for the penalties, there is no basis for asserting derivative liability against Mr. Lowery." (Document No. 34, p. 21).
Based on the foregoing, Plaintiff concludes that he is entitled to summary judgment as to all claims. (Document No. 34, p. 22).
In its opposition brief, Defendant United States of America declines to directly address Plaintiff's arguments, and instead, focuses on three reasons it believes Plaintiff's motion is defective.
First, Defendant asserts that Plaintiff's motion is not supported by admissible evidence. (Document No. 40, pp. 1-4). Defendant also states that "[t]he only question before the Court is whether Mr. Lowery and his employees willfully, or with an intentional or reckless disregard of the applicable rules and regulations, understated the taxpayers' liability for the twenty-five returns at issue." (Document No. 40, pp. 2-3) (citing 26 U.S.C. § 6694(b)).
Second, Defendant asserts that it is "utterly irrelevant" whether Plaintiff is a "signing" or "non-signing" tax return preparer. (Document No. 40, p. 5). Defendant contends that there is no dispute that Plaintiff "prepared and signed six of the returns at issue," and that he "employed individuals
Third, Defendant argues that Plaintiff has failed to meet his burden of showing that the returns at issue were not prepared in violation of §6694(b). (Document No. 40, pp. 8-14). Defendant first acknowledges that "the United States bears the burden of proving that the understatement was willfull," and then adds that Plaintiff "bears the burden of proving the understatement was not the result of reckless or intentional disregard of the applicable rules or regulation." (Document No. 40, p. 8) (citing Treas. Reg. § 1.6694-3(h)). Without addressing how it can satisfy its own burden, Defendant concludes that its position "is supported by overwhelming evidence," but that Plaintiff "cannot meet his burden."
In reply, Plaintiff adds additional context and authority supporting his motion and addressing Defendant's concerns. (Document No. 42, pp. 2-16).
First, Plaintiff asserts that he has offered admissible evidence in support of his motion. (Document No. 42, pp. 2-6). Plaintiff contends that the underlying administrative proceedings show that the assessed penalties were "without rational foundation," and "arbitrary and erroneous" and that the evidence shows that Defendant's own agents cannot agree on a theory of liability. (Document No. 42, p. 3). Plaintiff further contends that there is clearly admissible, and uncontradicted, evidence that Plaintiff had no involvement, no knowledge, and no discussions regarding the preparation of the nineteen (19) returns. (Document No. 42, p. 4). In addition, Plaintiff asserts that his admissible testimony, and that of the taxpayers, defeats the assertions of liability against him pursuant to § 6694(b). (Document No. 42, pp. 4-5). Moreover, Plaintiff suggests that Defendant's 30(b)(6) witness' testimony is probative of the issues before the Court and supports his lack of involvement with the nineteen (19) returns, and that his work on the six (6) returns he signed was appropriate. (Document No. 42, p. 6).
Next, the reply re-asserts that Mr. Lowery was not the employer of the preparers of the nineteen (19) returns. Plaintiff suggests that is at least a dispute of fact as to whether he employed the preparers of the nineteen (19) returns, and that Defendant's 30(b)(6) witness testified that Computer Plus, not Lowery, employed those preparers.
Plaintiff then presents a compelling argument that even if he were deemed to be the employer of the preparers of the nineteen (19) returns, there is no evidence he engaged in conduct prohibited by § 6994(b). (Document No. 42, pp. 10-12). Plaintiff argues that § 6694(b) only imposes liability for the conduct of a tax return preparer whose conduct willfully understates the liability on the tax return, or recklessly or intentionally disregards rules or regulations. (Document No. 42, p. 10) (citing I.R.C. § 6694(b)). If Lowery, is the "tax return preparer," it is only his conduct that gives rise to the imposition of penalties.
(Document No. 42, p. 11) (citing Document. No. 40, p. 7) (citing Document. No. 37, pp. 6-7; H.R. Rep. No. 658, 94 Cong., 2nd Sess. 1976 U.S.C.C.A.N. 2897, 1975 WL 12389)). Plaintiff also notes that the relevant cases relied upon by Defendant indicate that the employers were directly involved in the wrongful conduct, unlike this case where Plaintiff was not involved with the nineteen (19) returns. (Document No. 42, pp. 11-12) (citing
Plaintiff's final argument in the reply contends that Defendant has failed to meet its burden of proof as to the penalties arising from the six (6) returns Plaintiff did prepare and sign. (Document No. 42, pp. 12-18). Plaintiff notes that the parties agree that for a penalty predicated on willful conduct the Defendant carries the burden of proof, and that Defendant has alleged that Plaintiff's conduct was willful; however, Plaintiff suggests that Defendant has not provided evidence of willful conduct. (Document No. 42, pp. 12-13). Plaintiff further notes Defendant filed a "Corrected Response" — after the close of discovery, and after Plaintiff filed his motion for summary judgment — asserting for the first time that Mr. Lowery engaged in reckless or intentional disregard of rules or regulations under § 6694(b)(2)(B). (Document No. 42, p. 13). Plaintiff objects to this change in position, but contends that Defendant has still failed to point to evidence that his conduct violated the statute. (Document No. 42, pp. 15-19).
Following the initial briefing, and noting Plaintiff's request for a hearing, the Court held a hearing on the cross motions for summary judgment. (Document No. 50). In addition, the Court provided the parties an opportunity to file supplemental briefs.
The hearing and supplemental briefs have helped focus the issues here. Most notably, Plaintiff now contends he can prevail as to the nineteen (19) tax returns, even if he is considered the "tax return preparer." (Document No. 58, pp. 2-5). Plaintiff asserts that "[l]iability under I.R.C. § 6694(b) cannot attach unless Mr. Lowery engaged in "willful or reckless conduct' with respect to which any part of an understatement of liability is due." (Document No. 58, p. 2) (citing I.R.C. § 6694(b)). Assuming, arguendo, that Plaintiff is the tax return preparer by virtue of being the employer, Plaintiff argues there must be evidence that he engaged in willful or reckless conduct to hold him liable for penalties under §6694(b). (Document No. 58, pp. 2-3). The undersigned agrees.
"[A] preparer is considered to have. . . . intentionally disregarded a rule or regulation
The undersigned notes that Plaintiff, inter alia, asserts that: (1) Defendant admits that Plaintiff did not sign these returns; (2) the IRS did nothing to determine the signing preparer was not primarily responsible for these returns; and (3) there is no evidence Plaintiff prepared any part of the nineteen (19) returns. (Document No. 34, p. 9) (citing Document No. 34-2; Document No. 52-2). The "Declaration Of Marshall Lowery" states in pertinent part:
(Document No. 43-1, p. 3);
Although Defendant alleged at the hearing that Plaintiff had substantial involvement with all the returns at issue in this case, Defendant has failed to forecast any evidence to support such allegation and the record cited in the preceding paragraphs indicates that there is no such evidence. Defendant also argued at the hearing that the mere fact Plaintiff was the employer is enough to hold him liable for all the returns in this case.
As noted above, the undersigned encouraged Defendant to identify authority that might support finding a tax return preparer liable where he had little, if any, involvement in the actual return preparation. (Document No. 55, p. 5, n. 1). Defendant has identified two cases that it contends support a finding that Plaintiff is liable as the employer, regardless of the extent of his involvement with the tax returns or whether he signed them.
First, Defendant argues that
The undersigned finds the following excerpt from
Defendant contends that
The undersigned again disagrees with Defendant's interpretation of the caselaw. While it is accurate that both
The
The undersigned is not persuaded that
Contrary to Defendant's conclusion that
Based on the foregoing, the undersigned is convinced that a reasonable jury could not return a verdict finding Plaintiff liable for the alleged understatement of tax liability on the nineteen (19) tax returns in dispute that he did not prepare or sign. The deposition testimony, Plaintiff's declaration, and even Defendant's own list of undisputed facts, support Plaintiff's view of the case as to at least the nineteen (19) returns.
Unlike the nineteen (19) returns, Plaintiff acknowledges that he prepared and signed the remaining six (6) returns in dispute here. As to these remaining six (6) returns, the undersigned is persuaded that whether Plaintiff's conduct was willful or reckless are questions of fact that should be decided by a jury.
Therefore, the undersigned will grant "Plaintiff's Motion For Summary Judgment" (Document No. 33) as to the nineteen (19) returns and deny the motion as to the six (6) returns.
Defendant seeks summary judgment denying Plaintiff's tax refund claim, and in favor of Defendant for Plaintiff's unpaid balance on the assessed § 6694(b) penalties, plus accrued interest, on the twenty-five (25) returns at issue in this case. (Document No. 37);
For the purpose of deciding the pending motions, the Court assumes, arguendo, that Plaintiff is a statutory "tax return preparer" of the six (6) returns he signed, and the nineteen (19) returns he did not sign. The Court is focused on whether there are genuine issues of fact as to whether Plaintiff is liable for either set of returns due to willful or reckless conduct.
The information and arguments in the briefing and attachments to the cross motions is overlapping and largely repetitive; nevertheless, the undersigned has considered all the documents. After careful consideration of all the briefs, exhibits, and oral argument, the undersigned is still not persuaded that Plaintiff signed, prepared, or had any input in the preparation of the nineteen (19) returns. As such, and as addressed above, the undersigned has determined that a reasonable jury could not find Plaintiff engaged in willful or reckless conduct to create liability under § 6694(b) as alleged by Defendant. "[W]illfulness does not require fraudulent intent or an evil motive; it merely requires a conscious act or omission made in the knowledge that a duty is therefore not being met."
Moreover, the undersigned is not persuaded that § 6694(b) allows Defendant to properly attach liability to Plaintiff for the returns he was not involved with that were signed by other tax return preparers. Even after allowing oral argument and supplemental briefing, Defendant has failed to identify relevant legal authority that supports the imposition of § 6694(b) penalties under the circumstances of this case. Judgment as to the nineteen (19) returns will, therefore, be entered in favor of Plaintiff.
The undersigned does find that there are issues of fact as to the preparation of the other six (6) returns that should be considered by a jury, unless the parties are able to resolve this matter. It is undisputed that Plaintiff prepared and signed these returns, and the questions of whether his conduct in doing so was willful or reckless should be presented to a jury.
Based on the foregoing, the undersigned will deny Defendant's "Cross-Motion For Summary Judgment" (Document No. 36).
