Lyerly et al v. United States of America

Filing 50

MEMORANDUM OF OPINION. Signed by Judge L Scott Coogler on 11/3/2016. (PSM)

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,
Plaintiffs;
vs.
UNITED STATES OF AMERICA,
Defendant.

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2:15-cv-745-LSC

MEMORANDUM OF OPINION
Before the Court are Plaintiffs’ Motion for Summary Judgment (doc.
27), Defendant’s Motion for Summary Judgment (doc. 29) and Plaintiffs’
Motion to Strike Evidence (doc. 34). Plaintiffs, Jonathan and Sharon
Lyerly, brought this case based on tax penalties that they allege were
wrongfully assessed by the Internal Revenue Service (“IRS”). The Lyerlys
seek a refund of overpayments, damages, and a declaration of their
correct tax liability. For the reasons stated below, Plaintiffs’ motion for
summary judgment is due to be granted in part and denied in part.

Page 1 of 27

Defendant’s motion is due to be denied. Plaintiffs’ motion to strike is due
to be denied as moot. 1
I.

Background
Jonathan (“Rick”) and Sharon Lyerly (collectively “the Lyerlys”) are a

married couple living in Hoover, Alabama. Rick is an attorney with a
general practice who does not do any tax or bankruptcy work. Rick
suffers from many health problems, including diabetes, high blood
pressure, a broken hip, a hernia, a prostate problem that required
surgery, five heart bypass surgeries, internal bleeding, panic attacks, and
anxiety. His anxiety is apparently tied to dealing with financial matters
and sometimes manifests itself as shortness of breath, sweating, shaking,
and almost losing consciousness. In 2009, Rick began to take Klonopin for
his anxiety, which helped reduce these symptoms dramatically. Because
of this anxiety, Rick relied almost entirely on others to take care of his
financial matters, including filing his tax returns. He delegated this
responsibility to Doug Hill (“Hill”), his accountant, and various office
managers that he employed. Rick expected his office managers to gather
and transmit financial information to Hill, who would then prepare his tax
returns. Rick would simply sign his tax returns, apparently without
1

The Court did not consider the evidence that Plaintiffs object to in their motion to
strike. Therefore, the motion to strike will be deemed moot.
Page 2 of 27

reading them.
Mary Dobbs served as Rick’s office manager until April 2007. She
apparently did not attend to the tax matters that Rick had assigned her.
She was then replaced by Joy Simeone (“Simeone”), who also did not
handle Rick’s tax matters appropriately. In fact, Rick alleges that
Simeone embezzled from him and destroyed or altered his financial
records. However, she also sent a memo to Rick in September 2007 about
problems that the firm was having in complying with tax obligations.
Simeone was fired in July 2008 when Rick discovered her embezzlement.
Sharon then attempted to gather the necessary financial information
herself for submission to Hill. However, she found this to be difficult
because of the damage Simeone had done to Rick’s records.
A. Criminal Trial
For the years 2005, 2006, and 2007, Rick failed to file tax returns with
the IRS. Rick alleges, and the IRS disputes, that he always intended to file
these returns. While the IRS claims that Rick knew he was late in filing his
taxes, Rick contends that he thought his tax returns were covered by
“extensions” because Hill never told him otherwise. According to Rick, he
did not know his taxes were overdue until Jason Ward, an IRS criminal
investigator, visited him on August 27, 2009.
Page 3 of 27

During that visit, Rick told Ward that he thought the returns had been
handled, but that he would check with Hill to make sure. Rick also told
Ward that he was welcome to speak to Hill if he wanted more information
about Rick’s taxes, and even told Hill to cooperate with Ward and to give
him “whatever he asked for.” (Pl. Ex. 6 at 310.) Rick explained that he
kept his financial records on Microsoft Money and instructed his secretary
to put the records on a CD and give it to Ward. The next day, Ward went
to Hill’s office, talked to Hill, and collected some of Rick’s records. Ward
also visited and spoke to Dr. Bair, the psychologist who was treating Rick
for his anxiety issues. Dr. Bair informed Ward that Rick had been
diagnosed with “simple phobia and anxiety disorder primarily focused
around financial matters.” (Pl. Ex. 4 at 151.)
On October 10, 2012, the United States filed an information against
Rick in the United States District Court for the Northern District of
Alabama, alleging three counts of willful failure to file income tax returns
for the years 2005, 2006, and 2007. During the criminal trial, Sharon and
Rick testified that Rick had filed his taxes for these years on October 14,
2010, and that the delay in filing was not willful, but rather, was for
“reasonable cause.” Rick was found not guilty of all three counts on
August 9, 2013.
Page 4 of 27

B. 2005 Taxes
Even though Rick filed his 2005 tax return in 2010, he did not pay his
taxes for that year until September 20, 2012, when he mailed the IRS a
check “For 2005 Tax/Estimated Penalties.” (Pl. Ex. 16 at 2.) The IRS
replied to his payment on December 10, 2012 with a letter stating that
Rick owed $5,273.83 for the year 2005 for “penalties and interest figured
to December 31, 2012.” (Pl. Ex. 17 at 1.) Rick responded by sending the
IRS a check on December 29, 2012 marked “For 2005/2007 Taxes” in the
amount of $8,962.69, enough to cover the $5,273.83 he owed on his 2005
taxes and the $3,688.46 he owed on his 2007 taxes. (Pl. Ex. 19.) The IRS
applied this payment to Rick’s 2006 taxes because, according to the
United States, he submitted the check with a 2006 payment voucher.
Rick, however, argues that the IRS misapplied the check and therefore
created a credit balance of $8,962.69 for the year 2006 which was never
corrected. Rick also claims that if the check had been correctly applied,
the taxes for the year 2005 would have been paid in full with a credit
balance in his favor.
On September 9, 2013, the IRS sent the Lyerlys a letter stating that
Rick still owed $5,384.20 on his 2005 taxes. On October 4, 2013 Rick
replied, explaining that the IRS had misapplied his December 29, 2012
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payment. Jacquelyne Yarbrough, an accounts manager with the IRS,
responded to Rick’s letter, stating that “we have not completed all the
research necessary for a complete response . . . You don’t need to do
anything further now on this matter.” (Pl. Ex. 24.) She also stated that
the IRS would contact him within 45 days about the matter. (Id.)
However, the IRS never followed up with Rick or changed the application
of that payment.
C. 2006 Taxes
On August 27, 2012, the Lyerlys received a notice from the IRS that
showed an outstanding balance of $35,853.14 on their 2006 taxes. (Pl. Ex.
29.) The notice stated “[s]end us the amount due . . . by September 17,
2012, to avoid additional penalty and interest charges.” (Id.) Rick paid
the outstanding balance by check on September 7, 2012. The December
10, 2012 letter from the IRS listing the Lyerlys’ outstanding obligations
showed a balance remaining for the tax years of 2005 and 2007, but did
not show there was any balance remaining for 2006.
D. 2007 Taxes
Rick sent the IRS a check for $25,440 on September 20, 2012 with a
memo that the payment was for “2007 Tax/Estimated Interest.” (Pl. Ex.
16.) The IRS responded on December 10, 2012 stating that “[t]he amount
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[Rick] owe[d] for the tax period . . . includ[ing] penalties and interest
figured to Dec. 31, 2012” was $3,688.46. (Pl. Ex. 17.) On December 29,
2012, Rick sent the IRS a check for $8,962.69, which included the
$3,688.46 which he owed for his 2007 taxes and $5,273.83 that he owed
for his 2005 taxes. The check was labeled “For 2005/2007 Taxes”, but the
IRS applied this payment to Rick’s 2006 taxes. The United States argues
that they correctly applied the check to the 2006 taxes because Rick
submitted the payment with a 2006 payment voucher. However, Rick
alleges that if the check had been rightfully applied to the 2007 taxes,
the 2007 account would have been paid in full and would show a credit
balance in his favor of $1,492.40.
On May 13, 2013, the Lyerlys received notice from the IRS that an
overpayment of $6,989 from their 2012 taxes was applied to their 2007
account, leaving a balance of $22,644.28 on their 2007 account. Rick
alleges that this means that his September 20, 2012 and December 29,
2012 payments had never been applied to his 2007 taxes. Regardless, the
parties dispute what taxes Rick properly owed for 2007.
E. 2008 Taxes
The Lyerlys filed their 2008 tax return on time and submitted a
payment of $16,228 on October 19, 2009. However, the payment was not
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immediately posted to the Lyerlys’ account, according to an IRS report,
“due to the module being frozen by Criminal Investigation.” (Pl. Ex. 41.)
On June 16, 2014, the Lyerlys received an IRS notice showing a balance of
$4,905.09 on their 2008 account. This notice showed failure to file,
failure to pay proper estimated tax and failure to pay penalties as well as
interest. (Pl. Ex. 43.) On September 1, 2014, the Lyerlys received another
notice that they owed $4,936.23 for 2008 taxes. (Pl. Ex. 44.) Rick paid
that balance by check on September 9, 2014. (Pl. Ex. 45.)
The Lyerlys allege that the penalties were wrongful, but the United
States claims that their payments were both late and inadequate.
According to the United States, the Lyerlys should have paid a higher
estimated tax amount, and should have paid by April 15, 2009 instead of
in October 2009.
F. Assessment of Penalties
The IRS transferred Rick’s case to Maria Flournoy (“Flournoy”) and her
supervisor Dorothy Randle (“Randle”) on August 26, 2013. While the case
was Flournoy’s responsibility, the case file was updated with a Civil
Penalty Approval Sheet which stated that “Failure to File and Failure to
Pay penalties were considered and determined to be inapplicable . . . no
penalties will be asserted by exam in tax years 2005 through 2007.” (Pl.
Page 8 of 27

Ex. 13.)

From October 1, 2013 until October 17, 2013, the federal

government was shut down, and federal employees, including those
employed by the IRS, were ordered not to report to work. The Lyerlys
claim that this resulted in IRS employees not being allowed to do any
work. The United States asserts that “the IRS was required to continue
taking action to protect the United States’ property interests including
making assessments prior to statute expirations as required by law.”
(Doc. 38 at 6.)
The Lyerlys received two letters dated October 3, 2013 from Randle,
which stated that the IRS had “completed the review of the examination
of [the Lyerlys’] tax return for the year(s) [2005, 2006, and 2007].” (Pl.
Ex. 14.) One of these letters showed no penalties and no interest for the
year 2006, and the other showed no penalties and no interest for the
years 2005 and 2007. (Id.) However, Rick then received a notice dated
October 9, 2013 of penalties and interest which had been assessed for
2005 and 2006. (Pl. Ex. 25 & 32.) As a result, the Lyerlys met with Randle
on October 30, 2013 to clear up the obvious inconsistencies in the IRS’s
communications. Randle told the Lyerlys that she would investigate the
matter, and that the Lyerlys should call her back in four to six weeks.
While the Lyerlys were at the IRS office on October 30, they obtained
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a copy of their account transcript for 2005 and 2006, and found that the
penalties allegedly assessed on October 9, 2013 were not on the
transcript. (Pl. Ex. 26 & 33.) The parties do not dispute that these
assessments were logged onto the computer record between October 30,
2013 and November 19, 2013. As a result, the Lyerlys claim that the
penalties were assessed after the October 14, 2013 statute of limitations
had expired. However, the United States insists that quick assessments
are not always immediately logged onto account records. The Lyerlys and
the United States also dispute whether proper procedures for assessing
these penalties were followed. For example, the Lyerlys claim that the
required forms were not completed and filed prior to this assessment and
that they did not receive notice and an opportunity to provide an
explanation.
G. Payment of Penalties
On April 15, 2014, the Lyerlys filed a joint tax return for 2013, showing
an overpayment of $19,731, which they requested be credited to their
2014 taxes. The IRS sent back a notice that they had applied some of the
overpayment to the Lyerlys’ 2005 taxes. However, the Lyerlys maintain
that they did not owe money on their 2005 taxes.
On September 1, 2014, Rick received an IRS notice of intent to levy
Page 10 of 27

which stated that he owed a total of $9,913 for the year 2005 and
$6,003.52 for 2006. This sum included penalties, interest, and the
outstanding taxes on his account. Rick paid the 2005 and 2006 balances
on September 9, 2014. (Pl. Ex. 27 & 34.)
The Lyerlys filed the current action in this Court seeking a refund of
overpaid taxes, a declaration of the proper tax liability and an order
requiring the IRS to retransfer the allegedly misallocated payments. They
also seek compensatory damages for mental anguish as well as punitive
damages.
II.

Standard of Review
Summary judgment is appropriate “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). A fact is
“material” if it “might affect the outcome of the suit under the governing
law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). There is
a “genuine dispute” as to a material fact “if the evidence is such that a
reasonable jury could return a verdict for the nonmoving party.” Id. The
trial judge should not weigh the evidence but must simply determine
whether there are any genuine issues that should be resolved at trial. Id.
at 249.
Page 11 of 27

In considering a motion for summary judgment, trial courts must
give deference to the nonmoving party by “considering all of the
evidence and the inferences it may yield in the light most favorable to
the nonmoving party.” McGee v. Sentinel Offender Services, LLC, 719
F.3d 1236, 1242 (11th Cir. 2013) (citing Ellis v. England, 432 F.3d 1321,
1325 (11th Cir. 2005)). In prosecuting a motion for summary judgment,
“the moving party has the burden of either negating an essential element
of the nonmoving party’s case or showing that there is no evidence to
prove a fact necessary to the nonmoving party’s case.” Id. Although the
trial courts must use caution when granting motions for summary
judgment, “[s]ummary judgment procedure is properly regarded not as a
disfavored procedural shortcut, but rather as an integral part of the
Federal Rules as a whole.” Celotex Corp. v. Catrett, 477 U.S. 317, 327
(1986).
III.

Discussion
A. Jurisdiction and Relief
The Lyerlys request that the Court order the IRS to transfer funds to

accounts for specific years and determine the proper amount of taxes
owed for each of those years. They also request a refund for overpayment
of taxes plus interest, as well as compensatory and punitive damages.
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However, “[t]he United States, as sovereign, is immune from suit save as
it consents to be sued . . . and the terms of its consent to be sued in any
court define that court’s jurisdiction to entertain the suit.” United States
v. Sherwood, 312 U.S. 584, 586 (1941). These terms “must be strictly
observed and exceptions thereto are not to be implied.” Soriano v.
United States, 352 U.S. 270, 276 (1957). The United States may be sued
for a tax refund under 28 U.S.C § 1346, which states that “[t]he district
courts shall have original jurisdiction . . . of . . . [a]ny 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.”
A taxpayer may also sue for the sum of “actual, direct economic
damages sustained . . . as a proximate result of the reckless or
intentional or negligent actions of the officer or employee and . . . the
costs of the action” under 26 U.S.C. § 7433. While the Eleventh Circuit
has not yet published a decision interpreting this statute, the Fifth Circuit
has, and this Court will look to that circuit’s law for guidance. According
to the Fifth Circuit, a successful suit under this statute requires “a
taxpayer [to] establish that the Government recklessly or intentionally
disregarded a provision of the Code in connection with the collection of
Page 13 of 27

federal taxes.” Gandy Nursery, Inc. v. United States, 412 F.3d 602, 605
(5th Cir. 2005) (“Gandy II”). This statute is limited to damages for
“unauthorized collection actions.” 26 U.S.C. § 7433. It does not provide a
remedy for improper assessment of taxes. Gandy II, 412 F.3d at 607.
The Fifth Circuit explained the difference between proving a case
for improper “collection” as compared to improper “assessment” of taxes
in Shaw v. United States. 20 F.3d 182, 184 (5th Cir. 1994). It clarified
that in order to show “improper assessment, a taxpayer must
demonstrate why no taxes are owed,” while “to prove a claim for
improper collection practices, the taxpayer must demonstrate that the
IRS did not follow the prescribed methods of acquiring assets.” Id. One
taxpayer can bring both of these claims, but this “does not affect the
separate and distinctive nature of each claim.” Id.
In Gandy II, the IRS was found to have reassessed abated penalties
without notice or demand. 412 F.3d 602 at 605. The court found that
these violations of proper procedure “specifically focus on the
reassessment of . . . tax penalties without notice, not the means by
which the Government attempted to thereafter collect on those monies it
believed were owed.” Id. In this case, the Lyerlys claim that their
penalties were improperly assessed. While they can bring suit for a
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refund under 26 U.S.C. § 7422 and 28 U.S.C. § 1346, they cannot sue for
damages based on that alleged improper assessment. The Lyerlys do
argue that the IRS failed to follow assessment procedures. There is no
claim that the IRS disregarded proper collection procedures. Instead, the
allegations are that the Lyerlys do not owe these penalties. Thus, the
Lyerlys’ only possible remedy in this action is a refund of overpaid taxes
and the Court will treat this action as a refund action.
B. Assessment of Penalties
The Court has authority to decide if the Lyerlys are entitled to a
refund for the alleged wrongfully assessed penalties for failure to file tax
returns for the years 2005-2007. The United States asserts that these
penalties

are

mandatory,

and

therefore,

not

wrongly

assessed.

Conversely, the Lyerlys allege that because their failure to file was due
to reasonable cause and not due to willful neglect, the penalties should
not have been assessed. The relevant statute states that “unless it is
shown that such failure [to file a return] is due to reasonable cause and
not due to willful neglect, there shall be added . . . 5 percent for each
additional month

or fraction thereof during which

such failure

continues.” 26 U.S.C. § 6651(a)(1). The burden of proving reasonable
cause ultimately lies with the taxpayer, who must prove “(1) that the
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failure did not result from ‘willful neglect’, and (2) that the failure was
‘due to reasonable cause.’” United States v. Boyle, 469 U.S. 241, 245
(1985).
Reasonable cause for failure to file exists if “the taxpayer
‘exercised ordinary business care and prudence,’ but nevertheless was
unable to file the return on time.” In re Sanford, 979 F.2d 1511, 1514 &
n.8

(11th

Cir.

1992)

(quoting

Treas.

Reg.

§

301.6651-1(c)(1)).

Alternatively, a “court may find reasonable cause . . . if a taxpayer
convincingly demonstrates that a disability beyond his control rendered
him unable to exercise ordinary business care.” Id. This analysis must be
conducted for each tax period where penalties were assessed. Id.
The Lyerlys claim that they had reasonable cause for not filing their
tax returns because Rick had a multitude of health and emotional
problems, their office manager had been embezzling from them, and they
had relied on their accountant to timely file their returns. According to
the Lyerlys, Rick’s health problems required him to rely on his accountant
and office manager to take care of financial matters such as filing tax
returns. A “serious illness” of the taxpayer or his immediate family is
considered reasonable cause by the IRS. Boyle, 469 US at 245 & n.1.
However, “[t]he failure to make a timely filing of a tax return is not
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excused by the taxpayer’s reliance on an agent, and such reliance is not
‘reasonable cause’ for a late filing.” Id. at 242. Yet, in situations where
“a taxpayer relied on an attorney or accountant because the taxpayer,
was, for some reason, incapable . . . of meeting the criteria of ‘ordinary
business care and prudence’ . . . the disability alone could well be an
acceptable excuse for a late filing.” Id. at 248 & n.6. In cases where
elements that may constitute reasonable cause are present, the question
of the existence of reasonable cause is a question of fact. Id. at 249 &
n.8.
Rick’s reliance on his accountant and office manager to file the
returns does not constitute reasonable cause for his failure to file but a
question of fact remains about whether his illness was “serious” enough
to excuse Rick’s late filing. The United States argues that Rick’s illness
was not “serious,” while the Lyerlys claim that his anxiety was so severe
that it rendered him incapable of filing tax returns.
Further, the IRS considers “destruction by casualty of the
taxpayer’s records or place of business” to be reasonable cause, and
“casualty” is defined by the IRS as “an identifiable event that is sudden
unexpected, or unusual,” such as vandalism. Boyle, 469 US at 245 & n.1;
Internal Revenue Service Publication 547 at 2. Here, Simeone indisputably
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destroyed some of Rick’s records. However, it remains a question of fact
if this is enough to be “destruction by casualty” and constitute
reasonable cause for his failure to file. Because there is a genuine dispute
of material fact as to the presence of reasonable cause, the question of
whether or not penalties were mandatory in this case is a question for the
finder of fact.
C. Statute of Limitations
The Lyerlys claim that they are owed a refund on the tax penalties
that they paid after October 14, 2013, because those penalties were
barred by the statute of limitations. The Internal Revenue Code mandates
that “the amount of any tax imposed . . . shall be assessed within 3 years
after the return was filed.” 26 U.S.C. § 6501. Here, the tax returns for
years 2005, 2006 and 2007 were filed on October 14, 2010. (Pl. Ex. 15, 28
& 35.) Therefore, any tax for the years 2005-2007 had to be assessed by
October 14, 2013, to fall within the statute of limitations. The Lyerlys
received letters dated October 3, 2013 from the IRS saying that no
penalties for years 2005-2007 had been assessed. However, Rick then
received a notice dated October 9, 2013 assessing penalties and interest.
The Lyerlys claim that the IRS could not have assessed these penalties on
October 9, because the IRS was closed as part of the government shut
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down between October 1 and October 17. Thus, the penalties had to have
been assessed after October 17. Regardless, the United States points out
that the IRS is not required to return collected taxes that were assessed
beyond the limitations period “which might have been properly assessed
and demanded.” Lewis v. Reynolds, 284 U.S. 281, 283 (1932) modified by
284 U.S. 599 (1932).
In Lewis, the administrator of an estate filed a tax return for 1920
in February of 1921. Id. at 282. The return reported various deductions,
and the payment indicated by the return was submitted to the IRS. Id.
However, in November 1925, the return was audited, and all deductions
except one—for attorney’s fees—were disallowed, leaving a deficiency of
$7,297.15, which was paid in March 1926. Id. In July 1926, the petitioners
asked that the $7,297.15 be refunded, claiming that the assessment was
barred by the applicable five-year statute of limitations. Id. In 1929, the
IRS found that the deduction for attorney’s fees should not have been
allowed, but set out a new computation deducting the state inheritance
taxes. Id. This computation showed that the taxpayers owed more taxes
than they had yet paid. As a result, the request for a refund was
rejected. Id.
The Court in Lewis held that the Commissioner could lawfully refuse
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to refund taxes the petitioners had paid because “[w]hile no new
assessment can be made, after the bar of the statute has fallen, the
taxpayer, nevertheless, is not entitled to a refund unless he has overpaid
his tax.” Id. at 283 (quotations omitted). The court went on to hold that
“[a]lthough the statute of limitations may have barred the assessment
and collection of any additional sum, it does not obliterate the right of
the United States to retain payments already received when they do not
exceed the amount which might have been properly assessed and
demanded.” Id.
Lewis does not involve the assessment of penalties, which is the
issue before the Court in this case. Yet, the Fifth Circuit applied Lewis to
a case that involved penalties for filing a late tax return. Loftin &
Woodard, Inc. v. United States, 577 F.2d 1206, 1245-47 (5th Cir. 1978). 2
In Loftin, a corporation was assessed a 10 percent penalty for a late filing
of its 1961 tax return. Id. at 1245. When, in 1962, the corporation filed
for a refund of some of the 1961 taxes based on carryback of losses
suffered in 1962, the Commissioner audited the 1961 return and
disallowed several of the deductions that the corporation had claimed.

All decisions of the former Fifth Circuit handed down prior to close of business on
September 30, 1981 are binding on the Eleventh Circuit. Bonner v. City of Prichard,
Ala., 661 F.2d 1206, 1209 (11th Cir. 1981).
2

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Id.

The disallowance of these deductions increased the corporation’s

taxable income for 1961, and therefore, when the penalty was applied to
the amount of taxable income, the taxes owed for that year increased.
Id. The Commissioner then used the newly calculated taxes for 1961 as a
set off against the refund due from the 1962 losses. Id.
The corporation brought suit, claiming that the higher penalty
amounted to “additional” taxes, which are barred by the three year
statute of limitations. Id. (citing 26 U.S.C. § 6501). However, the court
held that the “assessment, as a set-off against a refund, does not
represent the imposition of an additional or new tax” because “the
delinquency penalty already was in existence prior to the 1962 return [as]
the 1961 return was filed late.” Id. at 1247. The court further explained
that the increased penalty “did not arise because the Commissioner, in
196[2], suddenly discovered items that had not been reported properly.
Had those items been discovered in 1961, the amount owing under the
late filing penalty would have been increased.” Id.
The United States also relies on Allen v. United States, which
similarly affirmed the denial of a request for a refund by a taxpayer. 51
F.3d 1012 (11th Cir.1995). In Allen, the taxpayer was convicted of willful
failure to pay taxes for the years 1975 and 1976. Id. at 1013. In 1985, the
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IRS assessed fraud penalties for Allen’s failure to pay, which he paid but
quickly requested a refund. Id. In 1990, based on case law holding that
fraud penalties were improper for cases such as Allen’s, the IRS decided
to refund Allen the fraud penalties. Id. However, it offset the refund “by
imposing, instead, delinquency and negligence penalties.” Id. Allen
brought suit, claiming that the delinquency and negligence penalties
were barred by the statute of limitations. Id. The court, however, held
that the reasoning in Lewis applied because “penalties . . . shall be
assessed, collected, and paid in the same manner as taxes . . . [and that
any] reference . . . to ‘tax’ imposed . . . shall be deemed also to refer to
. . . penalties.” Id. at 1015 (quoting 26 U.S.C. § 6659). Thus, according to
the court, if Lewis allowed tax premiums collected after the limitations
period to be retained by the IRS, then penalties asserted and collected
after the limitations period can also be retained. Id.
In the case before the Court, the penalties were not imposed as the
result of an audit. Yet, like in Loftin, the Lyerlys filed their tax return
late. Therefore, the reasoning in Loftin, which states that “the . . .
penalty already was in existence . . . as the . . . return was filed late” is
applicable. 577 F.2d at 1247. No matter when the IRS assessed the
penalty, it was not “new” based on Loftin and Lewis, because the
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penalties “[were] already . . . in existence” and “might have been
properly assessed and demanded” before the statute of limitations
expired. Id.; Lewis, 284 U.S. at 283. The date of the assessment of these
penalties is irrelevant, because they were already collected and can be
retained by the IRS whether or not their assessment was barred by the
statute of limitations. Thus, the Lyerlys are not entitled to summary
judgment in their favor based on their claim that the penalties were
barred by the statute of limitations.
D. Procedural Requirements and Estoppel
The Lyerlys assert that the penalty assessments were invalid
because the IRS failed to follow the proper procedural requirements of
the applicable statutes and regulations. They also claim that the IRS
should be estopped from claiming penalties and interest that are greater
than the original amount they claimed in early communications with the
Lyerlys. As explained above, the Court in this case can only provide the
remedy of a refund of overpayment as authorized under § 1346. Lewis
makes it clear that a taxpayer is only entitled to a refund if the taxpayer
has overpaid his taxes. 248 U.S. at 283; see also Leves v. Commissioner
796 F.2d 1433, 1435 (11th Cir. 1986)(“[R]emedies for the allegedly
wrongful assessment are to bring a bring a timely suit in the tax court
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under . . . § 6212 . . . or pay the tax and sue for a refund in district court
. . . under § 1346.”). In a refund suit such as this one, “the taxpayer
bears the burden of proving the amount he is entitled to recover.” United
States v. Janis, 428 U.S. 433, 440 (1976). This burden is met if a taxpayer
shows that “the amount he paid to the IRS ‘exceed[s] the amount which
might have been properly assessed and demanded.’” United States v.
Ryals, 480 F.3d 1101, 1109-10 (11th Cir. 2007) (quoting Lewis, 284 U.S. at
283).
Thus, the Lyerlys bear the burden of showing that there has been an
overpayment and the procedural issues or early communications that they
bring up are not relevant in making this determination. None of this
evidence changes the substantive determination of the amount of taxes
owed. In Ryals, the court held that the taxpayer did not meet his burden
of proof because he did “not claim that he paid any taxes in excess of the
amount(s) properly due or that he does not owe the taxes.” 480 F.3d at
1110. The Lyerlys’ procedural concerns and estoppel allegations do not
show that they did not owe these taxes. Further, various courts have held
that procedural or administrative errors are not enough to show that a
taxpayer is entitled to a refund. See Janis, 428 U.S. at 440; see also
Blansett v. United States, 283 F.2d 474, 479 (8th Cir. 1960); Decker v.
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Korth, 219 F.2d 732, 739 (10th Cir. 1955); Thomaston Cotton Mills v.
Rose, 62 F.2d 982 (5th Cir. 1933). Therefore, the Lyerlys are not entitled
to summary judgment in their favor based on the alleged procedural
deficiencies in the IRS’s assessment of penalties or on their reliance on
IRS letters.
E. Misapplication of Payments
The Lyerlys claim that the IRS misapplied payments that Rick sent
to the IRS, and because of that misapplication, they were charged a
higher amount of interest and penalties. As discussed above, the Court
has jurisdiction in this matter only to order a refund of any overpayments
that the Lyerlys have made. Because the question of whether or not the
penalties were mandatory and rightfully assessed is a question of fact,
the Court cannot, at this stage, determine if the alleged misapplication
of payments resulted in an overpayment. This issue will have to be
resolved after the finder of fact decides if the Lyerlys owed the IRS
payment for the penalties assessed.
F. 2008 Penalties
The Lyerlys allege that they are owed a refund of the “failure to
file,” “failure to pay proper estimated tax,” and “failure to pay”
penalties which were assessed for the year 2008. The United States
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concedes that the Lyerlys are entitled to a credit of $3,862.75 for the
failure to file penalty. Therefore, summary judgment in favor of the
Lyerlys is due to be granted as to the 2008 failure to file penalties to the
extent of $3,862.75.
However, the United States disputes the Lyerlys’ claim for a refund
of the 2008 failure to pay estimated tax and failure to pay penalties.
According to the United States, the Lyerlys’ extension only allowed them
to file on October 15, 2009, but not to pay on that date. The United
States claims that the Lyerlys still had to pay before April 15, 2009. The
Lyerlys claim that they paid on time. Automatic extensions give a
taxpayer six more months to file a timely return but do not extend the
time for payment. 26 U.S.C. § 6081. However, the IRS can also grant six
month extensions of time for paying taxes, though these extensions are
more unusual. 26 U.S.C. § 6161. The record is unclear as to whether an
extension of time for payment was granted, as neither side has presented
a copy of the alleged extension, but the Court assumes that the extension
granted was an automatic extension for time to file. Therefore, the
Lyerlys’ motion for summary judgment as to this claim is due to be
denied. If an extension to pay their taxes was granted, such should be
presented at the trial of this matter.
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IV.

Conclusion
For the reasons stated above, Plaintiffs’ motion for summary judgment

(doc. 27) is due to be GRANTED in part and DENIED in part. Defendant’s
motion for summary judgment (doc. 29) is due to be DENIED. Plaintiffs’
motion to strike (doc. 34) is due to be DENIED AS MOOT. Summary
judgment in Plaintiffs’ favor as to Plaintiffs’ claims for a refund of failure
to file penalties for the year 2008 is due to be granted. All other claims
remain. A separate order consistent with this opinion will be entered by
the Court.
DONE and ORDERED this 3rd day of November 2016.

_____________________________
L. Scott Coogler
United States District Judge

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