United States v. Shearer et al

Filing 85

ORDER signed by District Judge Troy L. Nunley on 6/29/2018 DENYING 67 Motion for Summary Judgment. (York, M)

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UNITED STATES DISTRICT COURT

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EASTERN DISTRICT OF CALIFORNIA

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UNITED STATES OF AMERICA,

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Plaintiff,

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No. 2:12-cv-02334-TLN-DB

v.

ORDER DENYING DEFENDANTS’
MOTION FOR SUMMARY JUDGMENT

L. RICHARD SHEARER; et. al.;

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Defendants.

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This matter is before the Court on Defendant L. Richard Shearer and Defendant Diane

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Shearer’s (collectively, “Defendants”) Amended Motion for Summary Judgement for Lack of

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Subject Matter Jurisdiction. (ECF No. 67 at 4.) Plaintiff the United States of America opposes

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the motion. (ECF No. 68.) Defendants have replied. (ECF No. 75.) For the reasons discussed

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below, the Court DENIES Defendants’ Motion for Summary Judgment, (ECF No. 67).

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I.

FACTUAL AND PROCEDURAL BACKGROUND

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Defendants, a husband and wife, are residents of Siskiyou, California. (ECF No. 4 ¶ 5.)

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This civil action is brought by the government, to reduce the joint federal tax assessments against

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Defendants, to establish that three trusts are nominees, or alter egos, of Defendants and set aside

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fraudulent transfers, and to foreclose federal tax liens on certain real property. (ECF No. 4 ¶¶ 25,

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32, 39, 48.) Defendants assert that the IRS did not comply with proper deficiency notice

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procedures and that this Court, therefore, lacks subject matter jurisdiction. (ECF No. 67 at 4.)

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L. Richard Shearer is a medical doctor who practiced in Siskiyou, California from 1995-

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2001. (ECF No. 53 at 2.) In 2001, L. Richard Shearer pleaded guilty to one count of conspiracy

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to defraud the United States in violation of 18 U.S.C. § 371 and one count of making and

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subscribing to false tax returns in violation of 26 U.S.C. § 7206(1) for tax years 1995-1999. (ECF

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No. 67 at 5.) The Internal Revenue Service (“IRS”) examined Defendants original tax returns for

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the relevant years and determined there were “substantial” tax deficiencies. (ECF No. 68 at 2.)

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In 2003, the IRS issued a Notice of Deficiency to Defendants for those tax years, stating

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the IRS “determined that you owe additional tax or other amounts, or both, for the tax year(s)

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identified above.” (ECF No. 67 at 5.) The Notice of Deficiency proposed deficiency amounts

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and fraud penalties pursuant to 26 U.S.C. § 6663 for each of the relevant tax years. (ECF No. 68

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at 2) (citing ECF No. 66-2 at 16). Defendants did not challenge the proposed assessments in the

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United States Tax Court. (ECF No. 68 at 2.) The proposed deficiencies and fraud penalties were

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“assessed” on March 8, 2004. (ECF No. 68 at 2.)

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Defendants then filed amended tax returns for tax years 1995-1999 disregarding the trusts.

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(ECF No. 67 at 5; ECF No 68 at 2.) In 2008, the IRS “essentially accepted the amended tax

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returns as filed with respect to income and expenses reports, made computational adjustments,

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and substantially reduced the original assessments of tax and fraud penalties.” (ECF No. 68 at 2.)

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The IRS “did not issue a second deficiency notice with respect to the reductions in tax and

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penalty relating to the amended returns.” (ECF No. 68 at 2–3.) Defendants argue the IRS failed

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to follow proper deficiency procedures because it did not issue a new deficiency notice based on

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the amended returns, so the IRS cannot now sue to collect the deficiency. (ECF No. 67 at 7–8)
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II.

STANDARD OF LAW

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Summary judgment is appropriate when the moving party demonstrates no genuine issue

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as to any material fact exists and the moving party is entitled to judgment as a matter of law. Fed.

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R. Civ. P. 56(a); Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). Under summary

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judgment practice, the moving party always bears the initial responsibility of informing the

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district court of the basis of its motion, and identifying those portions of “the pleadings,

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depositions, answers to interrogatories, and admissions on file together with affidavits, if any,”

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which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v.

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Catrett, 477 U.S. 317, 323 (1986). “[W]here the nonmoving party will bear the burden of proof

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at trial on a dispositive issue, a summary judgment motion may properly be made in reliance

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solely on the pleadings, depositions, answers to interrogatories, and admissions on file.” Id. at

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324 (internal quotations omitted). Indeed, summary judgment should be entered against a party

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who does not make a showing sufficient to establish the existence of an element essential to that

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party’s case, and on which that party will bear the burden of proof at trial.

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If the moving party meets its initial responsibility, the burden then shifts to the opposing

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party to establish that a genuine issue as to any material fact actually does exist. Matsushita Elec.

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Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585–87 (1986); First Nat’l Bank of Ariz. v. Cities

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Serv. Co., 391 U.S. 253, 288–89 (1968). In attempting to establish the existence of this factual

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dispute, the opposing party may not rely upon the denials of its pleadings, but is required to

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tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in

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support of its contention that the dispute exists. Fed. R. Civ. P. 56(c). The opposing party must

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demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the

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suit under the governing law, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986), and that

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the dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for

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the nonmoving party. Id. at 251–52.

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In the endeavor to establish the existence of a factual dispute, the opposing party need not

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establish a material issue of fact conclusively in its favor. It is sufficient that “the claimed factual

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dispute be shown to require a jury or judge to resolve the parties’ differing versions of the truth at
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trial.” First Nat’l Bank, 391 U.S. at 288–89. Thus, the “purpose of summary judgment is to

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‘pierce the pleadings and to assess the proof in order to see whether there is a genuine need for

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trial.’” Matsushita, 475 U.S. at 587 (quoting Rule 56(e) advisory committee’s note on 1963

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amendments).

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In resolving the summary judgment motion, the court examines the pleadings, depositions,

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answers to interrogatories, and admissions on file, together with any applicable affidavits. Fed.

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R. Civ. P. 56(c); SEC v. Seaboard Corp., 677 F.2d 1301, 1305–06 (9th Cir. 1982). The evidence

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of the opposing party is to be believed, and all reasonable inferences that may be drawn from the

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facts pleaded before the court must be drawn in favor of the opposing party. Anderson, 477 U.S.

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at 255. Nevertheless, inferences are not drawn out of the air, and it is the opposing party’s

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obligation to produce a factual predicate from which the inference may be drawn. Richards v.

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Nielsen Freight Lines, 602 F. Supp. 1224, 1244–45 (E.D. Cal. 1985), aff’d, 810 F.2d 898 (9th Cir.

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1987). Finally, to demonstrate a genuine issue that necessitates a jury trial, the opposing party

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“must do more than simply show that there is some metaphysical doubt as to the material facts.”

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Matsushita, 475 U.S. at 586. “Where the record taken as a whole could not lead a rational trier of

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fact to find for the nonmoving party, there is no ‘genuine issue for trial.’” Id. at 587.

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III.

ANALYSIS

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Defendants argue the IRS failed to follow proper deficiency notice procedures for any

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deficiency related to Defendants’ amended returns and, therefore, cannot sue in district court to

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collect that deficiency. (ECF No. 67 at 7.) Defendants argue that once the IRS accepted the

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amended returns as filed, the amended returns “superseded” the original returns, and the IRS was

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required to provide a new notice of deficiency before increasing Defendants’ liability from that

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declared on their amended returns. (ECF No. 67 at 7) (citing 25 U.S.C. §§ 6212 and 6213).

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The government argues the IRS did not identify new deficiencies triggering deficiency

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procedures, but rather reduced the original assessments based on Defendants’ amended returns,

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including adjustments for math errors the IRS made to those amended returns. (ECF No. 68 at 2–

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3.) The government argues the IRS already issued a notice for those original assessments and

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was not required to issue a new notice to reduce the original assessments. (ECF No. 68 at 3.)
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A deficiency is the amount of tax imposed by the IRS less any amount reported by the

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taxpayer on his return. 26 U.S.C. § 6211(a). If the IRS determines there is a deficiency, it must

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issue a notice of deficiency to the taxpayer, triggering jurisdiction in the United States Tax Court,

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in which the taxpayer may dispute the deficiency before paying the amount assessed. 26 U.S.C. §

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6212(a). In a district court, in contrast, the taxpayer must make full payment of the assessment

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before filing a suit for a refund. Reynoso v. United States, 692 F.3d 973, 980 (9th Cir. 2012).

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Where the IRS has previously made a deficiency assessment, “credit should be given for

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deficiencies previously assessed or collected.” Levinson v. United States, 496 F.2d 651, 652–53

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(3rd Cir. 1974). The calculation to determine whether any deficiency remains, therefore, is the

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correct tax minus the tax shown on the return, amounts previously assessed or collected without

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assessment, and rebates. Id. When the IRS applied the formula here, Defendants’ amended

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returns reduced the original assessments. Defendants had already received a notice of deficiency

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for the larger amount of the original assessment and had already had the opportunity to timely

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contest it in Tax Court. The amended returns, therefore, did not create a new deficiency under

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§6211 and the IRS was not required to issue a new notice of deficiency. 26 U.S.C. § 6212(a).

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Defendants also argue that the IRS failed to abate fraud penalties for the relevant tax years

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after reviewing Defendants’ amended returns. (ECF No. 67 at 8, 10.) The government argues

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Defendants cannot “erase” fraud penalties by filing amended tax returns. (ECF No. 68 at 5.)

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Filing a corrected tax return does not “zero out” a previously filed false return and cancel out any

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harm. United States v. Hanson, 2 F.3d 942, 946 n.1 (9th Cir. 1993) (citing Badaracco v.

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Commissioner of IRS, 464 U.S. 386, 394 (1984), stating that once a taxpayer has filed a

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fraudulent return, civil fraud liability remains, regardless of later revised conduct). That the

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taxpayer may later show there was no tax due for the tax year of the fraudulent tax return does not

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negate fraud penalties imposed based on the original return. Elmbrook Home, Inc. v. United

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States, 559 F. Supp. 787, 790 (D.R.I. Mar. 21, 1983). Here, the IRS calculated fraud penalties

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based on Defendants’ original returns, and was not required to remove all fraud penalties when

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Defendants later filed amended returns for those tax years disregarding the trusts. Id.

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Finally, Defendants argue the IRS made adjustments to portions of the amended returns

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that “slightly increased the taxes declared” by Defendants for some of those portions of the

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returns and these constituted new deficiencies which required a notice of deficiency. (ECF No.

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67 at 9.) The government argues the adjustments were due to math or clerical errors, which may

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be “summarily corrected” by the IRS under 26 U.S.C. § 6213(b). (ECF No. 68 at 7.)

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If the IRS notifies a taxpayer that a mathematical or clerical error on his return resulted in

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an amount of tax above that shown on his return, that notice shall not be considered a notice of

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deficiency. 26 U.S.C. § 6213(b)(1). Section 6213(g)(2) defines a number of “mathematical or

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clerical errors.” 26 U.S.C. § 6213(g)(2)(A)–(Q). Section 6213(g) includes in this list a deduction

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or credit in an amount which exceeds a statutory limit if that limit is expressed (i) as a specified

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monetary amount or (ii) as a percentage, ration, or fraction. 26 U.S.C. § 6213(g)(2)(E)(i)–(ii).

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Here, Defendants’ failed to consider the statutory $3,000 annual limit on long-term

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carryover loss in 26 U.S.C. § 1211(b)(1), (ECF No. 68 at 9), the type of error relating to a

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specified monetary statutory limitation described in § 6213(g)(2)(E)(i). Defendants’ failure to

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correctly deduct one-half of the self-employment tax in calculating taxable income per 26 U.S.C.

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§ 164(f)(1), (ECF No. 68 at 9), is the type of error relating to subtraction and multiplication

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described in § 6213(g)(2)(A). Defendants’ failure to consider the limitation on charitable

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deductions of 50% of the taxpayer’s Adjusted Gross Income under 26 U.S.C. § 170(b)(1)(A),

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(ECF No. 68 at 9), is the type of error relating to statutory limitation expressed as a percentage,

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described in § 6213(g)(2)(E)(ii). These corrections are excepted from deficiency procedures even

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if they increase liability. Here, the net of these adjustments “slightly” increased the abatements of

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the original assessments. The corrections did not require deficiency notice. 26 U.S.C. § 6213(b).

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The IRS did not fail to follow proper deficiency notice procedures. Accordingly, this
Court is not deprived of jurisdiction.

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The Court hereby DENIES Defendants’ Motion for Summary Judgment, (ECF No. 67).

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IS IT SO ORDERED.

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Dated: June 29, 2018

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Troy L. Nunley
United States District Judge