TOWNLEY et al v. UNITED STATES OF AMERICA

Filing 83

ORDER denying in part 23 Motion for Leave to File Amendment to Plaintiffs' Affirmative Defenses and Answer to Defendant's Counterclaims; denying 28 Motion for Partial Summary Judgment; denying [29 ] Motion to Compel; denying 30 Motion in Limine; terminating 38 Motion to Compel; terminating 39 Motion to Compel; terminating 40 Motion to Compel; terminating 43 Motion for Protective Order; terminating 54 Motion for Discovery; terminating 55 Motion to Compel; terminating 57 Motion to Compel. Ordered by US DISTRICT JUDGE CLAY D LAND on 11/14/2023. (ggs)

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF GEORGIA
ATHENS DIVISION
TONY D. TOWNLEY and ELIZABETH
A. TOWNLEY,

*
*

Plaintiff,
*
vs.

CASE NO. 3:22-cv-107 (CDL)
*

UNITED STATES OF AMERICA,
*
Defendant.
*
O R D E R
Several motions are currently pending before the Court.

This

order addresses Plaintiffs’ motion to amend the pleadings as to
the proposed § 6751(b) defense (ECF No. 23), Plaintiffs’ partial
motion for summary judgment (ECF No. 28), Plaintiffs’ motion to
compel production related to the Government’s counterclaims (ECF
No. 29), and Plaintiffs’ motion in limine (ECF No. 30).

For the

reasons that follow, those motions are denied.
BACKGROUND
This

tax

refund

action

concerns

whether

Plaintiffs

are

entitled to charitable contribution deductions for tax years 2018,
2019, and 2020 after they donated three conservation easements to
Oconee River Land Trust, Inc.

Plaintiffs claimed the

first

deduction in their original 2018 tax filings, but later amended
those filings to not claim the deduction in response to an IRS

audit.

Plaintiffs did not claim deductions in their original 2019

and 2020 tax filings but included with those filings an explanation
disclosing

their

intention

to

claim

deductions in an amended return.

charitable

contribution

After paying the amount of taxes

that would have been due had they not taken the deductions,
Plaintiffs filed amended returns for tax years 2018, 2019, and
2020 claiming the deductions and seeking a refund.

When the IRS

did not act within six months of Plaintiffs filing those amended
returns, Plaintiffs filed suit in this Court claiming that they
are entitled to $43,298,313 plus interest in refunds for tax years
2018, 2019, and 2020.
The Government denies that Plaintiffs are entitled to a tax
refund for any of the taxable years.

The Government also asserts,

as both a defense and a counterclaim, that Plaintiffs are liable
for penalties under 26 U.S.C. § 6676 due to their refund claim
being excessive without reasonable cause.

Section 6676 imposes a

20% penalty on the “excessive amount” of a refund claim, which in
Plaintiffs’

case,

the

Government

claims

is

no

less

than

$8,659,662.60.
DISCUSSION
The Court separates its discussion into two parts.

The Court

will first address the arguments raised by Plaintiffs in their
motion for partial summary judgment.

2

Then, the Court will address

the pending motions that relate to the 26 U.S.C. § 6751(b) argument
raised by Plaintiffs in their partial motion for summary judgment.
I.

Plaintiffs’ Motion for Partial Summary Judgment
Plaintiffs’

motion

for

partial

summary

judgment

seeks

dismissal of the Department of Justice’s (“DOJ”) counterclaim for
§ 6676 penalties on various grounds.
§ 6676

facially

Amendment.

violates

the

Plaintiffs first argue that

Petition

Clause

of

the

First

Plaintiffs also argue that the DOJ lacks the statutory

authority to assert a § 6676 counterclaim for penalties.1 Finally,
Plaintiffs argue that the DOJ was required to obtain supervisory
approval of the penalties under § 6751(b), and that since it failed
to do so, it is barred from asserting a counterclaim.

The Court

addresses each argument in turn.
A.

Does § 6676 violate the Petition Clause of the First
Amendment?

Plaintiffs argue that the § 6676 penalty provision facially
violates the Petition Clause of the First Amendment because it
penalizes legitimate tax refund claims.

The Court finds this

argument unpersuasive. See Ricket v. United States, 773 F.2d 1214,
1216 (11th Cir. 1985) (per curiam) (rejecting an argument that a
tax penalty provision violated the First Amendment’s free speech
clause as frivolous).

Plaintiffs attempt to distinguish this case

1

To minimize confusion, the Court refers to the DOJ specifically when
addressing Plaintiffs’ arguments that challenge the DOJ’s authority.
Otherwise, the Court refers to the Defendant as “the Government.”

3

from Ricket by analogizing to the Noerr-Pennington doctrine, which
insulates certain parties from antitrust and tortious interference
liability when those parties exercise their right to petition the
government and those petitions are not “shams.”

The Court cannot

conceive of how a penalty provision that aims to deter excessive
tax

refund

actions

diminishes

the

constitutional

right

to

petition, especially given § 6676’s reasonable cause defense.

26

U.S.C. § 6676(a); cf. Octane Fitness, LLC v. ICON Health & Fitness,
Inc., 572 U.S. 545, 556–57 (2014) (declining to apply NoerrPennington to a First Amendment challenge to a fee-shifting statute
in

the

patent

litigation

context).

Accordingly,

Plaintiffs’

partial motion for summary judgment is denied on that ground.
B.

Was the DOJ required to comply with § 6671?

Plaintiffs argue that the Government’s assertion of a § 6676
penalty by counterclaim was improper because DOJ did not follow
the requirements of 26 U.S.C. § 6671.

Section 6671 provides that

certain penalties, including § 6676, “shall be paid upon notice
and demand by the Secretary, and shall be assessed and collected
in the same manner as taxes.”

26 U.S.C. § 6671(a).

Plaintiffs

argue that this language means that (1) only the Secretary of
Treasury or her delegate (i.e. not the DOJ) can collect the penalty
and (2) the Secretary must “assess” the § 6676 penalty in the same
manner as taxes prior to imposing the penalty.

The Government

responds that Plaintiffs’ argument relies upon the wrong statute.

4

It maintains that the applicable statute is 26 U.S.C. § 7401, the
statute from which DOJ derives its authority to bring collection
suits.
The Court agrees with the Government and finds that DOJ was
required to follow the requirements of § 7401—not § 6671.

It is

well-established that the DOJ has the authority to institute suits
for the collection of taxes.

United States v. Janis, 428 U.S.

433, 440 (1976) (recognizing the United States’ authority to bring
a civil collection suit via counterclaim under § 7401).

Section

6671 is a procedural statute requiring the Secretary of Treasury
(through the IRS) to give the taxpayer notice and make a demand
prior to making a penalty assessment.

The Court finds that this

provision does not preclude the Government from asserting the
counterclaim under the circumstances presented here.
The Court further finds that the Government satisfied the
requirements of § 7401.

Section 7401 requires that civil tax

collection actions be authorized by the Secretary of Treasury and
the Attorney General, or their delegates.

26 U.S.C. § 7401.

Here,

the Government’s allegations in its counterclaim along with the
IRS and DOJ authorization letters that are part of the present
record indicate the Government has satisfied the requirements of
§ 7401.

See Def.’s Resp. to Pls.’ Mot. for Leave to File Amendment

Ex. 6, IRS Penalty Recommendation 1–2, ECF No. 26-6; Def.’s Resp.
to Pls.’ Mot. for Leave to File Amendment Ex. 7, Memorandum to the

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File 1, ECF No. 26-7.

Plaintiffs certainly are not entitled to

summary judgment on this issue.

Accordingly, the Court denies

Plaintiffs’ motion for partial summary judgment on this ground.
C.

Was the DOJ required to comply with § 6751(b)?

Plaintiffs further contend that even if the Government was
not required to comply with § 6671, it had to comply with 26 U.S.C.
§ 6751(b) prior to bringing a counterclaim for penalties.
6751(b)

requires

IRS

employees

to

obtain

written

Section

supervisory

approval of an initial determination of a penalty assessment before
assessing

the

penalty.

26

U.S.C.

§

6751(b);

Commissioner, 48 F.4th 1272, 1276 (11th Cir. 2022).

Kroner

v.

The Eleventh

Circuit recently recognized that § 6751(b) “regulates the process
of assessing tax penalties.”

Kroner, 48 F.4th at 1276.

An

“assessment” is a ministerial act conducted by the IRS which
consists

of

“recording

a

taxpayer’s

liability,

applicable penalties, onto the government’s books.”

including

any

Id. at 1277–

78.
Here, the IRS did not assess the § 6676 penalty against
Plaintiffs because Plaintiffs commenced this tax refund action
before the IRS completed its evaluation of their amended returns
at the administrative level.

Although Plaintiffs possessed a

statutory right to commence this action,

once they did,

the

Government’s procedural prerequisites became controlled by § 7401,
with which it has complied.

Under these circumstances, the

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Government has not waived its right or failed to satisfy the
procedural prerequisites to assert its counterclaim.

Accordingly,

Plaintiffs’ partial motion for summary judgment is denied.
II.

Plaintiffs’ Other Motions Relating to § 6751(b)
Plaintiffs

§ 6751(b).

have

three

Specifically,

other

motions

Plaintiffs

pending

moved

to

relating

compel

to

further

production as to DOJ’s compliance with § 6751(b), moved to amend
their pleadings to add a § 6751(b) defense, and moved to exclude
pursuant to Federal Rule of Civil Procedure 37(c) a document
entitled “Memorandum to the File,” which certified compliance with
§ 7401 and authorized the DOJ to pursue a counterclaim for § 6676
penalties.

Memorandum to the File 1.

All three motions are

denied.
First, given the Court’s conclusion that § 6751(b) does not
apply to this action as a matter of law, Plaintiffs’ motion for
leave to amend as to any § 6751(b) defense is denied for futility.
Hall v. United Ins. Co. of Am., 367 F.3d 1255, 1263 (11th Cir.
2004) (affirming the district court’s denial of a motion to amend
when the new claims would have been subject to dismissal as a
matter of law).

Accordingly, Plaintiffs’ motion to compel further

production as to DOJ’s compliance with § 6751(b) is denied as moot.
As to the Rule 37(c) motion in limine, Plaintiffs argue that
because

the

Government

initially

neglected

to

produce

the

“Memorandum to the File,” the Government should not be permitted

7

to use the document in support of any motion or at trial.

Rule

37(c) prohibits a party from using information that it was required
to produce under Rules 26(a) or (e) “unless the failure was
substantially justified or harmless.”

Fed. R. Civ. P. 37(c).

Here, the Government initially failed to disclose the “Memorandum
to the File” because Plaintiffs’ first request for production only
requested

documents

related

to

§ 6751(b)

authorization.

The

Government represented to the Court that when it learned that
Plaintiffs considered the “Memorandum to the File” to be responsive
to Plaintiffs’ request for production, it produced the document to
Plaintiffs.

Plaintiffs did not explain how they were prejudiced,

if at all, by this delay.

Accordingly, the Court is satisfied

that the Government did not violate any discovery rules, and that
even if it did, that failure was substantially justified or
harmless.

Therefore, Plaintiffs’ motion in limine is denied.
CONCLUSION

For

the

foregoing

reasons,

the

Court

denies

partial motion for summary judgment (ECF No. 28).

Plaintiffs’

Further, given

the Court’s conclusion that § 6751(b) does not apply to this
action, Plaintiffs’ motion for leave to amend as to that defense
(ECF No. 23), motion to compel production as to the Government’s
counterclaim (ECF No. 29), and motion in limine (ECF No. 30) are
denied.

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Further, the Court directs the Clerk to terminate the motions
docketed at ECF Nos. 38, 39, 40, 43, 54, 55, and 57 as they were
ruled on from the bench at the October 30, 2023 hearing.

IT IS SO ORDERED, this 14th day of November, 2023.
S/Clay D. Land
CLAY D. LAND
U.S. DISTRICT COURT JUDGE
MIDDLE DISTRICT OF GEORGIA

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