Access Behavioral Health Services, Inc. v. United States of America
MEMORANDUM DECISION AND ORDER RE DEFENDANTS MOTION FOR PROTECTIVE ORDER AND PLAINTIFFS MOTION TO STRIKE (Dkts. 20 & 29) - Defendants Motion for Protective Order (Dkt. 20 ) is DENIED and Plaintiffs Motion to Strike Portions of Reply Brief (Dkt. 29 ) is DENIED but Plaintiffs alternative Motion for Leave to File A Supplemental Brief (Dkt. 29 ) is GRANTED. Signed by Judge Ronald E. Bush. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjs)
UNITED STATES DISTRICT COURT
DISTRICT OF IDAHO
ACCESS BEHAVIORAL HEALTH SERVICES,
Case No.: 1:16-cv-00107-EJL-REB
MEMORANDUM DECISION AND
ORDER RE DEFENDANT’S
MOTION FOR PROTECTIVE
ORDER AND PLAINTIFF’S
MOTION TO STRIKE
UNITED STATES OF AMERICA,
(Dkts. 20 & 29)
Pending are Defendant’s Motion for Protective Order (Dkt. 20) and Plaintiff’s Motion to
Strike (Dkt. 29).1 These are non-dispositive matters referred to this Court under 28 U.S.C. §
636(b)(1)(A) by United States District Judge Edward J. Lodge. (Dkt. 10). Having carefully
considered the record, and otherwise being fully advised, the Court enters the following
Memorandum Decision and Order:
This is a tax refund suit brought by Plaintiff Access Behavioral Health Services, Inc.
(“Access”) against the United States under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422.
Access seeks a refund of the monies it paid against penalties assessed for failure to deposit,
failure to file a tax return, and late payments. Compl. ¶¶ 5, 17, 18, 20, 26 (Dkt. 1). It alleges that
its failures leading to the penalties were due to reasonable cause and not to willful neglect and
therefore it is protected by 26 U.S.C. §§ 6651 and 6656 from the penalties assessed. Id. ¶ 25.
The full title of Docket No. 29 is “Plaintiff’s Motion to Strike Portions of Reply Brief,
and in the Alternative for Leave to File a Supplemental Brief in Opposition to Motion for
MEMORANDUM DECISION AND ORDER - 1
Access’s Complaint sets forth the allegations relevant to the motions at issue here. Since
Access was formed in 2004, it has operated a business providing medical assistance and
counseling to persons afflicted with mental illness and other disabilities. Id. ¶ 8. In 2005, its
bookkeeper began embezzling money from the business, while also failing to make payroll
deposits and file necessary returns. Id. ¶ 9. The bookkeeper falsified Access’s records to show
that payroll taxes were being deposited as required. Id. When Access’s owners discovered the
embezzlement and concealment in 2007, they promptly terminated the bookkeeper and reported
the criminal conduct to local law enforcement. Id. ¶ 10. The owners then alerted the Internal
Revenue Service (“IRS”) of the bookkeeper’s concealments and fraud and inquired about any
problems with Access’s tax filings and payments. Id. ¶ 11. When the owners “self-reported”
Access to the IRS, they were allegedly told by the local IRS office that any penalties should be
waived under the circumstances. Id.
The penalties were not waived. Id. ¶ 12. Based on the failure to timely file tax returns,
the failure to timely make deposits of employment tax liabilities, and the failure to pay amounts
due on the tax returns, the IRS assessed $156,981.97 in penalties from 3rd quarter 2005 through
4th quarter 2007. Id. ¶ 17. In 2011, after continuing protests by Access’s representatives and
following communications with a revenue officer, the IRS issued a notice stating that the case
had been closed and that no collection action would be taken. Id. ¶ 19. Yet, further collection
action was threatened and Access subsequently made payments against the penalties. Id. ¶ 20.
The IRS has denied or ignored Access’s refund requests for the penalties it has paid. Id. ¶ 22.
Central to the instant motions are the contents and context of the 2011 notice the IRS
issued to Access. That notice was issued by the local IRS office and is titled “Notice of Case
Resolution.” Aff. of Brian Purdy (“Purdy Affidavit”), Ex. 2 (Dkt. 24-2). The notice provides in
MEMORANDUM DECISION AND ORDER - 2
pertinent part that “[w]e have closed your collection case. Based on our records, there are no
taxes or tax returns currently due on this case for the tax types and periods listed below. We will
reopen your case if warranted and will contact you if we do.” Id. Five of the ten challenged tax
periods are listed in the notice. Id.
The parties are engaged in discovery. As part of its discovery, Access seeks to depose
two former IRS employees, Brian Purdy and Valerie Flores. Def.’s Mot. for Prot. Order 1 (Dkt.
20). These employees were involved with the 2011 Notice of Case Resolution the IRS issued to
Access. Id. at 3. The Government seeks a protective order barring Access from deposing the
named IRS employees. Id. at 1. It argues that their testimony is irrelevant because in a tax
refund suit such as this, the court conducts a de novo review of the agency’s decision instead of
evaluating whether the IRS was correct. Id. at 4.
Access opposes the motion, arguing that the testimony of the IRS employees is relevant
as to whether the IRS has in fact decided if there was reasonable cause for Access’s failures.
Pl.’s Opp. to Mot. for Prot. Order 2 (Dkt. 23). It asserts that the purpose of the testimony is to
“confirm and explain an IRS written statement that has been provided, stating that no taxes are
due from this taxpayer.” Id. Concurrently with its opposition memorandum, Access also filed
an affidavit of Brian Purdy, one of the IRS employees. Purdy Affidavit (Dkt. 24). Nonetheless,
Access apparently still desires to depose Mr. Purdy formally. Access also affirms its continuing
desire to depose the other IRS employee, Valerie Flores. Pl.’s Opp. to Mot. for Prot. Order 4
In reply, the Government largely repeats the arguments from its motion. Def.’s Reply in
Supp. of Mot. for Prot. Order (Dkt. 26). However, it also asserts that the Purdy Affidavit should
MEMORANDUM DECISION AND ORDER - 3
be disregarded because former IRS employees cannot testify about a taxpayer’s tax information
without a testimony authorization, which has not been granted. Id. at 2, 8–9.
Subsequently, Access moves to strike those portions of the Government’s reply brief
relating to the Purdy Affidavit, or, in the alternative, for permission to file a supplemental brief.
Pl.’s Mot. to Strike (Dkt. 29). Access contends it is improper for the Government to raise the
new issue of the affidavit’s authorization for the first time in a reply brief. Id. at 2. It also
substantively addresses the Government’s argument that the Purdy Affidavit is improper without
a testimony authorization. Pl.’s Br. in Supp. of Mot. to Strike, and Supp. Br. in Opp. to Mot. for
Prot. Order 2–6 (Dkt. 29-1). The Government responds that the motion to strike should be
denied because the issue of the affidavit’s propriety did not arise until Access filed the affidavit,
so the issue could not have been raised in its opening brief. U.S. Resp. to Mot. to Strike or File
Sur-Reply (Dkt. 31). The Government further argues that Access’s alternative motion to file a
supplemental brief should be denied. Id. at 5. Finally, Access reiterates its position that
authorization was not required prior to submitting the Purdy Affidavit. Pl.’s Reply Br. in Supp.
of Mot. to Strike or in the Alternative, for Leave to File Supp. Br. in Opp. to Mot. for Prot. Order
A. Defendant’s Motion for Protective Order Is Denied.
The Government seeks to bar Access from deposing two retired IRS employees who
were involved in issuing a 2011 “Notice of Case Resolution” indicating that the IRS had closed
its collection case against Access and that there were no taxes or tax returns then due. Mot. for
Prot. Order 1 (Dkt. 20). The thrust of the Government’s argument is that the context and
circumstances surrounding the 2011 notice are irrelevant in the present proceeding, where the
MEMORANDUM DECISION AND ORDER - 4
Court must decide independently whether Access is entitled to a refund without reviewing the
proceedings before the IRS. Id. at 1–6. It notes that the central issue in this case is whether
Access can prove to the Court that its failure to file tax returns or pay taxes or deposits – from
2005 through 2007 – is due to “reasonable cause and not due to willful neglect.” Id. at 4–5; see
also 26 U.S.C. §§ 6651(a)(1) and (2), 6656(a). Testimony from IRS employees in 2011, the
Government argues, has no bearing on whether Access’s tax violations from 2005 through 2007
were due to reasonable cause. Mot. for Prot. Order 4–5 (Dkt. 20). The Government also
contends that even if the testimony of IRS employees handling the case in 2011 were relevant,
case law provides that oral statements of IRS employees are not binding on the Government in
refund suits. Id. at 6 (citing Qureshi v. United States, 67 Fed. Cl. 783, 788 (Fed. Cl. 2005) and
Danoff v. United States, 324 F.Supp.2d 1086, 1102 (C.D. Cal. 2004)).
Access asserts that “[t]he testimony of these IRS agents is relevant both as to whether the
IRS has in fact determined whether there was reasonable cause, and to the existence of
reasonable cause itself.” Pl.’s Opp. to Mot. for Prot. Order 2 (Dkt. 23). Access further asserts
that it “does not seek to elicit oral statements from IRS employees for any purpose other than to
confirm and explain an IRS written statement that has been provided, stating that no taxes are
due from this taxpayer.” Id. Access construes the 2011 notice as granting its penalty abatement
request. Id. at 4. It sought to confirm that position by serving a request for admission to that
effect on the Government, which was denied. Id. The Government’s basis for denial was that
the notice “did not constitute a formal and definitive determination by the IRS that no taxes or
tax returns were due regardless of any future facts that might be discovered.” Id. (quoting Aff.
of Richard G. Smith, Ex. 2, Interrog. No. 13 ¶ 3, p. 10 (Dkt. 25-2)).
MEMORANDUM DECISION AND ORDER - 5
Access anticipates the IRS employees’ testimony would “explain the background,
purpose and effect of the Notice of Case Resolution.” Pl.’s Opp. to Mot. for Prot. Order 5 (Dkt.
23). It contends this testimony is relevant for two purposes: “(1) As an indication that the IRS
has in fact determined that no further penalties are due in this case; and (2) as confirmation of the
evaluation by two experienced IRS agents that reasonable cause does in fact exist to abate the
penalties in this case.” Id.
Access acknowledges that the de novo nature of tax refund cases limits the relevance of
the factual and legal analysis employed by the IRS Commissioner. Id. at 5–6. However, Access
also points out that assessments by the Commissioner are presumed to be correct and that it must
overcome that presumption to meet its burden of proof before the Court. Id. at 6. In light of this
standard, Access argues, “it is extremely relevant to show that the IRS has at one time made a
determination that is inconsistent with the position it is now taking. Two experienced IRS
agents, following IRS procedures, made a determination that the penalty should be abated.” Id.
Access further asserts that “[e]ven if the IRS can show that the Notice of Case Resolution was
not a final determination, it is relevant as an admission that at that time, as evidenced by that
document, the IRS believed the reasonable cause standard was satisfied.” Id. at 7.
Under Federal Rule of Civil Procedure 26(b)(1), “Parties may obtain discovery regarding
any nonprivileged matter that is relevant to any party’s claim or defense and proportional to the
needs of the case.” Upon motion, the Court “may, for good cause, issue an order to protect a
party or person from annoyance, embarrassment, oppression, or undue burden or expense.” FED.
R. CIV. P. 26(c)(1).
A taxpayer seeking a tax refund bears the burden of proving that the assessment was
incorrect. Ray v. U.S., 762 F.2d 1361, 1362 (9th Cir. 1985) (citing Helvering v. Taylor, 293 U.S.
MEMORANDUM DECISION AND ORDER - 6
507, 515 (1935)). In such cases, courts conduct a de novo review of the correctness of the
assessment. R.E. Dietz Corp. v. United States, 939 F.2d 1, 4 (2d Cir. 1991); Ruth v. United
States, 823 F.2d 1091, 1094 (7th Cir. 1987); D’Avanzo v. United States, 54 Fed. Cl. 183, 186
(2002). A tax refund suit “is not an appellate review of the administrative decision that was
made by the IRS; instead, the Court must make an independent decision as to whether the
taxpayer is due a refund.” D’Avanzo, 54 Fed. Cl. at 186. In a de novo review, “[t]he factual and
legal analysis employed by the Commissioner is of no consequence to the district court.” R.E.
Dietz Corp., 939 F.2d at 4. In tax refund suits, rulings by the Commissioner have the “support of
a presumption of correctness.” Hostar Marine Transp. Sys., Inc. v. United States, 592 F.3d 202,
208 (2010) (quoting Welch v. Helvering, 290 U.S. 111, 115 (1933)). Therefore, the taxpayer
“bears the burden of persuading the trier of fact that the assessment is incorrect.” R.E. Dietz
Corp., 939 F.2d at 4.
Resolution of the instant motion turns on the relevance of the IRS employees’ testimony
to whether Access had reasonable cause for its failures to file returns and pay taxes and deposits
in 2005–2007. The Court is mindful that: (1) the de novo standard applies to Access’s claim;
(2) there either was or was not reasonable cause for Access’s failures in 2005–2007; and (3) the
opinions or actions of IRS employees involved in the case in 2011 simply cannot affect that
result. However, Access need not show that events in 2011 could affect a legal conclusion based
on conduct occurring no later than 2007. Under the discovery rules, Access’s burden is to show
merely that the testimony it seeks is “relevant to any party’s claim.” FED. R. CIV. P. 26(b)(1).
The Court is satisfied that Access has met this burden.
Although the testimony sought here might not be controlling over the ultimate legal
question in this case, it may nonetheless be persuasive. Access seeks the testimony to
MEMORANDUM DECISION AND ORDER - 7
understand the context and circumstances surrounding the 2011 notice. Presumably this
testimony will include the facts and reasoning considered or relied on by the IRS in issuing the
notice. Those facts or reasons are relevant to Access’s claim in this case because they address
the precise issue this case raises. For purpose of the discovery rules, it is of no import that the
testimony relates to events occurring long after the facts on which the ultimate question of the
case will be decided. The testimony sought is, on a surface review, relevant and therefore the
Government’s motion for protective order is denied. The Court is mindful that the particulars of
any such testimony may yield further argument about relevancy from the Government, but such
a possibility is a matter for a later day.
The Court need not, and does not, today reach the issue of whether the testimony at issue
will bind the Government. Regardless of whether the testimony will bind the Government, it is
relevant and therefore subject to discovery. “Information within this scope of discovery need not
be admissible in evidence to be discoverable.” FED. R. CIV. P. 26(b)(1). Issues regarding the
admissibility or legal significance of the testimony in question can be raised at the appropriate
time, if any such issues arise.
Plaintiff’s Motion to Strike is Denied But Its Motion for Leave to File a
Supplemental Brief Is Granted.
After Access filed the Purdy Affidavit with its opposition to the Government’s motion for
protective order, the Government challenged the propriety of the affidavit in its reply brief.
Access moves to strike those portions of the Government’s reply brief arguing this issue, on the
grounds that it is waived because it was raised for the first time in a reply brief. Pl.’s Mot. to
Strike (Dkt. 29). In the alternative, Access moves for leave to file a supplemental brief in
opposition to the Government’s motion for protective order. Id. It filed the supplemental brief it
MEMORANDUM DECISION AND ORDER - 8
now seeks leave to file at the same time as its motion. Pl.’s Br. in Supp. of Mot. to Strike, and
Supplemental Br. in Opp. to Mot. for Prot. Order (Dkt. 29-1).
The Government argues in its reply brief on its motion for protective order that IRS
employees are not authorized to give testimony unless the Government first obtains a testimony
authorization as required by federal regulations. Reply in Supp. of Mot. for Prot. Order 8–9
(Dkt. 29) (citing 26 C.F.R. §§ 301.900-1 through 301.9000-6). The Government contends that
absent such an authorization, “Mr. Purdy’s affidavit does not bind the IRS or the United States.”
Id. Access characterizes this concise argument as improperly raising a new issue in a reply brief.
Pl.’s Mot. to Strike 2 (Dkt. 29). In response, the Government contends it could not have raised
an issue about the propriety of the Purdy Affidavit without knowing Access would file it. U.S.
Resp. to Mot. to Strike or File Sur-Reply 1 (Dkt. 31).
The Government’s point is well-taken. There was no apparent need for it to invoke the
regulations it raised in its reply until Access filed the Purdy affidavit – which occurred after the
Government moved for a protective order. Therefore, the Government’s argument on this point
will not be deemed waived as a new issue raised in a reply brief.
The Court does not now reach the issue of whether the Purdy Affidavit was unauthorized
or does not bind the Government. In raising this issue, the Government indicated that it “has not
obtained a testimony authorization for Mr. Purdy or Mrs. Flores pursuant to 26 C.F.R. §§
301.900-1–301.9000-6, and will not do so unless the Court denies this motion.” Def.’s Reply in
Supp. of Mot. for Prot. Order 8 (Dkt. 26). The Court reads this to mean that the Government
will proceed to seek any necessary testimony authorization in light of the denial of its motion for
protective order. Accordingly, this issue is now moot, although it may later be re-raised by
MEMORANDUM DECISION AND ORDER - 9
either party as necessary. Access’s motion to strike is denied but its alternative motion for leave
to file a supplemental brief is granted.
Based on the foregoing, Defendant’s Motion for Protective Order (Dkt. 20) is
DENIED and Plaintiff’s Motion to Strike Portions of Reply Brief (Dkt. 29) is DENIED
but Plaintiff’s alternative Motion for Leave to File A Supplemental Brief (Dkt. 29) is
DATED: September 29, 2017
Honorable Ronald E. Bush
Chief U. S. Magistrate Judge
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