Lowery v. USA

Filing 55

ORDER that each side may file a supplemental brief of twelve (12) pages or less in support of its motion for summary judgment, on or before August 24, 2018. Responses to supplemental briefs shall be filed on or before August 31, 2018. Reply briefs will not be allowed unless otherwise ordered. Signed by Magistrate Judge David Keesler on 8/15/18. (mga)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
CHARLOTTE DIVISION
CIVIL ACTION NO. 3:16-CV-701-DCK
MARSHALL O. LOWERY,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

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ORDER

THIS MATTER IS BEFORE THE COURT regarding “Plaintiff’s Motion For Summary
Judgment” (Document No. 33) and Defendant’s “Cross-Motion For Summary Judgment”
(Document No. 36). The parties have consented to Magistrate Judge jurisdiction pursuant to 28
U.S.C. § 636(c), and these motions are ripe for disposition.
After carefully considering the pending motions, the record, applicable authority, and the
arguments of counsel at a hearing on August 7, 2018, the undersigned has decided to allow (and
encourage) the parties to file supplemental briefs in support of their positions. The Court has not
reached a final decision on either of the parties’ arguments on the cross motions for summary
judgment; however, it appears that: (1) Defendant has failed to set forth specific facts showing
there is a genuine issue for trial as to the nineteen (19) tax returns that were not prepared or signed
by Plaintiff; and (2) Plaintiff has failed to show there are not genuine issues of fact as to the six
(6) tax returns that Plaintiff did prepare and sign.
Plaintiff contends there is no genuine issue as to any material fact regarding his claims, and
that he is entitled to judgment as a matter of law. (Document No. 33, p. 1). Defendant seeks
summary judgment that Plaintiff is liable for twenty-five (25) preparer penalties assessed against

him, plus statutory interest. (Document No. 36, p. 1). In support of its motion, Defendant states
that the Court must decide two issues: (1) “whether Mr. Lowery is the ‘return preparer’ responsible
for the six returns he prepared and the nineteen returns for which he was the employer of the return
preparers;” and (2) “whether the understatement of the tax liability on the returns was the result of
either willful or reckless conduct.” (Document No. 37, p. 5). Later, responding to Plaintiff’s
motion, Defendant 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, 8) (citing 26 U.S.C. § 6694(b)) (emphasis added).
At this point, the undersigned will assume arguendo that Plaintiff can be considered a “tax
return preparer” of all twenty-five (25) tax returns underlying this lawsuit. See 26 U.S.C. § 7701
(a)(36)(A);

United States v. Stinson, 239 F.Supp.3d 1299, 1318 (M.D.Fla. May 3, 2017)

(“statutory definition of tax return preparer is broadly written to include those who ‘employ’ others
to prepare tax returns”) and Tiddy v. United States, 956 F.2d 1163, at *2 (4th Cir. Mar. 24, 1992).
However, as Defendant suggests in its briefs, the key question is whether Plaintiff willfully or
recklessly disregarded applicable rules and regulations to understate taxpayers’ liability.
Plaintiff makes a compelling argument that even if he is a “tax return preparer” of the
nineteen tax returns, Defendant has failed to satisfy its burden of showing that the alleged
understatement of those tax returns was the result of Plaintiff’s willful conduct. (Document No.
42, p. 11). Regarding the willfulness requirement, Plaintiff asserts:
Under the law, “[a] preparer is considered to have willfully
attempted to understate liability if the preparer disregards, in an
attempt wrongfully to reduce the tax liability of the taxpayer,
information furnished by the taxpayer or other persons.” Treas.
Reg. § 1.6694-3(b). Willfulness under I.R.C. § 6694(b) “requires a
conscious act or omission made in the knowledge that a duty is
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therefore not being met.” Richey v. U.S. I.R.S., 9 F.3d 1407 (9th Cir.
1993); Pickering v. United States, 691 F.2d 853, 855 (8th Cir.
1982). Neither the alleged failure to make inquiries nor the alleged
failure to “exercise the duty of care” rises to the level of willfulness
required under the statute. The Defendant points to no evidence
furnished to Mr. Lowery that Mr. Lowery disregarded. The mere
failure to make inquiries or exercise some undefined “duty of care”
does not equate to the disregard of information provided.
(Document No. 42, p. 15).
Although Defendant acknowledges its burden to prove that the understatement of the
underlying tax returns was willful, Defendant focuses on an argument that Plaintiff “is not entitled
to judgment as a matter of law for the nineteen returns prepared by his employees” because he has
failed “to demonstrate that the understatement on the returns was not the result of reckless or
intentional conduct.” (Document No. 40, p. 8).
The undersigned notes that Plaintiff, inter alia, asserts that: (1) Defendant admits that
Plaintiff did not sign, did nothing to determine the position of, and that there is no evidence he
prepared any part of the nineteen returns. (Document No. 34, p. 9) (citing Document No. 34-2;
Document No. 52-2). The “Declaration Of Marshall Lowery” states in pertinent part:
As to the nineteen (19) tax returns prepared by preparers other than
me and at issue in this case, I had no involvement whatsoever in the
preparation of those returns. I had no supervisory role with respect
to any of these returns. Other than what I have learned in the course
of these proceedings, I have no knowledge of what positions the
preparer took on the returns or why the preparers took those
positions.
(Document No. 43-1, p. 3); see also (Document No. 52-7). Moreover, like the testimony of its
30(b)(6) witness, “Defendant’s Statement Of Undisputed Material Facts…” appears to support
Plaintiff’s position that for the nineteen returns Plaintiff did not sign, there is no evidence of his
involvement with those returns, much less evidence of willful or reckless conduct by Plaintiff. See
(Document No. 37-1, pp. 13-32 and Document No. 52-2)).
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Nevertheless, Defendant argues that its cross-motion “is supported by overwhelming
evidence sufficient to prove that Mr. Lowery is liable for the penalty assessed against him under
Section 6694(b)” and further asserted at the hearing that Plaintiff had “substantial involvement in
all returns.” (Document No. 48, p. 1) (emphasis added). The undersigned is not persuaded there
is such evidence. Rather, Plaintiff appears to make a compelling argument that he did not engage
in willful or reckless actions sufficient to support the penalties levied against him, at least as to the
nineteen returns signed and prepared by others.
To the extent Defendant relies on Plaintiff’s peripheral involvement in the nineteen returns
as a third-party designee, or the provider of training and/or training materials to the employees
who prepared the returns, the undersigned is not convinced that such involvement can support
willful or reckless conduct related to any of the nineteen returns in question. The undersigned is
not persuaded at this stage that there is legal authority supporting a finding that Plaintiff is
vicariously liable for the actions of his alleged employees. The cases relied upon by Defendant to
date in support of a position that Plaintiff can be liable under 26 U.S.C. § 6694(b), despite having
little or no involvement with the returns, appear to be distinguishable.
For example, Defendant attaches great weight to Schneider v. United States, 257 F.Supp.2d
1154 (S.D.Ind. Feb. 5, 2003), but in that case it is undisputed that Mr. Schneider worked on the
return in question and was the signing tax return preparer. The court opined that a professional
tax return preparer cannot escape liabilities for any deficiencies by casting blame on employees in
a tax return he signed. Schneider, 257 F.Supp.2d at 1160-1161. See also United States v. Heggins,
240 F.Supp.3d 399, 405 (W.D.N.C. 2017) (“Defendant admitted in his criminal case he recruited
others to assist with preparation and filing of fraudulent IRS Forms and tax returns”); United
States v. Brier et al., 2010 WL 4510945, at *12-13 (D.R.I. Nov. 5, 2010) (Defendant Brier engaged

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in willful and reckless conduct preparing large numbers of returns); and United States v. Jerry O.
Adams III, 445 F.Supp.2d 586 (W.D.N.C. May 23, 2006) (Jerry Adams determined to be tax
preparer and enjoined under 26 U.S.C. § 6694 & 6695, even though his son Brian Adams was the
sole proprietor of First Choice Tax Service and transmitted the returns to the IRS). 1
Unlike the nineteen returns Plaintiff contends he was not involved with, there does appear
to be sufficient evidence to create a genuine issue of fact as to Plaintiff’s conduct regarding the six
returns he admits to preparing and signing. It appears likely that at least as to those returns this
matter will need to go before a jury if the parties cannot reach an amicable resolution.
In short, the undersigned has determined it may be helpful to allow the parties one more
opportunity to argue their positions on the relevant facts and legal authority of this case. The
undersigned continues to keep an open mind, but so far it appears that this case will likely require
a trial on issues of fact related to Plaintiff’s alleged willful and reckless conduct in the preparation
of at least six returns, and possibly, all twenty-five.
Finally, the undersigned respectfully encourages the parties’ experienced and capable
counsel to consider further settlement discussions that might result in a satisfactory result for both
sides without additional expense, delay, and Court intervention.
IT IS, THEREFORE, ORDERED that each side may file a supplemental brief of twelve
(12) pages or less in support of its motion for summary judgment, on or before August 24, 2018.
Responses to supplemental briefs shall be filed on or before August 31, 2018. Reply briefs will
not be allowed unless otherwise ordered.

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If the parties file supplemental briefs, they may also want to further address the applicability of cases
previously cited in the briefs or at the hearing such as Stinson, Mesadieu, and Carlson. The Court is
especially interested in any caselaw or other legal authority that addresses the liability of an alleged
employer pursuant to 26 U.S.C. § 6694(b) who had little, if any, involvement in the actual preparation of
allegedly deficient tax returns.

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SO ORDERED.
Signed: August 15, 2018

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