Lowery v. USA
Filing
62
ORDER granting in part and denying in part 33 Motion for Summary Judgment ; denying 36 Motion for Summary Judgment. The parties shall appear for a Pretrial Conference on February 7, 2019, and a trial, if necessary, will be held during the civil term beginning February 19, 2019. Signed by Magistrate Judge David Keesler on 9/25/18. (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 on “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. Having carefully considered the
written submissions, the record, applicable authority, and the arguments of counsel at a hearing on
August 7, 2018, the undersigned will grant the motions in part and deny the motions in part.
I.
BACKGROUND
Plaintiff Marshall O. Lowery (“Plaintiff” or “Lowery”) initiated this action against the
United States of America (“Defendant” or “United States”) with the filing of his “Complaint”
(Document No. 1) on October 3, 2016. The Complaint states that “[t]his is an action for refund of
tax preparer penalties and for determination of the Plaintiff’s liability for such penalties, brought
pursuant to Section 7422 of the Internal Revenue Code (“I.R.C.”), 26 U.S.C. § 7422, and I.R.C. §
6694(c).” (Document No. 1, p. 2). The Complaint’s only claim for relief is a “Claim for Refund
and Determination of Liability, I.R.C. §§ 6694(c) and 7422.” (Document No. 1, pp. 14-15).
This action arises from tax returns prepared for tax years 2009 and 2010, when Plaintiff
was the sole member of Computer Plus, LLC, d/b/a “Rapid Tax” (“Computer Plus”). (Document
No. 1, p. 2). Computer Plus “employed individuals, including the Plaintiff, to provide paid tax
preparation services to its clients.” Id.
On or about August 7, 2014, Defendant initially sought to impose $170,000 in tax preparer
penalties against Plaintiff, arising out of thirty-four (34) tax returns. (Document No. 34, p. 5)
(citing Document No. 51-1). On appeal, IRS Appeals Officer Maria A. Frazier (“Frazier”)
concluded on or about September 23, 2015, that there was insufficient evidence to support a
penalty in nine (9) of the twenty-five (25) returns now at issue in this case, and recommended
reducing the penalty from $170,000 to $100,000. (Document No. 34, pp. 6-7) (citing Document
No. 51-4).
On or about January 24, 2016, Plaintiff sent a request under the Freedom of Information
Act, 5 U.S.C. § 552 (“FOIA”), for every document in the IRS files relating to the proposed
penalties to be assessed against Plaintiff. (Document No. 1, p. 5). To date, no documents have
been provided. Id. See also (Document No. 28, ¶ 17).
Before the final penalties were assessed, the appeal was reassigned to IRS Appeals Officer
Sandra Mical (“Mical”). (Document No. 34, p. 7) (citing Document No. 51-5). On or about
January 26, 2016, Mical recommended an assertion of $77,500 in penalties against Plaintiff.
(Document No. 51-5, p. 3). Specifically, Mical recommended an assertion of a full penalty ($5,000
each) for each of the six (6) returns Mr. Lowery prepared; and she recommended a 50% penalty
($2,500) as to each of the nineteen (19) returns prepared by independent franchisees or employees
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of Computer Plus.1 Id. In recommending the reduced penalties, Mical noted that there were
“hazards to both parties” as to whether Mr. Lowery would be determined to be the “tax return
preparer.” Id. “Additionally, 5 of the 19 returns have significant evidentiary hazards as the client
was a no show during the examination or there is a severe lack of evidence in the files.” Id.
(emphasis added).
“On February 22, 2016, notice and demand was sent to the Plaintiff for alleged tax preparer
penalties assessed pursuant to I.R.C. § 6694(b) and arising out of twenty-five (25) tax returns
prepared for tax years 2009 and 2010.” (Document No. 1, p. 2). On March 22, 2016, Plaintiff
filed Forms 6118 (“Claim for Refund of Tax Return Preparer and Promoter Penalties”) for each
assessed penalty and provided payment in the amount of 15% of each penalty. Id. The Internal
Revenue Service (“IRS”) took no action on Plaintiff’s claims for refund, so Plaintiff filed this
action six (6) months later in accordance with I.R.C. § 6694(c) and Treas. Reg. § 1.6694-4. Id.
The “United States of America’s Answer And Counterclaim” (Document No. 6) was filed
on December 19, 2016. The parties’ “Certification And Report Of F.R.C.P. 26(f) Conference And
Discovery Plan” (Document No. 8) was then filed on January 5, 2017, along with their “Joint
Stipulation of Consent to Exercise Jurisdiction by a United States Magistrate Judge” (Document
No 9). Based on the parties’ “Certification And Report…,” the Court issued a “Pretrial Order And
Case Management Plan” (Document No. 10) on January 9, 2017.
The “United States of America’s Amended Answer And Counterclaim” (Document No.
28) was filed by consent on December 26, 2017. By its Counterclaim, Defendant seeks to “reduce
The undersigned will reference the “six (6) returns” throughout this Order as those returns prepared and
signed by Plaintiff Lowery; and the “nineteen (19) returns” as those returns prepared and signed by others.
See (Document No. 1; Document No. 34, pp. 9, 15-20; Document No. 49).
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to judgment outstanding federal tax assessments under 26 U.S.C. § 6694(b) against CounterclaimDefendant Marshall O. Lowery.” (Document No. 28, p. 7). The United States contends that
Lowery is the “statutory return preparer of returns filed by Computer Plus doing business as Rapid
Tax because he is the sole owner of Computer Plus.” (Document No. 28, p. 8). To the extent
Plaintiff Lowery contends Computer Plus is the employer of Rapid Tax return preparers,
Defendant asserts that the corporate veil should be pierced, as Lowery is the actual employer of
Rapid Tax return preparers. Id.
Defendant’s Counterclaim further contends that thirty-eight (38) of forty-one (41) returns
the IRS examined required income adjustments totaling $856,579, and additional tax liabilities of
$192,775, for clients of Computer Plus doing business as Rapid Tax. (Document No. 28, p. 9).
As a result, the United States made twenty-five (25) individual penalty assessments under 26
U.S.C. § 6694(b) against Plaintiff “because he either prepared the returns at issue in this case or
employed individuals to prepare the returns at issue in this case.” Id. Defendant’s Counterclaim
seeks a judgment: (1) denying Plaintiff’s Complaint; and (2) awarding the balance of the penalties
still owed by Plaintiff - $16,045.22, plus statutory interest. (Document No. 28, pp. 10-11).
“Plaintiff’s Motion For Summary Judgment” (Document No. 33) was filed on February
12, 2018. Plaintiff Lowery seeks summary judgment “on all issues and/or claims for relief set
forth in the Complaint.” (Document No. 33, p. 1). Defendant’s “Cross-Motion For Summary
Judgment” (Document No. 36) was filed on February 21, 2018. Defendant United States seeks
judgment that Lowery “is liable for 25 return preparer penalties assessed against him and the
unpaid balance of $16,045.22 as of November 7, 2016, plus statutory interest.” (Document No.
36, p. 1).
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On May 29, 2018, the parties filed a “Joint Stipulation” (Document No. 49). The parties’
stipulation notes that the amount of “combined penalty assessments for 2009 and 2010” against
Plaintiff Lowery is $77,500. (Document No. 49, p. 1). The parties agree that as of May 24, 2018,
Plaintiff had paid through direct payment or statutory offsets of his income tax refunds a total
amount of $67,374.78. (Document No. 49, p. 2). Defendants now seeks judgment in the amount
of $11,416.07, plus statutory interest; and Plaintiff seeks a refund of $67,374.78, plus any
additional amounts paid through statutory offsets, and statutory overpayment interest. (Document
No. 49, p. 3).
The pending summary judgment motions have been fully briefed. See (Document Nos.
34, 37, 40, 42, 43, and 48). At Plaintiff’s request, and to assist the Court’s consideration of this
matter, the undersigned held a Status and Motions Hearing on August 7, 2018. In addition, the
Court allowed the parties to file supplemental briefs. See (Document Nos. 55, 58, 59, 60, and 61).
This matter is now ripe for review and disposition.
II.
STANDARD OF REVIEW
The standard of review here is familiar. Summary judgment shall be granted “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). The movant has the “initial responsibility of informing
the district court of the basis for its motion, and identifying those portions of the pleadings,
depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,
which it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986) (internal citations omitted). Only disputes between the parties
over material facts (determined by reference to the substantive law) that might affect the outcome
of the case properly preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc.,
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477 U.S. 242, 248 (1986). A dispute about a material fact is “genuine” only if the evidence is such
that “a reasonable jury could return a verdict for the nonmoving party.” Id.
Once the movant’s initial burden is met, the burden shifts to the nonmoving party. Webb
v. K.R. Drenth Trucking, Inc., 780 F.Supp.2d 409 (W.D.N.C. 2011). The nonmoving party
opposing summary judgment “may not rest upon the mere allegations or denials of his pleading,
but ... must set forth specific facts showing there is a genuine issue for trial.” Anderson, 477 U.S.
at 248. In deciding a motion for summary judgment, a court views the evidence in the light most
favorable to the non-moving party, that is, “[t]he evidence of the non-movant is to be believed,
and all justifiable inferences are to be drawn in his favor.” Anderson, 477 U.S. at 255. At summary
judgment, it is inappropriate for a court to weigh evidence or make credibility determinations. Id.
When considering cross-motions for summary judgment, a court evaluates each motion
separately on its own merits using the standard set forth above. See Rossignol v. Voorhaar, 316
F.3d 516, 522 (4th Cir. 2003); accord Local 2-1971 of Pace Int’l Union v. Cooper, 364 F.Supp.2d
546, 554 (W.D.N.C. 2005).
III.
DISCUSSION
As noted above, the IRS assessed the underlying twenty-five (25) individual penalties
against Plaintiff pursuant to 26 U.S.C. § 6694(b). (Document No. 1, p. 2; Document No. 28, p.
1). In most pertinent part, 26 U.S.C. § 6694(b) states the following:
(b) Understatement due to willful or reckless conduct.-(1) In general.--Any tax return preparer who prepares any
return or claim for refund with respect to which any part of an
understatement of liability is due to a conduct described in
paragraph (2) shall pay a penalty with respect to each such return
or claim in an amount equal to the greater of-(A) $5,000, or
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(B) 75 percent of the income derived (or to be derived) by
the tax return preparer with respect to the return or claim.
(2) Willful or reckless conduct.--Conduct described in this
paragraph is conduct by the tax return preparer which is-(A) a willful attempt in any manner to understate the liability
for tax on the return or claim, or
(B) a reckless or intentional disregard of rules or regulations.
26 U.S.C. § 6694(b)(1) & (2).
A “tax return preparer” is “any person who prepares for compensation, or who employs
one or more persons to prepare for compensation, any return of tax imposed by this title or any
claim for refund of tax imposed by this title.” See 26 U.S.C. § 6694(f) (citing I.R.C. § 7701
(a)(36)); see also United States v. Heggins, 3:16-CV-794-FDW-DCK, 240 F.Supp.3d 399, 405
(W.D.N.C. 2017). A “signing preparer” is “any preparer who signs a return of tax or claim of
refund as a preparer.” Schneider v. United States, 257 F.Supp.2d 1154, 1160 (S.D. Ind. 2003)
(quoting 26 C.F.R. § 1.6694-2, Treas. Reg. § 1.6694-2). “[T]he signing tax return preparer
generally will be considered the person who is primarily responsible for all of the positions on the
return.” 26 C.F.R. § 1.6694-1(b)2), Treas. Reg. § 1.6694-1(b)(2); see also Schneider, 257
F.Supp.2d at 1160.
“A nonsigning tax return preparer is any tax return preparer who is not a signing tax return
preparer but who prepares all or a substantial portion of a return or claim for refund within the
meaning of paragraph (b)(3) of this section with respect to events that have occurred at the time
the advice is rendered.” (Document No. 1, p. 4) (quoting Treas. Reg. § 301.7701-15(b)(2); 26
C.F.R. § 301.7701–15(b)(2)).
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An individual is a tax return preparer subject to section 6694 if the
individual is primarily responsible for the position(s) on the return
or claim for refund giving rise to an understatement. See §
301.7701–15(b)(3). There is only one individual within a firm who
is primarily responsible for each position on the return or claim for
refund giving rise to an understatement.
...
If there is no signing tax return preparer within the meaning of §
301.7701–15(b)(1) of this chapter for the return or claim for refund
within the firm or if, after the application of paragraph (b)(2) of this
section, it is concluded that the signing tax return preparer is not
primarily responsible for the position, the nonsigning tax return
preparer within the meaning of § 301.7701–15(b)(2) of this chapter
within the firm with overall supervisory responsibility for the
position(s) giving rise to the understatement generally will be
considered the tax return preparer who is primarily responsible for
the position for purposes of section 6694 . . . .
26 C.F.R. § 1.6694-1(b)(1)-(3).
Plaintiff contends that for each tax return in question, the IRS was required to determine if
Plaintiff signed the tax return as preparer, or whether some other preparer signed the return.
(Document No. 1, p. 4). If a person other than Plaintiff signed the return as preparer, then “the
signing tax return preparer generally will be considered the person who is primarily responsible
for all of the positions on the return or claim for refund giving rise to an understatement unless,
based upon credible information from any source, it is concluded that the signing tax return
preparer is not primarily responsible for the position(s) on the return or claim for refund giving
rise to an understatement.” Id. (quoting 26 C.F.R. § 1.6694-1(b)(2); Treas.Reg. § 1.6694-1(b)(2)).
“The statutory definition of income tax preparer, read in conjunction with the regulations
to section 6694, conclusively answers the question of who shall be deemed the preparer as between
a signing and non-signing member of a firm.” Schneider, 257 F.Supp.2d at 1160. The regulations
“simply make clear that a professional preparer who signs a tax return may not avoid a preparer
penalty by casting blame on his or her employees.” Id. (emphasis added).
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Of the twenty-five (25) returns at issue in this case, nineteen (19) were signed by preparers
other than Plaintiff. (Document No. 1, pp. 6, 8; and Document No. 34, p. 9). Five (5) of these
nineteen (19) were prepared by employees of independent franchisees of Computer Plus, and
fourteen (14) were prepared by employees of Computer Plus other than Plaintiff. (Document No.
1, pp. 6, 8). The Complaint asserts that “Plaintiff was not a signing tax return preparer for any of
these returns.” (Document No. 1, ¶¶ 20 and 31). The “United States Of America’s Amended
Answer And Counterclaim” (Document No. 28) “Denies” Plaintiff’s contention that he did not
sign any of the nineteen (19) returns; however, Plaintiff notes that Defendant’s 30(b)(6) witness
acknowledged in deposition testimony that there is no evidence that Plaintiff signed or prepared
any part of these returns. (Document No. 34, p. 9) (citing Document No. 34-2) (citing Document
No. 51-2).
A. Plaintiff’s Motion For Summary Judgment
In support of his motion, Plaintiff first argues that there is no legal or factual basis to
conclude that he was the non-signing preparer of any returns prepared by Computer Plus
employees. (Document No. 34, pp. 8-10). Plaintiff asserts that Defendant admits that the IRS has
done nothing to determine whether the signing preparers of these returns were or were not
primarily responsible for the positions on the returns; and admits that there is no evidence Plaintiff
prepared any part of these returns. (Document No. 34, p. 9) (citing Document No. 34-2 and
Document No. 51-2). Plaintiff further asserts that even if it was determined he played a role in the
preparation of these returns, there is no evidence that he disregarded any information provided by
the taxpayer, or intentionally or recklessly disregarded any rule or regulation. (Document No. 34,
p. 10).
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Next, Plaintiff argues that there are three critical flaws to Defendant’s position that Plaintiff
is liable as the “employer” of any of the signing tax return preparers. (Document No. 34, pp. 1014). First, “Defendant’s own 30(b)(6) witness admits that Computer Plus LLC was the employer
of these preparers, not Mr. Lowery.” (Document No. 34, p. 11) (citing Document No. 51-2, pp.
20-21, 92-93). Second, there is no evidentiary support indicating Plaintiff had a supervisory
role/involvement with these returns, and no basis he had any involvement with these returns.
(Document No. 34, pp. 11-12) (citing Document No. 51-7). Third, there is no legal basis that
Plaintiff can be liable as the “third-party designee” on some of the returns. (Document No. 34, pp.
13-14). Plaintiff contends that such designation has no relevance to tax preparer liability.
(Document No. 34, p. 14).
Plaintiff’s third main argument in support of his motion asserts that, as to the six (6) returns
that he acknowledges he was the signing preparer, Defendant cannot show that he disregarded
information given to him. (Document No. 34, pp. 15-20). Plaintiff notes that liability under §
6694(b) against a tax return preparer requires that the preparer’s understatement of tax liability
was willful or reckless. (Document No. 34, p. 15). Plaintiff further notes that Defendant has
alleged willfulness, but has failed to meet its burden of showing that Plaintiff “disregarded, in an
attempt to wrongfully reduce the tax liability of the taxpayer, information furnished by the taxpayer
or other persons. Id. (citing Treas. Reg. § 1.6694-3(b)).
Finally, Plaintiff argues that Defendant’s veil piercing and alter ego theories are without
evidentiary support or legal foundation. (Document No. 34, pp. 21-22). Plaintiff contends “[i]n
short, since there is no claim that Computer Plus LLC is liable for the penalties, there is no basis
for asserting derivative liability against Mr. Lowery.” (Document No. 34, p. 21).
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Based on the foregoing, Plaintiff concludes that he is entitled to summary judgment as to
all claims. (Document No. 34, p. 22).
In its opposition brief, Defendant United States of America declines to directly address
Plaintiff’s arguments, and instead, focuses on three reasons it believes Plaintiff’s motion is
defective.
First, Defendant asserts that Plaintiff’s motion is not supported by admissible evidence.
(Document No. 40, pp. 1-4). Defendant also 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) (citing 26 U.S.C. § 6694(b)).
Second, Defendant asserts that it is “utterly irrelevant” whether Plaintiff is a “signing” or
“non-signing” tax return preparer. (Document No. 40, p. 5). Defendant contends that there is no
dispute that Plaintiff “prepared and signed six of the returns at issue,” and that he “employed
individuals who prepared and signed the remaining nineteen returns at issue.” (Document No.
40, p. 6) (emphasis added). Defendant further contends that Plaintiff is a “return preparer” as an
employer, because he is the sole member of Computer Plus, d/b/a Rapid Tax which employed the
return preparers who prepared the returns.” Id. (emphasis added). Defendant also takes the
position that Treas. Reg. 1.6694-3(a)(2) is inapplicable here because it refers to a “firm,” but the
IRS did not assert firm liability in this case. (Document No. 40, p. 5). Defendant concludes that
Plaintiff Lowery fits the statutory definition of a “return preparer” and is liable for understatements
of tax liability on the returns at issue if they were either willful or the result of the intentional or
reckless disregard of the applicable regulations. (Document No. 40, pp. 7-8).
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Third, Defendant argues that Plaintiff has failed to meet his burden of showing that the
returns at issue were not prepared in violation of §6694(b). (Document No. 40, pp. 8-14).
Defendant first acknowledges that “the United States bears the burden of proving that the
understatement was willfull,” and then adds that Plaintiff “bears the burden of proving the
understatement was not the result of reckless or intentional disregard of the applicable rules or
regulation.” (Document No. 40, p. 8) (citing Treas. Reg. § 1.6694-3(h)). Without addressing how
it can satisfy its own burden, Defendant concludes that its position “is supported by overwhelming
evidence,” but that Plaintiff “cannot meet his burden.” Id. Defendant re-asserts that Plaintiff has
failed to support his alleged facts with admissible evidence. Id.
In reply, Plaintiff adds additional context and authority supporting his motion and
addressing Defendant’s concerns. (Document No. 42, pp. 2-16).
First, Plaintiff asserts that he has offered admissible evidence in support of his motion.
(Document No. 42, pp. 2-6). Plaintiff contends that the underlying administrative proceedings
show that the assessed penalties were “without rational foundation,” and “arbitrary and erroneous”
and that the evidence shows that Defendant’s own agents cannot agree on a theory of liability.
(Document No. 42, p. 3).
Plaintiff further contends that there is clearly admissible, and
uncontradicted, evidence that Plaintiff had no involvement, no knowledge, and no discussions
regarding the preparation of the nineteen (19) returns. (Document No. 42, p. 4). In addition,
Plaintiff asserts that his admissible testimony, and that of the taxpayers, defeats the assertions of
liability against him pursuant to § 6694(b). (Document No. 42, pp. 4-5). Moreover, Plaintiff
suggests that Defendant’s 30(b)(6) witness’ testimony is probative of the issues before the Court
and supports his lack of involvement with the nineteen (19) returns, and that his work on the six
(6) returns he signed was appropriate. (Document No. 42, p. 6).
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Next, the reply re-asserts that Mr. Lowery was not the employer of the preparers of the
nineteen (19) returns. Plaintiff suggests that is at least a dispute of fact as to whether he employed
the preparers of the nineteen (19) returns, and that Defendant’s 30(b)(6) witness testified that
Computer Plus, not Lowery, employed those preparers. Id. (citing Document No. 34, p. 11).
Plaintiff then presents a compelling argument that even if he were deemed to be the
employer of the preparers of the nineteen (19) returns, there is no evidence he engaged in conduct
prohibited by § 6994(b). (Document No. 42, pp. 10-12). Plaintiff argues that § 6694(b) only
imposes liability for the conduct of a tax return preparer whose conduct willfully understates the
liability on the tax return, or recklessly or intentionally disregards rules or regulations. (Document
No. 42, p. 10) (citing I.R.C. § 6694(b)). If Lowery, is the “tax return preparer,” it is only his
conduct that gives rise to the imposition of penalties. Id. Plaintiff further argues that this “is
consistent with Treas. Reg. § 1.6694-3(a)(2), which imposes liability against a firm that employs
a tax return preparer only when it can be shown that the firm was complicit in the wrongful act.”
Id. Plaintiff contends that “the statute was not intended to impose mere vicarious liability on the
employer” and goes on to cite the legislative history of § 6694 for further support of his position:
The penalty is not to be imputed to an employer of a tax return
preparer solely by reason of the employment relationship; the
employer or one or more of its chief officers also must have
negligently or intentionally disregarded the rules or regulations if
the employer is to be penalized. For example, if an employer or
another employee supervises the preparation of a return by an
income tax preparer, any negligent or intentional disregard of rules
and regulations which occurs in connection with that return may be
attributable to the person supervising the preparation of the return if
that person had responsibility for determining whether or not the
rules and regulations were followed, or if that person in fact knew
that the rules or regulations were not followed.
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(Document No. 42, p. 11) (citing Document. No. 40, p. 7) (citing Document. No. 37, pp. 6-7; H.R.
Rep. No. 658, 94 Cong., 2nd Sess. 1976 U.S.C.C.A.N. 2897, 1975 WL 12389)). Plaintiff also
notes that the relevant cases relied upon by Defendant indicate that the employers were directly
involved in the wrongful conduct, unlike this case where Plaintiff was not involved with the
nineteen (19) returns. (Document No. 42, pp. 11-12) (citing U.S. v. Elsass, 978 F.Supp.2d 901
(S.D.Ohio 2013); and U.S. v. Heggins, 240 F.Supp.3d 399 (W.D.N.C. 2017)).
Plaintiff’s final argument in the reply contends that Defendant has failed to meet its burden
of proof as to the penalties arising from the six (6) returns Plaintiff did prepare and sign.
(Document No. 42, pp. 12-18). Plaintiff notes that the parties agree that for a penalty predicated
on willful conduct the Defendant carries the burden of proof, and that Defendant has alleged that
Plaintiff’s conduct was willful; however, Plaintiff suggests that Defendant has not provided
evidence of willful conduct. (Document No. 42, pp. 12-13). Plaintiff further notes Defendant filed
a “Corrected Response” – after the close of discovery, and after Plaintiff filed his motion for
summary judgment – asserting for the first time that Mr. Lowery engaged in reckless or intentional
disregard of rules or regulations under § 6694(b)(2)(B). (Document No. 42, p. 13). Plaintiff
objects to this change in position, but contends that Defendant has still failed to point to evidence
that his conduct violated the statute. (Document No. 42, pp. 15-19).
Following the initial briefing, and noting Plaintiff’s request for a hearing, the Court held a
hearing on the cross motions for summary judgment. (Document No. 50). In addition, the Court
provided the parties an opportunity to file supplemental briefs. See (Document No. 55). In
allowing additional briefing, the undersigned noted that it did not appear that Defendant had
presented “legal authority supporting a finding that Plaintiff is vicariously liable for the actions of
his alleged employees.” (Document No. 55, p. 4). The undersigned expressed particular interest
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“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 returns.” (Document No. 55, p. 5, n. 1). The undersigned also noted that the parties
briefing to date appears to indicate that there is “sufficient evidence to create a genuine issue of
fact as to Plaintiff’s conduct regarding the six returns he admits to preparing and signing.”
(Document No. 55, p. 5).
The hearing and supplemental briefs have helped focus the issues here. Most notably,
Plaintiff now contends he can prevail as to the nineteen (19) tax returns, even if he is considered
the “tax return preparer.” (Document No. 58, pp. 2-5). Plaintiff asserts that “[l]iability under
I.R.C. § 6694(b) cannot attach unless Mr. Lowery engaged in “willful or reckless conduct’ with
respect to which any part of an understatement of liability is due.” (Document No. 58, p. 2) (citing
I.R.C. § 6694(b)). Assuming, arguendo, that Plaintiff is the tax return preparer by virtue of being
the employer, Plaintiff argues there must be evidence that he engaged in willful or reckless conduct
to hold him liable for penalties under §6694(b). (Document No. 58, pp. 2-3). The undersigned
agrees.
“[A] preparer is considered to have …. intentionally disregarded a rule or regulation if the
preparer takes a position on the return or claim for refund that is contrary to a rule or regulation
and the preparer …. knows of the rule or regulation in question.” Schneider, 257 F.Supp.2d at
1161 (quoting Treas. Reg. § 1.6694-3(c)(1)) (emphasis added). Here, even if considered to be a
tax return preparer of the nineteen (19) returns in question, there is no evidence that Plaintiff took
a position on any of these returns. See (“Defendant’s Statement Of Undisputed Material Facts…
(Document No. 37-1); “Declaration Of Marshall Lowery” (Document No. 43-1); “Deposition Of
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Marshall O. Lowery” (Document No. 51-7); “30(b)(6) Deposition of the United States of America
Celia C. Theiler” (Document No. 51-2).
The undersigned notes that Plaintiff, inter alia, asserts that: (1) Defendant admits that
Plaintiff did not sign these returns; (2) the IRS did nothing to determine the signing preparer was
not primarily responsible for these returns; and (3) there is no evidence Plaintiff prepared any part
of the nineteen (19) 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 (19) 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)).
Although Defendant alleged at the hearing that Plaintiff had substantial involvement with
all the returns at issue in this case, Defendant has failed to forecast any evidence to support such
allegation and the record cited in the preceding paragraphs indicates that there is no such evidence.
Defendant also argued at the hearing that the mere fact Plaintiff was the employer is enough to
hold him liable for all the returns in this case.
As noted above, the undersigned encouraged Defendant to identify authority that might
support finding a tax return preparer liable where he had little, if any, involvement in the actual
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return preparation. (Document No. 55, p. 5, n. 1). Defendant has identified two cases that it
contends support a finding that Plaintiff is liable as the employer, regardless of the extent of his
involvement with the tax returns or whether he signed them. See (Document No. 61, pp. 4-6)
(citing Bui v. United States, 2001 WL 1244754 (W.D.Wash. 2001) and Schneider v. United States,
257 F.Supp.2d 1154 (S.D.Ind. 2003)).
First, Defendant argues that Bui “makes clear that the Plaintiff’s argument that he cannot
be liable because he neither signed nor prepared the 19 returns is simply wrong….” (Document
No. 61, p. 5). However, Defendant then notes that the “IRS assessed Section 6694 and 6695
penalties against Bui because she signed the returns despite the fact it was undisputed her husband
prepared all the returns” and that the Bui court observed “that Bui’s signature made her
presumptively responsible.” (Document No. 61, p. 5) (citing Bui, 2001 WL 1244754 at * 1-3)
(emphasis added).
The undersigned finds the following excerpt from Bui to be instructive:
Indeed, the applicable regulations require a return preparer to
“manually sign the return or claim for refund (which may be a
photocopy) in the appropriate space provided on the return or claim
for refund.” 26 C.F.R. § 1.6695–1(b)(1). Bui did this, and her
training in income tax preparation undoubtedly made her aware of
the significance of that act.
Bui’s signature on the tax returns also constitutes a declaration,
sworn to under penalty of perjury, that she had “examined th[e]
return and the accompanying schedules and statements, and [that] to
the best of [Bui's] knowledge and belief, they are true, correct, and
complete.” IRS Form 1040, Declaration of Paid Pre-parer.
Moreover, the Revenue Code provides that if “the preparer is
unavailable for signature, another preparer shall review the entire
preparation of the return or claim for refund, and then shall manually
sign the return or claim for refund.” 26 C.F.R. § 1.6695–1(b)(1).
See also United States v. Bailey, 789 F.Supp. 788, 815 (N.D.Tex.
1992) (“The only circumstance under which a person can sign
his name to a return he did not prepare is if the signer reviews
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the entire preparation of the return and is satisfied that the
return is prepared properly ... the preparer whose signature
appears at the bottom of the return is responsible for the
contents of the return.”). To the extent that Bui’s husband initially
prepared any of the returns she ultimately signed, Bui became the
return preparer as a matter of law when she adopted and
vouched for the correctness of those returns. Bui simply cannot
make sworn representations under penalty of perjury, which
declarations are attested to by her signature, and now avoid the
civil penalties for failing to fulfill the obligation of reviewing the
entire return she expressly undertook.
...
As detailed above, Bui’s signature as the paid preparer on the
subject returns is her sworn certification of the accuracy of the entire
contents of those returns.
Bui, 2001 WL 1244754, at *2–3 (emphasis added). The undersigned finds that the crux of the Bui
decision is not that Ms. Bui was liable for penalties because she employed the person who prepared
the tax returns, but because she was the signer of the tax returns. Id.
Defendant contends that Schneider “similarly shows that an individual may be liable even
if he did not prepare a substantial portion of a return.” (Document No. 61, p. 6). Defendant
contends that Mr. Schneider, like Ms. Bui, could be held responsible for the return because his
employee prepared the return. Id. (citing Schneider, 257 F.Supp.2d at 1155).
The undersigned again disagrees with Defendant’s interpretation of the caselaw. While it
is accurate that both Bui and Schneider support a finding that the employer can meet the statutory
definition of “tax return preparer,” both cases base liability for penalties on the fact that the
employer was also the signer on the return.
The Schneider decision states that “Mr. Schneider is plainly a ‘signing preparer.’”
Schneider, 257 F.Supp.2d at 1160 (citing 26 U.S.C. § 7701(36)(A)). Schneider further states that
the statutory definition of income tax preparer, in conjunction with the regulations to section 6694,
“make[s] clear that a professional preparer who signs a tax return may not avoid a preparer
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penalty by casting blame on his or her employees. Mr. Schneider’s belated attempt to do so cannot
help him escape liability for any deficiencies in the return he signed.” Schneider, 257 F.Supp.2d
at 1160-1161.
The undersigned is not persuaded that Schneider supports Defendant’s argument.
Defendant “agrees that signing a tax return makes the signer presumptively responsible.”
(Document No. 61, p. 4) (citing Treas. Reg. § 1.6694-(b)(2)). The undersigned observes that the
Schneider decision found Mr. Schneider could not escape liability where he signed the return.
Schneider, 257 F.Supp.2d at 1156, 1160-1161. In this case, Mr. Lowery did not sign any of the
nineteen (19) returns in question. Moreover, there appears to be no reason to rebut the presumption
that the actual signers of the tax returns were responsible, especially where there is no evidence
that Mr. Lowery prepared a “substantial portion,” or any portion, of the returns in question.
Contrary to Defendant’s conclusion that Bui and Schneider support liability based on
Plaintiff’s alleged role as an employer, the undersigned finds that both Bui and Schneider support
a finding that it is the tax preparer who signed the return that is liable for § 6694 penalties. This
finding is consistent with Defendant’s own acknowledgement that signing a tax return makes the
signer presumptively responsible.
Based on the foregoing, the undersigned is convinced that a reasonable jury could not
return a verdict finding Plaintiff liable for the alleged understatement of tax liability on the nineteen
(19) tax returns in dispute that he did not prepare or sign. The deposition testimony, Plaintiff’s
declaration, and even Defendant’s own list of undisputed facts, support Plaintiff’s view of the case
as to at least the nineteen (19) returns. See (Document No. 37-1; Document No. 43-1; Document
No. 51-7; and Document No. 51-2). Moreover, Defendant has failed to “set forth specific facts
showing there is a genuine issue for trial.” See Anderson, 477 U.S. at 248. Even if Plaintiff was
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a “tax return preparer” according to the statute, since the undisputed facts show that he was not
involved with and did not sign these nineteen (19) returns, a reasonable jury could not find that
Plaintiff’s conduct regarding these disputed returns was willful or reckless. See 26 U.S.C. §
6694(b)(1) & (2).2 As such, it appears that Defendant’s assessment of penalties against Plaintiff
for alleged understatement of tax liability in the nineteen (19) returns was misplaced. The
undersigned is satisfied that Defendant has failed to meet its burden of showing willful conduct,
and that Plaintiff has adequately shown the absence of reckless or intentional disregard.
Unlike the nineteen (19) returns, Plaintiff acknowledges that he prepared and signed the
remaining six (6) returns in dispute here. As to these remaining six (6) returns, the undersigned is
persuaded that whether Plaintiff’s conduct was willful or reckless are questions of fact that should
be decided by a jury. Compare (Document No. 34, pp. 15-20 and Document No. 40, pp. 10-14).
Therefore, the undersigned will grant “Plaintiff’s Motion For Summary Judgment”
(Document No. 33) as to the nineteen (19) returns and deny the motion as to the six (6) returns.
B. Defendant’s Motion For Summary Judgment
Defendant seeks summary judgment denying Plaintiff’s tax refund claim, and in favor of
Defendant for Plaintiff’s unpaid balance on the assessed § 6694(b) penalties, plus accrued interest,
on the twenty-five (25) returns at issue in this case. (Document No. 37); see also (Document No.
28). Defendant contends that the Court must decide two issues: (1) whether Lowery is a “return
preparer” responsible for the six (6) returns he prepared and the nineteen (19) returns for which he
2
See also 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).
20
is alleged to be the employer; and (2) whether the alleged understatement of tax liability on the
returns was the result of reckless or willful conduct. (Document No. 37, p. 5).
For the purpose of deciding the pending motions, the Court assumes, arguendo, that
Plaintiff is a statutory “tax return preparer” of the six (6) returns he signed, and the nineteen (19)
returns he did not sign. The Court is focused on whether there are genuine issues of fact as to
whether Plaintiff is liable for either set of returns due to willful or reckless conduct.
The information and arguments in the briefing and attachments to the cross motions is
overlapping and largely repetitive;
documents.
nevertheless, the undersigned has considered all the
After careful consideration of all the briefs, exhibits, and oral argument, the
undersigned is still not persuaded that Plaintiff signed, prepared, or had any input in the preparation
of the nineteen (19) returns. As such, and as addressed above, the undersigned has determined
that a reasonable jury could not find Plaintiff engaged in willful or reckless conduct to create
liability under § 6694(b) as alleged by Defendant. “[W]illfulness does not require fraudulent intent
or an evil motive; it merely requires a conscious act or omission made in the knowledge that a
duty is therefore not being met.” Bailey, 789 F.Supp. at 813 (citing Pickering v. United States,
691 F.2d 853, 855 (8th Cir. 1982)). There is no evidence that Plaintiff made such a conscious act
or omission regarding the nineteen (19) returns at issue. Similarly, there is no evidence that
Plaintiff understated any tax liability due to reckless or intentional disregard of rules or regulations,
as to the nineteen (19) returns.
Moreover, the undersigned is not persuaded that § 6694(b) allows Defendant to properly
attach liability to Plaintiff for the returns he was not involved with that were signed by other tax
return preparers. Even after allowing oral argument and supplemental briefing, Defendant has
failed to identify relevant legal authority that supports the imposition of § 6694(b) penalties under
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the circumstances of this case. Judgment as to the nineteen (19) returns will, therefore, be entered
in favor of Plaintiff.
The undersigned does find that there are issues of fact as to the preparation of the other six
(6) returns that should be considered by a jury, unless the parties are able to resolve this matter. It
is undisputed that Plaintiff prepared and signed these returns, and the questions of whether his
conduct in doing so was willful or reckless should be presented to a jury.
Based on the foregoing, the undersigned will deny Defendant’s “Cross-Motion For
Summary Judgment” (Document No. 36).
IV.
CONCLUSION
IT IS, THEREFORE, ORDERED that “Plaintiff’s Motion For Summary Judgment”
(Document No. 33) is GRANTED in part and DENIED in part, as described herein.
IT IS FURTHER ORDERED that Defendant’s “Cross-Motion For Summary Judgment”
(Document No. 36) is DENIED.
IT IS FURTHER ORDERED that the parties shall appear for a Pretrial Conference on
February 7, 2019, and a trial, if necessary, will be held during the civil term beginning February
19, 2019.
SO ORDERED.
Signed: September 25, 2018
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