United States District Court, D. Idaho
MEMORANDUM DECISION AND ORDER RE DEFENDANT'S
MOTION FOR PROTECTIVE ORDER AND PLAINTIFF'S MOTION TO
STRIKE (DKTS. 20 & 29)
Honorable Ronald E. Bush Chief U.S. Magistrate Judge
are Defendant's Motion for Protective Order (Dkt. 20) and
Plaintiff's Motion to Strike (Dkt. 29). 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:
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.
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.
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.
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
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.
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.
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 (Dkt. 23).
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 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.
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 (Dkt. 33).
Defendant's Motion for Protective Order Is
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 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 ...