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Access Behavioral Health Services, Inc. v. United States

United States District Court, D. Idaho

September 29, 2017



          Honorable Ronald E. Bush Chief U.S. Magistrate Judge

         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:

         I. BACKGROUND

         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.

         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 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 (Dkt. 23).

         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 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 (Dkt. 33).


         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 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. ยงยง 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 ...

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