Opinion
3:21-cv-01046-YY
10-23-2023
UNITED STATES OF AMERICA, Plaintiff, v. JEFFRY GOODRICH, Defendant.
FINDINGS AND RECOMMENDATIONS
YOULEE YIM YOU UNITED STATES MAGISTRATE JUDGE
FINDINGS
Plaintiff, the United States of America (“the government”), brings this action to reduce to judgment federal income tax assessments against defendant Jeffry Goodrich for tax years 2002 through 2006. Before the court are the government's motion for summary judgment (ECF 36) and Goodrich's motion to dismiss (ECF 22). For the reasons discussed below, the government's motion for summary judgment should be granted and Goodrich's motion to dismiss should be denied.
I. Factual Background
During the years 2002 through 2006, Goodrich was a partner in Eagles View Construction, LLC (“EVC”), a construction company that did subcontracting work. Goodrich and his former wife possessed a 10% and 40% stake in the company, respectively, and a third partner possessed 50%. Neither plaintiff's former wife nor the third partner are named in this lawsuit.
Mot. Summary J., Ex. I, ECF 36-13 (Forms 4549); id., Ex. N, ECF 36-18 at 6; Id., Ex. O, ECF 36-19 at 7.
Id., Ex. N, ECF 36-18 at 8.
Goodrich served as president of EVC. In that capacity, his tasks included preparing and filing EVC's tax returns, managing its tax withholding, and writing checks to suppliers to purchase services and materials for jobs. In exchange for these services, Goodrich received an income from EVC. While at EVC, Goodrich converted two-party checks, which he had received from general contractors, into single-party checks, signed them, and deposited them instead of paying his suppliers. Goodrich used a portion of these siphoned funds to pay for EVC's bills, including payroll and legal fees associated with suing a contractor to obtain payment for a project. Additionally, he turned to gambling in an attempt to pay EVC's bills.
Id., Ex. O, ECF 36-19 at 7.
Id., Ex. N, ECF 36-18 at 9; Id., Ex. O, ECF 36-19 at 8-10, 21.
Id., Ex. O, ECF 36-19 at 11.
Id. at 21-22.
Id. at 22-24.
Id. at 24.
In 2005, Goodrich was indicted for bank fraud and bank larceny, and later pleaded guilty to bank fraud by intentionally depositing a forged or altered check. As part of his sentence, Goodrich was ordered to pay $352,384.36 in restitution to the bank.
Id., Ex. K, ECF 36-15 at 3 (petition to enter guilty plea); see also U.S. v. Goodrich, No. 3:05-CR-08-KI (D. Or. 2005).
Id., Ex. R, ECF 36-22.
In 2008, the Internal Revenue Service (“IRS”) audited Goodrich based on his failure to file income tax returns from 2002 through 2006. The IRS determined Goodrich's tax liability and sent him notices of deficiency for this period. Simultaneously, the IRS audited EVC and produced two audit reports: the first, prepared on June 23, 2010, for tax years 2002, 2005, and 2006, and the second, prepared on July 8, 2010, for years 2003 and 2004.
Id., Ex. N, ECF 36-18 at 9.
Sur-Resp., Ex. 2, ECF 45.
Nash Decl. ¶ 5, ECF 41-1; Reply, Ex. S, ECF 41-2.
In 2011, Goodrich was indicted on five counts of failure to account for and pay payroll taxes for EVC. Goodrich subsequently pleaded guilty to four counts of failing to file payroll tax returns and failing to remit payroll taxes. Pursuant to a plea agreement, Goodrich was ordered to pay $145,308.00 in restitution to the IRS.
See U.S. v. Goodrich, 3:11-CV-426-BR (D. Or. 2011).
Mot. Summary J., Ex. L, ECF 36-16 (plea petition); id., Ex. M, ECF 36-17 (second am. judgment).
Id., Ex. M, ECF 36-17.
On April 9, 2014, Goodrich filed, jointly with his wife, personal income tax returns for 2003 through 2006. Goodrich never filed a tax return for 2002. In 2016, the IRS audited Goodrich's tax returns for 2003 through 2006, revised its prior assessments, and sent new notices of deficiency. This final audit precipitated this action in which the government seeks to reduce the tax assessments for 2002 through 2006 to judgment.
Id., Ex. G, ECF 36-11 (personal income tax returns).
See id., Ex. B, at 3, ECF 36-6 (Form 4340 showing no individual tax return filed for 2002).
Nash Decl. ¶ 5, ECF 36-4; Mot. Summary J., Ex. I, ECF 36-13 (revised Forms 1040).
II. The Government's Motion for Summary Judgment
A. Relevant Law
“In an action to collect taxes, the government bears the initial burden of proof.” Palmerv. U.S. I.R.S., 116 F.3d 1309, 1312 (9th Cir. 1997). The government may satisfy its burden by introducing an IRS assessment of tax due. Oliver v. United States, 921 F.2d 916, 919 (9th Cir. 1990). The IRS's assessment is presumptively correct, provided that it “is supported by a minimal evidentiary foundation.” United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983). It is well-settled in this circuit that IRS Form 4340, Certificate of Assessments, Payments and Other Specified Matters, is entitled to this presumption of correctness. Hansen v. United States, 7 F.3d 137, 138 (9th Cir. 1993) (“We stated that Form 4340 is probative evidence in and of itself and, ‘in the absence of contrary evidence, [is] sufficient to establish that notices and assessments were properly made.'”) (quoting Hughes v. United States, 953 F.2d 531, 540 (9th Cir. 1992)); see also Huff v. United States, 10 F.3d 1440, 1445 (9th Cir. 1993) (“Generally, courts have held that IRS Form 4340 provides at least presumptive evidence that a tax has been validly assessed under § 6203.”).
Once the government introduces an assessment, the burden shifts to the taxpayer to present evidence that the assessment is incorrect. Stonehill, 702 F.2d at 1294. The taxpayer may meet this burden by showing that the assessment is “arbitrary or erroneous.” Id. (citing Helvering v. Taylor, 293 U.S. 507, 515 (1935)). Where an assessment relies upon multiple pieces of evidence, the presumption of correctness attaches to each item individually. Id. Thus, even where a taxpayer proves that an item is erroneous, the presumption of correctness will remain as to the other items unless the taxpayer presents evidence of a pattern of arbitrariness or carelessness, which destroys the presumption as to the entire assessment. Id. If the taxpayer rebuts the overall presumption of correctness, the burden of proving that the taxpayer owes the requested amount reverts to the government. Id.
B. Application to Facts
The IRS assessments underlying this action are based upon Goodrich's personal income tax returns and the IRS's audits of Goodrich and EVC. See Nash Decl. ¶¶ 5-7, ECF 36-4; Nash Decl. ¶¶ 5-7, ECF 41-1. The assessments include civil fraud penalties under the theory that Goodrich intentionally misreported large amounts of his taxable income. Specifically, the government contends Goodrich failed to report pass-through income from EVC and, when reporting the amount of money he procured via bank fraud, listed an amount that differed from the amount adjudged against him. Mot. Summary J. 16, ECF 36; id., Ex. I, ECF 36-13 (Forms 4549); Id., Ex. O, ECF 36-19 at 16-17. Goodrich does not dispute the fraud penalty or that he owes unpaid income taxes. Resp. 1, 4, ECF 40. Rather, the only issue in dispute, and the only inquiry before the court, is whether the IRS's assessments are arbitrary or erroneous. Id.
At his deposition, plaintiff admitted he reported a different amount than the amount listed on the judgment. Mot. Summary J., Ex. O, ECF 36-19 at 16 (“Q. And is this amount the same amount that the IRS had attributed it to you? A. No, it is not. Q. And why did you report a different amount? A. Because my amount is correct.”).
The amounts assessed by the IRS are as follows:
The balances in the above table reflect accrued taxes, penalties, and interest through February 1, 2023. Mot. Summary J. 8, ECF 36.
Type of Tax
Tax Period
Assessment Date
Amount and Type of Assessment
Outstanding Balance as of 2/1/23
Income (1040)
2002
7/18/2011
$184,012 - Tax
$629,217.58
Income (1040)
2003
7/18/20114/02/20184/02/2018
$137,917 - Tax$136,675.00 - Tax$102,606.25 - Civil Fraud Penalty
$670,362.43
Income (1040)
2004
4/02/20184/02/2018
$74,368.00 - Tax$55,776.00 - Civil Fraud Penalty
$346,991.42
Income (1040)
2005
4/02/20184/02/2018
$110,574.00 - Tax$82,930.50 - Civil Fraud Penalty
$482,990.54
Income (1040)
2006
4/02/20184/02/2018
$268,652.00 - Tax$201,489.00 - Civil Fraud Penalty
$1,101,646.22
In addition to the civil fraud penalty, the IRS has assessed penalties due to Goodrich's late filing of his federal tax returns and the outstanding tax balance. Taxpayers owe a penalty of 0.5% per month on unpaid federal taxes, up to a maximum of 25% of the amount owed. 26 U.S.C. § 6651(a). This penalty increases to 1% per month ten days after the notice of intent is sent to the taxpayer, although not exceeding 25%. 26 U.S.C. § 6651(d). Additionally, taxpayers owe a penalty for failing to file a timely federal tax return, equivalent to 5% of the amount of tax owed on the return for each month the return is late, not exceeding 25% in the aggregate. 26 U.S.C. § 6651(a). If the taxpayer is already paying a penalty for delinquent federal taxes, the failure to file penalty is reduced to 4.5% per month. 26 U.S.C. § 6651(c).
To support its initial burden of proof, the government has introduced a Form 4340 for the years 2002 through 2006, as well as other IRS forms that reinforce the foundation of the assessments, including a Form 490 manual calculation of Goodrich's 2005 income tax, and transcripts showing the IRS's computations, including the breakdown of penalties and interest.
Mot. Summary J., Exs. A-F, J, ECF 36-5-36-10, 36-14; Nash Decl. ¶ 12, ECF 36-4. This is sufficient to satisfy the government's initial burden of proof. Thus, the burden is on Goodrich to present evidence that the assessments are arbitrary or erroneous. Because each of Goodrich's arguments fails for the reasons discussed herein, he has not met this burden.
Although Goodrich did not produce documents in response to the government's requests for production, see Green Decl. ¶ 7, ECF 36-3, he attached documents to his response and sur-response, which are considered for the purposes of evaluating the government's motion for summary judgment.
First, Goodrich contends that the IRS incorrectly determined his pass-through income from EVC for the 2003 and 2004 tax years because it relied upon inaccurate figures for EVC's earnings. Resp. 2-3, ECF 40; Sur-Resp. 3, ECF 45. Goodrich argues that the IRS used values that differ from those on the Form 886-A that the IRS completed pursuant to its audit of EVC in 2010. Resp. 2-3, ECF 40; id., Ex. 2, ECF 40-1. The Form 886-A lists Goodrich's pass-through income as $2,261 in 2003 and $10,485 in 2004. Resp., Ex. 2, at 1, ECF 40-1. In contrast, the notices of deficiency list Goodrich's pass-through income as $75,131 in 2003 and $21,209 in 2004. Mot. Summary J., Ex. I, at 20, 35, ECF 36-13. The government asserts that the assessment relies upon the final results of the 2010 EVC audit, which showed an income of $751,313 in 2003 and $212,093 in 2004. Reply 10, ECF 41; id., Ex. S, ECF 41-2 at 6-8, 11 (stating that the form reflected “the partners' shares as corrected by the partnership examination dated 07/08/2010”) (capitalization omitted). The government further asserts that the IRS form that Goodrich references is “not a final determination,” and, therefore, cannot be used to rebut the assessments. Sur-Reply 3, ECF 47. In his sur-response, Goodrich contends that the IRS's audit of EVC for tax years 2003 and 2004 was subsequently revised and signed, and the government's failure to reference the signed copy indicates that the audit it relies on is the older, obsolete version. See Sur-Resp. 2, ECF 45; see also Mot. Dismiss 2-3, ECF 22. Relatedly, in his motion to dismiss, Goodrich asserts that, with regard to EVC's audit, he was “allowed extra time to provide documentation” for EVC's 2003 and 2004 income and presented cashier's checks that resulted in EVC's earnings being “reduced pretty much to zero for the years 2003 and 2004.” Mot. Dismiss 2, ECF 22; id., Att., ECF 22-1 at 3.
Goodrich does not dispute the value the IRS assessed for distributive income in 2005. Resp. 4, ECF 40.
Goodrich, however, offers no evidence upon which to find that the EVC audit was revised. Despite asserting that he received permission to provide additional documentation, Goodrich attaches no evidence of such a conversation with an IRS representative. The Form 886-A that Goodrich references is undated. Resp., Ex. 2, ECF 40 at 6. As such, there is no indication that this form was completed following the IRS's July 8, 2010 examination. Goodrich also cites a workpaper prepared by an IRS examiner, which states that the IRS “secured a signed form 875 agreeing to the audit adjustments for the tax years 2003 and 2004. This occurred back during 2010.” Mot. Dismiss, Att., ECF 22-1 at 1. This document only supports the proposition that the IRS obtained Goodrich's signature on an audit that modified EVC's tax returns. Without further evidence, the workpaper Goodrich references does not show that the IRS improperly relied on the 2010 audit. Thus, Goodrich has not presented sufficient evidence upon which to conclude that the government's assessments for 2003 and 2004 are erroneous.
Goodrich asserts that the government should have provided the signed versions of the EVC audit results. Resp. 3, ECF 45. The government has stated that it is not in possession of a signed form, Reply 4, ECF 41; moreover, the failure to use a signed form does not vitiate the presumption that the IRS's assessment reflects the final determination of EVC's income. See Nash Decl. ¶ 5, ECF 41-1.
Next, Goodrich asserts that the IRS should have applied a deduction to his income for 2002 and 2006 when EVC experienced net losses, based on his 10% partnership stake in the company. Resp. 2, 4, ECF 40. The government states that Goodrich's personal income tax audit did not assign pass-through losses from his interest in EVC because Goodrich has not substantiated his outside basis and “a partner can only claim an individual loss passed through as a distributive share of the partnership's loss to the extent of the [partner's] outside basis.” Reply 8, ECF 41; see also 26 U.S.C. § 704(d)(1) (“A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred.”).
Goodrich has not responded to the government's argument. To claim a deduction based on pass-through losses, Goodrich was required to present evidence of his outside basis, or the value of his contribution to the partnership. See 26 U.S.C. § 722 (defining a partner's basis). He would then have been eligible to claim a deduction that was capped at the amount of his basis in EVC. Because Goodrich has not substantiated his outside basis, the IRS's decision not to deduct pass-through losses was correct.
In fact, a form that Goodrich relies upon in his sur-response explicitly states that “his share of the EVC's losses for the calendar years 2002 and 2006 cannot be deducted for tax purposes” because he failed to substantiate his outside basis in EVC. Sur-Resp., Ex. 4 at 1, ECF 40 at 10.
Goodrich also asserts the IRS should have applied a deduction for gambling losses, which would have negated his gambling winnings. Resp. 4, ECF 40. Goodrich claims the IRS confiscated a box of gambling tickets that demonstrates these losses. Id. He provides a copy of Form 9984, from an audit of EVC, that appears to show the IRS “received [a] box of lottery tickets” from Goodrich and “delivered [the] bankers box of lottery tickets . . . for summary input by [the] secretary, and photocopying.” See Mot. Dismiss, Att., ECF 22-1 at 4. In response, the government has proffered the declaration of an IRS agent who states that the IRS obtained these records in 2009, as part of its audit of EVC, and is no longer in possession of these documents or any copies of them. Nash Decl. ¶¶ 3-4, 6-7, ECF 47-1. The agent further states that it “is the practice of the IRS to collect documents, make copies, and then return the originals to the party being audited, which in that case would have been EVC.” Id. ¶ 5. Ultimately, Goodrich provides no receipts, statements, or other records to substantiate his claimed losses. The Form 9984 also does not indicate what portion of the “box of lottery tickets” were losing tickets. Thus, the Form 9984 alone is insufficient to show that the IRS acted in error by not deducting gambling losses.
Goodrich asserts the IRS improperly calculated capital gains for 2005 and 2006 because those values cannot be reconciled with EVC's income. Resp. 4, ECF 40; Mot. Summary J., Ex. I, ECF 36-13. Specifically, Goodrich asserts that there is no foundation for the assessment of $452,799 in capital gains in 2005 and $706,879 in 2006, given that EVC earned $52,425 in 2005 and experienced net losses in 2006. Resp. 4, ECF 40; id., Exs. 2, 6-7, ECF 40. The government contends that Goodrich conflates income with capital gains, which is defined as the “amounts that Mr. Goodrich took out of EVC that exceeded his basis.” Reply 10, ECF 41. Because Goodrich never substantiated his basis, the government argues, the full amount withdrawn from EVC is attributed to Goodrich as capital gains. Id.; Nash Decl. ¶ 10, ECF 41-1. The government's reasoning prevails. Goodrich does not contest the definition of capital gains and has not presented evidence to refute the government's calculation of the amount he received as distributions from EVC. Because Goodrich has failed to provide any evidence to substantiate his basis in EVC, attributing the entire withdrawn amount as capital gains is correct.
Goodrich next points to the significant discrepancy between earlier assessments that showed he owed $44,592.60 for the 2003 through 2006 tax years, and the current assessments totaling $3,231,208.19, as evidence of miscalculation. Sur-Resp. 2-3, ECF 45. The government asserts that the documents Goodrich references originate from outdated assessments of Goodrich's personal income taxes. Sur-Reply 4, ECF 47; Mot. Summary J. 8, ECF 36. The record shows that the IRS assessed Goodrich's personal income taxes for 2003 through 2006 before he filed late tax returns for that period. Mot. Summary J. 8, ECF 36; id., Ex. G, ECF 3611; Sur-Reply 4, ECF 47. After Goodrich filed his tax returns for 2003 through 2006, the IRS abated the initial assessments, conducted another audit of Goodrich's personal income taxes based upon those tax returns, and assessed additional tax. Sur-Reply 4-5, ECF 47; see also, e.g., Sur-Resp., Ex. 2 at 2, 9, 15, 21, ECF 45 (Forms 4340 showing abatement of earlier assessed tax penalties on February 15, 2016). Given that the prior assessments did not incorporate the IRS's audit of Goodrich's tax returns, the difference in the previous and current assessments does not show that the current assessments are in error.
Goodrich asserts that the IRS improperly calculated the value of checks he cashed in 2005 and 2006. See Sur-Resp. 3, ECF 45. Because Goodrich does not cite to the record, it is unclear which figures he is disputing, but it appears that he is looking to the IRS's determination of his capital gains. In support of his argument, Goodrich cites two documents from his criminal case, United States v. Goodrich, No. 3:11-CR-00426-BR: (1) an analysis performed by a forensic accountant, Jeff Cone, which states that the total value of checks Goodrich cashed was $277,817, Sur-Resp., Ex. 5 at 4, ECF 45, and (2) a supplemental sentencing memorandum, which Goodrich asserts confirms that the cashed checks totaled $277,817. Id., Ex. 6 at 4. The government asserts that the forensic accountant's report and the sentencing memorandum are not relevant evidence because they were “for sentencing purposes, and [are] separate from the calculation done by the IRS to determine tax assessments.” Sur-Reply 3, ECF 47. The government further argues that the sentencing report is outdated because it was completed in 2013, three years prior to the audit conducted for this case. Id.
Contrary to Goodrich's assertion, in the sentencing memorandum, the government agreed to apply three deductions, which revised the amount of cashed checks to $941,000. Sur-Resp., Ex. 6 at 2-3, ECF 45 (“The three adjustments the defendant's forensic accountant made to SA Wall's calculations mean[] that in 2005 and 2006 the defendant had $941,000 in EVC receipts (total EVC checks he cashed at a check cashing business and did not record in EVC books, minus the cash he deposited to EVC's account)[.]”). And, given that the IRS substantially revised, and replaced, its earlier assessment of Goodrich's income taxes once Goodrich filed his tax returns for 2003 through 2006, the prior forensic accountant's report and the government's sentencing memorandum, which did not have the benefit of Goodrich's tax returns, are not persuasive in challenging the IRS's assessments.
Goodrich asserts that he timely filed an appeal to the United States Tax Court, which was denied. The government claims he did not. Whether or not Goodrich timely appealed, Goodrich has not shown that the Tax Court's denial of an appeal somehow invalidates the IRS's assessments.
Lastly, as both parties acknowledge, the government incorrectly totaled the sum of the tax assessments for tax periods 2002 through 2006 in its motion for summary judgment, by accidentally excluding one year. Resp. 2, ECF 40; Reply 3, ECF 41. This clerical error alone, however, does not defeat the presumption of correctness as to the overall assessment. See Stonehill, 702 F.2d at 1294. Moreover, the correct total-$3,231,208.19-is set forth in the reply.
For the above stated reasons, Goodrich has not presented evidence on which to find that the IRS's assessments were in error. Thus, the government is entitled to summary judgment.
III. Plaintiff's Motion to Dismiss
Goodrich filed a motion to dismiss early in the case, before discovery was completed. Mot. Dismiss, ECF 22. Because the motion raised substantive, factual arguments, the court held it in abeyance pending the completion of discovery. Order, ECF 29. That motion is now ripe for review.
In his motion to dismiss, Goodrich asserts substantially similar arguments to those he raises in response to the government's motion for summary judgment: Goodrich asserts that the IRS's assessments are incorrect because (1) the IRS used outdated figures for EVC's 2003 and 2004 income, (2) the IRS failed to deduct for gambling losses, and (3) the government agreed during sentencing to reduce the amount Goodrich diverted from EVC to $277,817, in part because Goodrich used a portion of diverted funds to pay EVC's subcontractors. Mot. Dismiss 2-6, ECF 22. These arguments lack merit for the reasons stated above.
Goodrich raises one additional argument in his motion to dismiss, regarding garnishment. Goodrich asserts that the IRS failed to consider that $42,042.31 was garnished from his bank account by the Oregon Employment Department to pay EVC's construction bills. Mot. Dismiss 6, ECF 22. In support of this assertion, Goodrich cites to a bank statement that indicates a “legal order payment” of $42,042.31 that occurred on December 27, 2002. Id., Att., ECF 22-1 at 27. Regardless of whether this line item indicates a garnishment, Goodrich has not shown, and the court could find no evidence in the record to support the proposition, that such a garnishment reduces an individual's taxable income or that it should otherwise be treated as a deduction; therefore, this document does not show that the IRS incorrectly assessed Goodrich's 2002 personal income tax.
RECOMMENDATIONS
Because defendant Jeffry Goodrich has not presented evidence that a genuine issue of fact exists as to the IRS's assessments, the government's motion for summary judgment (ECF 36) should be granted and Goodrich's motion to dismiss (ECF 22) should be denied. Judgment in the amount of $3,231.208.19 should be entered in favor of the United States against defendant as of February 1, 2023, on the assessments made against him for tax years 2002 through 2006, plus interest and other additions as provided by law thereafter. If these findings and recommendations are adopted, the government should be directed to submit a proposed judgment within 14 days after final ruling on the motions.
SCHEDULING ORDER
These Findings and Recommendations will be referred to a district judge. Objections, if any, are due Monday, November 06, 2023. If no objections are filed, then the Findings and Recommendations will go under advisement on that date.
If objections are filed, then a response is due within 14 days after being served with a copy of the objections. When the response is due or filed, whichever date is earlier, the Findings and Recommendations will go under advisement.
NOTICE
These Findings and Recommendations are not an order that is immediately appealable to the Ninth Circuit Court of Appeals. Any Notice of Appeal pursuant to Rule 4(a)(1), Federal Rules of Appellate Procedure, should not be filed until entry of a judgment.