U.S. Motion for Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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DAVID A. HUBBERT
Acting Assistant Attorney General
DYLAN C. CERLING
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683, Ben Franklin Station
Washington, D.C. 20044-0683
Telephone: (202) 616-3395
Facsimile: (202) 307-0054
dylan.c.cerling@usdoj.gov
Of Counsel:
RAFAEL M. GONZALEZ, JR.
Acting United States District Attorney
IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF IDAHO
ACCESS BEHAVIORAL HEALTH
SERVICES, INC.,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.
Case No. 1:16-cv-0107-REB
UNITED STATES’ MOTION FOR
SUMMARY JUDGMENT
The United States now moves for summary judgment. For all tax periods except the
Third Quarter 2006 Form 941 Tax Period,1 the Court lacks subject-matter jurisdiction because:
1) Plaintiff did not file a refund claim with the IRS, that relates to this suit, for a number of tax
periods, and so lacks jurisdiction as to those tax periods; 2) Plaintiff did not full-pay the penalties
for any period at issue except Q3 2006 before filing its refund claim with the IRS; and 3) the IRS
1 Throughout this and the associated filings, Form 941 tax periods are referred to by a shortened
form. Thus, the tax period ending September 30, 2006 (also known as the Third Quarter 2006 tax
period) is the “Q4 2005” tax period.
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U.S. Motion for Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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has already abated all penalties for Q4 2005 and so any claims related to that period are moot.
Moreover, even as to Q3 2006, Plaintiff’s recovery is limited to the amount it paid during the
two years immediately preceding the filing of its refund claim with the IRS.
Moreover, for all periods (including Q3 2006), Plaintiff cannot satisfy its “heavy burden
of proving both (1) that the failure did not result from ‘willful neglect,’ and (2) that the failure
was ‘due to reasonable cause.’” United States v. Boyle, 469 U.S. 241, 245 (1985); see also
McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir. 1997). Because the person who
embezzled from Plaintiff and failed to satisfy Plaintiff’s tax obligations was not a “control
person” in the corporate structure and its actions did not disable Plaintiff, Plaintiff’s failures were
not due to reasonable cause. Conklin Brothers of Santa Rosa, Inc. v. United States, 986 F.2d 315,
317 (9th Cir. 1993)
Accordingly, the United States respectfully requests that the Court grant summary
judgment in favor of the United States.
Respectfully submitted this 31 day of March, 2017.
DAVID A. HUBBERT
Acting Assistant Attorney General
By: /s/ Dylan Cerling
DYLAN C. CERLING (NY)
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683, Ben Franklin Station
Washington, D.C. 20044-0683
Telephone: (202) 616-3395
Facsimile: (202) 307-0054
dylan.c.cerling@usdoj.gov
RAFAEL M. GONZALEZ, JR.
Acting United States Attorney
Of Counsel
Attorneys for the United States
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U.S. Motion for Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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CERTIFICATE OF SERVICE
I hereby certify that on this 31 day of March, 2017, I electronically filed the foregoing document
with the Clerk of Court using the CM/ECF system, which will send notification of such filing to
the following:
Richard G. Smith
Dustin Arthur Liddle
Hawley Troxel Ennis & Hawley
Attorneys for Plaintiff
/s/ Dylan C. Cerling
DYLAN C. CERLING
Trial Attorney
United States Department of Justice, Tax Division
Case 1:16-cv-00107-EJL-REB Document 27 Filed 03/31/17 Page 3 of 3
U.S. Memorandum in Support of Motion for Summary Judgment
Case No. 1:16-cv-0107-REB
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DAVID A. HUBBERT
Acting Assistant Attorney General
DYLAN C. CERLING
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683
Washington, D.C. 20044
202-616-3395 (v)
202-307-0054 (f)
Dylan.C.Cerling@tax.usdoj.gov
Of Counsel:
RAFAEL M. GONZALEZ, JR.
Acting United States District Attorney
Attorneys for the United States
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
ACCESS BEHAVIORAL HEALTH
SERVICES, INC.,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.
Case No. 1:16-cv-0107-REB
MEMORANDUM IN SUPPORT OF
MOTION FOR SUMMARY
JUDGMENT
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U.S. Memorandum in Support of Motion for Summary Judgment
Case No. 1:16-cv-0107-REB
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Table Of Contents
INTRODUCTION
FACTS AND PROCEDURAL POSTURE
I. The Filing Of Plaintiff’s Refund Claim ........................................................................... 1
II. The Facts Underlying Plaintiff’s Refund Claim ............................................................. 2
DISCUSSION
I. The Court Lacks Subject-Matter Jurisdiction For All Quarters Save The Third
Quarter 2006.................................................................................................................................. 3
A. The Court Lacks Jurisdiction For Any Claims Related To Quarters For Which
Plaintiff Did Not File A Refund Claim .................................................................................... 5
B. The Court Lacks Jurisdiction To Consider Whether Penalties Imposed On The Q4
2005 Tax Period Should Be Abated, As The IRS Has Already Abated All Penalties For
That Period And Such A Claim Is Moot ................................................................................. 6
C. The Court Lacks Jurisdiction Over Any Tax Period Where Plaintiff Has Not Full-
Paid The Penalties Owed .......................................................................................................... 7
D. Even Where The Court Has Jurisdiction, The Court’s Jurisdiction Is Limited To
Amounts Paid Two Years Before The Filing Of The Refund Claim With The IRS ........ 11
E. The Court Lacks Jurisdiction To Grant Plaintiff A Determination That It Is Not
Liable For Unpaid Penalties .................................................................................................. 12
II. For No Tax Period Can Plaintiff Show The Existence Of Reasonable Cause ............ 14
CONCLUSION
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U.S. Memorandum in Support of Motion for Summary Judgment
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INTRODUCTION
The United States now files this motion for summary judgment. The Court lacks subject-
matter jurisdiction except to grant a refund for the penalties paid that relate to the Q3 2006 Form
941 tax period that were paid during the two years immediately preceding the filing of Plaintiff’s
refund claim with the IRS. The Court lacks subject-matter jurisdiction to grant any other relief
because Plaintiff did not full-pay the penalties for three of the quarters at issue before filing its
refund claim with the IRS, Plaintiff has not filed a refund claim or made applicable payments for
several other quarters, and the IRS has already abated all penalties for one of the quarters.
In addition, the United States moves for summary judgment on the substantive issue of
reasonable cause, for all periods (including Q3 2006): under the undisputed facts of the case, the
embezzlement was done by Plaintiff’s bookkeeper, who was not a control person in the
corporation. Plaintiff chose not to supervise her closely enough to discover the embezzlement,
and did not hire external, independent auditors. Thus, reasonable cause is not present under the
law as stated by the Ninth Circuit. Accordingly, the Court should grant judgment in favor of the
United States as to all tax periods.
FACTS AND PROCEDURAL POSTURE
I. The Filing Of Plaintiff’s Refund Claim
Plaintiff filed its refund claim with the IRS on July 2, 2015. (Statement of Facts, ¶ 3)
(hereinafter “SoF”). That refund claim related only to the following Form 941 tax periods: Q4
2005, Q3 2006, Q2 2007, Q3 2007, and Q4 2007.1 (SoF, ¶ 3.) However, the IRS has already
1 Throughout this and the associated filings, Form 941 tax periods are described in the following manner: the tax
period ending March 31 (the first quarter tax period) is “Q1”; the tax period ending June 30 (the second quarter tax
period) is “Q2”; the tax period ending September 30 (the third quarter tax period) is “Q3”; and the tax period ending
(continued...)
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abated all penalties assessed for Q4 2005. (SoF, ¶ 6.) Moreover, Plaintiff only full-paid the
penalties at issue before filing its refund claim for the Q3 2006 period, (SoF, ¶ 8), and has not
full-paid the penalties at issue that relate to the Q2 2007 or Q3 2007 Form 941 tax periods. (SoF,
¶¶ 10, 12.) Plaintiff full-paid the Q4 2007 tax period only after it filed its refund claim with the
IRS (but before it filed suit in this Court.) (SoF, ¶ 14.) Plaintiff has not filed a refund claim at all
for the Q3 2005, Q1 2006, Q2 2006, Q4 2006, or Q1 2007 Form 941 tax periods
during the relevant statutory period. (SoF, ¶ 5.)
II. The Facts Underlying Plaintiff’s Refund Claim
Plaintiff’s refund claim—and its refund suit—contend that Plaintiff’s failure to timely file
payroll tax returns, deposit payroll taxes, and pay payroll taxes was due to reasonable cause and
not willful neglect, and so amounts paid for penalties assessed under 26 U.S.C. §§ 6651(a) and
6656 should be refunded, while amounts that have not been paid should be abated. (SoF, ¶ 2,
Dkt. No. 1 at 7–8.) The basis of Plaintiff’s reasonable cause claim is that Plaintiff’s former
bookkeeper, Sheri Close, embezzled money from Plaintiff while she was working there, while
failing to obey the company’s payroll tax obligations. (SoF. ¶ 27.)
Sheri Close was not an owner or officer of Access Behavioral, and was subject to the
supervision of Access Behavioral owners and officers. (SoF, ¶¶ 16–18.) Her supervisors had
access to the electronic system, as well as the receipts and other documents that came in. (SoF
¶ 18.) Her supervisors also had the ability to review her tax filings and tax payments, and
“sometimes” they did so. (SoF ¶ 19.) However, there was no consistent testimony regarding
(… continued)
December 31 (the fourth quarter tax period) is “Q4.” Thus, the tax period ending December 31, 2005, is the “Q4
2005” tax period.
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whether Phil Bush signed Form 941 tax returns, (as Laura Scuri testified at deposition), or
whether Sheri Close signed them, (as Phil Bush testified at deposition), or whether no one signed
them (as Sheri Close appeared to testify at deposition). (SoF ¶ 19.) There was no external review
of her work: while Access Behavioral did contract with an accountant, that accountant did not
conduct an external audit of the business. (SoF, ¶ 21.)
In fact, no one discovered Sheri Close’s wrongdoing until after she was fired for a
different reason. (SoF, ¶ 24.) It was only after she was fired for repeated and longstanding
problems, (SoF, ¶ 22–23), that her supervisors started going through all the bills and bank
account records and other records to see whether they actually matched up with what they had
been told was happening. (SoF, ¶ 23.) It was then that Access Behavioral discovered the
embezzlement (and the failure to pay payroll taxes and file returns), (SoF, ¶ 24), and reported her
to the police. And even after Sheri Close’s firing on October 11, 2007, (SoF, ¶ 23), Plaintiff
continued to have problems timely depositing and paying taxes, and so was assessed penalties
for the Q4 2007 period (which started on October 1, 2007 and ran until December 31, 2007).
(SoF, ¶ 25.)
DISCUSSION
For the following reasons, the Court lacks subject-matter jurisdiction for everything
requested by Plaintiff except for a refund of the payments made by Plaintiff, that relate to the Q3
2006 Form 941 tax period, that were made between July 2, 2013 and July 2, 2015. Moreover,
substantively, the Court should rule in favor of the United States as to all tax periods.
I. The Court Lacks Subject-Matter Jurisdiction For All Quarters Save The Third
Quarter 2006
Even assuming Plaintiff could show reasonable cause, the Court only has subject-matter
jurisdiction to consider the Plaintiff’s claim for a refund of the $15,253.40 paid between July 2,
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2013 and July 2, 2015, that relate to the Third Quarter 2006 tax period. First, for a number of tax
periods—Q3 2005, Q1 2006, Q2 2006, Q4 2006, and Q1 2007—Plaintiff did not file a refund
claim timely with the IRS, such as to give this Court jurisdiction over those tax periods. (SoF
¶¶ 3, 5.) Second, for the Q4 2005 tax period, the IRS has already abated all penalties for that
period, and so any refund claim related to penalties for that period is moot. (SoF ¶ 6.) Third, for
the Q2 2007, Q3 2007, and Q4 2007, Plaintiff did not full-pay the penalties before filing its
refund claim with the IRS, and the Court lacks jurisdiction over those quarters. (SoF ¶¶ 10, 12,
14.) Fourth, the recovery of all quarters is limited by statute to the amount paid two years before
Plaintiff filed its refund claim with the IRS. Fifth, the Court does not have jurisdiction over a
request from Plaintiff “[f]or a determination that Plaintiff is not liable for any penalties that have
not yet been paid but are allegedly still owing.” (Dkt. No. 1 at 8.)
Unlike most questions addressed in summary judgment, the party seeking to sue in
federal court bears the burden of establishing that subject-matter jurisdiction exists to hear the
action. Scott v. Breeland, 792 F.2d 925, 927 (9th Cir. 1986). To establish subject matter
jurisdiction in an action against the United States, there must be: 1) “statutory authority vesting a
district court with subject matter jurisdiction”; and 2) “a waiver of sovereign immunity.”
Alvarado v. Table Mountain Rancheria, 509 F.3d 1008, 1016 (9th Cir. 2007). Thus, even where
statutory authority vests the district courts with subject matter jurisdiction, the United States
cannot be sued unless it has expressly consented to suit. Dunn & Black, P.S. v. United States,
492 F.3d 1084. 1087–88 (9th Cir. 2007). Waivers of sovereign immunity cannot be implied,
must be unequivocally expressed, and are to be strictly construed in favor of the sovereign. Id. at
1088. A party bringing suit against the United States bears the burden of demonstrating both
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elements of subject matter jurisdiction; where it has failed to do so, “dismissal of the action is
required.” Id.
While 28 U.S.C. § 1346(a)(1) provides that the district court has jurisdiction over “[a]ny
civil action against the United States for the recovery of any internal-revenue tax alleged to have
been erroneously or illegally assessed or collected, or any penalty claimed to have been collected
without authority or any sum alleged to have been excessive or in any manner wrongfully
collected under the internal revenue laws,” other statutory provisions limit and determine the
scope of this grant of jurisdiction. United States v. Dalm, 494 U.S. 596, 600 (1990). Specifically,
sections 7422(a), 6532(a), and 6511(a) and (b) of the Internal Revenue Code define the scope of
the United States’ waiver of sovereign immunity for tax refund cases. Id.
Relevant here, for there to be jurisdiction for the Court to hear Plaintiff’s refund suit,
Plaintiff had to have “duly filed” a claim for refund with the IRS. 2 26 U.S.C. § 7422(a). To be
“duly filed” under § 7422(a), a refund claim submitted to the IRS “must be filed in accordance
with, inter alia, the provisions of I.R.C. § 6511.” Imperial Plan, Inc. v. United States, 95 F.3d
25, 26 (9th Cir. 1996).
A. The Court Lacks Jurisdiction For Any Claims Related To Quarters For Which
Plaintiff Did Not File A Refund Claim
To the extent Plaintiff is requesting a refund, or attempting to sue in any way, that relates
to penalties assessed for periods for which Plaintiff did not file a refund claim (such as the Q3
2005, Q1 2006, Q2 2006, Q4 2006, or Q1 2007 Form 941 tax periods), the Court should dismiss
any claims related to those periods. No refund suit can be maintained in any court “until a claim
2 In this filing, a “refund claim” refers to a refund claim filed with the IRS, not a refund claim against the United
States put forward in a refund suit filed in federal court. Instead, such a suit is called a “refund suit.”
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for refund or credit has been duly filed with the Secretary.” 26 U.S.C. § 7422(a). Here, Plaintiff
states, in its complaint, that it filed refund claims for Q4 2005, Q3 2006, Q2 2007, Q3 2007, and
Q4 2007 tax periods. (Dkt. No. 1 at 7, ¶¶ 20–21; see also SoF ¶¶ 3, 5.) Each of those tax periods
stands on its own. Comm’r v. Sunnen, 333 U.S. 591, 598 (1948) (“Each year is the origin of a
new liability and of a separate cause of action.”). Accordingly, no determination related to any
of those tax periods is relevant to a determination of any tax period for which Plaintiff did not
file a refund claim. To the extent Plaintiff seeks a refund for any amounts related to any other tax
periods (including Q3 2005, Q1 2006, Q2 2006, Q4 2006, or Q1 2007), the Court lacks
jurisdiction to consider those quarters.
B. The Court Lacks Jurisdiction To Consider Whether Penalties Imposed On The
Q4 2005 Tax Period Should Be Abated, As The IRS Has Already Abated All
Penalties For That Period And Such A Claim Is Moot
Plaintiff’s suit for refund, as to the tax period ending December 31, 2005, is moot
because the IRS has abated the penalties for that tax period. Where a “tax paid has already been
abated,” a suit for refund “is moot.” Catholic Answers, Inc. v. United States, Fed. App’x 640,
641 (9th Cir. 2011) (unpublished decision). See also Christian Coalition of Fla., Inc. v. United
States, 662 F.3d 1182, 1192 (11th Cir. 2011) (“While [plaintiff] wanted to obtain its refund on
the most favorable grounds possible, a refund is a refund, and the IRS returned all of the disputed
taxes shortly after this litigation began. . . . the district court correctly concluded it was without
jurisdiction to entertain a suit containing solely forward-looking claims.”). The United States has
attached Form 4340s3 that show that the IRS has abated all assessed penalties for the Q4 2005
3 Form 4340s are presumptively accurate. See, e.g., Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1992).
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tax period. (SoF ¶ 6.) Accordingly, as to the tax period ending December 31, 2005, Plaintiff’s
refund suit is moot.
C. The Court Lacks Jurisdiction Over Any Tax Period Where Plaintiff Has Not
Full-Paid The Penalties Owed
A taxpayer must generally make a full payment of the tax owed for a Court to have
jurisdiction in a refund suit. See, e.g., Flora v. United States, 362 U.S. 145 (1960); Boyton v.
United States, 566 F.2d 50, 52 (9th Cir. 1977) (“It has long been established that partial payment
of assessed taxes or a proposed deficiency is insufficient to support jurisdiction in the District
Court of a refund suit under 28 U.S.C. § 1346.”). In this case, while Plaintiff has full-paid the
penalties that relate to the Q3 2016 tax period, (SoF ¶ 8) it has not full-paid the penalties that
relate to the Q2 2007 or Q3 2007 tax periods. (SoF ¶¶ 10, 12.) Moreover, Plaintiff did not full-
pay the penalties related to the Q4 2007 tax period before it filed its refund claim with the IRS,
(SoF, ¶ 14), and so its refund claim was not “duly filed” under § 7422 and the Court lacks
jurisdiction for that period, even if Plaintiff did eventually full-pay the penalties after the filing of
its administrative claim. See Rosenman v. United States, 323 U.S. 658, 661 (1945) (“The claim is
for refund of a tax ‘alleged to have been erroneously or illegally assessed or collected,’ and the
claim [with the IRS] must have been filed ‘after the payment of such tax.’”). See also 26 C.F.R.
§ 601.103(c)(3); Ackerman v. United States, 643 F.Supp.2d 140, 146–47 (D.D.C. 2009)
(collecting cases holding that a taxpayer must full-pay the tax before filing its claim for refund
with the IRS). Plaintiff incorrectly argues that it can challenge the penalties at issue for those
three quarters because they are divisible.
There is an exception to the full-payment requirement for divisible taxes, which include
payroll taxes. This is because payroll taxes (and/or § 6672 penalties, which are merely the
attribution of an entity’s payroll taxes to the entity’s managing officers), represent “a cumulation
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of separable assessments for each employee from whom taxes were withheld.” Boynton v. United
States, 566 F.2d 50, 52 (9th Cir. 1977). In its Complaint, Plaintiff states that it complied with the
divisible tax requirement by paying an amount “sufficient to pay in full the penalties associated
with at least one employee of Plaintiff for each quarter.” (dkt. No. 1 at 2, ¶ 7.) But the penalties
at issue—penalties for the late deposit of payroll taxes, the late filing of Form 941 payroll tax
returns, and the late payment of the taxes to be paid as reflected on the returns—are not divisible,
even if the underlying taxes are. The penalties at issue do not relate to specific employees,
instead relating to the timely filing of returns, payment of taxes, and deposits, and so are not
divisible.
The divisibility exception to Flora’s full-payment rule is “a narrow exception.” Korobkin
v. United States, 988 F.2d 975, 976 (9th Cir. 1993). A tax or penalty is only divisible “if the
assessed tax or penalty is the aggregate of independent tax liabilities arising from separate
transactions,” and is not divisible “[w]here the liability is singular—even if the penalty base
involves summing multiple figures.” Diversified Grp. Inc. v. United States, 841 F.3d 975, 982
(Fed. Cir. 2016). Here, the penalties assessed under both § 6651 (the late payment and late filing
penalties), and under § 6656 (the failure to deposit penalties) are singular, as is supported by
their statutory language.
§ 6651(a) imposes a penalty if a taxpayer: 1) fails to “file any return required” under
relevant subchapters on or before the return’s due-date; 2) fails to “pay the amount shown as tax
on any return” on or before the date the tax was due; or 3) fails to pay “any amount in respect of
any tax required to be shown on” a return, that is not shown on the return, within 21 days from
the date of notice and demand for payment. § 6651(a)(1)–(3). In each of the statutory sections,
the penalty (or “addition”) is calculated by taking the amount of the tax shown on the return (or,
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in one case, required to be shown) and multiplying it by a percentage of the tax, which shifts
depending on the amount of time that has passed. § 6651(a)(1)–(3). That is a singular
calculation: file a return late or fail to pay at the time the tax is due, and the penalty is simply a
percentage of the amount of the underpayment or amount shown on the return, with the
percentage shifting based on the amount of time the return or payment was late. There is no way
to “split” that calculation into multiple parts.
§ 6656 imposes a penalty for a taxpayer’s failure to make a deposit of taxes (for instance,
a payroll tax deposit). 26 U.S.C. § 6656(a). Again, the penalty imposed is calculated as a
percentage of the amount of the underpayment, § 6656(a), with the percentage varying
depending on how late the deposit was. § 6656(b). Again, that is a singular calculation: miss a
deposit, and the penalty imposed is simply a percentage of the underpayment (shifting depending
on how late the failure was) regardless of the number of employees. Plaintiff cannot “split” that
calculation into multiple pieces.
While the penalties might be calculated based on the aggregate of an underlying divisible
tax, that does not make the penalties themselves divisible. Cf. Korobkin, 988 F.2d 977 (pre-1990
§ 6700 penalty for failure to register tax shelter not divisible because penalty was “based on the
aggregate of a person’s abusive tax shelter sales during the year” rather than “assessed on each
individual transaction”); Diversified Group, Inc., 841 F.3d at 983 (§ 6707 penalty for failure to
register tax shelter not divisible because failure to register tax shelter is relevant act, not number
of underlying sales). In this case, the penalties were based on the failure to perform specific,
single acts: failure to timely file returns for each period, failure to timely pay all taxes by the
deadline for each period, and failure to timely make deposits as required for each period. None of
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those requires an inquiry into the underlying number of employees, as the substantive payroll
taxes do. Accordingly, none of them are divisible.
Moreover, the fact that the statutes do not state that the penalties are divisible weighs
strongly in favor of the presence of sovereign immunity: “[a] waiver of sovereign immunity
‘cannot be implied but must be unequivocally expressed’” United States v. Mitchell, 445 U.S.
535, 538 (1980) (quoting United States v. King, 395 U.S. 1, 4 (1969)). In other contexts,
Congress has explicitly stated that the Flora full-payment requirement does not apply to certain
taxes or penalties. For instance § 6703(c) allows the filing a refund claim after the payment of
just 15% of the penalty assessed. 26 U.S.C. § 6703(c)(1). Similarly, § 6694 requires that only
15% of the penalty be paid before the filing of a refund suit. 26 U.S.C. § 6694(c). However, there
is no such exception available to penalties assessed under §§ 6651 and 6656. Accordingly, there
is no basis to permit the payment of less than the full amount of the penalties in this case, before
the institution of a refund suit.
In the alternative, to the extent the Court finds that failure to deposit, failure to timely
file, and failure to timely pay penalties are divisible, the United States submits that Plaintiff has
not submitted evidence that it properly paid a divisible portion of each of the penalties. It is not
sufficient that plaintiff merely pay a portion of a divisible tax; Plaintiff must pay a properly
divisible portion for each of the penalties at issue. For example, as to payroll taxes, Plaintiff must
pay “at least the part of the 100% [withholding] assessment attributable to the withholding taxes
of any one employee before he can maintain a refund action.” Boynton, 566 F.2d at 53. In this
case, Plaintiff merely paid apparently random amounts towards the each tax period before filing
its refund claim (most obviously insufficient, Plaintiff paid $100 towards the Q3 2007 penalties;
which must be split between both 6651 penalties and 6656 penalties).
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Accordingly, because Plaintiff has not full-paid the penalties for Q2 2007 and Q3 2007,
and full-paid the penalties for Q4 2007 only after filing its refund claim with the IRS, the Court
lacks jurisdiction as to those three tax periods.
D. Even Where The Court Has Jurisdiction, The Court’s Jurisdiction Is Limited
To Amounts Paid Two Years Before The Filing Of The Refund Claim With The IRS
For a refund claim to be “duly filed” under § 7422(a), a refund claim submitted to the
IRS must comply with the limitations set forth in § 6511. Imperial Plan, Inc. v. United States, 95
F.3d 25, 26 (9th Cir. 1996) (“To be ‘duly filed,’ a claim must be filed in accordance with, inter
alia, the provisions of I.R.C. § 6511.”). Because statutes of limitation are strictly construed in
favor of the government, particularly in tax cases, a claim is not duly filed unless it is timely.
Northern Life Ins. Co. v. United States, 685 F.2d 277, 279 (9th Cir. 1982). Thus, under this
provision, a failure to timely file a claim with the IRS deprives the Court of subject-matter
jurisdiction in a subsequent suit challenging the denial of such a claim. See id. See also Yuen v.
United States, 825 F.2d 244, 245 (9th Cir. 1987) (“Unless a taxpayer has duly filed a claim for
refund of federal taxes with the IRS, a district court is without jurisdiction to entertain a suit for
refund.”)
Section 6511 contains two provisions for determining the timeliness of a refund claim
filed with the IRS: a filing deadline and a look-back period. See 26 U.S.C. § 6511(a) & (b).
Section 6511(a) provides that if a taxpayer filed a return, it must file a claim for credit or refund
within: 1) three years from the time the return was filed; or 2) two years from the time the tax
was paid, whichever is later. 26 U.S.C. § 6511(a). In this case, Plaintiff filed its refund claim on
July 2, 2015, (dkt. No. 1 at 7, ¶ 21), and had made certain payments, as set forth in the
Complaint, in the two years immediately preceding that period. (Dkt. No. 1 at 7, ¶ 20.)
According, even if the Court finds that there is jurisdiction, Plaintiff’s possible recovery is
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limited to the amounts Plaintiff paid during the two years immediately preceding its July 2, 2015
refund claim. (SoF ¶¶ 7, 9, 11, 13.) Plaintiff cannot obtain a refund of amounts paid outside that
period (either before that period, or after the filing of Plaintiff’s refund claim with the IRS).
E. The Court Lacks Jurisdiction To Grant Plaintiff A Determination That It Is
Not Liable For Unpaid Penalties
Plaintiff also asks the Court “[f]or a determination that Plaintiff is not liable for any
penalties that have not yet been paid but are allegedly still owing.” (Dkt. No. 1 at 10.) First, the
Court lacks jurisdiction to enter that relief, and second, such relief would be barred by the Anti-
Injunction Act.
The only basis of jurisdiction asserted by Plaintiff is 28 U.S.C. § 1346(a)(1) & 26 U.S.C.
§ 7422. (See Dkt. No. 1 at 2, ¶ 4.) 28 U.S.C. § 1346(a)(1) grants the Courts jurisdiction over
civil actions “for the recovery” of taxes and penalties “claimed to have been collected without
authority.” It does not grant jurisdiction to a court to determine that a person or entity is not
liable for penalties that have not yet been paid, as Plaintiff requests. Similarly, § 7422 limits
jurisdiction in refund suits to those circumstances where a taxpayer has filed a proper claim for
refund with the IRS. 26 U.S.C. § 7422(a). Regardless, a taxpayer must full-pay the taxes or
penalties owed before filing a refund claim. See, e.g., Flora v. United States, 362 U.S. 145
(1960); Boyton v. United States, 566 F.2d 50, 52 (9th Cir. 1977) (“It has long been established
that partial payment of assessed taxes or a proposed deficiency is insufficient to support
jurisdiction in the District Court of a refund suit under 28 U.S.C. § 1346.”). Thus, the Court has
no jurisdiction to enter a determination that Plaintiff does not owe taxes it has not yet paid.
Second, such a remedy is barred by the Anti-Injunction Act, which provides that “no suit
for the purpose of restraining the assessment or collection of any tax shall be maintained in any
court by any person.” 26 U.S.C. § 7421(a). The principal purpose of the Anti-Injunction Act is to
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preserve the government’s ability to assess and collect taxes expeditiously with “a minimum of
pre-enforcement judicial interference” and “to require that the legal right to the disputed sums be
determined in a suit for refund.” Bob Jones Univ. v. Simon, 416 U.S. 725, 736 (1974). An action
that does not fall within a specific exception to the Anti-Injunction Act must be dismissed for
lack of subject matter jurisdiction. Elias v. Connett, 908 F.2d 521, 526 (9th Cir. 1990). Because
Plaintiffs are asking for a “determination that Plaintiff is not liable for any penalties that have not
yet been paid but are allegedly still owing,” (Dkt. No. 1 at 10, ¶ 1.) Plaintiff is asking for relief
that will restrain the collection of a tax.
Apart from the statutory exceptions to the Anti-Injunction Act, none of which is
applicable here,4 the Supreme Court has recognized a limited judicial exception to the statutory
prohibition, where the taxpayer establishes: (1) that “under no circumstances” could the United
States ultimately prevail on the merits; and (2) that the Plaintiff would suffer irreparable injury
for which they have no adequate remedy at law. Enochs v. Williams Packing & Navigation Co.,
370 U.S. 1, 6–8 (1962). Here, Plaintiff cannot satisfy either prong. Plaintiff must prove that that
its failure to pay taxes was due to reasonable cause, and the facts it has alleged do not show that
under no circumstances will the United States prevail, given the difficult legal standard Plaintiff
must satisfy to prove its case. See, e.g., Conklin Brothers of Santa Rosa, Inc. v. United States,
4 Sections 6212 and 6213 apply when a taxpayer seeks review by the Tax Court of a notice of deficiency; section
6015(e) concerns Tax Court review of innocent spouse determinations; section 6330(e)(1) only applies to certain
collection due process proceedings in Tax Court; section 6331(i) prohibits levy by the United States during the
pendency of a suit for refund of a divisible tax (such as a trust fund recovery penalty assessed pursuant to section
6672(a)); section 6672(c) applies only when a responsible person has filed a bond within 30 days of the assessment
to ensure collection; sections 6225 and 6246 apply in partnership tax assessments; section 6694 applies to certain
return preparer penalty proceedings; section 7426 applies in certain third-party wrongful levy actions; section 7429
applies in proceedings to review jeopardy assessments; and section 7436 applies to proceedings to determine
employment status. Plaintiff has alleged no facts establishing the applicability of any of those exceptions to this
action.
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986 F.2d 315 (9th Cir. 1993). Nor does Plaintiff’s failure to comply with the timely-payment
requirements under § 6511 mean that it will suffer irreparable injury for which it has no adequate
remedy at law.
II. For No Tax Period Can Plaintiff Show The Existence Of Reasonable Cause
Even on the substantive issue, Plaintiff cannot satisfy its theory of the case, and so the
Court should grant summary judgment in favor of the United States. Plaintiff’s theory of the case
is that its bookkeeper embezzled money from Plaintiff and “failed to make payroll deposits and
file necessary returns.” (Dkt. No. 1 at 3, ¶ 9.) Thus, Plaintiff argues that its failure to timely file
returns, pay taxes when owed, and deposit taxes, was due to reasonable cause and not willful
neglect. Summary judgment is proper because, based on the undisputed facts, Plaintiff cannot
show that its failure to comply with its tax obligations was due to reasonable cause and not
willful neglect under 26 U.S.C. §§ 6651, 6656.
Summary judgment is proper “if the pleadings, depositions, answers to interrogatories,
and admissions on file, together with the affidavits, if any, show that there is no genuine issue as
to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.
R. Civ. P. 56. Once the United States establishes the absence of genuine factual issues and its
entitlement to judgment as a matter of law, it is incumbent on Access Behavioral to “‘set forth
specific facts showing that there is a genuine issue for trial,’ by evidence cognizable under [Fed.
R. Civ. P. 56(e)].” See UA Local 343 v. Nor Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir.
1994), cert. denied, 516 U.S. 912 (1995). This burden is not negligible, and “‘[i]f the evidence is
merely colorable or is not significantly probative summary judgment may be granted.’” See id.
(quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 50 (1986) (citation omitted)).
Conclusory allegations unsupported by specific facts are insufficient to create a triable issue of
fact so as to preclude summary judgment. See Taylor v. List, 880 F.2d 1040, 1045 (9th Cir.
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1989). In this case, the question is whether there is any genuine issue of material fact concerning
the existence of reasonable cause where Plaintiff failed to timely file returns, pay taxes, and
make tax deposits as required by law.
Employers are required to withhold federal social security taxes (Federal Insurance
Contributions Act, or “FICA” taxes) and income taxes from the salaries and wages paid to their
employees and to pay over the withheld amounts to the United States. 26 U.S.C. §§ 3101;
3102(a), (b); 3402; 3403. Employers are also required to pay over their own contributions to the
social security system. 26 U.S.C. § 3111. The withheld portion of the taxes—the income taxes
and FICA taxes deducted from employees’ salaries—are debts of the employees to the federal
government on earned income. Although the employer collects the taxes and is, therefore, liable
for their payment, the withheld taxes are not the property of the employer. They are a part of the
wages held in trust for the benefit of the government. 26 U.S.C. § 7501. See Begier v. Internal
Revenue Service, 496 U.S. 53, 55–56 (1990).
The Internal Revenue Code imposes mandatory penalties for failure to file returns, pay
taxes, or make required tax deposits (including “trust fund taxes”), unless the taxpayer can
demonstrate that such failure was due to “reasonable cause and not due to willful neglect.” 26
U.S.C. § 6651(a)(1)–(3), § 6656(a). Addressing the application of Section 6651(a)(1), the
Supreme Court established that the taxpayer bears the “heavy burden of proving both (1) that the
failure did not result from ‘willful neglect,’ and (2) that the failure was ‘due to reasonable
cause.’” United States v. Boyle, 469 U.S. 241, 245 (1985); see also McMahan v. Commissioner,
114 F.3d 366, 368 (2d Cir. 1997).
The Supreme Court has ruled that since Congress has charged employers with an
unambiguous duty to file, pay, and deposit employment taxes, the employer’s reliance on an
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agent to comply with the statutory scheme does not absolve it of responsibility and constitute
reasonable cause. See Boyle, 469 U.S. at 250. “Treas. Reg. § 301.6651-1(c)(1) [concerning
reasonable cause] is viewed very narrowly because Congress has charged the taxpayer with an
unambiguous, precisely defined duty to ‘ascertain . . . statutory deadline[s] and then to meet
[those] deadlines.’” Conklin Brothers of Santa Rosa, Inc. v. United States, 986 F.2d 315, 317
(9th Cir. 1993). Because “[p]rompt payment of taxes is imperative to the Government, which
should not have to assume the burden of unnecessary ad hoc determinations,” Boyle, 469 U.S. at
249, “[t]he failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance
on an agent, and such reliance is not ‘reasonable cause’ for a late filing under § 6651(a)(1).” Id.
at 252.
Although the Supreme Court set a bright-line rule that reliance on an agent to perform
these statutory duties does not constitute reasonable cause, it “‘expressly distinguished the
question of the taxpayer’s misplaced reliance on an agent to perform a known duty from the
question of the taxpayer’s disability.’” Conklin Brothers, 986 F.2d at 318 (quoting In re
Biomaterials Corp., 954 F.2d 919, 923 (3rd Cir. 1992)); see also Boyle, 469 U.S. at 248 n. 6.
Thus, a taxpayer “may establish reasonable cause and avoid late penalty fees under I.R.C. §§
6651(a) and 6656(a) if it can show that it was disabled from complying timely.” Conklin
Brothers, 986 F.2d at 318, (citing Boyle, 469 U.S. at 248 n. 6 (emphasis in original)).
In Conklin Brothers, the Ninth Circuit noted that the Supreme Court had not determined
under what circumstances a taxpayer would be considered “disabled.” See Conklin Brothers, 986
F.2d at 318. Nevertheless, it noted that the United States Court of Appeals for the Third Circuit,
in Biomaterials, had been confronted with the situation where the corporation was unable to
timely comply with its tax duties because the corporate officials who had sole responsibility to
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file and pay the taxes embezzled funds from the corporation and found that reasonable cause
existed to excuse the corporation from paying the penalties. See id. Although the Biomaterials
court found that reasonable cause existed there, it noted that
[i]f a corporation has lax internal controls or fails to secure competent external
auditors to ensure the filing of timely tax returns and deposit and payment of
taxes, it fails to show reasonable cause or absence of willful neglect and is itself
liable for statutory penalties notwithstanding its lack of vicarious liability for the
criminal actions of its agents.
Biomaterials, 954 F.2d at 927.
In Conklin Brothers, the individual entrusted with the company’s employment tax duties
was an individual whom the president and majority shareholder had promoted from within the
company to controller and whom they decided did not need close supervision. Id. at 315–16. She
was not a control person in the corporate structure; she was simply the controller. Although it is
not clear whether she embezzled funds from the company, she failed to timely make employment
tax deposits and pay the taxes and concealed that failure until she unexpectedly resigned. Id. at
316. The Ninth Circuit found that her actions did not disable the corporation and thus found that
reasonable cause did not exist. Id. at 319. In doing so, the Ninth Circuit distinguished
Biomaterials because there, its chief executive officer and chief financial officer were the
individuals who committed the criminal conduct and that action was beyond the control of the
corporation itself because they were the control people within the corporation.5 See id. at 318.
5 For the same reason, Biomaterials is distinguishable here. Even though the bookkeeper in this case embezzled
funds, she was not in control of Access Behavioral, as the CEO and CFO were in control of the corporation in
Biomaterials. Here, the bookkeeper was subject to the control of the owners of Access Behavioral, who delegated
the duties to deposit taxes, file returns, and pay taxes to her.
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The Ninth Circuit noted that in Conklin Brothers, a decision was made that close
supervision and review of the controller’s payroll tax duties was no longer needed and stated that
although that decision may have been reasonable, “the decision was a corporate matter and it
does not resolve the matter as to [the corporation’s] tax duties” and thus, it did not disable the
corporation from timely meeting its tax obligations. Id. at 318–19. See also Pacific Wallboard &
Plaster Co. v. United tates, 2005 WL 3113470 at *1 (9th Cir. 2005) (“Although one of Plaintiff’s
employees embezzled funds, that crime does not automatically entitled Plaintiff to a refund,
because the employee was not in charge of the corporation and was subject to oversight.”).
This case is like Conklin Brothers. The person who embezzled the money from Access
Behavioral was its bookkeeper, not a control person. (SoF ¶ 17.) When she was hired, she was
the only person who really understood the accounting and billing practices, the owners “did not
have that knowledge.” (SoF ¶ 17.) For the entire first year of their operation, there was no real
way of keeping track of expenditures. (SoF ¶ 18.) Phil Bush would look over QuickBook entries,
looking at cash flow and accounts receivable. (SoF ¶ 18.) He also said that he “sometimes”
reviewed some of the Form 941s before filing, and “sometimes” reviewed tax payments or
deposits. (SoF ¶ 19.) However, no one who worked at the company testified that they even
signed the Form 941 tax returns before they were filed: Laura Scuri testified that Phil Bush
signed them, Phil Bush testified that Sheri Close signed them, and Sheri Close testified that it
“was just done electronically” and, apparently, no one signed them. (SoF ¶ 19.) In any case, after
Phil Bush left, Niccolia George did not review tax filings or tax payments before they were
made. (SoF ¶ 20.)
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Moreover, while Access Behavioral had contracted with an accountant, it never used the
accountant to engage in an external audit of the company, instead merely talking with Phil Bush
and Sheri Close about Access Behavioral’s policies and procedures. (SoF ¶ 21.)
While these decisions—limited and apparently sporadic review of Sheri Close’s work,
and the decision not to hire an outside auditor—may be understandable from a business
standpoint, they do not constitute reasonable cause for failure to timely pay taxes, file returns,
and make tax deposits. The Form 941 payroll taxes that were not paid did not come from Access
Behavioral’s funds; instead, they were funds held in trust by Access Behavioral, to be paid over
to the United States. See Begier v. Internal Revenue Service, 496 U.S. 53, 55 56 (1990). Access
Behavioral is saying, in effect, that despite holding funds in trust for the United States, the failure
to pay over those funds is not their fault, even though it was their own employee that they hired
and supervised that failed to pay the funds over, and even though, as a matter of law, “misplaced
reliance on an agent” can never constitute reasonable cause for failure to pay taxes. Conklin
Brothers, 986 F.2d at 318 (quoting In re Biomaterials Corp., 954 F.2d 919, 923 (3rd Cir. 1992)
Indeed, while Plaintiff contends that it was disabled from filing its returns and paying
taxes because it was deceived by Sheri Close, that would mean that any time an employee
embezzled from a company and lied to the company about it, there would be reasonable cause
for the company’s failure to pay. But the Ninth Circuit has already held that embezzlement (and
concealment of that embezzlement) is not sufficient to establish reasonable cause. Pacific
Wallboard & Plaster Co. v. United States, 2005 WL 3113470 at *1 (9th Cir. 2005) (“Although
one of Plaintiff’s employees embezzled funds, that crime does not automatically entitled Plaintiff
to a refund, because the employee was not in charge of the corporation and was subject to
oversight.”); Conklin Bros., 986 F.2d at 315.
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The hollowness of Plaintiff’s claim is punctuated by its claim for refund for penalties
assessed on Q4 2007: the embezzler was fired on October 11, 2007, less than two weeks into that
tax period (which started October 1, 2007). (SoF, ¶ 23.) She would not have been responsible for
all but a very few tax deposits for that period, and she could not have been responsible for paying
taxes at the time the returns were due (on January 31, 2008): in other words, her actions cannot
have been the cause for any of the § 6651(a) penalties, and for only a tiny portion of the § 6656
penalties, for that period. Yet Plaintiff continues to assert that her actions constituted reasonable
cause for Plaintiff’s failure to comply with its tax obligations even after she left and her duties
were taken up by someone else.
CONCLUSION
For the foregoing reasons, the United States respectfully requests that the Court grant
summary judgment to the United States both substantively and because the Court lacks subject-
matter jurisdiction for all but a small portion of the relief requested by Plaintiff.
Respectfully submitted this 31 day of March, 2017.
DAVID A. HUBBERT
Acting Assistant Attorney General
By: /s/ Dylan Cerling
DYLAN C. CERLING (NY)
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683, Ben Franklin Station
Washington, D.C. 20044-0683
Telephone: (202) 616-3395
Facsimile: (202) 307-0054
dylan.c.cerling@usdoj.gov
RAFAEL M. GONZALEZ, JR.
Acting United States Attorney
Of Counsel
Attorneys for the United States
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CERTIFICATE OF SERVICE
I hereby certify that on this 31 day of March, 2017, I electronically filed the foregoing document
with the Clerk of Court using the CM/ECF system, which will send notification of such filing to
the following:
Richard G. Smith
Dustin Arthur Liddle
Hawley Troxel Ennis & Hawley
Attorneys for Plaintiff
/s/ Dylan C. Cerling
DYLAN C. CERLING
Trial Attorney
United States Department of Justice, Tax Division
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United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
1
U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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DAVID A. HUBBERT
Acting Assistant Attorney General
DYLAN C. CERLING
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683, Ben Franklin Station
Washington, D.C. 20044-0683
Telephone: (202) 616-3395
Facsimile: (202) 307-0054
dylan.c.cerling@usdoj.gov
Of Counsel:
RAFAEL M. GONZALEZ, JR.
Acting United States District Attorney
IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF IDAHO
ACCESS BEHAVIORAL HEALTH
SERVICES, INC.,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.
Case No. 1:16-cv-0107-REB
UNITED STATES’ STATEMENT
OF FACTS IN SUPPORT OF
MOTION FOR SUMMARY
JUDGMENT
The United States now files this statement of facts in support of summary judgment. The
United States reserves the right to challenge the facts asserted in this
1) Access Behavioral Health Services, Inc. (“Access Behavioral”), Plaintiff, is a
provider of health, therapy, and rehabilitiation services. (Declaration of Dylan
Cerling, Ex. 7 at 9–10) (hereinafter “Cerling Decl.”).
2) Access Behavioral filed suit in this case in March 2016. (Dkt. No. 1.) In paragraph 17
of its complaint, Plaintiff referenced penalties assessed for Form 941 payroll taxes for
the quarters starting the third quarter of 2005 through the fourth quarter 2007. (Dkt.
Case 1:16-cv-00107-EJL-REB Document 27-2 Filed 03/31/17 Page 1 of 9
United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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No. 1 at 5, ¶ 17.) Plaintiff’s complaint requested both a refund “for all payments made
by Plaintiff upon the penalties identified in paragraph 17” of the complaint, (Dkt. No.
1 at 8, ¶ 1), and for a “determination that Plaintiff is not liable for any penalties that
have not yet been paid but are allegedly still owing.” (Dkt. No. 1 at 8. ¶ 2.)
REFUND CLAIM AND PAYMENTS
3) The refund claim filed with the IRS that Plaintiff asserts as the jurisdictional basis for
this suit was filed on July 2, 2015, for the following Form 941 tax quarters: Q4 2005,
Q3 2006, Q2 2007, Q3 2007, and Q4 2007. (Cerling Decl., Ex. 10 at 3–4.)
4) No other refund claim filed with the IRS can give this Court jurisdiction, under the
relevant statutes.
5) Plaintiff did not file a refund claim with the IRS, that relates to this suit, for the
following Form 941 tax periods: Q3 2005, Q1 2006, Q2 2006, Q4 2006, or Q1 2007.
(See Dkt. No. 1 at 7, ¶¶ 20–21, Cerling Decl., Ex. 10.)
6) For the Fourth Quarter 2005 tax period, the IRS originally assessed $10,931.80
(adding up $3,101.18 + $3,695.71 + $2,067.46 + $689.15 + $964.81 + $413.49), total,
in failure to timely file return, failure to timely pay taxes, and failure to timely deposit
trust fund taxes. (Cerling Decl., Ex. 1 at 2–3, Dkt. No. 1 at 5, ¶ 17.) The IRS later
abated $10,931.80 in such penalties (adding up $3,445.76 + $3,695.71 + $689.15 +
+$3,101.18), before Plaintiff filed its July 2015 refund claim with the IRS. (Cerling
Decl., Ex. 1 at 5–6.) The IRS has abated all penalties assessed for this tax period.
Case 1:16-cv-00107-EJL-REB Document 27-2 Filed 03/31/17 Page 2 of 9
United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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7) For the Q3 2006, Plaintiff made $15,253.40 in payments towards that Form 941 tax
period in the two years immediately preceding July 2, 2015. (Cerling Decl., Ex. 2 at
6–9.)1
8) Plaintiff has full-paid all taxes and penalties for the Q3 2006 Form 941 tax period.
(Cerling Decl., Ex. 2 at 10.)
9) For the Q2 2007, Plaintiff made $4,940.72 in payments towards that Form 941 tax
period in the two years immediately preceding July 2, 2015. (Dkt. No. 1 at 7, ¶ 20;
Cerling Decl., Ex. 3 at 6–7.)
10) Plaintiff has not full paid the penalties at issue for the Q2 2007 Form 941 tax period:
taking all assessments for penalties, (Cerling Decl., Ex. 3), and subtracting from those
assessments only payments that could have been allocated to penalties (tax deposits
and payments that Plaintiff chose to allocate to taxes rather than penalties, see Cerling
Decl., Ex. 6, cannot have been allocated to penalties), there remains an outstanding
amount owed on the penalties assessed for this period.
11) For the Q3 2007, Plaintiff made $100 in payments towards that Form 941 tax period
in the two years immediately preceding July 2, 2015. (See Dkt. No. 1 at 7, ¶ 20;
Cerling Decl., Ex. 4 at 5.)
12) Plaintiff has not full paid the penalties at issue for the Q3 2007 Form 941 tax period:
taking all assessments for penalties, (Cerling Decl., Ex. 4) and subtracting from those
assessments only payments that could have been allocated to penalties (tax deposits
and payments that Plaintiff chose to allocate to taxes rather than penalties, see Cerling
1 Plaintiff’s complaint asserts $13,880 in such payments during that period, (Dkt. No. 1 at 7,
¶ 20), but the IRS records show the higher amount.
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United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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Decl., Ex. 6, cannot have been allocated to penalties), there remains an outstanding
amount owed on the penalties assessed for this period.
13) For the Q4 2007, Plaintiff made $2,100 in payments towards that Form 941 tax period
in the two years immediately preceding July 2, 2015.2 (Cerling Decl., Ex. 5 at 5–6.)
14) Plaintiff did not full-pay the penalties at issue the Q4 2007 Form 941 tax period
before the filing of the refund claim with the IRS: taking all assessments for penalties,
(Cerling Decl., Ex. 5) and subtracting from those assessments only payments that
could have been allocated to penalties (tax deposits and payments that Plaintiff chose
to allocate to taxes rather than penalties, see Cerling Decl., Ex. 6, cannot have been
allocated to penalties), there remained an outstanding amount owed on the penalties
assessed for this period before the filing of the refund claim. However, Plaintiff did
full-pay the penalties before the filing of the refund suit: the last payments made on
the quarter were made in February 2016, (Cerling Decl., Ex. 5 at 7), while the
Complaint was filed in March 2016.
15) In the two years immediately preceding July 2, 2015, Plaintiff did not make any
payments towards the following Form 941 tax periods: Q3 2005, Q1 2006, Q2 2006,
Q4 2006, or Q1 2007.
THE UNDISPUTED FACTS RELATED TO PLAINTIFF’S REFUND CLAIM
16) Access Behavioral was founded in late 2004, by Laura Scuri, Niccolia George, and
Phil Bush, (Cerling Decl., Ex. 7 at 8), who were all owners at the time of founding.
(Cerling Decl., Ex. 7 at 9.) Those three owners have been the only officers of the
2 Plaintiff’s complaint asserts only $100 in such payments during that period, (Dkt. No. 1 at 7,
¶ 20), but the IRS records show the higher amount.
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United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
5
U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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company, since the time of founding. (Ex. 7 at 9, 14–15.) Initially all three of them
were owners and officers, but in 2007, Phil left the company and was no longer either
an owner or an officer, which left Laura Scuri and Niccolia George as the only
owners and officers. (Ex. 7 at 14–15.)
17) At the time they started, they had either one or two employees, one of whom was
Sheri Close. (Cerling Decl., Ex. 7 at 10–11.) All three owners agreed to hire her on as
the bookkeeper. (Cerling Decl., Ex. 7 at 12.) At the time she was hired she was the
person in the company who understood the accounting and billing practices, and the
owners “did not have that knowledge.” (Cerling Decl., Ex. 7 at 11.) The billing
system Sheri filed was complicated, but she was familiar with the software and
procedures. (Cerling Decl., Ex. 7 at 11–12.) In addition to billing and accounting,
Sheri Close was hired partly because of her knowledge in how to pay taxes and file
returns. (Cerling Decl., Ex. 7 at 20.)
18) During her time at Access Behavioral, Sheri Close was first supervised primarily by
Phil Bush, then by both Phil Bush and Niccolia George, and then—after Phil Bush
left—by primarily Niccolia George. (Cerling Decl., Ex. 7 at 13, 18; Ex. 8 at 15, 19;
Ex. 9 at 27.) Sheri Close’s duties including entering billing and accounting
information into Quickbooks, (Cerling Decl., Ex. 9 at 28.) While being supervised
primarily by Phil Bush, Phil Bush acted as a sort of “financial overseer,” making sure
she was performing her duties. (Cerling Decl., Ex. 9 at 27–28.) He would, for
instance, review QuickBook entries, looking at cash flow, accounts receivable, and
accounts payable, and would ask Ms. Close about her bill payments. (Cerling Decl.,
Ex. 7 at 18; Ex. 9 at 29, 42.) However, at the beginning of the company’s tenure,
Case 1:16-cv-00107-EJL-REB Document 27-2 Filed 03/31/17 Page 5 of 9
United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
6
U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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there was no real way of keeping track of expenditures; later, Access Behavioral
started keeping track of them in a book and (subsequent to the book) a spreadsheet.
(Cerling Decl., Ex. 8 at 11.) Access Behavioral did have a receipt book. (Cerling
Decl., Ex. 8 at 10.) It was about a year into the business that Access Behavioral
started getting more organized. (Cerling Decl., Ex. 8 at 11.)
19) Another one of her duties was ensuring that payroll tax returns were filed and the
taxes timely deposited and paid. (Cerling Decl., Ex. 7 at 20, Ex. 8 at 14.) In fact, her
ability to file returns and pay taxes was part of the reason she was hired. (Cerling
Decl., Ex. 8 at 15.) Witnesses disagree about whether Sheri Close, or Phil Bush, or no
one signed Form 941 returns before filings. (Compare Cerling Decl., Ex. 7 at 22
(Laura Scuri testified that Phil Bush signed them), with Ex. 9 at 16 (Phil Bush
testified that Sheri Close signed them), with Ex. 12 at 16 (Sheri Close testified that
she did not sign them and it “was just done electronically”.) During his time with
Access Behavioral, Phil Bush reviewed some of the Form 941s before filing, but he
does not know if he reviewed all of them. (Cerling Decl., Ex. 9 at 16.) Similarly, he
says he “sometimes” reviewed tax payments or deposits, and “saw receipts with
numbers on them.” (Cerling Decl., Ex. 9 at 17.)
20) After Phil Bush left Access Behavioral, Niccolia George took the lead on supervising
Sheri Close. (Cerling Decl., Ex. 8 at 19–22.) She spent a few days in Sheri Close’s
office, effectively shadowing Sheri Close and learning how to do Sheri Close’s job.
(Cerling Decl., Ex. 8 at 21–23.) Among other duties, she learned how to do tax filings
and make tax payments. (Cerling Decl., Ex. 8 at 23.) However, she did not review tax
filings or tax payments before they were made. (Cerling Decl., Ex. 8 at 23–24.)
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United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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21) Periodically, Sheri Close and whoever was supervising her (generally Phil Bush)
would meet with an accountant. (Cerling Decl., Ex. 8 at 12.) However, the accountant
never conducted an audit. (Cerling Decl., Ex. 7 at 39, Ex. 9 at 16.) Rather, the
accountant simply conducted a general review, making sure the policies and
procedures of the company were acceptable, rather than actually going through
Access Behavioral’s books. (Cerling Decl., Ex. 9 at 29.)
22) Sheri Close had had problems with her work for some time before her being fired.
Even while being supervised by Phil Bush, she was not good at filing or keeping good
records, and was generally disorganized. (Cerling Decl., Ex. 9 at 21.) She would get
behind on posting bills to the system. (Cerling Decl., Ex. 7 at 83.) The owners would
get notice of payments on debts being made late. (Cerling Decl., Ex. 7 at 95.) There
were also problems with her coming in late and leaving early, (Cerling Decl., Ex. 7 at
27), and taking excessive sick leave and vacation. (Cerling Decl., Ex. 7 at 111.)
23) Sheri Close was fired October 11, 2007. (Cerling Decl., Ex. 11.) She was fired after
the owners had first placed her on probation after discovering that she had not timely
filed a state workman’s compensation document, (Cerling Decl., Ex. 8 at 24), and
then they discovered that the state of Idaho was going to put a levy or lien on Access
Behavioral’s payee account, for failure to make certain required payments. (Cerling
Decl., Ex. 8 at 26.) After she was fired, Niccolia George started “digging through
QuickBooks,” (Cerling Decl., Ex. 8 at 26), and noticed that payments to the Idaho
State Tax Division, listed in QuickBooks, had not actually gone through. (Cerling
Decl., Ex. 8 at 26–27.) At that point, Niccolia George actually started looking at the
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United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
8
U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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receipts and bills and bank statements, and trying to match them up to see what had
actually been paid. (Cerling Decl., Ex. 8 at 27.)
24) After she was fired, the owners discovered that she had been using Access
Behavioral’s money to pay personal expenses, including utilities and loans. (Cerling
Decl., Ex. 7 at 28–31, Ex. 8 at 29.) She had made payments both through direct
deposit from Access Behavioral’s accounts, (Cerling Decl., Ex. 7 at 31), and through
the use of a debit card connected to one of Access Behavioral’s bank accounts.
(Cerling Decl., Ex. 8 at 29.) Access Behavioral testified that there was not supposed
to be a debit card connected to that account. (Cerling Decl., Ex. 8 at 29.)
25) After she was fired, the owners also discovered that she had not timely been filing
returns and paying federal payroll taxes. (Cerling Decl., Ex. 7 at 33, Ex. 8 at 74.)
They reported her to the police, who charged her with a crime. Plaintiff continued to
have problems timely depositing and paying the Form 941 taxes after she was fired,
and was assessed penalties on that basis. (Cerling Decl., Ex. 5 at 2–4.)
26) Apart from statements that the embezzlement and failure to file and pay taxes “didn’t
come up,” the owners “didn’t see it,” because “it was pretty well hidden” and “there
weren’t a lot of questions,” (Cerling Decl., Ex. 7 at 41), Sheri Close hid her
embezzlement and failure to timely file, pay, and deposite payroll taxes by “not
paying things that she said she was paying,” (Cerling Decl., Ex. 8 at 40), putting
numbers into QuickBooks that were wrong, (Cerling Decl., Ex. 8 at 40), and saying
she’d paid taxes and filed returns when she had not. (Cerling Decl., Ex. 8 at 73–74.)
27) Accordingly, Access Behavioral filed the relevant refund claim with the IRS on July
2, 2015, asserting that Sheri Close’s wrongdoing constituted reasonable cause for its
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United States' Statement of Facts in Support of Motion for
Summary Judgment
(Case No. 1:16-cv-0107-REB)
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U.S. DEPARTMENT OF JUSTICE
Tax Division, Western Region
P.O. Box 683
Washington, D.C. 20044
Telephone: 202-616-3395
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failure to timely file Form 941 payroll tax returns, failure to make trust fund deposits,
and failure to timely pay the taxes owed. (See Dkt. No. 1.)
Respectfully submitted this 31 day of March, 2017.
DAVID A. HUBBERT
Acting Assistant Attorney General
By: /s/ Dylan Cerling
DYLAN C. CERLING (NY)
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 683, Ben Franklin Station
Washington, D.C. 20044-0683
Telephone: (202) 616-3395
Facsimile: (202) 307-0054
dylan.c.cerling@usdoj.gov
RAFAEL M. GONZALEZ, JR.
Acting United States Attorney
Of Counsel
Attorneys for the United States
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