Gandy Nursery, Inc. v. U.S.

• Decision Date: 08 January 2003
• Docket Number: No. 01-40985.,01-40985.
• Citation: 318 F.3d 631
• Parties: GANDY NURSERY, INC.; Dennis C. Gandy, doing business as Dennis Gandy Nursery; Gandy Marketing and Trucking, Inc.; Dennis C. Gandy, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

318 F.3d 631

GANDY NURSERY, INC.; Dennis C. Gandy, doing business as Dennis Gandy Nursery; Gandy Marketing and Trucking, Inc.; Dennis C. Gandy, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 01-40985.

United States Court of Appeals, Fifth Circuit.

January 8, 2003.

COPYRIGHT MATERIAL OMITTED

William A. Roberts (argued), The Roberts Law Firm, Dallas, TX, for Plaintiffs-Appellants.

Robert J. Branman (argued), Richard Bradshaw Farber, U.S. Dept. of Justice, Tax Div., Washington, DC, for Defendant-Appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before DAVIS, SMITH and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

This case arises from a tax dispute pitting the government against an individual and two corporations. Plaintiffs-appellants Dennis Gandy, doing business as Dennis Gandy Nursery ("Gandy"), Gandy Nursery, Inc. ("Gandy Nursery"), and Gandy Marketing and Trucking, Inc. ("Gandy Marketing and Trucking") brought suit in district court seeking refunds of certain tax payments and penalty assessments by the Internal Revenue Service ("IRS"), and damages for the IRS's alleged negligent failure to release a tax lien and unauthorized tax collection practices. A jury heard the refund claims and sat in an advisory capacity over the damages claims. The jury rendered a verdict and issued recommendations in favor of plaintiffs-appellants on all issues. The district court, however, entered an amended final judgment, awarding appellants refunds of some of the penalty assessments and damages for the negligent failure to release a tax lien, but concluding that the appellants were collaterally estopped from raising the claims for a refund from penalties for fraud and that the court did not have subject matter jurisdiction over the claims for unauthorized tax collection practices.

On appeal, appellants seek entry of judgment in accordance with the jury's verdict and recommendations. The government requests that the district court's judgment be affirmed.

I.

Dennis Gandy is in the tree nursery business. He operated as a sole proprietor until 1991, at which time he formed two corporations: Gandy Nursery, Inc. (to grow trees), and Gandy Marketing and Trucking, Inc. (to market and transport the trees). In 1989, the IRS began investigating Gandy for criminal tax violations for the years 1985, 1986, and 1987. In September 1992, Gandy pled guilty to one count of making and subscribing to a false income tax return for the year 1987, in violation of 26 U.S.C. § 7206(1). The IRS also issued Gandy a statutory notice of deficiency, determining that he was liable for additional income taxes for the years 1985 through 1989, and that he was liable for fraud penalties for those years. Gandy filed a petition with the United States Tax Court contesting these determinations. The tax court found that Gandy had fraudulently under-reported his income on his returns for the years 1985 through 1989 and that, as a result, Gandy had filed income tax returns reporting negative adjusted gross income for the tax years from 1985 through 1989. Thus, the tax court determined that Gandy was liable for fraud penalties for each of those years. The Fifth Circuit affirmed the tax court's determination. See Gandy v. Commissioner, 74 T.C.M. (CCH) 1283, 1997 WL 736880 (1997). On May 31, 2001, in its amended findings of fact and conclusions of law in the present case, the district court found that the evidence at trial established that Gandy had an outstanding tax liability of $2 million.

According to the government, appellants had neither filed returns for nor paid employment taxes for several taxable periods, but the IRS did not pursue the matter before 1993 because of the ongoing criminal proceedings against Gandy. Appellants note that in April 1993, Gandy discovered that his Chief Financial Officer, Mildred Ann Dozier had been embezzling funds that were to be used to pay employment taxes. Dozier subsequently pled guilty to this alleged embezzlement scheme.

According to appellants, on April 24, 1993, after discovering the embezzlement, their accountant, Tony Morgan, met with Tyler Revenue Officer Jo Kirkham and petitioned for a reasonable cause hearing on the penalties, pending appellants' payment of the underlying taxes, and requested involuntary collection proceedings to be withheld until after the reasonable cause hearing. Appellants claim that Kirkham found reasonable cause existed as to some of the quarters for which appellants had failed to file employment taxes. She assured Morgan that the IRS would not issue a levy on appellants' accounts until after the IRS's Dallas office had determined if reasonable cause existed as to all quarters. Nevertheless, appellants claim that Kirkham began civil collection actions on behalf of the IRS and, in August 1993, levied on appellants' bank accounts.

The government describes the same events differently. It states that in 1993, appellants filed delinquent employment tax returns for several preceding years. Upon receipt, the IRS assessed employment taxes, interest, and late-filing and late-payment penalties against all appellants. Appellants tendered payment of the employment taxes, directing that the funds be applied only to the taxes, and not to the related interest or penalties. They also filed administrative claims for abatement of the taxes and penalties. According to the government, Kirkham testified at trial that during her meeting with Morgan she agreed to refrain from collecting by levy so long as appellants abided by certain conditions, which included paying the interest due on the employment tax by July 6, 1993, and submitted proof that they were remaining current on their employment tax obligations. By late August, Kirkham had concluded that the agreement was no longer effective because appellants had not kept their side of the deal. Thus, in August 1993, the IRS served a levy on the Agricultural Production Credit Association ("PCA"), an institution at which Gandy had deposits, to collect the assessments made against Gandy for penalties and interest. The PCA issued a check to the IRS in the amount of $470,864.23 on August 24, 1993. This sum satisfied all interest and penalties on the employment tax, so the IRS released the liens. In December 1993, the IRS Service center granted Gandy's claims for abatement of the penalties. Thus, it began refunding to Gandy some of the PCA funds that had been applied to the penalties. But before refunding all of the funds, a special agent with the Criminal Investigation Division of the IRS contacted the Service Center with instructions that the abatements of the penalties of the employment taxes be reversed. Thus, the Service Center ceased issuing refunds and reassessed the penalties, without notice or demand. Neither party cites the precise date of the reassessment of penalties. Tax liens were filed in April 1995 and again in September 1995, according to appellants and the record.

On January 12, 1996, appellants filed administrative claims with the IRS to obtain release of the liens. According to appellants, on August 14, 1996, the IRS refused in writing to refund any of appellants' funds that had been applied to the penalties, or to remove any of the liens filed against appellants in April and September 1995. On December 12, 1996, appellants filed administrative claims for relief from wrongful collection actions, but the IRS again refused to stop the collection actions or to remove the liens. According to appellants, the issuance of the tax liens prevented appellants from purchasing property for the expansion of their business. In addition, the liens prevented appellants from selling property or receiving the fair rental value for their property.

Appellants then filed this action in district court on November 13, 1995, and a first amended complaint on January 16, 1996. The government filed its answer to the first amended complaint on February 12, 1996. Although appellants filed a second amended complaint with leave of court on January 24, 1997, no answer was filed immediately.

In their second amended complaint, appellants sought: (1) abatement of the unpaid balance of penalty assessments for late filing of employment tax returns and late payment of employment tax; (2) refund of payments that had been credited toward the penalty assessments; (3) damages under 26 U.S.C. § 7432 for negligent failure to release a tax lien; and (4) damages under 26 U.S.C. § 7433 for unauthorized tax collection practices. In addition, appellant Gandy sought a refund of fraud penalties assessed against him.

Although the deadline to file dispositive motions expired on January 15, 2000, the government filed an answer to the second amended complaint without leave of the court on August 7, 2000, over three years after the second amended complaint was filed and 50 days before trial was scheduled to begin. And, on August 23, 2000, over appellants' objection, the government was granted leave to file a motion for partial dismissal and/or summary judgment, which motion was denied in its entirety.

Appellants had a right to a jury trial on the refund and abatement issues, see, e.g., Martin v. C.I.R., 584 F.Supp. 977, 978 (N.D.Ohio 1984) (discussing the constitutional underpinnings of providing a right to a jury on such matters), aff'd, 753 F.2d 1358 (6th Cir.1985), and the presiding magistrate judge allowed the jury to sit in an advisory capacity over the damages issues pursuant to Rule 39(c), Fed.R.Civ.P. At trial, the jury found in favor of appellants on the employment tax penalties and the 1990 and 1991 fraud penalties, awarding Gandy Marketing and Trucking a refund of $11,156.79, which was the amount of a tax overpayment that had been applied to the employment tax penalties. The jury also awarded Gandy a refund of $105.63, which was the amount of an income tax overpayment that had been applied to the...