Lyerly v. United States
| Decision Date | 03 November 2016 |
| Docket Number | 2:15–cv–745–LSC |
| Citation | 218 F.Supp.3d 1309 |
| Parties | Jonathan E. LYERLY and Sharon Lyerly, Plaintiffs; v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Northern District of Alabama |
Charlie Cleveland, Kenneth Lee Cleveland, Cleveland & Cleveland PC, Birmingham, AL, for Plaintiffs.
Joyce White Vance, US Attorney, US Attorney's Office, Birmingham, AL, William E. Farrior, U.S. Department of Justice, Washington, DC, for Defendant.
Before the Court are Plaintiffs' Motion for Summary Judgment (doc. 27), Defendant's Motion for Summary Judgment (doc. 29) and Plaintiffs' Motion to Strike Evidence (doc. 34). Plaintiffs, Jonathan and Sharon Lyerly, brought this case based on tax penalties that they allege were wrongfully assessed by the Internal Revenue Service ("IRS"). The Lyerlys seek a refund of overpayments, damages, and a declaration of their correct tax liability. For the reasons stated below, Plaintiffs' motion for summary judgment is due to be granted in part and denied in part. Defendant's motion is due to be denied. Plaintiffs' motion to strike is due to be denied as moot.1
Jonathan ("Rick") and Sharon Lyerly (collectively "the Lyerlys") are a married couple living in Hoover, Alabama. Rick is an attorney with a general practice who does not do any tax or bankruptcy work. Rick suffers from many health problems, including diabetes, high blood pressure, a broken hip, a hernia, a prostate problem that required surgery, five heart bypass surgeries, internal bleeding, panic attacks, and anxiety. His anxiety is apparently tied to dealing with financial matters and sometimes manifests itself as shortness of breath, sweating, shaking, and almost losing consciousness. In 2009, Rick began to take Klonopin for his anxiety, which helped reduce these symptoms dramatically. Because of this anxiety, Rick relied almost entirely on others to take care of his financial matters, including filing his tax returns. He delegated this responsibility to Doug Hill ("Hill"), his accountant, and various office managers that he employed. Rick expected his office managers to gather and transmit financial information to Hill, who would then prepare his tax returns. Rick would simply sign his tax returns, apparently without reading them.
Mary Dobbs served as Rick's office manager until April 2007. She apparently did not attend to the tax matters that Rick had assigned her. She was then replaced by Joy Simeone ("Simeone"), who also did not handle Rick's tax matters appropriately. In fact, Rick alleges that Simeone embezzled from him and destroyed or altered his financial records. However, she also sent a memo to Rick in September 2007 about problems that the firm was having in complying with tax obligations. Simeone was fired in July 2008 when Rick discovered her embezzlement. Sharon then attempted to gather the necessary financial information herself for submission to Hill. However, she found this to be difficult because of the damage Simeone had done to Rick's records.
For the years 2005, 2006, and 2007, Rick failed to file tax returns with the IRS. Rick alleges, and the IRS disputes, that he always intended to file these returns. While the IRS claims that Rick knew he was late in filing his taxes, Rick contends that he thought his tax returns were covered by "extensions" because Hill never told him otherwise. According to Rick, he did not know his taxes were overdue until Jason Ward, an IRS criminal investigator, visited him on August 27, 2009.
During that visit, Rick told Ward that he thought the returns had been handled, but that he would check with Hill to make sure. Rick also told Ward that he was welcome to speak to Hill if he wanted more information about Rick's taxes, and even told Hill to cooperate with Ward and to give him "whatever he asked for." (Pl. Ex. 6 at 310.) Rick explained that he kept his financial records on Microsoft Money and instructed his secretary to put the records on a CD and give it to Ward. The next day, Ward went to Hill's office, talked to Hill, and collected some of Rick's records. Ward also visited and spoke to Dr. Bair, the psychologist who was treating Rick for his anxiety issues. Dr. Bair informed Ward that Rick had been diagnosed with "simple phobia and anxiety disorder primarily focused around financial matters." (Pl. Ex. 4 at 151.)
On October 10, 2012, the United States filed an information against Rick in the United States District Court for the Northern District of Alabama, alleging three counts of willful failure to file income tax returns for the years 2005, 2006, and 2007. During the criminal trial, Sharon and Rick testified that Rick had filed his taxes for these years on October 14, 2010, and that the delay in filing was not willful, but rather, was for "reasonable cause." Rick was found not guilty of all three counts on August 9, 2013.
Even though Rick filed his 2005 tax return in 2010, he did not pay his taxes for that year until September 20, 2012, when he mailed the IRS a check "For 2005 Tax/Estimated Penalties." (Pl. Ex. 16 at 2.) The IRS replied to his payment on December 10, 2012 with a letter stating that Rick owed $5,273.83 for the year 2005 for "penalties and interest figured to December 31, 2012." (Pl. Ex. 17 at 1.) Rick responded by sending the IRS a check on December 29, 2012 marked "For 2005/2007 Taxes" in the amount of $8,962.69, enough to cover the $5,273.83 he owed on his 2005 taxes and the $3,688.46 he owed on his 2007 taxes. (Pl. Ex. 19.) The IRS applied this payment to Rick's 2006 taxes because, according to the United States, he submitted the check with a 2006 payment voucher. Rick, however, argues that the IRS misapplied the check and therefore created a credit balance of $8,962.69 for the year 2006 which was never corrected. Rick also claims that if the check had been correctly applied, the taxes for the year 2005 would have been paid in full with a credit balance in his favor.
On September 9, 2013, the IRS sent the Lyerlys a letter stating that Rick still owed $5,384.20 on his 2005 taxes. On October 4, 2013 Rick replied, explaining that the IRS had misapplied his December 29, 2012 payment. Jacquelyne Yarbrough, an accounts manager with the IRS, responded to Rick's letter, stating that "we have not completed all the research necessary for a complete response...You don't need to do anything further now on this matter." (Pl. Ex. 24.) She also stated that the IRS would contact him within 45 days about the matter. (Id. ) However, the IRS never followed up with Rick or changed the application of that payment.
On August 27, 2012, the Lyerlys received a notice from the IRS that showed an outstanding balance of $35,853.14 on their 2006 taxes. (Pl. Ex. 29.) The notice stated "[s]end us the amount due...by September 17, 2012, to avoid additional penalty and interest charges." (Id. ) Rick paid the outstanding balance by check on September 7, 2012. The December 10, 2012 letter from the IRS listing the Lyerlys' outstanding obligations showed a balance remaining for the tax years of 2005 and 2007, but did not show there was any balance remaining for 2006.
Rick sent the IRS a check for $25,440 on September 20, 2012 with a memo that the payment was for "2007 Tax/Estimated Interest." (Pl. Ex. 16.) The IRS responded on December 10, 2012 stating that "[t]he amount [Rick] owe[d] for the tax period...includ[ing] penalties and interest figured to Dec. 31, 2012" was $3,688.46. (Pl. Ex. 17.) On December 29, 2012, Rick sent the IRS a check for $8,962.69, which included the $3,688.46 which he owed for his 2007 taxes and $5,273.83 that he owed for his 2005 taxes. The check was labeled "For 2005/2007 Taxes", but the IRS applied this payment to Rick's 2006 taxes. The United States argues that they correctly applied the check to the 2006 taxes because Rick submitted the payment with a 2006 payment voucher. However, Rick alleges that if the check had been rightfully applied to the 2007 taxes, the 2007 account would have been paid in full and would show a credit balance in his favor of $1,492.40.
On May 13, 2013, the Lyerlys received notice from the IRS that an overpayment of $6,989 from their 2012 taxes was applied to their 2007 account, leaving a balance of $22,644.28 on their 2007 account. Rick alleges that this means that his September 20, 2012 and December 29, 2012 payments had never been applied to his 2007 taxes. Regardless, the parties dispute what taxes Rick properly owed for 2007.
The Lyerlys filed their 2008 tax return on time and submitted a payment of $16,228 on October 19, 2009. However, the payment was not immediately posted to the Lyerlys' account, according to an IRS report, "due to the module being frozen by Criminal Investigation." (Pl. Ex. 41.) On June 16, 2014, the Lyerlys received an IRS notice showing a balance of $4,905.09 on their 2008 account. This notice showed failure to file, failure to pay proper estimated tax and failure to pay penalties as well as interest. (Pl. Ex. 43.) On September 1, 2014, the Lyerlys received another notice that they owed $4,936.23 for 2008 taxes. (Pl. Ex. 44.) Rick paid that balance by check on September 9, 2014. (Pl. Ex. 45.)
The Lyerlys allege that the penalties were wrongful, but the United States claims that their payments were both late and inadequate. According to the United States, the Lyerlys should have paid a higher estimated tax amount, and should have paid by April 15, 2009 instead of in October 2009.
The IRS transferred Rick's case to Maria Flournoy ("Flournoy") and her supervisor Dorothy Randle ("Randle") on August 26, 2013. While the case was Flournoy's responsibility, the case file was updated with a Civil Penalty Approval Sheet which stated that "Failure to File and Failure to Pay penalties were considered and determined to be inapplicable...no...
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