Mycles Cycles, Inc. v. United States

• Court: District Court, S.D. California
• Decided: September 4, 2019
• Docket: 3:18-cv-00314
• Status: Unknown

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 MYCLES CYCLES, INC. dba SAN Case No.: 18-CV-314 JLS (AGS) DIEGO HARLEY DAVIDSON, 12 ORDER GRANTING IN PART AND Plaintiff, 13 DENYING IN PART DEFENDANT’S v. AMENDED MOTION FOR 14 SUMMARY JUDGMENT UNITED STATES OF AMERICA, 15 Defendant. (ECF No. 19) 16 17 18 Presently before the Court is Defendant and Counter Claimant the United States of 19 America’s Amended Motion for Summary Judgment (“MSJ,” ECF No. 19). Plaintiff and 20 Counter Defendant Mycles Cycles, Inc. dba San Diego Harley Davidson filed a Response 21 in Opposition to (“Opp’n,” ECF No. 22) and the United States filed a Reply in Support of 22 (“Reply,” ECF No. 26) the Motion. After reviewing the Parties’ arguments, the evidence, 23 and the law, the Court rules as follows. 24 /// 25 /// 26 /// 27 /// 28 /// 1 BACKGROUND 2 Plaintiff Mycles Cycles is a family owned Harley Davidson Dealership that has been 3 operating in San Diego, California, since 1993. MSJ at 9. Mycles Cycles was founded by 4 Michael Shelby, who was the owner during all times relevant to this case. Id. 5 Plaintiff’s trouble with the Internal Revenue Service (“IRS”) began in August 2006, 6 when the IRS conducted the first of several compliance audits. Id. at 10. The compliance 7 audit was to ensure Plaintiff fulfilled its reporting obligations under Internal Revenue Code 8 (“I.R.C.”) section 6050I, which requires persons engaged in business to file a Form 8300 9 disclosure statement any time the business receives more than $10,000 in cash in a single 10 transaction from an individual. 26 U.S.C. § 6050I(a). Revenue Agent Tim Burke 11 conducted the audit and determined that although Plaintiff had generally complied with the 12 reporting requirements, two Forms 8300 were incomplete because they lacked tax payer 13 identification numbers (“TINS”). MSJ at 10 (citing Declaration of Carl Hankla (“Hankla 14 Decl.”) Ex. 2, ECF No. 19-4). Revenue Agent Burke provided instructional materials 15 related to the section 6050I reporting requirements and assessed no penalties. Id. 16 Seven months later, the IRS returned.2 See Hankla Decl. Ex. 4. Revenue Agent 17 Elizabeth Arnold conducted the audit and concluded that Plaintiff had not fully complied 18 with the section 6050I requirements during the audit period. See id. Revenue Agent 19 Arnold found Plaintiff had failed to file one Form 8300, id. Ex. 17; had failed to file timely 20 four Forms 8300, id. Ex. 5; had omitted TINS from three Forms 8300, id. Ex. 17; and had 21 failed to send eight customer information statements, id. at Ex. 5. Revenue Agent Arnold 22 conducted an in-person closing conference outlining the compliance issues and assessed a 23 $600 negligence penalty under I.R.C. sections 6721 and 6722. MSJ at 12. 24 /// 25 26 1 Neither Party submitted a separate statement of undisputed material facts. The Court cites primarily to Defendant’s Motion, noting any discrepancies between the Parties’ factual contentions. 27

28 2 The Parties dispute whether this visit was a “second audit,” as the United States contends, see MSJ at 1 Following this second visit, Plaintiff’s general manager, Tyler Miller, sent a letter to 2 the IRS that acknowledged there had been “a couple of items” that had been “not in 3 compliance resulting in a penalty.” Hankla Decl. Ex. 7. The letter stated that Plaintiff was 4 “taking immediate measures to become 100% compliant.” Id. The corrective actions 5 included “task[ing] its managers in the finance and insurance (“F&I”) department with 6 compliance” to ensure completion of all Forms 8300 and notices sent to consumers. Opp’n 7 at 11 (citing Deposition of Tyler Miller (“Miller Depo.”) at 19:18–20; 32:10–14, ECF No. 8 22-1). Plaintiff also “instituted a training and quality control system for its employees on 9 the Form 8300 compliance.” Id. (citing Miller Depo. at 19:6–7). Additionally, Plaintiff 10 “create[ed] an internal log so that ‘if for whatever reason a finance manager didn’t fill it 11 out, didn’t think it applied, forgot, it would get caught by accounting,’” id. (citing Miller 12 Depo at 18:10–15), as well as a “binder to keep track of its Forms 8300 and notices sent to 13 consumers.” Id. (citing Miller Depo. at 18:16–19).3 14 In 2014, the IRS conducted another audit. After reviewing Plaintiff’s sales, Revenue 15 Agent Brian Kuhns found that Plaintiff sold ten motorcycles for cash over $10,000. MSJ 16 at 14 (citing Hankla Decl. Ex. 10). Plaintiff filed Forms 8300 for only nine of these 17 transactions,4 all of which lacked customers’ TINS. Id. (citing Hankla Decl. Ex. 8). Of 18 the nine completed forms, eight lacked the customer’s occupation. Id. After the field visit, 19 Revenue Agent Kuhns discovered the 2006 and 2007 audit files, noting Revenue Agents 20 Burke and Arnold had found Plaintiff had failed to comply with its section 6050I 21 responsibilities, had educated Plaintiff about its filing responsibilities under section 6050I, 22 and had assessed negligence penalties. Id. at 16 (citing Hankla Decl. Ex. 10). 23 Based on the findings made during the field visit, in addition to the previous 24 deficiencies found during the 2006 and 2007 visits, Revenue Agent Kuhns levied 25 26 3 Defendant disputes the adequacy of these measures and the extent to which Plaintiff implemented them. See MSJ at 13–14. 27

28 4 During the audit, the Revenue Agent Kuhns found the missing Form 8300 and assessed a negligence 1 intentional disregard penalties under section 6721(e) for filing the nine Forms 8300 without 2 TINS. Id. at 17 (citing Hankla Decl. Ex. 12). The IRS assessed penalties of $25,000 for 3 each of the nine incomplete Forms 8300 filed by Plaintiff under section 6721(e)(2)(C), 4 totaling $225,000. Id. The IRS also assessed negligence penalties under section 6721(a)(2) 5 totaling $700 for failure to send ten customer information statements and one late filing. 6 Id. The IRS denied Plaintiff’s administrative appeal, after which Plaintiff paid one of the 7 $25,000 penalties and requested a refund. Id. After the IRS denied Plaintiff’s request, 8 Plaintiff filed this lawsuit. See ECF No. 1. 9 LEGAL STANDARD 10 Under Federal Rule of Civil Procedure 56(a), a party may move for summary 11 judgment as to a claim or defense or part of a claim or defense. Summary judgment is 12 appropriate where the Court is satisfied that there is “no genuine dispute as to any material 13 fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); 14 Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Material facts are those that may affect 15 the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A 16 genuine dispute of material fact exists only if “the evidence is such that a reasonable jury 17 could return a verdict for the nonmoving party.” Id. When the Court considers the 18 evidence presented by the parties, “[t]he evidence of the non-movant is to be believed, and 19 all justifiable inferences are to be drawn in his favor.” Id. at 255. 20 The initial burden of establishing the absence of a genuine issue of material fact falls 21 on the moving party. Celotex, 477 U.S. at 323. The moving party may meet this burden 22 by identifying the “portions of ‘the pleadings, depositions, answers to interrogatories, and 23 admissions on file, together with the affidavits, if any,’” that show an absence of dispute 24 regarding a material fact. Id. When a plaintiff seeks summary judgment as to an element 25 for which it bears the burden of proof, “it must come forward with evidence which would 26 entitle it to a directed verdict if the evidence went uncontroverted at trial.” C.A.R. Transp. 27 Brokerage Co. v. Darden Rests., Inc., 213 F.3d 474, 480 (9th Cir. 2000) (quoting Houghton 28 v. South, 965 F.2d 1532, 1536 (9th Cir. 1992)). 1 Once the moving party satisfies this initial burden, the nonmoving party must 2 identify specific facts showing that there is a genuine dispute for trial. Celotex, 477 U.S. 3 at 324. This requires “more than simply show[ing] that there is some metaphysical doubt 4 as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 5 586 (1986). Rather, to survive summary judgment, the nonmoving party must “by her own 6 affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ 7 designate ‘specific facts’” that would allow a reasonable fact finder to return a verdict for 8 the non-moving party. Celotex, 477 U.S. at 324. The non-moving party cannot oppose a 9 properly supported summary judgment motion by “rest[ing] on mere allegations or denials 10 of his pleadings.” Anderson, 477 U.S. at 256. 11 ANALYSIS 12 Defendant contends that Plaintiff intentionally disregarded the section 6050I 13 reporting requirements when it knowingly omitted TINS from its Forms 8300. MSJ at 14 23–29. According to Defendant, the uncontested material facts show that Plaintiff had 15 actual knowledge of its compliance deficiencies, yet willfully failed to take corrective 16 measures to fully comply with the law, proving Plaintiff intentionally disregarded its filing 17 obligations under 26 U.S.C. § 6721 as a matter of law. MSJ at 23–25. Further, Defendant 18 argues that Plaintiff is not entitled to “reasonable cause” relief under 26 U.S.C. § 6724 19 because Plaintiff failed to seek that relief in its administrative refund claim or in the 20 Complaint and, therefore, Plaintiff cannot raise that claim in this refund suit. Reply at 4. 21 I. Intentional Disregard 22 Section 6050I(a) requires “[a]ny person . . . engaged in a trade or business” to file a 23 Form 8300 to report any transaction for which it receives “more than $10,000 in cash in 1 24 transaction (or 2 or more related transactions).” Additionally, the business must also notify 25 the customer who made the payment that it filed a Form 8300. 26 U.S.C. § 6050I(e). 26 Penalties for failure to comply with these statutory reporting requirements are set 27 forth in sections 6721 (failure to file the Form 8300 disclosure) and 6722 (failure to send 28 the customer notification statement) of the I.R.C. 26 U.S.C. §§ 6721, 6722. The ordinary 1 penalty in both sections is $50 for each failure that occurs, see id.; however, “[b]oth 2 Sections 6721 and 6722 provide for greatly enhanced penalties where the failure is due to 3 ‘intentional disregard’ of the filing or notification requirements.” Purser Truck Sales, Inc. 4 v. United States, 710 F. Supp. 2d 1334, 1338 (2008). If the failure to file or complete the 5 Form 8300 is due to intentional disregard––as the IRS has alleged here––the penalty for 6 each failure is the greater of $25,000 or the amount of cash received in the transaction, up 7 to $100,000. 26 U.S.C. § 6721(e)(2)(C). 8 Section 6721 does not define the term “intentional disregard.” The accompanying 9 IRS regulations provide guidance, stating that “[a] failure is due to intentional disregard if 10 it is a knowing or willful . . . [f]ailure to file timely, or . . . [f]ailure to include correct 11 information.” 26 C.F.R. § 301.6721-1(f)(2). “Whether a person knowingly or willfully 12 fails to file timely or fails to include correct information is determined on the basis of all 13 the facts and circumstances in the particular case.” Id. The regulations include suggestions 14 as to what the Court should consider when looking at the facts and circumstances: 15 The facts and circumstances that are considered in determining whether a failure is due to intentional disregard include, but are 16 not limited to–– 17 (i) Whether the failure to file timely or the failure to 18 include correct information is part of a pattern of conduct 19 by the person who filed the return of repeatedly failing to file timely or repeatedly failing to include correct 20 information; 21 (ii) Whether correction was promptly made upon 22 discovery of the failure; 23 (iii) Whether the filer corrects a failure to file or a failure 24 to include correct information within 30 days after the date 25 of any written request from the Internal Revenue Service to file or to correct; and 26

27 (iv) Whether the amount of the information reporting penalties is less than the cost of complying with the 28 1 roenq aunir einmfoenrmt taot ifoilne rteimtuernly. or to include correct information 2 3 26 C.F.R. § 301.6721-1(f)(3) (the “301.6721–1 Factors”). “[T]hese considerations are not 4 an exhaustive or conclusive list,” Purser Truck Sales, 710 F. Supp. 2d at 1339, they are 5 simply “among any of a number of factors which may be considered in concluding that a 6 failure to file was due to an intentional disregard.” Kruse, Inc. v. United States, 213 F. 7 Supp. 2d 939, 944 (N.D. Ind. 2002). 8 Although “Section 6721 does not use the term ‘willful’” and instead “uses the term 9 ‘intentional disregard’ . . . [,] 26 C.F.R. § 301.6721-1(f)(2)(ii) defines ‘intentional 10 disregard’ as synonymous with ‘willfulness.’” Lefcourt v. United States, 125 F.3d 79, 83 11 (2nd Cir. 1997). For this reason, the Second Circuit––and the limited number of other 12 courts that have considered the question––defines “‘intentional disregard’ set forth in 13 § 6721’s penalty provision” as “conduct that is willful, a term which in this context requires 14 only that a party act voluntarily in withholding requested information, rather than 15 accidentally or unconsciously.” Id.; cf. Denbo v. United States, 988 F.2d 1029, 1034–35 16 (10th Cir. 1993) (defining “willful” conduct under 26 U.S.C. § 6672 as a “voluntary, 17 conscious and intentional decision”) (quoting Burden v. United States, 486 F.2d 302, 304 18 (10th Cir. 1973), cert. denied, 416 U.S. 904 (1974)); Hansen v. Comm’r of Internal 19 Revenue Serv., 820 F.2d 1464, 1469 (9th Cir. 1987) (defining intentional disregard, as it 20 concerns 26 U.S.C. § 6653, as when “a taxpayer . . . knows or should know of a rule or 21 regulation[ but] chooses to ignore its requirements”). Because of the “extreme harshness” 22 of the penalties involved, intentional disregard in this context “is a high standard of 23 culpability, requiring much more than merely negligent or reckless disregard.” Purser 24 Truck Sales, 710 F. Supp. 2d at 1339. Here, the Court will “[a]pply [the Lefcourt] 25 definition as well as § 301.6721-1(f)(3) of the Regulations . . . [to] the facts and 26 circumstances in this case.” Am. Vending Grp., Inc. v. United States, No. CIV.A.WGC- 27 07-2277, 2008 WL 4605934, *5 (D. Md. Aug. 28, 2008). 28 /// 1 Under the first factor suggested by 26 C.F.R. § 301.6721-1(f)(3), Defendant 2 contends that the audit history shows a pattern of conduct that amounts to intentional 3 disregard. There is no dispute that in 2006 and 2007, the Revenue Agents auditing Plaintiff 4 found Plaintiff’s Forms 8300 deficient and “provided instructional materials, made . . . 5 field visit[s], met with employees, explained [Plaintiff]’s legal responsibilities, pointed out 6 the penalties for noncompliance, and interviewed the [F&I] managers responsible for filing 7 [the] Form[s] 8300” for Plaintiff. MSJ at 7. Further, despite the steps taken by the Revenue 8 Agents, Plaintiff submitted nine incomplete Forms 8300 in 2014, all of which lacked TINS. 9 From these facts, Defendant argues that the Court can infer Plaintiff “was aware of its 10 obligations” yet engaged in a “pattern of conduct that reveals intentional disregard of filing 11 requirements.” Purser Truck Sales, 710 F. Supp. 2d at 1339. 12 Plaintiff disputes that the prior audit history shows a pattern of conduct sufficient to 13 infer intentional disregard. Plaintiff contends that, although it was aware of deficiencies in 14 its compliance, the Revenue Agents never specifically mentioned TINS and none of the 15 instructional materials provided by the IRS stated that failure to include TINS constituted 16 a violation. Opp’n at 7–8. The deposition testimony of Plaintiff’s employees, in which the 17 employees claim they do not remember the Revenue Agents identifying concerns related 18 to providing TINS, supports this. See, e.g., Prask Decl. Ex. D (Deposition of Tyler Miller) 19 at 16:16–17:18 (Plaintiff’s general manager stating he had no recollection of any discussion 20 about leaving out Social Security numbers during the 2007 audit); Prask Decl. Ex. D 21 (Deposition of Kim Walters) at 27:23–25 (Plaintiff’s controller stating same regarding 22 2006 and 2007 audits). Further support comes from Plaintiff’s 2007 letter that it submitted 23 to the IRS, which identified several deficiencies it would work to improve but made no 24 mention of TINS. See generally Hankla Decl. Ex. 7. Finally, Plaintiff notes it voluntarily 25 filed the Forms 8300 with all required information other than TINS, which supports its 26 claims that it mistakenly omitted TINS from the forms. Opp’n at 11–12. Defendant offers 27 no evidence to refute Plaintiff’s contention, merely stating that “[i]t is likely [Revenue 28 /// 1 Agent] Arnold would have mentioned the omission of the TINS as part of the basis for 2 asserting the negligence penalties” during the 2007 audit. Reply at 7. 3 Based on the above facts, the Court finds that a trier of fact could conclude that 4 Plaintiff did not intentionally disregard its obligation to file complete Forms 8300. 5 Although a trier of fact could conclude that, based on the prior audits, Plaintiff knew of its 6 obligations yet continued its pattern of filing incomplete Forms 8300, knowledge alone 7 does not lead to an automatic finding of willfulness. See Tysinger Motor Co., Inc. v. United 8 States, 428 F. Supp. 2d 480, 485 (E.D. Vir. 2006) (noting section 6721 is an “intent based 9 statute” rather than “one of strict liability”). Indeed, a trier of fact could conclude that, 10 despite the prior audits, Plaintiff did not have sufficient knowledge to comply with the 11 regulations. The Court therefore finds a dispute of material fact as to this factor. 12 Next, the Court notes that neither party has introduced evidence concerning any 13 corrective actions taken by Plaintiff, as suggested by the second and third factors of the 14 regulation. It seems from the record that Plaintiff discovered its omissions only after the 15 IRS notifications and there is no indication that Plaintiff corrected the omissions within 16 thirty days of notification. 17 Regarding the fourth factor, cost of compliance, the Court finds there are material 18 disputes of fact. The cost to comply with section 6050I “appears to be minimal.” See 19 Purser Truck Sales, 710 F. Supp 2d at 1343. “Section 6050I does not require [Plaintiff] 20 to pay any additional tax; it merely requires [Plaintiff] to fill out a form and mail a letter to 21 the customer.” Id. Defendant, however, argues that Plaintiff’s F&I managers knew that 22 Form 8300 required TINS, yet did not request TINS from customers “because [they] w[ere] 23 afraid of losing a sale.” MSJ. at 8. Plaintiff views the evidence differently, noting that in 24 her deposition, Plaintiff’s F&I manager Vanessa Hunsaker stated that not asking for TINS 25 “wasn’t about not obtaining [a] sale, because there are no commissions paid on a cash 26 deal. . . . It was about not tipping the customer off that [filing the Form 8300 with the IRS] 27 was going to be happening after they left the dealership.” Prask Decl. Ex. E (Deposition 28 of Vanessa Hunsaker) at 27:21–28:14. A trier of fact could view this evidence and 1 conclude that Plaintiff had a financial motive to omit TINS from the forms; however, a 2 trier of fact could also reasonably conclude that Plaintiff had no financial motive. A 3 genuine dispute of material fact therefore exists as to this factor. 4 In addition to the regulatory factors, Plaintiff claims it took remedial measures after 5 the 2006/2007 audits that show it intended to comply with the law. As noted above, 6 Plaintiff claims it “instituted a training and quality control system for its employees on the 7 Form 8300 compliance.” Id. (citing Miller Depo. at 19:6–7). Plaintiff also “create[ed] an 8 internal log so that ‘if for whatever reason a finance manager didn’t fill it out, didn’t think 9 it applied, forgot, it would get caught by accounting,’” id. (citing Miller Depo at 18:10– 10 15), as well as a “binder to keep track of its Forms 8300 and notices sent to consumers.” 11 Id. (citing Miller Depo. at 18:16–19). 12 Defendant refutes Plaintiff’s claims, arguing that Plaintiff did “nothing meaningful 13 to achieve 100 percent compliance on a regular basis.” MSJ at 24. According to 14 Defendant, after the 2006/2007 audits, Plaintiff “did not provide its F&I managers with 15 training, did not pay them extra for filling out the Forms 8300 and sending customer 16 information statements, did not adopt any system of internal controls, and did not hold 17 them accountable for their mistakes.” Reply at 8. This nonaction “allow[ed] a pattern of 18 noncompliance to continue to grow.” Id. at 8. 19 The Court cannot resolve this factual dispute on summary judgment. Further, “it is 20 not clear” that Plaintiff’s corrective measures––whatever they were and however 21 effective—“were the result of intentional disregard of the law.” See Purser Truck Sales, 22 710 F. Supp. 2d at 1344. “A trier of fact could find that these efforts, ineffective though 23 they were, indicated an intent to comply with the law, not an intent to disregard it.” Id.; 24 see also Tysinger Motor Co., 428 F. Supp. 2d at 486 (noting that with regard to compliance 25 efforts, “[s]loppiness is not the same as willfulness”). 26 After reviewing the evidence and applying the regulatory factors to the facts and 27 circumstances of this case, the Court concludes that a trier of fact could find that Plaintiff 28 met its burden to show it did not intentionally disregard its section 6050I filing 1 requirements. This conclusion is supported by other courts that have faced similar factual 2 circumstances. For example, in Tysinger Motor Co., the district court sitting as trier of fact 3 in a bench trial held the plaintiff taxpayer had met its burden in showing intentional 4 disregard penalties were inappropriate. 428 F. Supp. 2d 480. The court found persuasive 5 evidence similar to that which Plaintiff presented in this case, including the tax payer’s 6 “efforts to set up a system that would identify reportable transactions,” “the fact that [the 7 tax payer] filed a Form 8300 for half the reportable transactions,” and the fact that the “IRS 8 . . . produced no evidence from which the Court could even infer that [the tax payer’s CFO] 9 intentionally designed a flawed compliance system.” Id. at 485. 10 Similarly, in Purser Truck Sales, the court determined that genuine issues of material 11 fact precluded summary judgment on the issue of whether the IRS was authorized to 12 impose intentional disregard penalties for the plaintiff’s failure to file Forms 8300. 710 F. 13 Supp. 2d at 1342. There, after an audit uncovered a failure to comply with section 6050I’s 14 filing requirements, the plaintiff taxpayer attempted to comply with the requirements by 15 setting up an excel spreadsheet to track sales. Id. at 1342. The court found that, although 16 the government produced evidence that the plaintiff’s failure to file any Forms 8300 over 17 a two-year period after the initial audit could “be construed as a pattern of conduct that 18 reveal[ed] intentional disregard of filing requirements,” there was “substantial evidence 19 that [the plaintiff]’s failures were not due to intentional disregard but were simply mistakes 20 resulting from unsophisticated office procedures” and, thus, summary judgment was not 21 warranted. Id. at 1342–43. The same can be said here, as there is ample evidence presented 22 in this case, including far more robust compliance efforts, from which a trier of fact could 23 conclude Plaintiff’s failures were not due to intentional disregard. 24 In sum, Plaintiff has brought forth evidence sufficient to create a genuine dispute of 25 material fact as to whether it intentionally disregarded its filing requirements. Thus, 26 Defendant is not entitled to summary judgment as to Plaintiff’s claims under section 6721. 27 /// 28 /// 1 II. Reasonable Cause 2 Defendant argues that Plaintiff cannot avoid penalties under 26 U.S.C. § 6724(a) 3 because Plaintiff failed to raise its claim of reasonable cause in its administrative refund 4 claim. 5 Under 26 U.S.C. § 6724, “[n]o penalty shall be imposed . . . with respect to any 6 failure if it is shown that such failure is due to reasonable cause and not to willful neglect.” 7 To fall under this mandatory waiver provision, the taxpayer must prove: “(1) that 8 significant mitigating factors excuse the failure to file; or (2) the failure to file arose from 9 events beyond the taxpayer’s control.” Tysinger Motor Co., 428 F. Supp. 2d at 486 (citing 10 26 C.F.R. § 301.6724-1(a)(2)). “The taxpayer must also prove that he acted in a 11 ‘responsible manner’ both before and after the failure occurred.” Id. Acting in a 12 responsible manner means: 13 (i) That the filer exercised reasonable care, which is that standard of care that a reasonably prudent person would use under the 14 circumstances in the course of its business in determining its 15 filing obligations . . . and

16 (ii) That the filer undertook significant steps to avoid or mitigate 17 the failure. 18 26 C.F.R. § 301.6724-1(d). 19 Before filing a claim in a refund suit, taxpayers must first file an administrative 20 refund claim. 26 U.S.C. § 7422(a). The administrative refund claim “must set forth in 21 detail each ground upon which a credit or refund is claimed and facts sufficient to apprise 22 the Commissioner of the exact basis.” 26 C.F.R. § 301.6402-2(b)(1). Compliance with 23 the specificity requirements of section 301.6402-2(b)(1) is a prerequisite to subject matter 24 jurisdiction over a claim for a refund. New Gaming Sys., Inc. v. United States, No. 2:11- 25 CV-00627-MCE-AC, 2013 WL 5798998, at *10 (E.D. Cal. Oct. 28, 2013) (citing Quarty 26 v. United States, 170 F.3d 961, 972–73 (9th Cir. 1999); Bear Valley Mut. Water Co. v. 27 Riddell, 493 F.2d 948, 950–51 (9th Cir. 1974)). To meet these specifications, neither a 28 “detailed explanation” of the legal theories nor a “full factual background” is required in 1 the tax payer’s refund claim; rather, “the claim on its face” must apprise the IRS of points 2 to which it must examine and direct its attention. Boyd v. United States, 762 F.2d 1369, 3 1371–72 (9th Cir. 1985). “If the claim on its face does not call for investigation of a 4 question, the taxpayer may not later raise that question in a refund suit.” Id. at 1372. 5 Here, Defendant argues that Plaintiff may not seek relief based on reasonable cause 6 under 26 U.S.C. § 6724 because it “did not seek such relief in its administrative refund 7 claim.” Reply at 4. The Court must agree. The first time Plaintiff raised its claim for 8 reasonable cause was in its Opposition. See generally Opp’n. Plaintiff’s refund claim and 9 Complaint mention only section 6721, not section 6724. See generally Compl. & Ex. 3. 10 Importantly, the refund claim fails to mention any facts to support an inference that there 11 occurred “significant mitigating factors” that must “excuse the failure to file” or that “the 12 failure to file arose from events beyond [Plaintiff]’s control.” See Tysinger Motor Co., 428 13 F. Supp. 2d at 486. The claim also fails to raise any facts that Plaintiff’s employees “acted 14 in a responsible manner” before and after the alleged failure. The Court thus concludes 15 that Plaintiff’s refund claim failed to present “facts sufficient to enable the Commissioner 16 of Internal Revenue to make an intelligent administrative review of the claim,” see Lemoge 17 v. United States, 378 F. Supp. 228, 232 (N.D. Cal. 1974), and, therefore, Plaintiff may not 18 raise a claim for reasonable cause under section 6724 at this late stage. 19 CONCLUSION 20 Based on the foregoing, the Court GRANTS IN PART AND DENIES IN PART 21 Defendant’s Motion for Summary Judgment (ECF No. 19). Specifically, the Court 22 GRANTS Defendant’s Motion as it concerns the mandatory waiver of penalties under 26 23 U.S.C. § 6724 and DENIES Defendant’s Motion with regards to the penalties assessed 24 under 26 U.S.C. § 6721. The Parties SHALL CONFER and SHALL FILE a proposed 25 /// 26 /// 27 /// 28 /// 1 ||schedule of pretrial dates and deadlines within fourteen (14) days of the electronic 2 || docketing of this Order. 3 IT IS SO ORDERED. 4 ||Dated: September 4, 2019 tt 5 jen Janis L. Sammartino 6 United States District Judge 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28