The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge
ORDER: (1) GRANTING IN PART AND DENYING IN PART THE UNITED STATES' MOTION FOR SUMMARY JUDGMENT; (2) GRANTING THE UNITED STATES' MOTION TO STRIKE (Doc. No. 35, 48.)
Presently before the Court is the United States' motion for summary judgment to reduce federal tax assessments to judgment against Defendant Tony J. Helms ("Defendant"). (Doc. No. 35.) The United States has also filed a separate motion to strike certain exhibits filed in support of Defendants' response in opposition. (Doc. No. 48.) For the reasons stated below, the Court GRANTS the United States' motion to strike and GRANTS IN PART and DENIES IN PART the United States' motion for summary judgment.
This action was commenced by the United States to reduce federal tax assessment to judgment for the tax years 1989, 1990, 1991, 1992 and 1993 against Defendant. (See Doc. No. 1.) Defendant is a professional tax return preparer and owns his own tax preparation business called Beach Cities Financial Group ("Beach Cities"). However, Defendant did not timely file his own tax returns for these five years at issue, despite demands by the Internal Revenue Service ("IRS") to do so. As a result, the IRS made assessments for those tax years and generated Substitutes for Return ("SFRs") based upon third-party sources, including bank deposit analysis. Finally, in late 2008, through his attorney, Defendant submitted income tax returns for the tax years at issue. Pursuant to this litigation, IRS Revenue Agent Simon Bonilla conducted an administrative audit and produced an extensive report making line-by-line adjustments to income, deductions and credits for the tax years at issue. After additional evidence was sent to Revenue Agent Bonilla by Defendant, Revenue Agent revised his report and submitted a final report.
During his examination, Revenue Agent Bonilla first determined Defendant's income by analysis of deposits into Defendant's bank accounts. The IRS's calculation of income for all five years differed from Defendant's claimed income by an increase of $378,914.42. Then, the IRS examined various deductions claimed by Defendant for all five years, allowing some deductions and disallowing others based on whether the IRS found they were properly substantiated. Finally, the IRS made adjustments as a result of the changes in deductions as well as various penalties for failing to file a tax return and failure to pay tax penalties. The final liability as calculated by Revenue Agent Bonilla for all five years at issue is $1,370,285.00, including penalties, fees, and accrued interest calculated through April 3, 2010, minus any payments.
II. Procedural Background
The United States initiated this action by filing a complaint in this Court on January 24, 2008. (Doc. No. 1.) Defendant filed an answer to the complaint on May 14, 2008. (Doc. No. 4.) On November 24, 2008, this Court granted a joint motion to stay the proceedings pending the administrative audit discussed above. (See Doc. Nos. 18, 20.) On May 5, 2010, the United States filed the present motion for summary judgment. (Doc. No. 35.) Defendant filed his response in opposition on May 27, 2010. (Doc. No. 41.) The United States filed both a motion to strike documents filed in support of Defendant's opposition and its reply to Defendant's opposition on June 11, 2010. (Doc. Nos. 48, 49.) Defendant filed a response to the motion to strike on June 28, 2010, and the United States filed its reply on July 5, 2010. (Doc. Nos. 51, 53.) Oral argument on both the motion for summary judgment and the motion to strike was held before this Court on July 22, 2010 and was thereafter taken under submission.
Federal Rule of Civil Procedure 56 permits a court to grant summary judgment where (1) the moving party demonstrates the absence of a genuine issue of material fact and (2) entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). "Material," for purposes of Rule 56, means that the fact, under governing substantive law, could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). For a dispute to be "genuine," a reasonable jury must be able to return a verdict for the nonmoving party. Anderson, 477 U.S. at 248.
The initial burden of establishing the absence of a genuine issue of material fact falls on the moving party. Celotex, 477 U.S. at 323. The movant can carry his burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party "failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof." Id. at 322--23. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).
Once the moving party establishes the absence of genuine issues of material fact, the burden shifts to the nonmoving party to set forth facts showing that a genuine issue of disputed fact remains. Celotex, 477 U.S. at 324. The nonmoving party cannot oppose a properly supported summary judgment motion by "rest[ing] on mere allegations or denials of his pleadings." Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, the court must view all inferences drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
As a threshold matter, the United States seeks to strike certain documents submitted by Defendant in opposition because they were not disclosed during discovery or were altered from the document that was originally produced. (See Mot. to Strike at 4-5.) Specifically, the United States argues that Defendant has failed to timely supplement his responses to the United States' requests for production and failed to timely comply with the magistrate judge's order ending discovery by December 2, 2009. See Fed. R. Civ. P. 26(e); Fed. R. Civ. P. 37; Doc. No. 29.
Rule 37 provides: "If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless the failure was substantially justified or is harmless." Fed. R. Civ. P. 37(c)(1). The burden of establishing that failure to produce the documents is substantially justified or harmless is on the party seeking to introduce such documents. See Yeti v by Molly Ltd. v. Deckers Outdoor Corp., 259 F.3d 1101, 1106 (9th Cir. 2001). Defendant admits that the documents at issue in the motion to strike were not previously produced to the United States and that two others were altered from their produced state. (See Helms Decl. ISO Opp. at ¶¶ 2, 3, 4, 7, 8; see also Opp. to Mot. to Strike at 2-6.) However, he fails to explain why these violations are harmless or substantially justified. Defendant argues that they were produced to clarify or for "historical purposes" and do not produce any new data. (Opp. to Mot. to Strike at 2.) The Court disagrees. Defendant seeks to exclude several documents in an attempt to bolster his opposition and create a genuine issue of material fact without giving the United States an ability to inquire into these documents. For example, Defendant produced "Mileage Reconstruction" summaries for 1990, 1991, and 1993, which attempt to reconstruct the mileage and costs and illustrate a "variance with the amount claimed." Further, Defendants have altered documents produced without adequately justifying such an alteration. (See, e.g., Opp to Mot. to Strike at 5.)
Moreover, the burden is on Defendant to substantiate all claimed deductions and Defendant has had ample opportunity to create charts or other documents purportedly aiding the reviewer in evaluating the claimed substantiation. Defendant now claims that the documents at issue here are doing just that-aiding and assisting the reviewer by summarizing and connecting claimed deductions and substantiation of those deductions. However, that opportunity arose during discovery and Defendant was given ample opportunity to produce all documents substantiating his claims. He did not do that and Defendant should not now be able to produce new or altered documents in an effort to defeat summary judgment when those documents could not have been relied on by the United States in the opening motion for summary judgment. Therefore, the Court GRANTS the United States' motion to strike the documents at issue.*fn1
II. Actions to Collect Taxes and Burdens of Proof
In an action to collect taxes, the United States has the initial burden of proof which can be satisfied by introducing proof of tax assessments. See Palmer v. Internal Revenue Serv., 116 F.3d 1309, 1312 (9th Cir. 1997). The tax assessments and deficiency determinations are "entitled to a presumption of correctness so long as they are supported by a minimal factual foundation." Id. The burden then shifts to the taxpayer to show that the assessment is incorrect. Id.; see also United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983); Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985). The presumption is rebutted by establishing by a preponderance of the evidence that the deficiency determination is arbitrary or erroneous. See Rapp, 774 F.2d at 935.
In this action, the United States has submitted Certificate of Assessments and Payments for the income tax assessments against the Defendant for the tax years ending December 31 of the years 1989, 1990, 1991, 1992 and 1993. (See Fuchs Decl. Exs. 1-5.) Such Certificates of Assessment and Payments establish the United States' initial burden of proof and are afforded the presumption of correctness. See Koff v. United States, 3 F.3d 1297, 1298 (9th Cir. 1993); see also Hughes v. United States, 953 F.3d 531, 535 (9th Cir. 1992); Huff v. United States, 10 F.3d 1440, 1445-46 (9th Cir. 1993). Furthermore, in addition to these Certificates of Assessments and Payments, the United States has performed an administrative audit and submitted a detailed examination report reviewing all years at issue and explaining its assessments of Defendants' liabilities. (See Bonilla Decl. ¶ 385; see also Bonilla Decl. Exs. 6-10.) Defendant does not dispute that the United States has met its initial burden. Accordingly, the burden is now on Defendant to rebut the presumption of correctness and establish by countervailing proof that these assessments are in error. In an effort to create said genuine issue of material fact, Defendant submits a 6-page memorandum in opposition to the motion for summary judgment and an 86-page declaration by Defendant explaining over 1200 pages of exhibits filed in support of his opposition, as well as various other documents.*fn2 (Doc. Nos. 39-46.)
The Internal Revenue Code defines gross income as "all income from whatever source derived," including "income derived from business." 26 U.S.C. § 61(a)(2). Every individual liable for tax must keep records, statements and returns to establish gross income. See 26 U.S.C. § 6001; see also DiLeo v. Commissioner., 96 T.C. 858, 867 (1991), aff'd, 959 F.2d 16 (2d Cir. 1992). "If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary, does clearly reflect income." 26 U.S.C. § 446(b); see also Holland v. United States, 348 U.S. 121 (1954); Palmer v. Internal Revenue Serv., 116 F.3d 1309, 1312 (9th Cir. 1997). "The use of bank deposits and cash expenditures has long been an acceptable method of computing income." Mahigel v. Commissioner, T.C. Memo. 1983-529 (1983) (citations omitted). The burden falls on the taxpayer to prove that the IRS's method of computation is incorrect. Id. (citations omitted); see also Parks v. Commissioner, 94 T.C. 654, 661 (1990).
In this case, the IRS performed a deposit analysis of Defendant's bank accounts. The IRS identified the likely source of income for all deposits as his financial services business as well as the occasional sale of real property. Revenue Agent Bonilla reviewed the returns as well as Defendant's general ledger of Profit and Loss Statements and other documents provided by him to substantiate his claims. (Bonilla Decl. ¶ 14.) When such records or deposition testimony from this action corroborated Defendant's characterization of certain deposits as a loan or other non- income deposit, Revenue Agent Bonilla did not include these as income. (Id. ¶ 13.) As a result, the IRS adjusted Defendant's claimed income for each year, with a total difference for all five years of $378,914.42.*fn3 (See Pl. SOF ¶ 24 (chart summarizing all five years adjustments and total difference).)
Defendant does not challenge the method used to compute the income, but rather the specific findings as to which deposits were or were not included as income. In Defendant's declaration, he discusses innumerable deposits included as income which he contends he "did and can offer evidence that it is inappropriate to be claimed as income." (See Helms Decl. ¶ 6.) Defendants' separate statement of facts also indicate that the amount attributed as income is incorrect.*fn4
The Court focuses on two categories of income which Defendant contends are in dispute: purported loans and duplicate deposits.*fn5
Amounts loaned to Defendant are properly considered non-income. In this case, the IRS did not include purported loans as income so long as they were properly substantiated by documentation, deposition, or other evidence. However, the IRS did include as income various purported loans, finding that they were not probably substantiated as loans. See Mahigel v. Commissioner, T.C. Memo. 1983-529.*fn6 In his declaration, Defendant specifically addresses a purported loan made to him from his father, Eugene Dinkins, which the IRS attributed as income. (See Helms Decl. ¶¶ 66-68.) Defendant contends that these "installments" approximated "$100,000 to $125,000" and were made once a year. (Id. ¶ 66.) In support, Defendant submits a declaration from Mr. Dinkins; the declaration, however, only states that the loans were made throughout 1989 through 1993 and that he has "no exact recollection" of the amounts, but that they were "in excess of $100,000 during the course of that time." (Dinkins Decl. ¶ 1.) Mr. Dinkins also declares that he has personal knowledge that his former wife and Defendant's mother, Bonnie Dinkins, loaned Defendant money during that same period of time. (Id. ¶ 2.) Defendant also submits a check made out to him by Mr. Dinkins for $50,000. (Id. ¶ 66, Ex. D at 2210.)
The Court finds that Defendant has not substantiated the loans allegedly given to him by Mr. and Ms. Dinkins and that the IRS correctly included these checks as income. Both Defendant's and Mr. Dinkin's recollection of the exact amounts given to him, and when, are unsubstantiated by sufficient evidence other than vague and self-serving testimony. Thus, this conclusory declaration and check does not create a genuine issue of material fact as to whether these purported loans should be excluded from income.
Defendant also discusses several other alleged loans. These loans include those made to Peter Ma, Steven Dicken, Terry Davis, "Julie", Wayne and Lila Dean, Walt Jolley, and many others. (See Helms Decl. ¶¶ 9, 10, 53, 63, 105, 110-112, 188, 250-367; see also Exs. P, Q.) It is not readily apparent which of these loans the IRS attributed to income or not. Furthermore, Defendant has not adequately substantiated that these loans are in fact loans, especially considering that many of the loans appear to be clients of Defendant. As such, the Court GRANTS the United States motion for summary judgment insofar as it pertains to attributing the disputed purported loans as income.
In his opposition, Defendant contends that the IRS attributed several check deposits as multiple deposits. In support of this contention, Defendant submits a document allegedly reconciling these double deposits which was not previously disclosed during discovery and is one of the documents at issue in the United States' motion to strike. (Helms Decl. Ex. A at 2031, 2035.) As stated above, the Court strikes this document. However, even if the Court were to consider this document, the Court finds that Defendant has not created a genuine issue of material fact as to this issue. Defendant's "reconciliation" sheet attempts to reconcile various checks with deposit slips to show that they were included twice. However, for the vast majority of the alleged double deposits, the bank numbers on the deposit slip and the bank numbers on the checks which purportedly were double-counted do not match. As such, there is simply no indication that these deposits are the same and were thus counted twice. Just because the deposit amounts and the writer of the check is the same does not ...