Government Files Suit for Erroneous Refunds

UNITED STATES OF AMERICA,
Plaintiff,
v.
LEONARD L. GRIGSBY and BARBARA F. GRIGSBY,
Defendants.

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF LOUISIANA

COMPLAINT

The United States of America, pursuant to 26 U.S.C § 7401, with the authorization of a delegate of the Secretary of the Treasury and at the direction of a delegate of the Attorney General, brings this civil action to recover erroneous refunds of income taxes made to Defendants Leonard L. Grigsby and Barbara F. Grigsby and to obtain a judgment against them for the amount of the erroneous refund, plus statutory interest thereon, and alleges as follows for its complaint in this matter.

Jurisdiction and Parties

1. This action is brought pursuant to 26 U.S.C. § 7405(b) to recover erroneous refunds of federal taxes paid to the Defendants Leonard L. Grigsby and Barbara F. Grigsby.

2. This Court has jurisdiction over the subject matter of this action pursuant to 26 U.S.C. § 7402(a) and 28 U.S.C. §§ 1340 and 1345.

3. Defendant Leonard L. Grigsby resides within the jurisdiction of the Court.

4. Defendant Barbara F. Grigsby resides within the jurisdiction of the Court.

5. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1391 and 1396.

6. During the year 2013, Leonard Grigsby was a member of Cajun Industries, LLC Subsidiaries (hereinafter, “Cajun”). Cajun has elected to be treated as an “S corporation” for federal income tax purposes.

7. Under 26 U.S.C. § 1366, an S corporation's items of income, loss, deduction or credit are treated as if they were realized directly by the corporation's shareholders, divided pro rata. Each shareholder's respective items are reported to them, and to the IRS, on Schedule K-1.

8. Leonard and Barbara Grigsby timely filed a joint federal income tax return for the 2013 tax year claiming an overpayment carryforward to tax year 2014 of $239,310. This federal income return is referred to below as the Grigsbys' First 2013 Return.

9. The Internal Revenue Service (IRS) applied the $239,310 carryforward to the 2014 tax year.

10. After filing their First 2013 Return, but still before the April 15, 2014, deadline, Leonard and Barbara Grigsby filed a second joint federal income tax return for 2013 claiming an overpayment carryforward of $259,962 to the 2014 tax year (“the Second 2013 Return”).

11. The IRS did not process the Grigsbys' Second 2013 Return until approximately September 15, 2017.

12. On both their First 2013 Return and their Second 2013 Return, Leonard and Barbara Grigsby reported Leonard Grigsby's pro rata share of Cajun's income for 2013.

13. On or about November 19, 2015, Cajun engaged Alliantgroup, LP, to perform a Research and Development Tax Credit Study for the tax years 2012 through 2016. The Study purported to analyze whether Cajun was entitled to claim any “research credits” under 26 U.S.C. § 41. That Section of the Internal Revenue Code permits businesses to claim an income tax credit for increasing certain qualified research expenses or basic research expenses, or for making payments or contributions to an energy research consortium.

14. Cajun had not previously claimed any research credits on its 2012, 2013, and 2014 federal tax returns.

15. On or about October 3, 2016, Cajun filed an amended federal tax return for its income tax period ending September 30, 2013 that claimed $1,341,420 of research credits under 26 U.S.C. § 41.

16. On or about October 3, 2016, Leonard and Barbara Grigsby filed another amended 2013 federal income tax return (“the Third 2013 Return”). The Grigsbys' Third 2013 Return claimed a tax refund in the amount of $576,756. The claimed refund was attributable from the portion of the researched credits claimed on Cajun's amended federal tax return that were allocable to Leonard Grigsby as one of its shareholders.

17. On or about March 27, 2017, the IRS sent a letter to Leonard and Barbara Grigsby stating that the Third 2013 Return could not be processed because the IRS had no record of an amended Schedule K-1 from Cajun.

18. On or about April 24, 2017, Leonard and Barbara Grigsby sent the IRS the amended Schedule K-1 from Cajun's income tax period ending September 30, 2013.

19. On or about May 4, 2017, the IRS sent a letter to Leonard and Barbara Grigsby stating that the IRS was denying their claim for refund in the Third 2013 Return because it was not timely filed.

20. On or about May 19, 2017, Leonard and Barbara Grigsby protested the denial of their claim and provided proof of their timely filing.

21. On September 18, 2017, the IRS processed the Second 2013 Return as an amended return. It allowed the additional overpayment of $20,652 claimed on that return.

22. The IRS then processed the Third 2013 Return and erroneously allowed the $576,756 refund claimed on that return.

23. On November 4, 2016, the IRS erroneously issued to Leonard and Barbara Grigsby a refund in the amount of $671,071.38, which reflected the amount of the refund claimed by the Grigsbys on their Third 2013 Return, plus statutory overpayment interest of $373,663.38.

24. Cajun is not entitled to the research credits it claimed on its amended 2013 federal tax return because Cajun failed to comply with the statutory and regulatory requirements under 26 U.S.C. § 41.

25. Specifically, Cajun claimed the credits for activities that did not constitute qualified research under 26 U.S.C. § 41(d). Cajun did not engage in technological or scientific research to design and/or create new or improved business components of Cajun.

26. Furthermore, Cajun is not entitled to claim the research credits because it did not maintain, and did not claim and compute research credits with, sufficient documentation and substantiation of the percentage of overall work time that specified employees spent performing or supervising performance of allegedly qualified research under 26 U.S.C. § 41(d), the hours and wages attributable to such work by those employees, and the nature and specifics of such work by those employees.

27. Furthermore, Cajun is not entitled to the research credits because it claimed the credits based on computations that are incorrect under 26 U.S.C. § 41. Its claim is based on an invalid statistical sampling of projects that did not involve qualified research under 26 U.S.C. §41(d) and that used wage expense data that is based on insufficient documentation and substantiation of the percentage of overall work time that specified employees spent performing or supervising performance of allegedly qualified research under 26 U.S.C. § 41(d), the hours and wages attributable to such work by those employees, and the nature and specifics of such work by those employees. The statistical sampling report also is invalid because it was not prepared using accepted statistical sampling methodology and it was not prepared in compliance with Internal Revenue procedures.

28. Because Cajun was not entitled to claim the research credits on its amended 2013 federal tax return, the Grigsbys were not entitled to claim a pro rata share of the research credits.

29. The IRS erroneously issued the Grigsbys the refund claimed on the Grigsbys' Third 2013 Return.

30. The amount of interest due on the erroneous refund as of August 23, 2019, is $65,567.41.

31. This action is timely under 26 U.S.C. § 6532(b).

WHEREFORE, the Plaintiff United States of America prays for the following relief:

a. That this Court order, adjudge, and decree that the Defendants Leonard L. Grigsby and Barbara F. Grigsby are jointly and severally indebted to the United States of America in the amount of $713,440.28 for tax year 2013, plus interest on that amount from August 23, 2019 until paid, at the underpayment rate established under 26 U.S.C. §§ 6621 and 6622, and that judgment be entered against them in favor of the United States of America in that amount; and

b. That the United States be granted its costs in this action, and such other relief as the Court deems just and appropriate.

Baton Rouge, Louisiana, this 11th day of September, 2019.

UNITED STATES OF AMERICA, by

BRANDON J. FREMIN
UNITED STATES ATTORNEY

Chase E. Zachary, LBN 37366
Assistant United States Attorney
777 Florida Street, Suite 208
Baton Rouge, Louisiana 70801
Telephone: (225) 389-0443
Fax: (225) 389-0685
E-mail: chase.zachary@usdoj.gov
LOCAL COUNSEL

RICHARD E. ZUCKERMAN
Principal Deputy Assistant Attorney General
Tax Division, U.S. Department of Justice

JAMES M. STRANDJORD
NY Reg. No. 5150198
Trial Attorney, Tax Division
U.S. Department of Justice
P.O. Box 55
Washington, D.C. 20044
202-616-3345 (v)
202-514-5238 (f)
James.M.Strandjord@usdoj.gov
LEAD ATTORNEY