The Internal Revenue Service and the Justice Department have decided to dismiss a case against a North Carolina small business owner from whom they had seized $107,000 in a controversial practice known as civil asset forfeiture.

The case involves Lyndon McLellan, the owner of L&M Convenience Mart in Fairmont, N.C. Federal authorities seized the money from his bank account suspecting him of illicit activity based on the pattern of his cash deposits, which he kept under $10,000 after a bank teller advised him and his niece that would help the bank avoid onerous reporting requirements. Under the Bank Secrecy Acts, banks are required to report any deposits over $10,000, but if someone continually makes deposits just under that threshold, it can arouse suspicions of money laundering and structure transactions.

However, civil asset forfeiture, which is practiced by the IRS and law enforcement agencies around the country, has generated negative publicity in recent years. The IRS announced last year that it would be changing its policies under pressure from Congress and the IRS and the Justice Department have since dropped several cases against innocent small business owners (see Congressmen Introduce Bill to Curb IRS Civil Asset Forfeitures, Prosecutors Drop iRS Civil Forfeiture Case and Prosecutors Return $447,000 in IRS Civil Asset Forfeiture). The Institute for Civil Justice, a libertarian law firm in Arlington, Va., represented several of the business owners and is the same firm that also won a legal victory against the IRS in 2013 over efforts to require mandatory testing and continuing education of tax preparers.

The Institute for Justice announced Thursday that the IRS and the Justice Department moved Wednesday to voluntarily dismiss the case and give McLellan back all of the money seized from his bank account, only two weeks after the firm agreed to take on the case.

“I'm relieved to be getting my money back,” McLellan said in a statement. "What’s wrong is wrong, and what the government did here is wrong. I just hope that by standing up for what’s right, it means this won’t happen to other people.”

Even after he recovers his bank account, however, the Institute noted that McLellan lost tens of thousands of dollars, thanks to the government’s actions. He had paid a $3,000 retainer to a private attorney before the Institute took the case on a pro bono basis, and he also paid approximately $19,000 for an accountant to audit his business and to provide other services to help convince the government he did nothing wrong. The government is refusing to pay those expenses or any interest on the money.

“The government cannot turn Lyndon’s life upside down and then walk away as if nothing happened,” said Robert Everett Johnson, an attorney at the Institute for Justice who represents McLellan. “Lyndon should not have to pay for the government’s lapse in judgment. And the government certainly should not profit from its misbehavior by keeping the interest that it earned while holding Lyndon’s money. We’ll continue to litigate this case until the government makes Lyndon whole.”

The Institute noted that the government pursued the case despite a change in policy, announced by the IRS in November 2014 and adopted by the DOJ in March 2015, that was intended to shield property owners just like Lyndon. The case was discussed at a congressional hearing, and IRS Commissioner John Koskinen told members of Congress, “If that cases exists, then it’s not following the policy.”

In moving to drop the case almost half a year after the IRS announced its policy change, the government cited the change in policy as its reason for backing down.

“The government in this case had to have its arm twisted to follow its commitment to property owners like Lyndon,” said IJ attorney Scott Bullock. “That shows reform of the civil forfeiture laws cannot be entrusted to voluntary policy changes from the government. What is truly needed is binding reform from Congress.”

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